SAFCOL on impact of land claims and future sustainability

Meeting report

The Chairperson noted that senior management of the South African Forestry Company Limited (Safcol) still comprised of acting officials and, though she knew that a new board had been sworn in recently, her hope was that there would soon be some stability at Safcol.

Mr E Mlambo (ANC; Gauteng) raised a complaint that the Safcol presentation was the same as that made to the Committee during an oversight visit in Mpumalanga in 2015.

Mr J Julius (DA; Gauteng) said that if the presentation did not follow the brief then the Committee could not entertain Safcol.

Ms C Labuschagne (DA; Western Cape) interjected that the Committee had heard the exact presentation in September 2015. The impact of land claims on the company had been prioritised as a follow up. It was a waste of time and money to allow Safcol to present on something the members had answers on, though they were unsatisfactory even in 2015. There was only one page on land claims which was the agenda.

Mr J Parkies (ANC; Free State) said that he had just received a letter that the Safcol delegation was comprised of new management and board. He believed the new leadership of the State Owned Entity (SOE) would fill all the gaps and take ownership of the challenges faced by Safcol. He also believed that the delegation had come to present according to the brief from the Committee.  He proposed that the Committee allow Safcol to present so members could highlight important issues that the Safcol leadership would have to take responsibility for ensure that they were attended to.

The Chairperson allowed the board chairperson of Safcol to respond to the members.

Mr Lungile Mabece, Safcol board chairperson, apologised for what he called an obvious misunderstanding. He said that the preparation of the presentation though recognising that the impact of the land claims and the sustainability of Safcol were a priority for the Committee; Safcol had seen fit to prepare the presentation before the Committee. Seeing that that was offending to the Committee, Safcol would certainly prioritise the key areas that the Committee wanted to discuss. However Mr Mabece wondered if the Committee had the same presentation as he had, because the portions of his presentation dealing with future sustainability of Safcol had not existed before the last week of February 2016. Safcol was asking for the Chairperson’s guidance on what to present and what to leave out.

The Chairperson noted that there were timeframes for submission of briefing documents to Parliament, so that Members of Parliament could prepare. Presenters should not send documents a day before a briefing. Since the Committee wanted a follow-up session with Safcol, it was only on that basis that she was leaning towards allowing it to present.

Mr Parkies reiterated his plea for the collective leadership of Safcol to be allowed to proceed.

Mr O Sefako (ANC; North West) said he supported Mr Parkies’ motion.

The Chairperson thanked the Committee for its understanding and allowed Safcol to present.

South African Forestry Company Ltd (Safcol) on impact of land claims and future sustainability
Mr Mabece said possibly they would jump around the presentation by indicating first what had changed since the Committee had been to Safcol premises and then prioritise the impact of land claims thereafter.

Mr Gabriel Theron, Acting Chief Executive Officer (ACEO), Safcol, took the Committee through the presentation noting that in the previous report Safcol had had two dormant subsidiaries. Through considerable investigation by the new board and management, the collective leadership realised that those two entities were not completely dormant. Those entities had properties and employees currently working within them. On the future of those two entities, the plan was to absorb them into more operational and profitable entities, seeing that they were all duplicating functions. The board was also reviewing the structure of the company as IFLOMA was currently under Komatiland; the recommendation was to put it at the same level as Komatiland.

On the minority shareholding in associate companies, Safcol realised that it was best to keep them separate from its establishment and report separately on them as well. Moreover, Safcol had decided to hand those companies back to the Department of Public Enterprises (DPE) so that next time it was reporting they would not appear in Safcol’s report.

Safcol had advertised for a Chief Operations Officer (COO) and the Minister had signed off on the CFO and CEO positions in the last week of February 2016.

He said that IFLOMA was currently under care-in-maintenance where Safcol had put a task team together to develop a turn-around strategy which the board was planning to implement as of 1 April 2016.

