Report of the Portfolio Committee on Public Enterprises on Annual Reports of Department of Public Enterprises and Transnet, Eskom and Denel, dated 16 February 2005:
Report of the Portfolio Committee on Public Enterprises on Annual Reports of Department of Public Enterprises and Transnet, Eskom and Denel, dated 16 February 2005:
The Portfolio Committee on Public Enterprises, having considered the annual reports of the Department of Public Enterprises and Transnet, Eskom and Denel, reports as follows:
A. An Initial Foray
The Committee considered the annual reports of the Department of Public Enterprises (DPE) on 12 October, Transnet on 13 October, Denel on 14 October and Eskom on 27 October.
The Committee did not consider the annual reports of Alexkor, Safcol and Arrivia.kom because of time limitations and other considerations, including difficulties posed by the different reporting cycles of Alexkor and Safcol. However, the Committee considered briefings from Alexkor and Safcol. These will not be covered in this report. The Committee will meet with Arrivia.kom early in the New Year.
This was the first time that the Committee considered the annual reports of DPE and the state-owned enterprises (SOEs). Most of the members are new to the Committee. There is also a new developmental thrust being given to SOEs. We had limited time and research support. We also have limited technical capacity, especially in respect of financial, accounting, economic and management issues. Our programme of empowering ourselves has just begun.
The Committee is, moreover, seeking to establish what precisely our role should be in considering the annual reports of DPE and the SOEs. The Constitution, the rules of parliament, and the Public Finance Management Act (PFMA), Act 1 of 1999, provide a framework for the Committee’s role. But there needs to be greater clarity, especially in respect of the SOEs. Of course, the Standing Committee on Public Accounts (SCOPA) also considers annual reports. Essentially, as we see it, for now, their focus is largely on financial performance, and ours is mainly on the achievement of measurable objectives and on outcomes. Of course the two aspects cannot be crudely separated. The work of our committee and SCOPA needs to be complementary. We are to engage with SCOPA, the Finance Portfolio Committee, the Committee of Chairpersons, the National Treasury and other relevant stakeholders to get greater clarity on this.
As we see it, for now, our Committee’s concerns in considering annual reports revolve mainly around the following issues:
What were the main measurable objectives, strategy and programmes in the business plan of DPE and SOEs for the financial year under review? How does the business plan advance the agenda set by government and parliament?
What are the key aspects of the shareholder compact between government and each SOE? To what extent does the business plan of each SOE reflect the priorities in the compact?
How was the budget allocated to fulfill the plan?
To what extent was the plan fulfilled and why? In particular, if objectives were not achieved, why is this so and what is being done to ensure that they are met?
How was the money allocated in the budget spent?
What lessons were drawn from implementing the plan of the previous financial year for the implementation of the plan for the current financial year?
What progress has there been in the six months since the end of the financial year and now? What are the projections for the remainder of the current financial year? What are the projections for the longer term?
Obviously, the Committee did not expect clear and comprehensive answers to all the questions in section 5 above this time around. The Committee is also acutely aware that DPE and the SOEs are currently re-defining their mandates to take account of the new emphasis the government is placing on the role of SOEs in economic growth, development and service delivery. Major investment plans are being finalised. But, over time, the Committee is to engage in appropriate consultation with all the relevant authorities and stakeholders, including the Ministry, DPE and relevant SOEs, and secure greater clarity on how annual reports should be considered by a parliamentary committee. The Committee will certainly be clearer about its role and what it seeks to do in considering annual reports reasonably soon.
In view of the considerations set out here, the Committee decided to be strategic in our approach and choose to take on only so much as we can mange in this first attempt at considering the annual reports of DPE and the SOEs. Our approach must be understood in terms of the Committee’s programme, "Towards Developing a Longer-Term Programme: Setting the Foundations", adopted on 4 August 2004. Our aims have been modest. We have a phased approach to dealing with the issues in our portfolio. Essentially, we have sought through these briefings to:
Get a feel for the issues.
Express our initial views.
Set the foundations for a more rigorous consideration of the annual reports next year.
More clearly identify our role and responsibilities.
Begin to shape our overall programme for next year.
Of course, the financial year being considered is 1 April 2003 to 31 March 2004. In view of the new emphasis being placed on SOEs, the Committee did not focus too much on the extent to which DPE and the SOEs fulfilled the objectives set out in their strategic and business plans; in future years the Committee will be far more concerned about this. But, inevitably, an assessment of the past financial year cannot be crudely separated from current developments and projections for the rest of this financial year and beyond.
Of course, a key concern of the majority in the Committee in these briefings is the contribution of DPE and SOEs to the goals of job creation, fighting poverty and reducing the gap between the "first" and "second" economies. These briefings represent our first consideration of this. We understand that DPE and the SOEs are still finalising plans, programmes, and budgets on this. In future briefings, we will pursue these issues more rigorously.
This report does not dwell on the new investment plans for SOEs. The first tranche of this, the R165 billion proposed for Eskom and Transnet, was announced by the Minister of Public Enterprises just as the final briefing on annual reports was being considered by the Committee. These investment plans will be considered by the Committee in due course.
This report is longer than it should, ideally, be. The overviews provided of the submissions of DPE and the SOEs on their annual reports to the Committee are perhaps too detailed. But the extent of detail is partly related to the fact that this was our initial consideration of annual reports and we need to quickly come to terms with our portfolio. However, the report still provides no more that an overview of the submissions. A fuller account of the presentations to the Committee is to be found in the annual reports and submissions received by the Committee. These can be obtained from the Committee Secretary, Mr Chris Thisani.
In a way, this report is as much about the Committee shaping its identity and role as it is about the Committee’s views on the annual reports of DPE and the SOEs – and so, inevitably, it must be for now!
B. Department of Public Enterprises
The Department was represented by Director General, Dr M Eugene Mokeyane; Deputy Directors General, Ms Portia Molefe, Mr Tebogo Mphuti and Mr James Theledi; Chief Director: Communications and External Liaison, Mr Andrew Aphane; Director: Analysis and Risk Management, Mr Mvikeli Ngcamu; Director: Policy, Mr Denzil Matjila; Chief Finance Officer, Mr Mario van der Walt; Chief Operations Officer, Mr Mandla Mazibuko; Parliamentary Liason Officer, Ms Dudu Mhlongo; and Ministerial Spokesperson, Ms Gaynor Kast.
Dr Mokeyane explained that DPE’s vision is "excellence in shareholder management" and its mission is "to provide an enhanced shareholder management system, inclusive of restructuring" to promote economic efficency. DPE’s key objective is to develop a "coherent approach to restructuring and transforming SOEs to ensure improved economic and social impact". DPE seeks to "systematically monitor the performance of SOEs to ensure the alignment of their activities with government policies".
DPE’s "strategic goals" for the 2003-4 financial year were:
Clear mandates with SOEs regarding the operating parameters between government and the SOEs.
Performance criteria and a process of monitoring performance on a regular basis.
Ensuring that SOEs adhere to corporate governance principles.
