Report of the Portfolio Committee on Public Enterprises on Budget Vote 9: Public Enterprises, dated 13 April 2005:

The Portfolio Committee on Public Enterprises, having considered Budget Vote 9: Public Enterprises, reports as follows:

A. Introduction
The budget review of the Ministry and Department of Public Enterprises (DPE) was undertaken on 5 and 6 April. The Annual Workshop of the Ministry, Department and Committee, held on 8 March, served as a precursor to the review. Some of the key issues raised in the workshop were carried over into the review, and are covered in this report. This report on the budget review should also be related to the "Annual Report on the Reports of the Department of Public Enterprises and Transnet, Eskom and Denel", published in the ATC of 22 February 2005.

Those who appeared before the Committee included Minister Alec Erwin; Ms P Molefe, Acting Director-General; Mr T Mphuti and Mr J Theledi, Deputy Directors-General; Mr A Aphane, Chief Director; Ms R Solomons, Director; Mr M van der Walt, Chief Financial Officer and Mr P Vanier, Projects Co-ordinator.

The Committee would have preferred to hold the budget briefings later in the year so that we could prepare properly. We would also have preferred more time between the briefings and the House debate on the budget vote so as to prepare and process our report properly. However, with the changes in the overall parliamentary programme to take account of the need for more constituency time and the forthcoming local government elections, our needs could not be accommodated. This report has, therefore, been prepared and processed rather hurriedly.

This report presents the submissions by the Department at the briefings in great detail as the submissions serve as a framework for the programmes of the Department for several years ahead, and this report will serve as a guide to monitor progress by the Department. The Committee will also develop its own views in greater detail over time, and will set these out in future reports. Ideally, these Committee reports on the budget will be briefer in future.

For the Committee to engage effectively on the Department’s budget, it is vital that the documentation to be presented at the budget briefings reach the Committee Secretary at least seven days before the briefings.

B. Minister’s Political Overview
Minister Erwin referred to the President’s constant stress on the economy in respect of the need to increase growth and "developmental capacity, including providing basic needs, jobs, shelter, education, and so on." He said, "both sides have to be seen in tandem – economic growth rates and development". The President, he said, has been stressing the need to improve the efficiency of the economy and lower the cost of business. Since 1994, the economy has grown at about 3%, but there is now a possibility that over the next few years it could grow by 4% and more. The state-owned enterprises (SOEs) "could play an extremely important role in the growth and development process", and the Department’s Strategic Plan is geared to address this.

As the economy has grown, the country’s infrastructure has come under stress. The Minister referred to "dramatic changes in the structure of the economy" and "a significant increase in manufacturing exports". This has meant that the transport of freight has to be speedier and much more efficient. There has been "a rapid increase in the need for container traffic", he said. "If you’re exporting cars, you have to do it on time, not just any old time." He also referred to the urgent need to generate more electricity. Until recently, it was expected that the excess energy would run out in about four or five years’ time, but now it is estimated that it would happen in two years’ time if no action is taken now. Given the technological advances made in various areas of the economy, the defence industry is also identified as strategic. The industry has technological capacity that can assist the manufacturing sector. With the growth in the economy, and the need for more growth, Transnet, Eskom and Denel have major roles to play. Investments of about R165 billion are to be made in transport and electricity infrastructure over the next five years and beyond.

In view of the crucial role of these three SOEs, they would remain in state hands. They would focus on their core competencies and lead major investment programmes. It is "strategically important to have a single shareholder" in the transport and energy sectors, said the Minister. This did not mean that the private sector did not have an important role to play. In fact, "we are looking for more private sector investment in our infrastructure than has ever been done in this economy before". The Minister referred to the proposed introduction of independent power producers in the electricity industry, the partnerships between Spoornet and the iron ore producers to invest in the railway system, and the partnership between Spoornet and the mining industry as a whole. There are many opportunities open to the private sector. "Are they ready to come on board?", asked the Minister.

Eskom, he explained, would generate 70% of the country’s new electricity needs over the next 10 years, ring-fence electricity transmission in preparation for the opening up of the market some years ahead, and continue to distribute electricity to major clients as part of the overall restructuring of the distribution sector.

Transnet will focus on the transport of freight. It will work through rail, ports and pipelines. Its passenger components will be formed into a separate entity and be answerable to the Department of Transport. SAA will be removed from Transnet by the end of this year and become a stand-alone SOE answerable to DPE. A complex process of unbundling is underway. SAA will increase its routes in Africa. The need for regional airlines is being explored.

