Department of Public Enterprises on its 2013/14 Strategic Plan and Annual Performance Plan

Meeting report

Mr Tshediso Matona, DPE Director General, introduced the presentation. The framework had been created when the current government had been installed in 2009. The current Medium Term Strategic Framework (MTSF) had been developed at a time of global economic collapse. Major economies, such as the United States of America (USA) and Europe, had been thrown into recession and were still battling to recover. There was even the possibility that there would be a third dip. This had an effect on the South African economy.

Mr Matona said that the focus of DPE was minimising the effects of global recession on the South African economy. New opportunities for growth had to be found. A new vision had been developed. The New Growth Path (NGP) and National Development Plan (NDP) had been developed. He felt that there were now enough policies in place. All countries had had to resort to the state as the main driver in the economy. For example, the state had had to bail out major banks in both the USA and Europe. There was a view that the state should not play an active role in the economy. In a developing country such as South Africa, the challenges would not be overcome without carefully chosen state intervention. Intervention should not be wholesale. A strategic role should be played.

Mr Matona said that in the time that the state had increased investment, including investment by state owned companies (SOC), there had been interventions by the Reserve Bank such as keeping interest rates low. South Africa was not escaping the impact of global downturn. There were consequences in terms of employment and international interventions, but the country had been spared the worst effects.

Mr Matona said that the challenge was to provide a workable partnership between the state and private sector. There was a lot more potential that what was being indicated in economic performance. The focus needed to stay in this area. Dialogue between public and private sectors must be encouraged. The debate seemed to suggest that it must be one or the other, but he disagreed with that viewpoint.

Mr Matona illustrated the point he was making. Private sector investment had remained constant from 2007 to 2012, but investment by government had increased. The two main players were Eskom and Transnet. Investment had increased by 9.1% in the public sector as compared to 3.9% in the private sector. Public corporations had invested R123 billion in 2012.

Mr Matona said that a summit had been held the previous week. Eskom and Transnet had outlined their plan in the view of capital expansion over the forthcoming years, especially regarding the role to be played by suppliers. A significant amount of the economy must be from local procurement. If this was not done, and it was a complex exercise, jobs would be created in China, India and Europe while South Africans battled to find work. It was doable. Eskom and Transnet had identified areas of capacity to supply, and were working with the identified suppliers. The suppliers had to be competitive, and it would not help to pay premium prices simply for localisation.

Mr Matona was excited by this development. The quantum of investment was huge. The investments made it possible to create many industries and empower thousands of entrepreneurs. There were many opportunities.

Mr Matona said that DPE was constantly looking to strengthen its oversight role in order to achieve these roles. In 2009, National Treasury (NT) had published a new plan for performance reviews. DPE was happy with this, and had drawn lessons since 1994. The framework envisaged a five year strategic plan, and Annual Performance Plans (APP) outlining delivery targets for one year and projections for the two following years. This APP was tabled in Parliament.

Mr Matona presented the planning cycle. For each five year period there would be a strategic plan and expenditure framework. The Medium Term Expenditure Framework (MTEF) was still in a three year cycle, but this might change to five. Reports were presented on a quarterly basis, and the Annual Report (AR) was tabled in Parliament.

Mr Matona listed the objectives set by DPE. Adequate infrastructure was needed. There had to be a clear framework for economic regulation and competition. Productivity levels needed to be high. Adequate maintenance was needed to sustain the life cycle of current assets. Increased investments were needed.

Mr Matona said that the current APP was informed by the strategic plan, and was aligned to the NDP. Infrastructure was a key component, and this was where SOCs operated. There had been progress in the term of the current administration.

Mr Matona outlined the strategic priorities for 2013/14. There would be increased oversight on the implementation of the build programme, particularly regarding Eskom and Transnet. Problems had been reported with Eskom's programme, and the external factors had to be isolated. At present, there was a whole entanglement of factors, including labour, failings by contractors and a lack of oversight by Eskom. DPE had initiated a review of the build programme in general and the Medupi project in particular. These two SOCs would be spending huge amounts in the future, and DPE needed to see these investments delivered on time and providing the desired benefits to the economy.

Mr Matona said that it was important to strengthen capacity in the DPE. The Department would not manage the projects itself, but wanted to be in a position to understand how they were being executed. Some early warning was needed to make interventions where necessary. This would be a major focus area, and he anticipated challenges. It would be an exciting time.