Developing and implementing an effective communication process with all stakeholders.
Restructuring of SOEs.
The Department had organised its work around four programmes to achieve these goals: administration; restructuring of SOEs; performance monitoring and shareholder management; and alternative service delivery. The Department felt that it had made significant progress in advancing these goals. In particular, it had strengthened its oversight role over the SOEs, especially in ways that overlapped with the government’s more recent "strategic shift" of emphasis on the crucial role of SOEs in investing in the economy and contributing to economic growth and development. Among the achievements pointed to were the following:
Development of a new shareholder management model.
Progress in finalising a Risk Management Policy Framework for SOEs.
Creation of Restructuring Frameworks for SOEs.
Alienation of "non-core, non-strategic" assets.
Development of a Guarantee Exposure Monitoring System (GEMS) to monitor guarantees issued to SOEs on a quarterly basis.
Establishment of an SOE database of quarterly and annual results of SOEs.
Development of an "Investment Map" to monitor SOE investments.
Progress in terms of broad-based Black Economic Empowerment (BEE).
Development of an IPO (Initial Public Offering) Reference Manual based on the Telkom experience.
Development of new skills within DPE to effectively implement the strategic shift in emphasis.
In order to play its role more effectively, the Department had strengthened its internal structures and streamlined its operations. With the "strategic shift", the Department had also been restructured. It now had four Deputy Directors General for Analysis and Risk Management; Governance and Policy; Corporate Strategy and Structure; and Corporate Finance and Transactions. Currently, the staff is made up of 82% Africans, 6% Coloureds, 2% Indians and 10% Whites. 53% of the staff is female.
DPE had been allocated a budget of R88,1 million for 2003-4. DPE had underspent by 5%. National Treasury’s benchmark is 3%. For the fourth year in a row, DPE had received an unqualified audit from the Auditor-General.
The Director General explained that the "government has repeatedly maintained that we are not going to have a bargain basement, wholesale sell-off of state assets". But the government was going to do everything to encourage private sector participation in state-owned enterprises through a variety of other forms. In transport, the state would mainly retain control of the infrastructure, but the operations will be largely in private hands. In the energy sector, 30% of new electricity generation will be provided by an independent power producer. Generation and transmission within Eskom will be ring-fenced. A multi-market model for wholesale electricity trading is on the agenda. A South African Power Exchange is to be established. The government had decided to shelve for now getting a strategic equity partner for Denel. A strategy for Denel is being worked on.
The Department feels that since the elections in April, it has made significant progess in clarifying the "strategic shift" in emphasis, finalising new SOE investment plans, and restructuring the Department and appointing new senior managers. The Minister had also concluded a new performance contract with the Director General and senior managers. A process has also begun of ensuring more regular contact between the Minister and the Chairpersons of the SOE Boards, and between the Director General and the CEOs of the SOEs. The Director General explained that DPE’s progress towards achieving its measurable objectives was set out in its website, and the Department would be prepared to give the Committee a quarterly report on this. The Director General said that attempts are being made to brand DPE more effectively as it is not seen to be visible enough.
Overall, the Committee feels DPE made valuable progress in the 2003-4 financial year. It is to be commended for the way it has dealt with the "strategic shift" in emphasis, and it has certainly made significant progress in the financial year to date. The new structure of the Department seems to be more consistent with the "strategic shift". The Committee feels too that the composition of the Department’s staff is very consistent with the requirements of the Employment Equity Act 55 of 1998, and is particularly impressed with the fact that 53 % of the staff comprise women. The Committee welcomes the Department’s Employee Wellness Programme and hopes that it will contribute to ensuring the stability of the staff. The Committee commends the Department for the unqualified report it received from the Auditor-General and for its minimal under spending.
While welcoming the progress in the strengthening of DPE’s oversight role over the SOEs, the Committee feels this needs to be taken further. The Committee will offer concrete suggestions in this regard within the next six months. The Committee would also like DPE to in future spell out more clearly in its presentations on its annual reports to the Committee the shareholder compacts concluded with the SOEs and how precisely DPE monitored the progress of SOEs in fulfilling the objectives and other aspects of the compacts. The Committee believes that consideration should be given to tabling the shareholder compacts in parliament. This would also serve to clarify the oversight responsibilities of the Committee in respect of both DPE and the SOEs. The Committee feels it would be useful to have a workshop with DPE within the next six months on corporate governance of the SOEs and the new shareholder management model being developed.
The Committee would also like a briefing from the Department on the development of its SOE Risk Management framework within the next six months. The Committee is concerned at the inadequate sanctions for SOE Board members and officials who take hedging and other decisions which lead to huge financial and other losses. While appreciating the complexities, the Committee would like the Minister and Department to clarify what is being done to avoid a recurrence of these unsound decisions and what sanctions, consistent with the PFMA, will be applied to those responsible, should they occur again.
C. Transnet
Transnet was represented by the Board Chairperson, Mr Phaswana; and Group Chief Executive Ms Maria Ramos; the CEO of Spoornet, Ms Dolly Mokgatle; the CEO of the National Ports Authority (NPA), Mr Siyabonga Gama; the CEO of South African Port Operations (SAPO) Mr Tau Morwe; the CEO of Petronet, Mr Charl Moller; the Group Executive: Strategy and Transformation, Mr Pradeep Maharaj; the SAA Executive Manager: Strategy and Planning; Mr Mohan Vivekanandan and Transnet Group Executive: Legal, Mr Vuyo Kahla.
Ms Ramos explained that Transnet’s role is to "contribute to the sustainable economic development of South Africa by providing the best connected and efficient transport network run by world-class rail, pipeline and port operators." It seeks to reduce the cost of doing business, make South Africa more globally competitive and stimulate job-creating economic growth. It aims to provide "an integrated, seamless transport and logistics solution to its customers and users". It seeks to respond to the challenges posed by globalisation and integrate the needs of the first and second economies in our country.
In 2003 the transportable production in the economy amounted to 745 million tons. Mining accounted for 49%, manufacturing 45% and agriculture 6% of this. (In 1998, the total amount was 580 million tons.) The total transport costs associated with this production to the economy was R135 billion. With an associated logistics cost of R45 billion, the total logistics cost was R178 billion, which was 14,7% of GDP.
Transnet has nine main divisions and a number of subsidiaries and related businesses. Currently, Transnet’s key businesses are Spoornet, NPA, SAPO, Petronet and SAA. It also has several other operating divisions, including Freight Dynamics (dealing with road freight), Metro Rail, Autopax (dealing with inter-city and cross- border road passenger services), Marine Data Systems (disposed of subsequently), Virtual Care (pharmacies that have subsequently been disposed of), Transtel (telecommunications), and Transnet Housing, Transnet has assets in excess of R70 billion and over 77 000 employees.
Transnet faces huge challenges in fulfilling its role. During the 2003/4 financial year, Transnet suffered a R6,3 billion loss. Its operating profit fell to R187 million from R5,1 billion the previous year. Cash flow and capital reserves were down. Turnover increased by only 5,7% to R43,6 billion. Transnet carried a debt of R27, 8 billion. Its gearing ratio was 83%, when 55 to 60% is a more reasonable benchmark.