Denel has considerable capacity that needs to be drawn on and developed further. The aerospace industry in particular has enormous potential. The Minister referred to government support for a revised Rooivalk programme and Denel’s participation in the A400m programme. Denel will not be able to undertake advanced manufacturing and to be competitive internationally on its own, Denel needs new forms of partnerships, both with South African and international defence companies – announcements in this regard will be made in the next few months.

Most of the government-owned forests have been privatised. The sale of the Komatiland forest is subject to an inquiry by the Competition Commission. There are various legal, administrative and other matters relating to previous sales that SAFCOL has to continue to attend to. But whether there is a long-term role for a state-owned forest company will be decided in the months ahead.

The Minister explained that government did not want to retain control of Alexkor, but "we cannot walk away either. Alexkor is a mine that is also a local government, a medical service, an education department; it’s everything". Alexkor will have to transfer its government functions to provincial and local government over time. He explained that the restructuring of Alexkor was also held up by negotiations on the land claims of the Richtersveld community. If the matter is not settled out of court, the Land Claims Court will meet from 25 April to decide on what the appropriate compensation to the community should be.

The government will also decide in time on whether Arivia.kom, the SOEs joint IT company, should be retained by the state or offered as a major BEE deal. The government intends to exit altogether from Aventura soon.

The Minister explained that he is encouraging greater co-operation among the key SOEs. There is now a regular consultation forum of the Minister, senior DPE managers, SOE Board Chairpersons and SOE CEOs. A forum of chief financial officers is also being established. A Joint Project Facility of the SOEs has been formed. The projects are on ICT, property holdings, SOE involvement in Africa, pipeline infrastructure and human resource development.

The Ministry and Department, he explained, were focusing on driving an investment programme and an efficiency programme, and restructuring that relates to this.

The Minister said that there are governance and policy issues among the SOEs that should be tightened up. This includes areas such as employment equity, gender, Black Economic Empowerment (BEE), small, medium and micro enterprises (SMMEs), the environment, the Urban Renewal Programme and the Integrated Sustainable Rural Development Programme. He feels the SOEs could also be more involved elsewhere in Africa, and more systematically.

The Minister explained that providing the SOEs with key performance indicators (KPIs) is a complex process. A full set of KPIs cannot be provided immediately. Some of the KPIs can only be determined once the respective policy departments have finalised their policies. The Boards of SOEs are responsible for the performance management system of their respective SOEs and determine KPIs within the framework provided by the Ministry and Department. The Minister said that revised shareholder compacts and more precise KPIs will be finalised during the 2006-7 financial year. A new risk management framework will also begin coming into effect during the same financial year.

The Committee welcomes, broadly, the approach set out by the Minister and acknowledges the progress made over the past year. The Committee is aware of the magnitude of the investment and efficiency programmes and the related restructuring. The Committee recognises that it is not reasonable to expect dramatic results overnight. But precisely because of the significance of the overall role and programme of the Ministry and Department, the Committee feels that we should be increasingly effective in exercising our oversight role. We appreciate the complexities in determining shareholder compacts and KPIs, but feel that these should be clearer by the end of the 2006-7 financial year. We feel that an appropriate form of the compacts and KPIs should be tabled in Parliament within a reasonable timeframe. The Committee’s oversight role would also become clearer with this. We welcome the Minister’s approach to Alexkor. It coincides with the views expressed in our report on our November study tour of Alexkor. While recognising the complexities, the Committee feels that the government needs to be clearer about the direction it wants Denel to take – this clarity should emerge reasonably soon. We also welcome the Minister’s commitment to "tightening up" of the governance and policy issues referred to in B12 above. The Committee reiterates its concern about the need for a new effective risk management framework for SOEs to be implemented as soon as possible.

While agreeing with aspects of the Minister’s approach, the Democratic Alliance (DA) believes that much of what the SOEs do, should be done by the private sector and supports a major privatisation drive.

C. Overview of Strategic Plan and Budget
Acting DG, Ms Portia Molefe, said that the Department has oversight responsibilities for key SOEs. DPE’s vision, she explained, is to ensure the SOEs facilitate economic growth through operational efficiencies and investment programmes; lead in the economy in corporate governance and implementation of national policy; and catalyse sector and regional economic development opportunities.

Among key aspects of DPE’s mission are:
To work with policy and regulatory departments to "establish optimal industry structures within which the SOEs will operate".
To develop a "clear policy and operational environment for SOEs".
To ensure "increased levels of operational efficiency and cost effectiveness of service provision".
To develop "economically effective and sustainable investment programmes by the SOEs that will enhance economic growth and increase the competitive capacity of the economy".
To encourage SOEs to develop effective public/private partnerships.