Mr Matona admitted that there were policy uncertainties. The Department of Transport (DoT) was still reviewing rail policy, which would have implications on Transnet. Similarly, the Department of Energy (DoE) was busy with legislation on the Independent System and Marketing Operator (ISMO). There were also concerns in the aviation sector, particularly regarding competition.

Mr Matona said that localisation was a big concern. There had already been some successes. The supplier community needed to organise itself. A supplier bond was needed, which was an onerous requirement for small companies. DPE would need to see how it could find resources to support small enterprises in this regard.

Mr Matona cautioned Members that some SOCs were financial challenged. There were heightened expectations of the state. South African Airways (SAA) was under the spotlight at present, but Eskom had received increases which were far less than what the company had expected. NT might have to come to the fore as innovative ways would be needed to keep Eskom sustainable. The company played an important role in the economy and must not suffer from the lower than requested tariff increases. He hoped that Eskom would report on its position in the following weeks.

Mr Matona said that DPE had now been consolidated into three programmes, where there had been six in the past. NT had decided that allocations for particular areas, such as Transport, should go to DoT. The programmes at DPE would now be retained at the Department as sub-programmes. The first was administration. The aim was to support the work of DPE. Adequate resources must be in place, and the Department must adhere to all legislative requirements. The financial controls were not yet completely satisfactory, but DPE was almost there. The Department had received clean audit reports for the previous eight years. He was personally committed to maintaining this status. He had managed to keep a clean record at the Department of Trade and Industries (dti). The South African Broadcasting Corporation (SABC) had invited him to appear in a discussion programme as an example of a DG with the secret to financial control.

Mr Matona said that the monitoring and evaluation (M&E) function was important. Credible and clear planning was needed, with proper reporting. It was one thing to have plans, but it was another to report properly. The DPE was within the top five regarding the payment of invoices. The budget was small, so the goods and services spending was not huge. Over 95% of invoices were paid within thirty days. Failures occurred due to suppliers changing banking details without informing the Department, and some mistakes had been made by DPE itself. The state was a big player in the economy, and made significant purchases of services and goods. Many jobs were put in jeopardy if payments were not made in time. In Europe, governments were making an issue of this. Many enterprises working with government there were in a precarious position due to late payment. At a joint meeting of Departments, the DGs had agreed that there should be a 'naming and shaming' process to single out the Departments failing to achieve this policy.

Mr Matona said that officials who performed well should be recognised. The DPE had a vacancy rate of 11%, just above the accepted norm of 10%. The DPE was aiming to get below this standard. Communication strategy would be improved.

Mr Matona said that Programme 2 dealt with legal and governance. The Minister should ensure that there was a process to ensure that Cabinet decisions were implemented. Over thirty recommendations had been made affecting DPE. Some state assets might be merged or even disposed of if no longer needed. Logical planning and monitoring would be improved. Shareholder compacts would be monitored. Annual General Meetings (AGM) were attended. Boards were rotated where needed. This was important work. In some instances there had been challenges where compacts could not be concluded, or there was a stalemate between DPE and SOCs over targets.

Mr Matona was hoping to revive legislation that had been floated in the past over shareholder oversight. There was no legal basis on shareholder function. There was some overall legislation such as the Companies Act and the Public Finances Management Act (PFMA), and then sector based regulations. DPE was also doing work on remuneration standards. DPE was now preferring the word 'standards' to 'guidelines'. There had already been a report to Cabinet, which supported the approach with some comments. He hoped that DPE would soon be able to engage with the Committee. Bonuses should be better linked to performance. Fringe benefits should also be considered, as these were not uniform. Such allowances could far exceed the fixed salary. Implementation would be a challenge. Change management would be needed and much more transparency.

Mr Matona announced that there would be more focus on Board management. Skills gaps on Boards would be addressed. This was a topical issue given recent events at SAA and the SABC. World class work was being done on the remuneration standards. Cabinet wanted to see these standards implemented across all SOCs. Governance issues would remain a major focus area. Deep reflection would be needed going forward. A downward spiral could result if standards were not maintained.

Mr Matona added that some issues around risk management would be addressed. Strong intervention was needed from law enforcement to combat copper theft.

Mr Matona stated that Programme 3 dealt with portfolio management and strategic partnerships. There were sub-programmes dealing with Energy and Broadband Enterprises, Manufacturing Enterprises, Transport Enterprises, Economic Impact and Policy Alignment, and Strategic Partnership. It was possible to account for direct employment, but DPE wanted to track what the indirect effects of investment were. DPE also wanted to track suppliers and explore possibilities for co-investment.