Transnet attributed its weak financial position to "inadequate corporate governance, lapses in financial discipline and risk management which resulted in poor operating performances and substantial financial impairments in many businesses within the Group. Inefficiencies, low margins, investment backlogs, aged assets and infrastructure as well as the maintenance costs of under-utilised rail networks and port infrastructure are undermining operational returns".
A key explanation for Transnet’s financial position is SAA’s R15 billion net loss over the past two years. These losses stem largely from hedging activities undertaken by SAA as well as a significant downturn in the global aviation sector post-11 September and the outbreak of SARS. There also had to be a large adjustment in the valuation of SAA’s aircraft due to a drop in market value of aircraft in view of exchange rate differentiations and the poor airline business environment. The hedge book was closed off on 30 June 2004. SAA’s current net exposure is $100 million. SAA was technically insolvent at year end and requires further capitalisation of R4 billion with a further R1,5 billion credit line of credit from its parent company to enable SAA to continue operations over the current next year.
Transnet’s losses also have to be explained in terms of the new accounting standards in terms of which it has to report, particularly AC128 and AC133, which deal with asset impairments and fair value adjustments and the valuation of embedded derivatives related to customer service contracts.
Post-retirement liabilities continue to plague the financial position of Transnet with the unfounded obligation at year end valued at R7,6 billion.
Spoornet experienced a loss of R668 million in 2003-4, as against a profit of R400 million in the previous year. This was mainly due to changes of commodity prices in respect of the iron-ore contract and high operating costs and increases in maintenance costs, an ageing workforce and loss of valuable skills also made their mark.
The NPA increased profits before tax by 31% to R2,1 billion. SAPO posted a profit before tax of R348 million as against a reported loss of R86 million the previous year. Petronet increased profits before tax by 99% to R239 million.
To improve its financial position and ensure that it fulfills its crucial role, Transnet is undergoing major restructuring. It is to be transformed from "a diversified conglomerate into a focused freight transport and logistics provider". Its core business is to be rail, ports and pipelines. SAA is to be removed from the Transnet stable. Transnet recognizes that there are significant shifts in the South African economy that require a change in supply chains. South Africa has to reduce logistic costs by a third to sustain its competitiveness. There is a need to "focus on strategic clusters and strategic corridors". It is also necessary to have long-term planning that anticipates demand.
Transnet has a 4-point turn-around plan:
Redirecting the business.
Restructuring the balance sheet.
Implementing and adopting strict corporate governance principles.
Adhering to a vigilant risk management process.
Transnet’s revised industry positioning focuses on:
Vertical separation of operations and custodianship of infrastructure in its core businesses of rail ports and pipelines.
Inter-modal co-ordination to ensure seamless integration between rail and ports.
Non-core operations to be housed in an investment portfolio for potential future divestment.
Other aspects of its strategy include increasing operational efficiencies; changing the organisational culture; developing new skills; raising productivity; radically restructuring the head office and reducing costs; developing a strong customer orientation; and addressing the legacy of post-retirement benefits. The aim is to have a lean, well-functioning, more focused holding company with infrastructural and operational arms, which would be corporatised in time. A key aspect of the strategy is to have greater synergy between Spoornet, NPA and SAPO, and to integrate investment strategies.
There is a multi-year plan under way. In 2004-5 the focus is on "Building a Solid Foundation", with the emphasis on operational efficiency, vertical separation; corporate office restructuring; and divestment. The focus in 2005/6 will be on "Implementing A New Business Model", with the focus on operational synergy between SAPO, NPA and Spoornet, and a restructured portfolio. The focus in 2006-7 will be on "Delivering the Mandate", with the emphasis on operational integration of the ports and rail with the private sector; and local and global partnerships for growth. None of these phases are mutually exclusive and will be run concurrently.
Transnet believes that the implementation of its new strategy will, over time, improve its financial position. It will substantially reduce its borrowings if it divests its non-core assets and restructure its balance sheet. By strengthening its balance sheet, it will be able to raise fresh capital in the market and use this to strengthen its core business.
Ms Ramos explained that she could not at this stage spell out the impact Transnet’s new strategy will have on jobs within the company. But any job losses will be negotiated with the trade unions in terms of the National Framework Agreement. Transnet’s key contribution to job-creation was through reducing the cost of business and assisting the economy to expand so that more jobs can be created.
Spoornet is a "stagnant business warranting fresh solutions". It has been losing market share to the roads which accounts for 82% of the value of transport in the economy. Since 1990 there has been minimal growth in the total freight tansported by Spoornet. For over 60 years, there has been no new railway constructed in South Africa. Spoornet is to be revitalized and has engaged in a "re-strategisation programme’. This will revolve around customer service, operational efficiency, safety, profitability and skills. A key component of the strategy is to better understand the needs of the customer base. Resources will be used in a segmented way with the focus on large paying customers. To increase density on the lines, new locomotives with on-board signalling and changes to signal spacing, especially on the Sishen-Saldanha corridor are planned. Metrorail and Shosholoza Meyl are to be ceded to the Department of Transport. There is a three-phase strategic direction spanning the next five years. Phase 1 focuses on "Fixing the Basics", phase 2 on "Growth" and phase 3 on "Adding Value. A National Operations Centre is to be established to ensure planning, co-ordination and implementation. The CEO, Ms Dolly Mogkatle, is actively in the field herself, constantly engaging with customers and staff in different parts of the country.
Based on the new strategy and with the aim of investing R14 billion in upgrading infrastructure over the next 5 years, the aim is to increase Spoornet’s freight capacity by 30% in 5 years.
The NPA is to be strengthened as the custodian of the country’s seven commercial ports. It will have landlord, maritime and control functions. It will set and monitor efficiency standards to meet customer expectations. The NPA will have to adjust its operation in line with the impending introduction of a port regulator. Aspects of the NPA’s strategy include ring-fencing of assets, corporatisation, private sector participation, and funding plans. The aim is to invest R16,3 billion in ports infrastructure over the next 5 years. The NPA’s challenge is to reduce tariff income while increasing capital investment.
SAPO operates 13 terminals in 6 ports with assets of R3,2 billion. Its revenue of R3,2 billion in the 2003-4 financial year is expected to grow by 9% per annum. It aims to reduce operating costs by 10% per unit of volume in the 2005-6 financial year. It will also seek to diversify revenue streams through partnerships with the private sector to grow the revenue in real terms by 2007, anticipate market demand to plan timeously, and create a performance management culture.
Petronet’s core business is the bulk transportation of energy, which includes a range of petroleum products and gas. It does this though 3 000 kms of high-pressure, underground steel pipelines. Petronet transports about 40% of the country’s refined fuel requirements and all of Natref refinery’s crude oil requirements, which is 21% of South Africa’s total crude requirement. About 80% of Johannesburg International Airport’s requirements are supplied by Petronet’s Avtur pipeline.
