SAFCOL Annual Report: briefing; State-Owned Enterprises: National Treasury briefing

Meeting report

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
16 September 2004
SAFCOL ANNUAL REPORT: BRIEFING; STATE-OWNED ENTERPRISES: NATIONAL TREASURY BRIEFING

Chairperson: Mr Y Carrim (ANC)

Relevant documents
Presentation by SAFCOL on Annual Report 2003
Briefing by National Treasury on State-owned Enterprises

SUMMARY
The South African Forestry Company Limited (SAFCOL) presentation dealt with its shareholding; the nature of the business; privatisation objectives; structure of the SAFCOL Board; SAFCOL's financial results on 30 June 2004; and the funding arrangements and staff complement in July 2004. During the discussion, Members sought clarity on SAFCOL's senior staff and middle management structure; whether SAFCOL's projects actually benefited and empowered the communities; its measures to address the declining numbers of graduates involved in forestry studies and the fact that it did not appear to be fully compliant with government's employment equity requirements; and the extent to which traditional healers had the right to use the land for their practices. The Committee also asked SAFCOL to explain the lessons it has learnt from the privatisation of the Singisi Forests and Siyaqhubeka Forrest Products and the reason for the late tabling of its Annual Report.

The National Treasury presentation outlined the underlying principles regarding state-owned enterprises in the Public Finance Management Act (PFMA), the position of the pre-financial year, in-year management and post-financial year reporting obligations placed on state-owned enterprises by the PFMA. During the discussion, Members sought clarity on the difference between the state-owned enterprises in Schedules 2 and 3 of the PFMA and whether Treasury could ensure that the Committee received researchers and other expertise. The Committee agreed with Treasury that a balance must be struck between micro-management and interfering in the business of the boards of state owned enterprises, and suggested that Parliament's oversight with regard to the budgets of the Schedule 2 entities especially must be strengthened.

MINUTES

SAFCOL briefing
Mr M Ntuli, Chairperson of the SAFCOL Board, stated that SAFCOL last briefed this Committee in 1997. He outlined the portion of the presentation (document attached) that dealt with the SAFCOL shareholding, the nature of the business, privatisation and the structure of the SAFCOL Board.

Mr M Breed, CEO: SAFCOL, outlined the portion of the presentation that dealt with SAFCOL's position as at 30 June 2004, its shareholding and privatisation objectives.

Mr J Coetzer, SAFCOL Financial Director, outlined the portion of the presentation that dealt with SAFCOL's financial results, its funding arrangements and the staff complement as at July 2004.

Discussion
Mr P Hendrickse (ANC) sought the staff complement figures 5 or 10 years ago, so that a comparison could be done for the SAFCOL senior staff or middle management structure.

Mr R Nogumla (ANC) asked SAFCOL to explains its measures to change its staff complement.

Mr S Kholwane (ANC) asked whether SAFCOL envisaged major job losses after the 5 concerns have been sold.

Chief M Nonkonyana (ANC) asked whether the Singisi Forests and Siyaqhubeka Forrest Products projects in fact made a difference to the community

Ms P Mnandi (ANC) stated that the presentation did not mention the training or skilling of the community or the employees, and asked SAFCOL to explain its efforts with regard to skills development.

Mr Kholwane asked SAFCOL to explain the role of its subsidiaries in ensuring that the communities benefit socially and otherwise, as it was expected that SAFCOL would play a crucial role in bridging the urban/rural divide.

Ms Mokoto asked whether SAFCOL could monitor whether the lives of communities around the forestry areas were improved after the sale of the land.

Chief Nonkonyana sought clarity on the revenue drop by 2.2% in the 2003 financial year

Secondly, Chief Nonkonyana asked whether there was any reason why SAFCOL's financial year had ended in June and not at the end of March, in line with the government cycle.

Ms Mnandi asked SAFCOL to explain the extent to which the 25% share still held by government would allow it to achieve some of its core objectives, especially in ensuring that the State-owned enterprises owned by foreigners adhered to government's mandate.

Ms N Kondlo (ANC) asked SAFCOL to explain whether it believed that the 6% shareholding in SAFCOL retained by government would enable SAFCOL to achieve its objectives regarding sustainable rural development, empowerment of previously disadvantaged communities and human resource development in the forestry sector.