Footprint in Africa
On Safcol’s new strategy there was a big drive in terms of vertical and horizontal integration. Safcol had already met with the Department of Agriculture, Forestry and Fisheries (DAFF) on horizontal integration, where the plan was for Safcol to manage some of the DAFF forests.

Statement of financial performance
Mr Theron said that in the earlier version of the presentation the 2015 profit had been report to be R55 686 000 as indicated. However, new management and the board had raised the issue of that total being comprised of dividends received from minority shareholding in associate companies which was supposed to be ring fenced separately. Therefore the actual profit of Safcol in that slide was the operating profit of R2 780 000 – that 2014/15 profit had come from a negative loss of R38 622 000 in the 2013/14 financial year.

Land Claims
Mr Khaya Buthelezi, Senior Communications Manager, Safcol, said the biggest challenge that the entity was facing was the slow and protracted process of land claims.

Safcol’s socio-economic mandate: key infrastructure, employment creation rural and development
Mr Buthelezi said that in 2015 Safcol had taken individuals from its claimant communities to the World Forestry Congress (WFC) as part of its post-settlement plan training and development initiative which it had committed to doing in ensuring sustainability of its forests after settlement.

Safcol Furniture Manufacturing
As a flagship project, Safcol was optimistic that if it partnered with claimant communities and others as part of its vertical integration and beneficiation process – that would assist in its sustainability as a business going forward. To date Safcol had already trained about 20 young people in furniture manufacturing with the assistance of the Small Enterprise Development Agency (SEDA). The young graduates had been set-up into a co-operative contracted to Safcol for the manufacturing of school desks and other furniture elements.

Future Strategic Objectives 2016/17-2020-/21: Vertical integration
Mr Mabece said that Safcol had identified a number of downstream businesses that it had the capacity to operate and in some instances the facilities had always been there but had never been operationalised. To date Safcol was operationalising those businesses to assist in diversifying its revenue streams as well as to increase the skill set that it possessed.

Discussion
Mr Parkies commented that Safcol reported that it had taken some of its claimant communities to the WFC when in fact during the Committee’s oversight visit, it had heard from some of those communities that they had never been invited. Secondly there was an imminent model that Safcol was planning to implement for settlements; however, claimant communities were not allowed to make inputs or to critically engage the matter. Could Safcol speak to that? He also noted a chronological error in the dates in the presentation, saying that it was highly unacceptable.

Mr C Smit (DA; Limpopo) said he was repeating his comment since the establishment of the Fifth Parliament that claimant communities had apparently made it clear that they would prefer to grow maize meal on their land rather than continue with forestry, and that the proposed solution to that challenge had been the specific amount that was being paid to rent the land from its claimant owners, which had been pitched at R60 per hectare. Taking the lowest amount paid for one hectare at that rate totalled R6000 which meant 1% return on investment, which was simply unacceptable. If Safcol had to pay a claimant community a fair amount for land use which was between 8-12% return on investment, which was based on the R6000 a hectare rate, would Safcol still be viable. Entities could not ride on the back of poor communities by paying small rentals just to break even as businesses.

From his experience as a businessman, Mr Smit asserted that once a business started diversifying, that showed a clear sign of distress. Looking at the different sets of products that Safcol was selling and its businesses, how was it proposing to give attention to each one of them, to ensure that each was viable? What was Safcol’s flagship product/service?

How would Safcol actualise the creation of industrialists from its claimant communities? How would that project be funded? Was there communication with the Department of Rural Development and Land Reform (DRDLR) to fund that and what was the progress so far?

Mr Julius said that even the R60 rates were held in a trust; had the claimants been paid their dividends from that to date? How much had they received and how many had been paid? Safcol had two options in terms of its expansion regarding land claims. One of which the entity proposed the entrance into a strategic partnership with claimants. The second option was a lease back option where the entity would transfer the title deeds to the claimants so that it could rent it back from the claimants. However, all of that had never been mentioned in the entire presentation. That was the most strategic growth indicator for the entity as land claims were one of its biggest challenges. From that perspective, Mr Julius said that either Safcol had not anticipated land claims or it was simply not in charge of its business processes.