SAA serves over 600 intercontinental, 30 African and 21 domestic destinations, and offers 358 daily frequencies. Intercontinental routes account for 60% of passenger revenue. About 50% of SAA’s sales are generated outside South Africa. By 2005, SAA will have 61 aircraft. All but 7 of them will be on lease. Despite its major financial challenges, SAA clearly has the potential to become successful. Currently, it is ranked among the top ten transatlantic airlines in the world. A strategy for SAA’s renewal is currently being worked out.
The Committee welcomed the frank and comprehensive presentation offered by the Transnet Group CEO and her team. The Committee agrees with Ms Ramos that it will not do to expect dramatic changes overnight and that it will take time to effect the strategy. The Committee appreciates the enormous challenges that confront Transnet, but believes that the clear, measured, creative, wide-ranging strategy Transnet set out has much to commend it. The Committee is very encouraged by the determination of the Chairperson of Transnet’s Board and the senior managers who were present at the briefing to make Transnet work. While appreciating the difficulties it could cause, the Committee thinks it is commendable that the Group CEO and all the senior managers have not taken a salary increase or incentive bonuses this year in view of Transnet’s financial challenges.
While expressing strong support for the new management of Transnet, the DA believes more space should be given to the use of private sector capital in the financial restructuring of Transnet.
The Committee feels that the major challenge now is phasing in the strategy appropriately and implementing it effectively. It would be vital to negotiate maximum support for the strategy from Transnet managers, the staff, trade unions, business, public representatives, and civil society and other stakeholders. The Committee is aware that Transnet has in recent years devised grand strategies, but has simply not implemented them. This time Transnet has to implement its strategy, plans and programmes effectively, and has to be given all the necessary support to do so. While the Committee appreciates the difficulties, we would like to see in Transnet’s presentation on the annual report next year more specific measurable targets that were decided on and the time-frames that were allocated to achieve these. The same would apply to the projections for the future that Transnet sets out.
The Committee also wants greater clarity on the financial implications of Transnet’s restructuring. There is also a need for greater clarity on how Transnet is going to fund its proposed R37 billion investment programme.
The Committee is keen to get greater clarity on the following, among other issues:
The impact of Transnet’s restructuring and the investment plans on job-creation.
Transnet’s broad-based Black Economic Empowerment policy and programme.
The synergy being effected between Spoornet, NPA and SAPO.
The Committee is especially keen to find out what the new risk management framework of Transnet is and how it will seek to avoid a recurrence of the financial losses experienced in recent years. As raised in section B11 above, the Committee feels that appropriate sanctions, consistent with the PFMA, should be applied to those responsible for such decisions that could be avoided. The Committee will arrange with Transnet appropriate briefings with it and its subsidiaries to take further issues raised in the briefing on the annual report.
D. Eskom
Eskom was represented by CE, Mr Thulani Gcabashe; Finance Director, Mr Bongani Nqwababa; Managing Director: Distribution, Mr Mongezi Ntsokolo; Managing Director: External Relations Division, Mr Joe Matsau; Liasion Manager: External Relations Division, Ms Pravashini Govender; and Eskom spokesperson, Mr Fani Zulu. An apology was tendered on behalf of the Board Chairperson, Mr Reuel Khoza, who was away from the country.
2. Eskom’s "strategic intent" is to be "the pre-eminent African energy and related services business of global stature". Its mission is to "grow shareholder value by exceeding the needs of local and foreign customers with energy and related services". Its "key competency" is "the ability to develop and manage the extended electricity value chain so as to deliver high quality, low cost electricity, using low-grade and scarce resources (e.g. coal and water) in a challenging business, social, natural and political environment". The key objective of Eskom is to "provide the most people with the safest and lowest cost electricity". Eskom generates 95% of South Africa’s electricity and over 50% of the electricity consumed in Africa. It is the 11th largest utility in the world in terms of generation capacity and the 9th in terms of sales.
Eskom focuses on sustainable development, in terms of a strategy to ensure integrated achievement of economic, environmental and social goals. Eskom measures and reports on its performance in a single integrated sustainability report covering the following 4 key aspects:
Socio-economic: electrification; BEE.
Technical: plant availability; plant reliability; system minutes.
Financial: profit before tax; return on assets; debt-equity.
People, Safety, Health and Environment: Peoples measures; HIVand AIDS; Eskom Fatalities; Specific Water Consumption; relative particular emissions.
Eskom Holdings Limited is a vertically integrated utility that is split into:
The Regulated Businesses: This entails generation; transmission; distribution; key sales and customer services; and corporate divisions.
The Subsidiaries: Eskom Enterprises (Pty) Ltd; Eskom Finance Company (Pty) Ltd; Escap Limited; and Gallup Insurance Company Limited.
Eskom Enterprises and its subsidiaries carry out all Eskom’s non-regulated activities. Its "core lines of business are infrastructure development, energy business operations, specialised energy services and the pursuit of key opportunities in related or strategic businesses such as information technology and telecommunications". Eskom Enterprises has its own Board, as do all Eskom’s other wholly-owned enterprises.
Eskom has 13 coal-fired stations, 2 gas turbines, 6 hydroelectric stations, 2 pumped storage schemes, and a nuclear power station. Eskom serves more than 3,5 million customers by means of 336 270 kms of power lines of all voltages. 3 million of these customers were connected in the past 10 years. Eskom electrified 7 976 schools and clinics since 1994. Eskom’s theme for the year is "Corporate Delivery in a Decade of Democracy". Currently, more than 70% of South Africans can have access to electricity. Eskom estimates that about 80% of them are active customers.
Eskom received the Platts Global Energy Award for the " Community Development Programme of the Year" in 2003.
Eskom has about 32 000 employees. It ranks high on the Human Resources Sustainability Index at 91,8%, well above the threshold of 80% and the previous year’s score of 89,9%. The Human Resources Sustainability Index combines 25 weighted measures in the areas of employee satisfaction, competence, equity, and health and wellness, to reflect on a company’s ongoing ability to achieve its human resources objectives. In terms of representivity, the percentage of Blacks in the managerial, professional and supervisory levels increased from 54,6% in 2002 to 56,3% in 2003. Women at these levels increased from 24,5% to 27,8% and people with disabilities from 0,16% to 1,4%. Blacks in managerial, professional and supervisory positions increased from 8,9% in 1994 to 56,5% in 2003. Women in such positions increased from 10,4% to 27,8%.
Eskom’s financial reports cover the period 1 January 2003 to 31 December 2003. In line with the request from the Department of Public Enterprises, the Board of Eskom has approved the change of its financial year end from 31 December to 31 March. Eskom reported a Group profit after tax of R3,5 billion in 2003. The profit was R3,7 billion in the previous year. There was a 4,8% growth in electricity sales in 2003. The growth was 3,5% in 2002. Debt-equity ratio improved from 0,30 in 2002 to 0,46 in 2003. Total productivity improvement for the year increased from 1,6% in 2002 to 2,5% . Eskom’s real rate of return declined from 1,69% to 0,53%. The delay in the issuing of the licence prompted the Eskom Board to raise an important provision of R649 million against its investment in the second national operator. The Eskom Board also raised a provision of R154 million relating to the Eskom Enterprises investment in Mountain Communications (Pty) Ltd, a Lesotho registered telecommunications company. Overall, Eskom’s assets are worth about R100 billion.