Mr Breed responded to these questions by stating that government's goals with regard to SAFCOL and its assets were very clear: government's objective was to exit commercial forestry, especially where it was done on a purely commercial basis. The strategy was clearly communicated to SAFCOL to sell its major assets, and it has embarked on this process. The commercial documents of the remaining 3 SAFCOL properties have already been signed. The process was irreversible, unless the Competition Commission decided to reverse the transactions. All five transactions have business plan undertakings that listed government's objectives, which would be signed by all parties to the transaction and was monitored closely by SAFCOL. At least one director would represent SAFCOL and government.

The 25% shareholding would be split into 10% allocated to the National Empowerment Fund, but the precise allocation had not yet been clarified by government. He stated that his interactions with government made it clear that the intention was to benefit the local community. The major benefit for the communities would come via the lease payments, where government would then redistribute the lease payments back to the communities.

Ms Mnandi asked SAFCOL to explain the extent to which its restructuring would enable it to generate sufficient revenue.

Mr Nogumla asked whether the communities would be participating in the game farming initiatives.

Mr Kholwane asked whether the two sales that have already been finalised have resulted in major job creation, as it was one of SAFCOL's major objectives.

Secondly, Mr Kholwane asked SAFCOL to explain its measures to address the declining numbers of graduates involved in forestry studies.

Mr Breed replied that the forestry industry was not an easy industry because of the history of the industry, and because the majority of the graduates were from Stellenbosch University and were white students. The bursaries provided over the past 10 years were given primarily to historically disadvantaged people, but Stellenbosch University currently has one graduate in wood technology that was promising. There was thus a major problem in the industry as a whole with regard to technical expertise, which was high on the Forestry South Africa (FSA) agenda.

Mr Kholwane asked how SAFCOL or the forest industry would be marketed outside the communities in which it was directly involved, because it currently seemed limited to that specific environment.

Mr C Gololo (ANC) asked SAFCOL to explain the exact percentage of its forests that have already been privatised, and what the plans were for the remaining percentage of forests. Secondly, he asked how many subsidiaries SAFCOL currently had.

Ms Mnandi asked SAFCOL to explain the lessons it has learnt from the privatisation of the Singisi Forests and Siyaqhubeka Forrest Products. She asked whether the performance of these two entities was better now than while under SAFCOL's control.

Mr T Louw (ANC) asked SAFCOL to explain the percentage of its sales that have gone to women empowerment groups.

Mr Gololo stated that SAFCOL did not appear to be fully compliant with government's employment equity requirements, and asked it to explain when it planned to comply.

Mr Breed responded to these questions by stating that SAFCOL was still learning lessons because only the two properties have been privatised. The local communities around the Siyaqhubeka Forrest Products will benefit from an additional 10% shareholding, of which 50% of that 10% will be shared with the amakhosi. Apart from the shareholding bought by the Black Economic Empowerment (BEE) partners in the Singisi Forests, there has not been any further empowerment to date. The Business Plan Undertaking (BPU) of the Siyaqhubeka Forrest Products project aimed to look at forestry contractors and training. There has been success in this regard but it was a long process, and the real benefits will be seen now in years four and five when the contractors have been fully trained.

Mr Coetzer added that there were other activities contained in the BPU such as gardening, mushroom picking and bee-keeping initiatives, and this would also assist the empowerment process. The BPU contained all the commitments given by the bidder to government during the evaluation phase and makes it a firm legal commitment to government and the communities, which SAFCOL monitored on a regular basis. It would then report back to the shareholder on the progress made.

Mr Ntuli responded that both the buyers and sellers have learnt lessons. The strategic partners have also learnt how to structure a deal in order to empower communities, but there were very difficult issues involved in generating funds to empower people. SAFCOL was working with the 75% strategic partners to understand government's vision.

Mr Coetzer added that each of the subsidiary companies had forwarded their employment equity report to the Department of Labour, and the BPU contained specific targets.

Mr Breed replied that it was correct that SAFCOL has not met government's employment equity targets. SAFCOL has been under privatisation for 8 years now and during that time it was very difficult to restructure and recruit people. Together with the Department of Labour, SAFCOL then decided to put the employment equity plans on ice until 2003, and it has now begun to aggressively pursue this.