Mr Julius said that the entity was in distress, in which case the best would have been an intent to apply or an actual application to the Minister of Public Enterprises in terms of section 54.

It had been previously recommended that Safcol look at including one or two claimants as board members, even if the current leadership did not know about that, had it been something it had considered? Would it assist Safcol in its relations with claimant communities and in ensuring the sustainability of the company?

It was commendable that Safcol was distributing bursaries for rural youth to educate themselves about the forestry business. Mr Julius pleaded for Safcol to increase that funding so that with the development of the rural economy, the youth would remain where they were without having to resort to moving to urban areas. Could Safcol submit a breakdown of from where the recipients of the bursaries were in terms of province; how many there were, where had they gone to read for their qualifications and what type of qualifications were they reading for? He would accept a written submission as a response to his question if it was not immediately available.

Ms Labuschagne requested explanations on the differences from the previous presentation which were:
In September 2015 Safcol had said there were 18 plantations whereas in this briefing there were 15 actually in SA. Originally there were four plantations in Mozambique whereas current leadership had said there were three. Also Safcol had been managing 22 plantations in September 2015 but in March 2016 it was managing 18 instead. There was also a difference in the hectare size of forests that were managed. What had happened within the five months from September?

Seeing that 61% of land was under claims processing it was understandable that Safcol’s growth would include acquisition of land beyond the borders of SA. Of the 17 claims which were at negotiation stages, what model of settlement had been proposed by Safcol to claimants and what seemed possible in the resolution of those claims?

How sustainable were the socioeconomic benefits for each individual family at the end of the claims process, especially in terms of ensuring that whatever the claims process outcome, the families would remain with viable livelihoods. Could Safcol elaborate more on the 13 social compacts signed with communities?

Would the diversification of products and services be done in partnership with land claimants?

On the creation of black industrialists, what type of industries were these and how had they been identified within the forestry sector; would those industrialists come from the existing communities? Was there a link between the current markets and the new markets that Safcol was envisaging for exploitation by those industrialists within and beyond the borders of SA?

What would be the impact if Safcol could not achieve its strategic objectives of diversification of products, services and new markets?

Was Safcol speaking to stronger internal financial controls and monitoring when alluding to financial management?

Mr Singh (ANC; KwaZulu Natal) noted the equipment challenge that Safcol had lamented. What was its impact on the company’s operations and was the challenge still in existence? What was Safcol’s strategy in terms of combating corruption in its foreign operations?

Mr Sefako asked whether there were current collaborations between Safcol and DRDLR, DAFF and local government. Could Safcol reflect on its corporate social investment (CSI) and working in partnership with municipalities in terms of integrating its labour plan with the integrated development plans (IDPs) of these municipalities so that meaningful and sustainable relationships could be maintained in the long term? Could it also do the same in relation to its relationship with traditional authorities?

Seeing that Safcol’s core business was plantations and trees, to what extent had climate change affected operations and what was its mitigation strategy for that?

Mr Sefako was concerned about the R48 million rentals. He asked to whom the rental was being paid and if there was no possibility of Safcol owning its own land parcel.

Mr Mlambo was concerned that Komatiland still had an equipment challenge and asked why it was renting the sawmills; how much were the rentals; for how long it had been renting and to whom was the rent paid?

The Chairperson asked if claimants had received any compensation from DAFF and Department of Water and Sanitation (DWS) in terms of land claims. She repeated an earlier question about the dissatisfaction of claimant communities about the non-consultation by Safcol in determining a settlement model. Could it speak to why there had been no consultation. Would Safcol be open to reviewing its settlement model to the satisfaction of claimant communities? It was commendable that some profit was being generated though it was not significant. What other tariff rate had Safcol indicated that it could afford beside the R60 per hectare to its claimant communities? Diversification of products and services was also commendable as well.