Eskom spent R7,3 billion on procuring goods and services from BEE companies in 2003. Since 1997 Eskom has spent more than R20 billion. Eskom spent R714 million with Black women-owned enterprises since 2002. Eskom has a comprehensive strategy to deal with "fronting", including unannounced visits to companies to verify information given to Eskom to qualify as BEE companies.
Eskom has a major programme on HIV and Aids. Tests conducted in 2000 and 2002 found that 11% of the staff was found to be HIV positive. The company has a multi-pronged approach, and provides information, education, testing, counseling, free condoms, and a medical aid package including anti-retrovirals. Eskom has contributed R67 million towards research to develop an Aids vaccine and has allocated a further R45 million until 2007 for this.
Eskom’s safety record has improved with a reduction in public electrical fatalities and injuries, and the lowest work-related fatalities in 30 years. Eskom improved its environmental ratings in 2003. Many parts of Eskom have received ISO 14001 certification, while the remainder of the group demonstrated compliance during 2003, through third-party audits. Eskom made a commitment to reduce overall particulate emissions to an average of 0,28 kg/MWh sent out by the end of 2003. This target was achieved.
Mr Gcabashe stressed Eskom’s commitment to NEPAD and the related energy projects on the continent. Eskom’s strong emphasis is on providing energy in the Southern African region. The possibilities of hydro energy in the region are being explored. Obviously, there are risks entailed in Eskom’s engagement in the continent, but Eskom is sensitive to this, he said.
Eskom explained that at the current growth rate for electricity demand, and in the absence of any corrective measures, South Africa will run out of excess peaking capacity in 2007. A major restructuring of the whole electricity industry is under way, and major investment plans are being finalised for new electricity generation capacity. Eskom will meet most of these needs, but there will be room for an independent power producer. Eskom is in the process of returning to service 3 of its mothballed coal-fired stations. In line with the Cabinet decision of the 20 October 2004, Eskom will lead South Africa’s drive to create new electricity generation capacity.
Eskom explained that the entire country cannot be provided electricity from the grid. South Africa’s topography in the rural areas makes this very difficult. Eskom is in discussion with the Department of Minerals and Energy to discuss other non-grid options, especially for some of the remote rural areas. Solar non-grid is one of the options discussed. Mr Gcabashe explained that Eskom would like to increase the pace of delivery of free basic electricity services, but that negotiations with municipalities often took too long. Eskom would prefer to be allocated money directly from the national fiscus to deliver the free services, instead of the money being allocated through the municipalities.
Eskom does not anticipate any job losses through the disposal of its non-core assets, as part of government’s restructuring programme. These non-core businesses are viable and would be sold as going concerns. Many of them are potential BEE companies with room for expansion. Eskom will inform the Committee shortly about the number of jobs that will be created through the re-commissioning of the 3 power stations. It is too early to say how many jobs will flow from the major investment drives being finalised, but these figures, too, will be sent to the Committee as soon as they become available.
Eskom explained that illegal electrical connections occur mostly in areas not set aside as residential areas (informal settlements and unproclaimed areas). Eskom estimates that it loses 18% of its domestic household sales as a result of illegal connections. The financial impact is low but the hazard and nuisance factors are high. Eskom is working with municipalities to reduce these illegal connections and also has a major advertising campaign to do this.
The Committee congratulated Eskom on its many successes and expressed the hope that it will rise to greater heights. Apart from Eskom’s many well-known achievements, the Committee was interested to hear about the company’s advanced HIV and AIDS programme, and commended Eskom for this. From what the Committee can tell, it seems that Eskom’s BEE programme is also encouraging, even if they still have a long way to go.
The DA believes that the government had earlier planned a phased privatisation of Eskom, and expresses its disappointment that the original target of 30% of generation capacity being provided by an independent power producer has been down-scaled to 30% of new capacity.
In order to get a better sense of Eskom’s achievements and to facilitate MPs constituency work, the Committee would like Eskom to in future provide a provincial and municipal breakdown of the statistics it provides, where possible. With major investment plans pending, the Committee appreciates that there will be pressure to increase Eskom’s tariffs, but stresses the importance of deciding on a price structure that does not burden the poor or impede the delivery of free basic services. The Committee will pursue this further with Eskom. The Committee also needs to understand better the financial implications of the restructuring of the electricity industry for municipalities. A joint meeting of the Public Enterprises, Minerals and Energy, and Provincial and Local Government portfolio committees to consider this further is proposed for early next year. The Committee will also raise with the Provincial and Local Government Portfolio Committee Eskom’s concerns about the slow pace of negotiations with municipalities on the delivery of free basic services. While appreciating the many complexities, the Committee feels that more should be done to extend electricity in the rural areas. The Committee is interested in developments on the Pebble Bed Modular Reactor project. The Committee is also interested to get a better understanding of Eskom’s role in the rest of Africa, and will pursue this further.
E. Denel
Denel was represented by Board Chairperson, Mr Sandile Zungu; and CEO, Mr Victor Moche; Group Executive Director: Commercial and IT Business: Director of Finance (Acting); Mr Pottie Potgieter; and Chief of Staff in the CEO’s Office, Ms Cassandra Gabriel.
Mr Zungu stressed that Denel sees it as very valuable to engage with the Portfolio Committee and welcomes the decision of the Committee to formally consider its annual report each year from now on. He explained that contrary to media reports, it was not true that Denel had concluded a contract for artillery systems in India. Denel is in partnership with an Indian company for the self-propelled version of the Howitzer gun, which makes up about 25% of the contract. However, the Indian government had not yet awarded the contract. If it is approved, it would be worth about R6 billion. However, the positive effects of this would only be reflected in Denel’s balance sheet in 2 to 3 years’ time.
Mr Moche explained that the manufacturing arm of Armscor was hived off to form Denel in 1992 as a state-owned commercial company. Armscor remains as the procurement division of the SANDF (South African National Defence Force). Denel defines itself as a "technology-based company with a strong emphasis on high technology research, development and manufacturing of defence products and the provision of services". It "commands a wide spectrum of management, research and development, engineering, and manufacturing capabilities in the defence industry". The "key focus areas of the business are in Aerospace, Land Systems and commercial businesses, mainly industrial properties". Denel aims to "create economic value by transforming its technological capabilities into superior quality defence and commercial products and related services for the global market. It aims to achieve this by "international partnering, international market penetration and maintaining the position of key supplier to the SANDF".