DPE’s mandate is "to co-ordinate with policy and regulatory Ministries and provide oversight and strategic direction" to SOEs reporting to it.

DPE sees the key features of an SOE as:
Ownership by the state.
Balance sheet allowing for capital markets to be engaged.
Capital injections from Treasury.
Shareholder expectations and shareholder compact.
Strategic public objectives that would be compromised by purely private owner, particularly given monopoly powers.
DPE’ s understanding of shareholder management is that:
It needs to reflect the special public purpose of the enterprise.
At enterprise level: Sustainable enterprise delivering competitively on market demand and inspiring private sector confidence to invest.
At industry level: Design of division of labour with the private sector to ensure optimum delivery in partnership with policy departments.
At sector and regional development level: Optimising SOEs impact in catalysing industrial and regional development.

DPE’s strategic plan sets out the broad strategy for each of the SOEs. This was covered by the Minister and is referred to in section B above.

Specific interventions by DPE in Transnet include:
Enterprise level: Business and investment plan review; financing strategy; SAA hive-off of Transnet balance sheet; divestment from non-core business; COEGA NPA alignment; shareholder compact: KPI definition; and enterprise risk assessment.
Industry level: Private sector participation strategy; and rail industry regulation and structure.
Sector development level: Development pricing; and sector development and strategic procurement.
Second economy level: Utility trains for rural areas.

DPE’s interventions in Eskom include:
Enterprise level: Business and investment plan review; capacity expansion; refinement of capital expenditure forecasts; Eskom’s participation in the IPP project; review of the shareholder compact; and enterprise risk assessment.
Industry level: Private sector participation strategy; stable and predictable regulatory framework; and multi-year tariff.
Sector Development level: Development pricing.

DPE’s interventions in Denel include:
Enterprise level: Business and investment plan review; strategic partnership development; and divestment from non-core business.
Enterprise and industry level: A400M acquisition; and SANDF procurement review.

In terms of the Strategic Plan, a shareholder compact is defined as a "key document containing a performance agreement between the DPE and the SOEs so as to formalise government expectations of management." The compact contains:
Key performance indicators and associated management targets such as expected rate of return, efficiency and investment spend targets and balance sheet ratios.
Governance and reporting systems within the SOEs and between the SOEs and government.
Special initiatives such as private sector participation and development projects.

Ms Molefe said that "although historically this aspect of shareholder management has been neglected, significant progress has been made in finalising draft Transnet and Eskom compacts which are planned to be signed by the end of June".

The Department, she explained, has re-organised itself to more effectively fulfill its fine-tuned vision and mission. It runs five programmes: administration; analysis and risk management; governance and policy; corporate strategy and structure; and corporate finance and transactions. DDGs head each of the last four programmes.

The budget allocated to the Department is R91, 9 million. Last year it was R74, 8 million. In terms of the MTEF (Medium Term Expenditure Framework), for the next two financial years the projected allocations are R79,7 million and R88,8 million. The increased allocation for this year includes R13 million to be refunded to Alexkor for costs incurred during the cancelled strategic equity partnership process. The full details of the budget are to be found in vote 9 in the "Estimates of National Expenditure" (pages 177 to 199).

The Committee feels that significant progress has been made since last year in clarifying the strategic plan of the department. The Committee recognises that this is work in progress and greater clarity will emerge in the year ahead. The Committee feels that the Department should consider organising aspects of the mission and parts of the overall plan in simpler language and seek to be more precise and concise. This would also help in avoiding the unnecessary duplication across some parts of the plan. Overall, the Committee feels that the measurable objectives and KPIs need to be more precise. In respect of the DPE interventions in Transnet, Eskom and Denel referred to in C6, C7 and C8 above, it is understood that some of these interventions are ongoing and others are difficult to pin down in terms of time-frames; but there are certainly interventions which could do with timeframes, and the Committee requests the Department to look into providing time-frames for this category of interventions. The Committee’s tentative view is that, overall, the budget seems to be better organised now. However, we would have liked to engage more rigorously with the Department on the precise allocation to the different programmes and sub-programmes, and exactly how these allocations ensure the most effective use of the budget to fulfil the programmes and goals of the Department. However, limitations of time and our capacity constraints hindered this. But next year we intend to be more effective in this respect.

D. Programme 1: Administration
The administration programme has sub-programmes on human resources, IT, finance, strategy and business planning, legal counsel, internal audit and communications.

At R35 million, it is the programme with the largest budget. The allocation to salaries goes up from R17,9 million last year to R27,6 million this year and "goods and services" come down from R15,3 million to R8,8 million. The decline in goods and services is due in part to the removal of costs of the IPO manual. To fund part of the additional posts created as part of the restructuring, funds were moved to the personnel budget. The Department explained that it is concerned that there is such a huge bias towards support services and is going to address this during the course of this year.