Mr Matona said that the focus in the Energy and Broadband Enterprises sub-programme would be on oversight on the roll-out of the build programme. Financial performance would be addressed. The nuclear programme would be considered. The Pebble Bed Modular Reactor (PBMR) programme would be wound up during the year. There would also be a focus on Broadband Infraco.

Mr Matona said that in terms of the Manufacturing Enterprises sub-programme, Denel was turning a corner and hoped to raise a profit in the current financial year (FY). The company had unique capabilities, some of them the envy of major superpowers. The company had to transform. Pressure would be applied by DPE. The lessons learned in the Rooivalk Programme would have to be assessed. The future of Alexkor should be determined now that the Deed of Settlement issue had been finalised. The same issue applied to SAFCOL. A new strategy had been completed and would go to Cabinet shortly.

Mr Matona said that in the Transport Sub-programme, Transnet played a crucial role. The Minister had a delivery agreement with the President. The issue of branch line concessions was proving to be more challenging than previously expected. Pilot plans would be implemented shortly. The negative impact to companies in terms of the cost of doing business also needed to be assessed. Regarding SAA and South African Express Airways (SAX), a long-term turnaround strategy was being finalised. Long-term leadership was needed at SAA. There would be continued instability in the lack of leadership. The search for a Chief Executive Officer was well advanced, and a candidate should be proposed to Cabinet by the end of March 2013. There would be support for fleet acquisition, which would be a major component of the turnaround strategy.

Mr Matona touched on the Economic Impact and Policy Alignment sub-programme. Environmental policy needed to be aligned. Some SOCs, such as Eskom, were major polluters. There was also an emphasis on transformation, the youth and skills development. There needed to be a sharper focus on transformation.

Mr Matona moved on to the Economic Impact and Policy Alignment sub-programme. A macroeconomic model was being developed to assess the contribution of SOCs to the economy. An Aviation Biofuel strategy policy was being finalised, with the position of the shareholder on carbon tax being determined. SOCs should also support their own infrastructure development.

Mr Matona was pleased with the way that NT had responded in providing the resources needed. More money had been requested to recruit more people, only to find that there was not enough office accommodation at DPE offices.

Mr Matona demonstrated how the budget for DPE had varied over the years, depending on how funds had been channelled to SOCs. The budget for DPE was generally small. It had decreased from R3.9 billion in 2009/10 to R1.4 billion in 2012/13.

Mr Matona revealed that the staff establishment had increased from 168 in 2009 to 201 in 2012/13. The vacancy rate had been reduced from 16.7% to 11.9% in the same period.

Mr Matona said that DPE was satisfied that it was aligned to the NDP, and with the issues raised during the State of the Nation address (SONA).

Discussion
The Chairperson asked for more information on the DG's invitation to the SABC.

Mr Matona explained that this was to discuss good corporate governance.

Mr E Marais (DA) was pleased to hear that the position of Chief Executive Officer (CEO) at SAA was to be filled. He hoped that the position of Chief Financial Officer (CFO) at Eskom would be filled quickly as this would soon be vacant.

Ms N Michael (DA) congratulated the DG for the way he managed his Department. The Committee engaged in robust discussion both as politicians and as citizens. She was pleased to see how the plans of DPE were aligned to the NDP, which her party supported. She asked why privatisation of some of the SOCs was not being considered. On the performance of the Boards, the Committee had noted that Board members were overworked. One director sat on 59 Boards. This was concerning. She was also concerned about copper theft, and asked if a unit such as the 'Copperheads' in Cape Town should be established to address this crime. Monopolies had been formed in terms of energy and rail transport. The previous day, the buffer levels for electricity had reduced to 500MW. This was the same level as during the period of times of rolling black-outs. The reserve level of 1.5% was well below international loans. There had been ongoing strikes at Medupi. Such low reserves would frighten investors away.

Mr K Dikobo (AZAPO) agreed with Ms Michael's comments. The Boards needed to be more efficient, but the DG had not made any comment on the proposal that there be a limit on the number of Boards on which one could sit. Legislation was needed to give the DPE some teeth. This was long overdue, and showed that DPE was moving in the right direction under the DG's guidance. He asked when this would come before the Committee. He heard that the DG was on a recruitment drive and the offices were overflowing. He asked what would happen if the Review Committee were to decide to reduce the role of DPE, or even close the Department completely.