Denel has 23 major divisions and subsidiaries spread over 3 provinces. The 3 major business lines of Denel are Aerospace, Land Systems, and Commercial and Information Technology (IT). Among its key Aerospace products and services are missiles and guided weapons; helmet-lighting systems; the Rooivalk attack helicopter; aircraft parts manufacture, repair and refurbishment; flight test facilities; unmanned aerial vehicle observation systems; and target drones. Among its key land systems products and services are artillery systems; artillery propellant charges and projectiles; plant manufacture; infantry weapons; and small and medium calibre ammunition.
Denel’s non-military products include humanitarian demining; mine action; hunting and sporting ammunition; rock-breaking and mine drilling equipment; marine distress flares; hilti industrial percussion products; and micro-gas generators used for triggering airbags in the motor industry.
Denel’s non-core businesses include an Arrivia.kom shareholding (IT), SPP (soya processing plant), Irenco (plastics and electronics), Sybase (IT), Voltco (household electronics ), Bonaero Park (property), Cosource (IT) and Dendustri (aluminium).
Denel currently has a staff of 9 742: 50,1% is Black and 24,3% comprise women. In 2003-4, Denel had a staff of 10 925, of which 51,6% were Black and 25,6% women. The number of Black executives and senior managers increased from 35 in 2002-3 to 65 in 2003-4. The number of women senior managers increased from 4 to 25. 70% of Denel’s employees are technical staff, engineers and scientists. Denel believes that it is challenged by a shortage of engineers and technicians, an ageing skills base, and a lack of employment equity.
Apart from DPE, Denel also works with the Departments of Defence, Finance, Foreign Affairs, Labour, Science and Technology, Intelligence, and Trade and Industry. Denel is bound by international conventions and agreements signed by the government, including the Nuclear Non-proliferation Treaty, Biological and Chemical Weapons Convention, Mines Ban Treaty, and the Non-proliferation of Weapons of Mass Destruction Act.
Denel’s highlights for the year under review included:
Aerospace
Contracted by BAE Systems/Saab for design, development and supply of helmet tracking system for Eurofighter-Typhoon and the export version of Gripen.
OTB involvement with NASA’s Mars rover mission.
Installation of manufacturing cell and start of production of Boeing commercial airplanes detail components for The Boeing Company.
Further exports of Ingwe anti-armour missile.
An international award for best live demonstration at IDEX 2003 exhibition in Abu Dhabi.
Land Systems
Despite the strengthening of the rand and postponement of awarding of a major contract (Kingfisher), Denel Land Systems achieved its profit and cash flow budgets.
Six sites have ISO 9000 quality certification.
Five sites have ISO 14000 environmental certification.
Four sites have NOSA NOSCAR gradings, and two sites have five-star awards for safety, health and environment (SHE).
The Naschem division at Potchefstroom was awarded first place in the NOSA Top 100 International award for compliance with SHE management.
Commercial and IT Activities
Good business performance by the properties group.
Solid financial performance by Dendustri.
A centralised property management model for Denel’s industrial properties has been implemented.
Rigorous risk management processes have resulted in low claims ratio and good business performance for Densecure (Pty) Limited.
42% of Denel’s revenue comes from sales to the SANDF, 20% from the Middle East, 15% from Europe, 11% from Asia, 5% from South America, 4% from Africa and 3% from North America.
Denel posted a loss of R377,5 million from total revenues of R4,4 billion in 2003/4. In the previous year, the loss was R72,6 million and revenues were R4,3 billion. Current liabilities amount to R2,4 billion and non-current debt to R832 million. Denel’s assets are worth just over R4 billion.
Denel identified the following immediate reasons for its financial difficulties:
Implementation of accounting standard AC133, which reduced Denel’s possible profit and reserves by about R270 million.
The reduction in value of non-productive assets by R65,4 million.
The strengthening of the Rand by 26% against the US dollar.
Major losses from non-core businesses.
Retrenchment costs of R22,9 million.
The write-off of research and development costs of R64,7 million.
Other reasons cited for Denel’s unfavourable financial position include:
Operational inefficiencies.
High overhead costs.
Decline in orders from the SANDF.
Decline in Research and Development funding.
Investment in and losses from the Rooivalk programme (about R2 billion over 9 years).
An unsuccessful commercial diversification strategy (about R900 million).
The global economic slowdown.
Intensified international competition.
Both the Board Chairperson and CEO stressed that Denel was severely disadvantaged by the open tender policy of Armscor, which forced it to compete with foreign companies for tenders from the SANDF. Denel is completely opposed to this policy and claims that very few, if any, countries with a defence manufacturing industry has such a policy; the defence industry is highly protected. Denel even says that "domestic orders often exceed the national requirement, but tend to secure the industry, which is seen as a strategic entity with export potential". Denel also feels that foreign defence forces would be discouraged from buying from Denel if the domestic defence force is not doing so.
Denel holds that it was partly forced to venture into non-defence commercial businesses because of the decline in SANDF orders. At the time that Denel was formed, there was a decline in international defence spending, and many defence companies turned to non-defence commercial activities to survive.
The CEO explained that the Rooivalk combat helicopter has been developed for 20 years now. Very few countries have been able to build a sophisticated helicopter like this. In terms of "aerospace technology, this places South Africa in the same state-of-the-art league as the United States, France, Germany, Italy, Britain and Russia". The Rooivalk was ranked in the top three internationally, in terms of capabilities. It is considered better than its American and Chinese counterparts, and foreign defence forces showed much interest in it. There was a need to speed up the process of putting a finished product in the market. It requires an injection by the Department of Defence of R661 million until 2007 to be completed, and a further R283 million until 2007 for support. If the flow of funds through Armscor is managed properly, Denel will complete the Rooivalk in three years.
Denel is implementing a new strategy of turn-around interventions. It is selling off its non-core businesses. It defines its core business as "the manufacturing, refurbishment and maintenance of land and aerospace defence systems, products and components". However, activities not directly defence or aerospace related, such as project management and electronic or engineering manufacturing will be retained because of the cost-effective synergies derived from them for the core businesses. But Denel’s food and plastic manufacturing, IT investments, household electronics and commercial property businesses are to be sold.
The core businesses will also be restructured and rationalised. For example, Vektor will be integrated into LIW (engineering plant) saving millions of rands by avoiding duplication of management, and operational structures and resources. Support services were provided separately in each of the 23 divisions of Denel. These services are now being centralised and consolidated. They include finance, procurement, marketing, IT, human resources, legal services and communication. Products are also being reviewed to ensure that Denel’s product base remains internationally competitive. The Aerospace and Land Systems business lines are being restructured. Programmes of cost-cutting, rightsizing, business process re-engineering and contract re-negotiation have been implemented. Other elements of the restructuring include better alignment of skills; more effective performance management; "zero tolerance" of fraud, corruption and mismanagement; and aggressively growing new markets.
Denel has already successfully turned around some loss-making businesses, including Somchem (explosives and propellants), Menchem (landmine clearance) and PMP (small calibre ammunition).