Mr Mabece replied that if every claimant had been invited to the WFC that would have cost Safcol a lot of money as it had been hosted in Durban. There was a process of introducing people to Safcol and the company was doing other things besides invitations to congresses.

The report that the board had received from management regarding consultation on the settlement model said that there was an unfolding process of workshopping communities on possible options post-land claims however, certain communities possibly would have not been reached yet but the process was ongoing. That process kept going back to DRDLR because even Safcol was not the owner of the land it was operating in and it was only playing the role since the land was critical for its business. Therefore it was doing the facilitation though there was no legal status for Safcol to do so.

The key model that Safcol had been driving was the transfer of land to its claimants so that they would charge a rental fee from Safcol for the company to continue its operation. Claimants then received the rental payment together with beneficiation in terms of employment and social entrepreneurial development by Safcol.

Safcol was not just distributing bursaries but it also was rolling out training through its own facilities on the forestry sector.

On communities wanting to plant maize meal instead forests, Safcol was interacting with claimant communities and as part of what Safcol was considering, as an added value to beneficiating said communities as a result of Safcol operations in their vicinity was to look at programmes where communities were able to use the land for other agricultural opportunities over and above the fact that there were forests on the land. Those opportunities included grazing land, bee farming and even maize meal plantations.

On the rate of R60 00 as a rental hectare the Committee had to be aware that historically Safcol had operated without paying anything before at some stage. At another stage between 2012/13 a decision was taken that a rental had to be paid but the amount had been arbitrarily decided on by DAFF. The R48 million reflected on the presentation was a result of the latest agreement where Safcol had paid a rental for use of the forests which were on DAFF land. In 2014/15 Safcol and DAFF had agreed to appoint consultants to do an evaluation of the asset to determine a fair value for the purposes of the rental. A report was available in that regard but there were still interaction between DAFF and Safcol in terms of how to interpret that report and to implement the recommendations thereof. Therefore Safcol was not purposefully depriving the communities of the fair value of the rental charge.

 In terms of Safcol’s viability if it were to pay R6000 per hectare, Mr Mabece said that it would unfair for the company to be expected to respond to that question as that rental figure was not a valuated and verified value of a single hectare. Safcol had taken the initiative to appoint expert valuators to evaluate the fair value of a single hectare. Beyond that the company was looking at growing its revenue so that it was in a position to meet its financial and other obligations.

On diversification, Mr Mabece referred the Committee to the slide with products that Safcol was already providing. There was a plywood plant that had been mothballed historically and the new leadership was intending to revive the operations of that plant. With the current operations of sawmills, energy was being produced, however, that energy had not been harnessed. Co-generation therefore was something that was already happening at Safcol sawmills and that currently the fuel (sawdust and chips) from the sawmills was not being used at fair value.

On the wholesale aspect of diversification; the company was referring to accessing the market, as it was already there. As noted earlier, Safcol was processing only 25% of its produce harvesting with 75% being sold and also renting of sawmills. The plan was to continue growing the business as all those listed items regarding growth were not aspects that would derail the company’s focus. Safcol’s competitors were doing all that the company was still planning to do, for example, Mondi Paper’s annual turnover for 2014/15 had been about R115 billion as a result of diversification.

In terms of how Safcol would choose who was to be an industrialist, he said that the company would interact with other players including the Departments of Trade and Industry (DTI), Economic Development (DED) and DRDLR. The company had interacted with the Council for Science and Industrial Research (CSIR) which had already tested a number of products through its applied research and which needed commercialisation. It was Safcol’s responsibility to make those known to the public so that citizens would then choose the opportunities themselves without the company having designated specific people.

On whether the rentals which were being paid into a trust account were benefiting the intended beneficiaries, Mr Mabece said that Safcol was only responsible for paying money over to DAFF. It was DAFF’s responsibility to see to it that beneficiaries did indeed benefit.

On the section 54 application which Mr Julius noted that Safcol had failed to mention, Mr Mabece said that the improvement of efficiency processing was the actual note; as the current process on the Timbadola sawmill had seen the company doing a pre-notification. The following process would be a section 54 notification.