Ms Mnandi asked to what extent traditional healers were given the right to use the land for their practices.

Mr Ntuli replied that this was a very important question. Access to forests by traditional leaders was embedded in the lease agreement itself as well as the National Forest Act of 1998, which allowed them full access to such areas.

Mr Coetzer added that the only land that would be sold was that on which the sawmills were situated. The access to the forest and indigenous trees for medicinal purposes were described in the National Forests Act as well as the lease agreement, with an annexure detailing the activities. They would thus definitely have access to the forests.

Mr S Manie (ANC) asked whether the cash flow position of R150 million was included in the company when it was put up for sale. Secondly, he sought clarity on the R30 million spent on advisors' fees. Thirdly, he asked SAFCOL to explain the veto right government would have via its shareholding of 25% in SAFCOL.

Mr Coetzer replied that the shareholder agreement contained a specific section that dealt with about 20 veto rights which government could exercise via SAFCOL through share ownership, even if it was just one share for a period of 5 years. The directors of the company cannot make any of the decisions as prescribed in those 20 veto rights without the SAFCOL director being present.

Mr Manie asked SAFCOL to explain whether the Komatiland area would be sold as part of the business, as his understanding was that it would be part of a lease agreement.

Mr Breed responded that the land would not be sold but would instead be leased, except one piece of land in Kwazulu-Natal which was bought subsequent to the transfer of assets from government to SAFCOL. The lease payments were based on commercially acceptable rates and the intention was for these rates to be returned to the communities surrounding the forestry areas. A formal lease agreement was entered into with government for 70 years.

Mr Manie asked whether consideration was being given to optimally beneficiating forestry products.

Ms Mokoto sought clarity on SAFCOL's assets and liabilities.

Secondly, Ms Mokoto asked SAFCOL to explain what was meant by "deferred taxation" of R27.9 million indicated in the presentation.

Ms Mnandi asked whether SAFCOL planned to take on a partner in the forestry industry.

The Chair noted that there was insufficient time for SAFCOL to adequately respond to all the questions raised by Members.

Mr Manie proposed that Members interact individually with SAFCOL in their constituency areas on the questions raised during this meeting, in order to develop a hands-on approach.

Mr Breed stated that SAFCOL would be able to facilitate this.

The Chair stated that state-owned enterprises were supposed to submit their Annual Reports by the end of September each year, yet SAFCOL submits its reports in November. The Committee has been sympathetic to date but in the next financial year SAFCOL must submit its Annual Report by the end of September, as is required of all state-owned enterprises in the Public Finance Management Act (PFMA).

Mr Breed replied that SAFCOL did comply with the PFMA but, because its financial year ended at 30 June, it received a formal request from the Department to change that to 31 March as of 2005. SAFCOL could not change that date during 2004 due to its privatisation, but committed to change it in 2005. The Chair agreed.

Presentation by the National Treasury
Mr I Momoniat, National Treasury Deputy Director-General: Intergovernmental Relations, conducted the presentation (document attached) which outlined the underlying principles regarding state-owned enterprises in the PFMA, the position in the PFMA pre-financial year, in-year management and post-financial year reporting obligations placed on state-owned enterprises in the PFMA.

Discussion
The Chair sought clarity on the difference between the state-owned enterprises in Schedules 2 and 3 of the PFMA.

Mr Momoniat responded that Schedule 3 dealt with largely the small business entities and all the non-business entities, which included the National Electricity Regulator (NER), the National Monuments Council, the National Parks Board, South African Revenue Services and the State Information and Technology Agency (SITA). These were not large business institutions. Schedule 2 entities were the large parastatals such as Eskom, Transet, Armscor and DENEL. The decisive question when the PFMA was drafted was not what the dividing line was between these different kinds of state-owned enterprises, but instead it was decided that the Schedule 3 entities would be granted much greater managerial powers. Thus the Committee's focus would fall primarily on the Schedule 2 entities.

The Chair asked Treasury to respond to the question he posed to SAFCOL regarding the tabling of its Annual Report.

Ms Mokoto stated that the PFMA must be amended to require all state owned enterprises to table their annual reports by end September.