Recognising the importance of developing mathematics, science and technological skills among South Africans, especially those historically disadvantaged, Denel established the Denel Centre for Learning and Development in March this year. The Centre has 4 schools: the School of Business Leadership, Marketing and Management; the School of Aerospace; the School of Land Systems; and the Denel Youth Foundation Training Programmes. Denel offered bursaries of R4,3 million in 2003-4 for students doing engineering and related courses. About 200 students each year are being sponsored by Denel and the SANDF. Denel also runs a tuition programme for matriculants with inadequate mathematics and science passes to assist them to meet the requirements to enter mathematics and science courses at university. Denel has also started an outreach programme at schools to encourage learners, especially girl children, to become interested in Denel-related careers.
Denel spent R136,5 million on procurement from BEE companies in 2003-4, out of a total procurement spend of R1.07 billion. Denel believes this to be far from adequate. To improve spending on BEE suppliers, Denel is implementing the following initiatives: training for BEE entrepreneurs, verification of BEE credentials, publicising opportunities in Denel and externally, and sanctions for "fronting". Denel noted the following BEE challenges: continued BEE credential verification, rewarding achievement of BEE targets, developing current and potential BEE companies, educating employees on the importance of BEE in the economy, and supporting the adoption of the Defence BEE Charter.
Denel explained that with its divestment it will obviously end up with fewer employees. Its projections are that it will have 8 928 employees by 1 April next year, down from the current 9 933. Most of these employees will be retained by the companies being sold. Denel’s restructuring also raises the need to address issues around the skills mismatch, redeployment, development of new skills and other related matters. Over 40% of revenues are spent on salaries. Denel believes that this is too high, and should ideally be 30% for a manufacturing company like Denel. Denel is seeking to address this by increasing revenues and efficiencies, which includes ensuring the right people in the right jobs and the right numbers of people in the different areas.
In terms of its turn-around strategy, the Board and the management has essentially identified the following key objectives:
Completion of disposal of non-core businesses.
Finalisation of turn-around of Denel Aviation.
Continued restructuring for efficiency.
Continued cost reductions.
Joint ventures at business unit or product level.
Positioning for future major SANDF and global projects.
Incentivising and modernising the workforce.
Denel has requested the government as its shareholder to consider the following:
Review Armscor’s preferential procurement policy to benefit local industry and secure a base load on consumable products.
Increase research and development funding to benefit Denel and the local defence industry.
Recapitalisation of Denel: remove balance sheet risks and position Denel for future growth.
Divestiture and recapitalisation to renew certain critical plants.
Review Armscor’s requirement for costly bank guarantees on major Denel contracts.
Denel reported that it had estimated that it lost over R1 million through fraud and corruption in 2003-4, and was pursuing criminal action against those responsible, even if the process is extremely slow. A materiality and significant framework is currently being developed to report material losses through criminal conduct and irregular, fruitless and wasteful expenditure, as well as for significant transactions that require reporting to the Minister as envisaged in section 54(2) of the PFMA.
Denel’s projections of its financial situation are that it will reduce its loss to R283,6 million in this financial year and to R2,2 million in 2005-6, and make profits of R81,4 million in 2006-7, R361,5 million in 2007-8 and R459,7 million in 2008-9.
The Committee acknowledges that Denel faces major challenges and that there are no easy turn-around strategies. The CEO and senior managers addressing the challenges have been in Denel for just 18 months. The majority in the Committee feels that, overall, they are to be commended for evolving the new turn-around strategy and interventions. The Board Chairperson and CEO were very frank and open in their engagement with the Committee and conveyed a strong sense of their awareness of the challenges facing Denel. The majority in the Committee hopes that the potential of the present leadership of Denel to address its challenges conveyed to us will be fulfilled.
The DA, however, has reservations about the performance and future of Denel under the present management. The DA feels that there is no need for the government to own Denel and that it should be sold to the private sector. The DA certainly does not support any government funding for Denel.
Some of the issues, especially about defence policy, that Denel raised with us are more appropriately dealt with by the Defence Portfolio Committee and will be referred to them. The Committee has, anyway, raised with the Minister of Public Enterprises Denel’s concerns about Armscor’s open-tender policy and its view that government should provide funding for Denel’s recapitalisation, the Rooivalk and research and development, and has been assured that these issues are being addressed through interaction with Denel and other stakeholders.
The majority in the Committee recognises the overall value of Denel’s turnaround strategy. But the Committee as a whole would like to see more clearer, time-bound measurable objectives and the programmes of action to implement them, and will pursue this further with Denel. The Committee is also concerned about the negative effect of Denel’s balance sheet on the prospects of getting export orders. The Committee is not sufficiently clear about the basis on which Denel has prepared its financial projections for the next 5 years, and will need to engage with this further. The Committee would also like greater clarity on the outcome of Denel’s divestment on jobs and the composition of Denel’s new staff structure. Clarity will also be sought on Denel’s pension and provident schemes.
F. On SOEs in General
1. As the Committee sees it, Transnet and Denel are seriously challenged, and Eskom is doing very well, but also faces major challenges ahead. However, all of them have huge potential to, over time, meet their challenges. To the Committee, the leaders of these SOEs seem very impressive; they came across as clear, innovative, determined. Of course, in briefings such as these, Committees will not get "the whole story", but "parts of the story", usually the positive parts, but we feel, anyway, that the SOE leaders engaged with us in a commendably open and frank manner. The Committee believes that these SOEs play a very crucial role in our economy and society and it is vital that the huge potential conveyed to us is realised.
2. In general the Committee feels that the overall strategies of the SOEs, which are, in a broad sense, similar, are sound. The Committee believes that it is vital that these new strategies are appropriately negotiated with the widest range of stakeholders. While appreciating the magnitude of the challenges being addressed, and that the SOEs are still in an early phase of evolving the new strategies, the Committee would like to see the SOEs set out more specific business plans and programmes with more specific measurable objectives and time-frames by the time of the next presentation of annual reports to the Committee, in the fourth quarter of next year. It is in the business plans, programmes of action and deadlines for achieving measurable objectives and the fulfillment of these, that a strategy is ultimately assessed. More specific business plans, programmes, objectives and time-frames will also provide greater clarity on what the Portfolio Committee is monitoring and contribute towards a clearer framework for interaction between the Committee and the SOEs.
3. As explained in section B 10 above, the Committee believes that consideration has to be given to the shareholder compacts concluded by the Ministry and DPE with the SOEs being tabled in parliament. This will also provide greater certainty on what the Portfolio Committee is monitoring in respect of the SOEs.
4. Given the government’s "strategic shift" of emphasis on SOEs, DPE will also be more actively fulfilling its oversight role over SOEs. While recognizing the staff, resource and other constraints of DPE, and the need for DPE to respect the necessary autonomy of the SOEs, the Committee feels that it is vital that DPE is more active in its oversight of SOEs. This will also assist the SOEs to become clearer about what government and parliament expects of the SOEs. The Committee will certainly be more actively monitoring DPE’s implementation of its oversight role over the SOEs and in this sense too also be monitoring the SOEs.
5. The Committee feels that in parts the SOE submissions were far more technical than they need be. The SOEs should explain issues in a more useful way, and focus mainly on their relevance to the major questions raised in section A5 above.