The Committee feels that the Department needs to be more clear about its Human Resources challenges and how precisely it is going to address this. The Committee will engage the Department on this in next years budget briefings. As this programme is allocated the largest budget, the Committee would like to engage the Department on this programme more effectively next year.

E. Programme 2: Analysis and Risk Management
DDG Mr James Theledi explained that the Analysis and Risk Management programme had taken on a new significance with the Department’s strategic shift of emphasis and recent negative experiences in some of the SOEs. This programme entails the analysis and monitoring of SOEs operations and economic effectiveness, and ensuring that SOEs are exemplary in corporate governance and risk management. More specifically, the programme aims to:

Conduct "insightful analysis and provide quality advise" on the performance of SOEs" and "systematically manage key risks".
Proactively monitor and report on SOEs strategic, operational and financial issues.
Develop and "put in place" an integrated risk management framework for SOEs.

Among the outputs of the programme are the following:
Annual publication on the performance of SOEs.
Annual client surveys.
An award ceremony for best performing SOEs.
Key performance targets for SOEs (supported by global benchmarks on operational efficiencies and financial performance).
Annual reporting on risk management of SOEs (supported by risk audits, reporting and a risk management system).
An enterprises-wide risk management and treasury risk management framework.
Guidelines on hedging and compliance with international accounting standards (embedded derivatives).

DPE identifies risks in strategic, operational, financial, technology, environmental and human resource terms. Mr Theledi said that at present Eskom, Alexkor and Arivia.kom have a formal risk management system, Transnet and Safcol do not, and Denel has a risk management system but its effectiveness "cannot be confirmed". He said that "government, as the shareholder with the ultimate fiduciary responsibility in SOEs does not have a risk management framework and the Public Finance Management Act (PFMA) and protocol on corporate governance for SOEs has not been vigorously implemented by most executive authorities". He said that "the Boards must manage the risks, the shareholder needs assurance, and there must be early warning systems to avoid surprises".

He identifies the challenges as to:
Set up economic and financial models and to influence the planning of SOEs.
Set up operational, financial and strategic targets and commit to shareholder compacts.
Set up an integrated risk management framework and system.
To recruit and retain skilled personnel.

The Committee reiterates its concern about the urgency for an effective risk management system to be implemented by the SOEs. The Committee feels, the complexities notwithstanding, that effective sanctions need to be taken against leaders who are responsible for avoidable decisions that lead to huge financial losses and other negative consequences for SOEs. The new risk management framework needs to address this appropriately. Both the public and the leaders of SOEs need to know that the government is going to effectively act against mismanagement. Providing a "dignified exit" for those who mismanage is just not right!

The Committee acknowledges that the Department has made more progress on defining the new risk management framework than we had understood. The Committee welcomes attempts to put in place "early warning systems". The Committee acknowledges that risk management is a very challenging and complex area. The Committee is struck by the very simple and clear manner in which very technical issues in risk management were presented to us – and expresses its appreciation. The Committee will pursue its concerns further when the new risk management framework is finalised at the end of this year.

F. Programme 3: Corporate Governance and Policy
Director Ms Solomons explained that the corporate governance and policy programme aims to "achieve shareholder excellence in the management of SOEs through sound corporate governance and policy imperatives, and to provide reliable secretariat functions whilst ensuring that the DPE complies with the relevant legislative requirements". The programme has 3 chief directorates: governance; policy; and secretariat and compliance.

More specifically, its governance aims include:
Develop and implement a Shareholder Management Model for Government.
Ensure a consistent and transparent governance environment for SOEs.
Effectively co-ordinate government’s mandate for SOEs.
Ensure SOE compliance with the PFMA.
Manage government’s shareholding interests in SOEs.
Develop ethical guidelines for SOEs.

The work programme for 2005 on governance includes implementation of a shareholder model; frameworks on corporate governance, corporate practice and remuneration practices; development and implementation of shareholder compacts; a dividend policy for SOEs; a stakeholder management framework; regulatory management framework; ethics/probity framework; and evaluation of Board performance.

The policy chief directorate aims at:
Policy advocacy.
Alignment of SOEs policies with government’s broader policy objectives.
Undertaking research and development to enhance DPE mandate.
Ensuring SOEs operations comply with environmental and other legislation.

The work programme for 2005 in this area includes SOEs environmental compliance assessment; a revised policy framework; research priorities on DPE mandates; and reports on the contribution of the SOEs to the second economy.