Mr C Gololo (ANC) commended the DPE on its nine clean audits. On naming and shaming, the Departments not paying their invoices timeously should be exposed. He asked if the Presidential Review Commission (PRC) would remain in place to assist the DPE on an ongoing basis, or if it would be disbanded now that it had completed its initial task. He asked how suppliers could be capacitated to stay competitive. On copper theft, this was a serious problem. PBMR had been wound up. A mispronunciation caused some mirth, as Members felt that the programme had been a wound to the economy. He asked about plans for SAA and SAX.

Mr A Mokoena (ANC) commended the DG for his leadership. The accolade rubbed off on the members of DPE. On the performance monitoring project, CEOs of SOCs should be represented. It should not be a top heavy body with its own Board. Secondly, legislation should be cast so that there was no duplication of oversight. Parliament already had that role. Either Parliament of the DPE could be taken lightly by those who did not understand the depth of oversight. Thirdly, in order to entice the private sector to invest, concrete incentives were needed. This could be done in conjunction with dti. Aventura had disappeared. It was a Cinderella SOC. It seemed to have been quietly privatised.

Mr M Sonto (ANC) had presented the Committee's report in the National Assembly the previous week. There had been many clean audits. He added his congratulations. Eskom was being asked what was being done to discourage electricity theft. There were areas where illegal connections proliferated like spaghetti. Copper theft was also a threat to rail travel. He asked if copper theft would be criminalised, in the same way that Eskom was considering its options regarding electricity theft.

Mr Matona thanked the Committee for the words of encouragement and compliments. He would now have to strive even harder to continue the good record. Electricity and copper theft were related. Eskom sometimes talked about illegal connections. While this was true, it should be clear what the penalties were. Any thief should be arrested. Eskom should consider how to ensure that the law was enforced. It was not easy to do this, as it occurred in poor communities where a number of other crimes were happening already. A clear strategy was needed, together with agreements with local government and the police. DPE would work with Eskom on this. Copper theft was slightly different. Currently, it was dealt with under stolen goods legislation. This was inadequate. Penalties were light, but major disruptions were caused. Stronger measures were needed. New legislation should be created, or existing legislation amended, to impose higher penalties for the theft of certain strategic materials such as copper. DPE would work with the Department of Mineral Resources on this matter. The matter had been discussed for some time. The issue had been raised at a Cabinet lekgotla. Law enforcement authorities had admitted that they were not able to deal with these crimes. The Minister had admitted that the Police did not have the necessary skills to pursue these crimes. A more sophisticated approach was needed. Regarding copper theft, different technologies were needed. Denel had a capability that could be deployed to combat this crime. Simply putting legislation in place would not suffice. Partnerships were needed and communities needed to be made aware.

Mr Matona said that there were a number of funders looking for direction. Incentives were an option. The Presidential Infrastructure Committee had put planning in place, and it was a good time to explore such an option. The President was in discussion with organised business.

Mr Matona warned against an overkill in oversight. Different levels of oversight were needed for specific functions. Different levels of government needed their own levels of oversight. He could be called to Parliament to account for his actions, and this forced him to be serious about his job. Parliament could call directors of companies to account. This was a powerful incentive to encourage good conduct. DPE would account for its oversight role. The different oversight roles could complement each other. A more strategic approach was needed.

Mr Matona said that South African Airlink was a private company, but it did co-operate with SAA and SAX in terms of code-sharing. The value for money nature of the relationship would be assessed in the turnaround strategy. The three airlines were designed to serve different market sectors. Over time, the lines had become a bit blurred and there had been some cannibalisation. It was time to reorganise the sector. Whatever would be done would have to be in line with competition law. The principle that would be tested, given the challenges made by Comair, would be that of neutrality. The state could play a role in the economy, but not at the expense of the private sector. The playing field had to be level for both state and private companies, particularly in competitive markets such as the aviation market. The test for the Competition Commission would be whether state support had the effect of reducing competition. It would be a challenging case. There were other jurisdictions, such as Europe and North America, which would provide precedents. It was important to achieve policy neutrality.

Mr Matona agreed that Eskom was a monopoly. The DoE was gradually bringing competition into the sector through the ISMO Act. Eskom could not supply the full energy requirements of the country. What the DoE needed to do was to ensure that the conditions were conducive to competition. The regulatory regime in monopolistic sectors had to be examined. Rail transport was another monopolistic sector. It was not about destroying SOCs, but about encouraging efficient operations.