6. Of course, the Committee also has a direct oversight responsibility for SOEs and we mean to fulfill this more effectively over time. As part of the process of doing this, we need greater clarity on the following, among other issues:
The ways in which our oversight role is influenced by the fact that funds are not directly allocated from the national fiscus to SOEs.
The ways in which our oversight role over the SOEs overlaps with and is distinct from that of the Transport, Minerals and Energy, Defence Portfolio Committees and SCOPA, so as to avoid duplication.
The ways in which our oversight role over the SOEs is distinct from that of DPE. To what extent and in which sense, if at all, would the notion of "shareholder activism" apply to a parliamentary committee as distinct from government?
Greater clarity on these issues will assist the SOEs to better understand the manner in which they are accountable to our Portfolio Committee, other Portfolio Committees, DPE and other government departments.
7. The Committee appreciates that the annual reports of the SOEs are prepared in terms of the Companies Act 61 of 1973, the PFMA and other relevant legislation, and long-standing norms and conventions, and they address the concerns of a wide range of stakeholders. But these reports can be challenging to read and do not necessarily address some of the specific concerns of the Portfolio Committee. The Committee will, of course, consider these annual reports as a whole. But we feel very strongly that the SOEs should make available a user-friendly summary of the key features of the annual report to the Committee at least 7 days before they brief the Portfolio Committee, usually in October each year. These summaries would also be of value to other stakeholders. The cue could be taken from National Treasury, which produces a very helpful user-friendly summary of the national budget each year so that the lay-person can understand its key aspects. The summaries from the SOEs should seek to address the concerns of the Portfolio Committee set out in section A5 above and related concerns. To encourage a more productive exchange between the Committee and the SOEs, the Committee will explore the possibility of general guidelines or a format being made available to SOEs to prepare for their briefings of the Committee on their annual reports. The Committee will discuss this matter with the House Chairperson, SCOPA, Joint Budget Committee, DPE, National Treasury, the SOEs and other stakeholders.
8. The SOEs argue that the primary way in which they can contribute to job-creation is through contributing to economic growth, mainly through reducing the costs of doing business. They explain that if they are restructured to become more efficient and productive and fulfill their new responsibilities effectively, they will probably have to shed jobs. The Committee is clear that if job losses are unavoidable altogether, this should be negotiated appropriately with the trade unions and dealt with in terms of the National Framework Agreement (NFA). The Committee needs to get a better understanding of how the SOEs are going to deal with the possibility of job losses. The Committee is very interested to find out what the impact is going to be on job-creation of the proposed investment plans. To what extent, for example, will the SOEs be stressing labour-intensive building of infrastructure?
9. The Committee appreciates that it can be very challenging to appoint suitably qualified and representative Boards of SOEs. Those appointed to the Boards often have many other responsibilities and cannot give the SOEs the attention they deserve. But the Committee feels that the Boards of the SOEs have to be far more effective and meet the requirements of the PFMA and other relevant legislation. The Ministry and DPE are urged to assist the Board, and empower Board members, where necessary, to fulfill their role much more effectively. The Committee believes that the chairperson of the Boards, or if they are absolutely not available, another non-executive member of the Board should be present at the briefings to the Committee on the annual reports of the SOEs.
10. The Committee recognises that the remuneration packages of senior managers and Board members raise many complex issues. Among other issues relating to the remuneration of senior managers, the Committee is aware of the following:
Market forces obviously influence the remuneration packages.
SOEs have to compete in particular with the high remuneration packages available in the private sector.
As the responsibilities of the SOEs increase, there will be increasing pressure for higher remuneration packages for senior managers.
The Committee welcomes the government’s decision to develop a framework for the remuneration of senior managers and Board members in the SOEs and looks forward to its release.
11. The Committee is very concerned that the Boards and senior managers are not being made to take full responsibility for decisions they made that have had extremely negative consequences for the SOEs. While recognizing the complexities, the Committee feels very strongly that the Minister and DPE should take appropriate action in terms of the PMFA and other relevant legislation. As raised in section B 11 above, the Committee would like DPE to discuss its new risk management framework with the Committee. We also want the SOEs to address the Committee on their risk management frameworks.
12.As the Committee held a briefing on "The contribution of SOEs to Women’s
Empowerment" in August, this matter was not pursued in detail with the SOEs during these briefings. But as agreed in the report we adopted on this, there will be a follow-up briefing in the first half of next year.
13. The Committee did not sufficiently explore the challenges posed by fraud and corruption in the SOEs – and will raise this matter more fully in future meetings with the SOEs.
14. Overall, the Committee is very encouraged by its exchanges with the SOEs, and we are motivated to fulfill our oversight role in a helpful and effective manner. We do not believe that our oversight role consists in just monitoring the performance of the SOEs. As is appropriate for a portfolio committee we should also, where possible, through our parliamentary, constituency and party political work, also contribute to the implementation of the programmes and the achievements of objectives of the SOEs. Obviously, we respect the operational autonomy of the SOEs. We will not seek either to micro-manage the SOEs or reduce our oversight role to mere verbal exchanges with the SOEs; we will try to strike a sensible path in between, that is consistent with parliament’s definition of the oversight role of a portfolio committee – and we will shape this path through consultation with all the relevant stakeholders, including the Ministry, DPE and the SOEs.
G. The Way Forward
This report, together with our programme adopted in August, "Towards Developing a Longer-Term Programme: Setting the Foundations," will be important in shaping our programme for 2005 and beyond.
2. In February next year we should have a workshop with the Ministry and DPE to establish what their programme for 2005 is. This workshop will assist us in clarifying our programme for 2005. At the workshop we should also seek a response from DPE to this report. It would be useful to have such a workshop with the Ministry and DPE in February each year so that we are clearer about our respective programmes.
3. If we are to play our oversight role effectively, it is important that we are empowered. As part of this, we should have an education and training programme. Flowing from our consideration of the annual reports of DPE and the SOEs, the following are among the workshops we should try to organise in 2005:
Evaluating the budgets and financial statements of government departments and SOEs.
Towards greater understanding of the PFMA, the Companies Act, other relevant legislation and the King II Report as they apply to SOEs.
Shareholder management models and corporate governance.
The lessons of restructuring of SOEs in Africa and other developing countries.
Different forms of private sector participation in SOEs.
Towards greater clarity on the oversight role of the Portfolio Committee in respect of SOEs.
4. The Committee has to finalise the appointment of a suitable full-time researcher for the Committee as soon as possible.
5.The Committee needs to take further its study tour of SOE sites next year.
H. Appreciation for Co-operation
The Committee expresses its appreciation to the Director General of the DPE, the Board Chairpersons and CEOs of the SOEs, and their teams for their co-operation on the briefings on the annual reports.
The Committee also thanks Mr Ekhsaan Jawoodeen, Mr Nickie van Zyl and Mr Victor Ngaleka from Parliament’s Research Unit (Information Services Section) for their initial research reports on which this report drew.