Mr Mabece requested that Safcol be allowed to respond in writing to the questions on the bursaries.

On benefits for individual families instead of community wide benefits, he said that to date Safcol had been looking at a number of beneficient initiatives including employment and bursaries. However, Safcol would look into its assets which included eco-tourism as the company had a few assets including hiking and four wheel trails, picnic spots and so on. The company was reviewing how all that could be used not only for Safcol but to involve communities as businesses.

On the sustainability of community businesses where Safcol operated, Mr Mabece said the idea was to further solidify relationships between the company and its surrounding communities.

On social compacts, he said that the essence of the compacts was the commitment of Safcol to assist communities with some of their needs. The communities determined what their priorities were at any given time.

He replied that on the land claimants receiving an opportunity to participate in the diversification of Safcol business, the board envisioned the company as a catalyst in the industrialisation of forestry.

There was a link between old and new markets within the forestry industry because with the arrival of the new board, it had realised that there had not been efficient exploitation of even the old markets. The new markets would then influence how soon Safcol accessed them based on the response the company would get in better exploiting the old markets.

As had been mentioned, there were over 150 products coming out of forestry. Safcol would not determine for black industrialists what they had to do. It was going to present though on the opportunities that were available. The company believed those opportunities would be sustainable as they were not only going to be based on its current biological assets but on other forestry assets that did not belong to Safcol.

Financial management does include financial controls. Those matters had been raised by the Auditor-General South Africa (AGSA) in Safcol’s previous audit report, as issues needing urgent attention.

Mr Mabece said that Timbadola did indeed need to be upgraded as a matter of addressing the company’s equipment challenges. On other equipment, Safcol was identifying plants that had been historically mothballed which were expected to generate additional revenue after revamping.

The current leadership was reviewing some of the investigations that had been instituted historically to see if all disciplinary protocol had been followed to the letter. There was an ongoing investigation that was to enable the new board to see a full picture of Safcol’s state of affairs prior to the new board’s arrival. That was why the delegation before the Committee had acting personnel [due to suspensions]. Hopefully that ongoing investigation would have been concluded by the time the company returned to the Committee.

On collaborations, Safcol was collaborating with DRDLR on land claims. This was why Safcol was seeking consent from the DRDLR on its settlement model for the land claims. The company was working with DAFF which was why there was mention of Safcol seeking to manage and develop over 160 000 hectares of DAFF forests. In terms of local government, there were no structured and formal interactions however there were ongoing processes in that regard. For example, as part of the process of looking at co-generation, as part of upgrading Timbadola sawmills; Safcol would have engaged a municipality to determine if the municipality could buy from Safcol some of its excess electricity. Additionally there would be engagements on matters of employment from time to time between Safcol and municipalities. Sometimes those engagements went as far as provincial government such as discussions about the forestry industry between Safcol and the Mpumalanga provincial government on its Industrial Development Zone (IDZ).

The normal process of IDP development was with community members in getting their voices heard on how to structure municipal priorities. Safcol had not to date formally decided to participate as a separate entity in IDP development though its presence in a given location was considered by certain municipalities as its existence had an influence on their IDPs.

The relationship that Safcol had with some traditional authorities was generally good where Safcol had presence, in terms of the reports that the board received from management and from anecdotal experience of the current board since appointment.

On climate change effects on the business, Mr Mabece replied the company had a research and development unit. Part of its work was researching and developing tree species that were drought resistant and required less water. The company had broadened the mandate of that unit to doing similar work for trees that can be grown in Mozambique and beyond. Seeing that the State’s plan was to have one million trees at some stage in future, therefore Safcol was obligated to assist communities to appreciate the value of trees.

The possibility of owning its own property was something that though not formally discussed was there and needed attention. Safcol certainly had to be exemplary in what capabilities wood had and with its head office lease agreement coming to an end, the company could review this.