Mr Matona accepted the observations on the electricity system. There was a difficult balance required of Eskom. After the load-shedding of 2008, it was a balance to ensure that this did not happen again. At the same time, there was an unprecedented programme of capacity building. This itself was proving to be a challenge. In the middle of this, maintenance had to be carried out. The roll out of the build programme was also a concern. The balance of reserves was delicate, and was causing the DPE great concern. There was engagement with Eskom on both these issues. Eskom had been asked to evaluate the impact of the Medupi strikes, and what plan was in place to make up for lost time. DPE had had to intervene between labour and the contractors. DPE was not a party to the employer – employee relationship, but had played a mediating role in terms of the agreement signed. The National Union of Metalworkers of South Africa (NUMSA) had pulled out the agreement, creating a difficult environment. The programme could not be compromised given its strategic importance. DPE was appealing to the parties concerned to keep the big picture in mind.

Mr Matona stated that the conduct of Boards was an important matter. Any person wishing to be a director should read the Companies Act, which spelled out the requirements for a director. A lot of clarification and cleaning up was needed. More transparency was needed. The DPE had a procedure. When potential Board members were identified based on their skills and potential contribution, there was more at stake than prestige and remuneration. Directors should be looking to support the companies they served. Reward should be reasonable and fair. More consistent application was needed. If one served on more than three Boards, a warning flag should be raised as the candidate's available time would be compromised. Criteria should be spelt out. The dynamics of a Board should be considered, and the DPE should be able to raise a challenge where it felt that things were going wrong.

Mr Matona admitted that the issue of private versus public ownership was not an easy one. While government might make strategic decisions to drive a particular agenda, the next question was where and if the state could invest capital. Without this, SOCs could not drive a developmental agenda. This was clearly a political matter. He worked with the system as it was.

Mr Matona said that the appointment of a CFO was the responsibility of the company. DPE expected that Eskom would advertise the position of CFO shortly. He understood that the current CFO would be leaving in July. The CFO was an ex-officio director on the Board, and the appointment would have to be ratified by the Minister. It was an important appointment.

Mr Matona did not expect the PRC to recommend the dissolution of DPE. An exciting but daunting prospect was the leveraging of SOCs to develop the economy. This could result in other SOCs being added to the DPE portfolio. SABC was not necessarily about economic development, going to the furthest flung communities. There would be some reorganisation. The choice could not be 100% centralisation or 100% decentralisation. There was room for certain departments to take control of certain SOCs. There was an opportunity to bring rationalisation into the area.. DPE would play what role it could with great enthusiasm and commitment.

Mr Matona said that Aventura had been liquidated by a resolution of the Board. This was an experiment in privatisation. The Department would have to approach Parliament and ask for the repeal of the establishing Act. DPE had taken their eyes off the ball, creating a situation where the Board was dysfunctional. PBMR had been put under care and maintenance. Certain strategic assets would be maintained for the nuclear programme.

Mr Matona replied that the programme for suppliers was critical. Suppliers should be capacitated to the level where they could make global contributions. Standards were in place.

Mr Matona said that the PRC had been disbanded. A report had been given to the President. It was now sitting with DPE. Some of their members might be approached to share their expertise.

The Chairperson noted that Members felt the plan was good. For it to be meaningful, the DPE had to remain in the good shape it already was. The Committee took pride in the Department's performance. Boards also needed to be in good shape. Whilst people should know about the provisions of the Companies Act, and many did know their duties, the problem lay with those that appointed persons to 59 Boards. Directors should be familiar with the work being done by the entities involved. It was not just about attending occasional meetings. They should follow the good example set by the Minister. To nods of agreement from Members, he emphasised that the Committee stood by the DPE and would continue to raise matters of concern. Once the SAA CEO was appointed, the position of the Chairperson of the Board also had to be addressed. When he was a young boy, some of his seniors at a soccer club had been sentenced to fifteen years imprisonment for economic sabotage after stealing copper wire. This had been sufficient deterrent and there had not been any repeat of this offence for many years in that area. People were using stolen electricity to run flourishing businesses. Police vans were driven over these lines without taking any action. Government had provided a response in the form of free basic services. More work was needed with local government.

The Chairperson felt that Denel was an important issue. One area that had impressed Members was a visit to the Overberg Test Range. Other countries were benefiting from their capabilities. He wished the DG well for the implementation of the plan, and assured the Department of the Committee's support.

Committee Minutes and Programme for second session
The Committee considered and adopted with amendments the minutes for the meeting of 26 February 2013 and 5 March 2013. The Committee Programme for the second term was adopted.

The Chairperson noted which Members were available for a proposed visit to Alexkor the following week. This visit would be confirmed later.

The meeting was adjourned.