Mr Momoniat replied to these two questions by stating that all state-owned enterprises had different financial years before 1994 and there was no consistency. The PFMA now required all state owned enterprises especially the Schedule 3 entities, besides the Water Boards, to operate in line with provincial and national government. Not all the Schedule 2 entities have been made to comply, although it was desirable to have all on the same page.

Section 65(2) of the PFMA required state owned enterprises to table their Annual Reports within 6 months after the end of the financial year. They would thus have to submit them by 30 September if they had the same financial years as provincial and national government. It was primarily the Schedule 2 entities and the Water Boards that had different financial years.

Mr Manie stated that the boards and executive authorities of the state owned enterprises must be properly resourced and capacitated for proper management to be ensured.

Mr Hendrickse asked Treasury to assist Parliament to become more empowered to properly exercise its oversight function by allocating funds for the employment of researchers and other expertise.

Mr Momoniat replied that Treasury was always open to empowering the Committee and he hoped that, through Parliament, the Committee would be allocated a researcher. Communication between the researcher and Treasury would be welcomed, especially on annual reports or budgets. He stated that he was not familiar with Parliament's budget or its decisions on the allocations made, but agreed that researchers were needed to enable Parliament to properly execute its oversight role.

The Chair asked Treasury to explain what exactly this Committee must do with the annual reports submitted, and whether this overlapped with the work done by the Standing Committee on Public Accounts.

Mr Momoniat responded that the Committee needed, as the very least, to have hearings to investigate service delivery, to ask the hard questions and "the stuff that's not put in the Annual Report". In fact a few days should be set aside for each entity because they were large parastatals.

The Chair asked whether there was a distinction between the terms "state owned enterprises" and "public entities".

Mr Momoniat replied that these terms were used very loosely, and the terms "state owned enterprises", "public entity" and "public enterprise" were used to refer to the Schedule 2 entities, and sometimes to the large businesses like the Rand Water Board. There was however no clear definition, but they meant the same thing.

The Chair stated that surely the Minister should also appear before this Committee when the Department's annual report is considered by Parliament.

Mr Momoniat replied that it would probably be easier to ask Departments to report on all their entities, particularly for the small ones.

The Chair stated that the Committee agreed with the sentiments expressed by Mr Momoniat during his presentation that a balance must be struck between micro-management and interfering in the business of the boards of state owned enterprises.

Mr Manie stated that Parliament's oversight with regard to the budgets of the Schedule 2 entities especially must be strengthened, so that it could make very strong recommendations before the budget of the state owned enterprise was finalised.

Secondly, Mr Manie stated that the PFMA merely requires the boards of the Schedule 2 entities to submit their expenditure and borrowing projections as well as the corporate plan, whereas the Schedule 3 entities must have those approved by the executive authority. He suggested that the same should be applied to Schedule 2 entities as well, and perhaps they should also be tabled in Parliament for discussion before approval by the executive authority.

Chief Nonkonyana stated that Schedule 4 boards were appointed by the shareholders, which is government, and would thus be accountable to the Minister. They must also report to Parliament on their budgets.

Mr Momoniat replied to these questions by stating that the large entities were businesses and they needed to have proper boards with powers contained in the Second King Report on Corporate Governance. He agreed that they could not be micro-managed but instead needed to exercise their fiduciary duties. There are however public interest issues such as the capital plans and budgets that must be tabled in Parliament. He agreed with Mr Manie that the budgets should be tabled in Parliament for consideration and public debate. Treasury was discussing this with the Department and a committee has been established to look at the improvement of oversight over these issues.

The Chair suggested that Treasury host a workshop on the presentation.

Ms Mokoto stated that the subsidiaries of the state owned enterprises must also submit their annual reports to Parliament.

Mr Momoniat responded that some of the state owned enterprises have such large subsidiaries that this would be necessary. All their financial statements were meant to be included in their annual financial statements in any event under Section 55(2)(c) of the PFMA.

The Chair asked Mr Momoniat to indicate Treasury's measures to ensure the PFMA was conformed to, such as the provision of a specific reporting format for Committees.

Mr Momoniat replied that there was no common format because they tended to be specific to each parastatal.

The meeting was adjourned.