On how long Safcol would continue renting sawmills and why that had been the case, the two custom cut sawmills being rented were assisting in the meantime with increasing the capacity of processing. The plans of course were for the company to go beyond its current processing numbers and, with the options being considered, when the time was right Safcol would be in a position to inform the Committee of the progress. Sawmill rental contracts were quite short term since the Competition Commission was looking into ensuring that new players were given an opportunity from time to time by the company. All were less than five years.

Mr Theron said that there had been 18 plantations across the country which Safcol worked. Three of them had been moved into some of the other plantations so that they were no longer standalone. The reason four were mentioned as situated in Mozambique in the previous presentation whereas three was noted in this briefing is there was IFLOMA 1 and 2. There were three operational plantations in IFLOMA 1 in care-and-maintenance, which meant that they were not being harvested. IFLOMA 2 had been removed from reporting from a transparency point of view since Safcol was not sure as of 31 March 2016 whether it would still own the plantations. That was a matter that the company still had to address with the Mozambican Government. The expected sustainable yield total had been reduced accordingly as well.

From a governance point of view, sawmill rentals were out on an open market tender in early 2016 for a three year tender. Safcol would be looking at whether the saw mills would be able to do its specific volumes where the current two saw mill contracts were expiring in March 2016 and a renewal respectively. Mr Theron explained that when Safcol was referring to a land rental that was for land specifically. Saw mill rental was payment of a production fee and not a rental amount for a saw mill. The production fee was from intake to processed lumber which meant that the product stayed as Safcol’s but the labour was not.

On Safcol’s vertical integration, Members needed to look at the company’s competition in the forestry industry. Safcol supplied its biggest competitor with approximately 40% of its raw material. They had forests half the size of Safcol but were doing double Safcol’s turnover just because of vertical integration. Safcol had the potential to sit at R3 billion which meant there was room for growth. For example on eco-tourism, other forestry companies in the world generated 20% of their revenue just from that item. That was why Safcol was going out on tender to get expert opinion on what it could do to revive its eco-tourism business.

Mr Theron said that the new collective leadership had a similar frustration when it came in, as what the Committee was feeling. Specifically from the perspective that the handed over information had just been enough to keep the leadership at arm’s length, because when digging deeper responses were not forthcoming. That was when the new board had instituted an investigation into the affairs of Safcol. The leadership had become aware of pole treatment facilities that were not operational and when the question was put as to why they were not in use, responses were not forthcoming.

Currently Safcol was selling its poles at R150 per pole and after processing it was sold at R2000 by its competition, per single pole. That had been the discrepancy found by the new leadership as it was under R10 million to set-up a pole treatment facility to process poles. It was that vertical integration which Safcol was looking at and indeed the company was diversifying. However, all that it was going to be doing was not new business in terms of risk.

The Chairperson asked how Safcol managed to build schools and clinics if it did not participate in IDPs. She said that Safcol would be called in to meet together with municipalities – since during oversight the Committee had found out that the previous leadership of Safcol had no relationship with municipalities.

The DPE said that it understood and appreciated the fact that its SOEs undertook to assist municipalities where they operated in terms of their socio-economic mandate. DPE had made it a point in its provincial engagements to understand provincial and local government plans so that its SOEs’ investment plans and CSI programmes were aligned to government plans. For example on 29 February 2016 DPE had engaged with Northern Cape senior government leadership from the Department of Cooperative Governance and Traditional Affairs (COGTA) to speak exactly to what the Chairperson had alluded.

Mr Theron said that Safcol had had a problem where its saw dust build-up at one of its mills was such that its boiler could not burn it as it was under maintenance. It became a cost to the company to get rid of in the long term which was why Safcol was going into co-generation. With a co-generation facility set-up, the company would save on its electricity bill internally and when it cut a log, only 48% of a log actually made money for the company. The rest was waste which could be used more efficiently.

The Chairperson thanked Safcol responding to similar questions as had been asked previously, but with more detail and some progress.

The meetings were then adjourned.