The secretariat/compliance chief directorate aims at:
Organisational effectiveness.
Effective and reliable secretariat functions.
Heightened awareness of compliance issues internally.
Ensuring all bid processes comply with the various rules, regulations and legal requirements.
Promoting proper knowledge management.

The work programme in this area includes an information collation project; risk management strategy; implementation of an internal compliance framework; and re-introduction of an electronic document management system.

The Committee welcomes the work being done on the new shareholder management model. A workshop was held on the current draft of the model on 15 March and the Committee has communicated its views to the Department on this. While recognising the challenges, the Committee feels that there needs to be more effective co-ordination between DPE and the policy and regulatory departments in ensuring a common overall approach to SOEs. This entails reviewing, over time, legislation, policies and regulations applying to SOEs to ensure reasonable consistency and clarity. Of course, there are aspects of the PFMA that are too difficult for SOEs to comply with and need to be reviewed, but there are other aspects that can and must be complied with – and some of the SOEs are not doing so. This matter will be raised in more detail with the Department and the SOEs when their annual reports are considered by the Committee in October this year. The Committee also feels that the Department should lay greater stress on the need to stamp out corruption in the SOEs. Once there is agreement in Cabinet on the new shareholder management model, the Committee believes that the model should be presented to a joint meeting of the relevant portfolio committees dealing with the SOEs and will seek to arrange such a meeting.

G. Programme 4: Corporate Structure and Strategy
Much of what is entailed in this programme is already covered in the Minister’s and Acting DG’s overviews set out in sections B and C above. Ms Molefe takes direct responsibility to lead this programme as the DDG.

The aim of this programme is to "design strategies and structures for SOEs and the industries in which they operate which will ensure that SOEs deliver on Government’s economic growth objectives through increased competitiveness (lowest sustainable cost; globally competitive service; and capacity availability) and the use of SOEs to strengthen key sectors and for sectoral and regional development".

The work programme includes annual reviews and both cross-cutting and sector specific projects. The reviews include those of monitoring "strategic KPIs given SOEs strategy and business plans"; PFMA applications; half-yearly results, annual reports and SOEs investment, financial and operational progress against approved strategy and business plans; PFMA applications; and lessons learned.

Among the deadlines provided for the Transport work programme are the following:
Shareholder compact with Transnet - September 2005
Policy framework for private sector participation
in ports - November 2005
Policy framework for private sector participation
in rail - March 2006
Framework for SAA strategy and industry structure - May 2006
Investment Framework for Transnet - December 2005
Deadlines for the energy sector work programme include:
Shareholder compact with Eskom - July 2005
Integrated framework aligning Eskom strategies
with government goals – various deadlines from July to December 2005
Review of regulatory framework - December 2005
Electricity pricing policy - October 2005
Private sector participation policy - April 2005
IPP power purchase agreement - June 2007

Deadlines for the Defence sector work programme include:
Shareholder compact - December 2005
Corporate strategy and investment plan - July 2005
Review of Department of Defence procurement - December 2005
Signing of A400M agreement and industry
development plan - December 2006

The Committee recognizes that the work programmes are comprehensive and welcomes the clear deadlines set out. The Committee is struck by how much there is to do. The Committee will monitor progress and contribute where we can to the achievement of the work programmes in terms of the deadlines provided. The Committee’s general views are already covered in sections B and C above and elsewhere in this report.

H. Programme 5: Corporate Finance and Transactions
DDG Mr T Mphuti explained that the programme on corporate finance and transactions focuses on overseeing, managing and executing the corporate legal structure of SOEs, including transactions such as Initial Public Offerings, Joint Ventures, and PPPs.
The Management sub-programme is responsible for the co-ordination and overall strategic management of the programme.

The Corporate Finance sub-programme is responsible for the development of optimal financing structures in relation to the nature and extent of the transaction, taking into consideration SOE’s access to local capital markets, financial position, the objective of the transaction, etc. The unit also acts as mediator/liaison between financiers.

The Transactions sub-programme is responsible for the execution, management and oversight execution of approved SOE transactions of a material nature in accordance with the approved corporate strategy.

Among the outputs aimed at are to "research and develop optimal financing strategies aligned to SOEs corporate structure and strategy" and the "development of optimal funding structures for increased infrastructure investments of R165 billion."

Mr Mphuti reported that the following are current transactions:
Implementation of optimal corporate structure of Alexkor.
Finalisation of the ALCAN investment plan at Coega.
Execution of the restructuring of Denel’s non-core activities.
Disposal of Denel’s shareholding in Arivia.kom.
Execution of PBMR’s finance strategy.
Eskom Finance Company.
A400M acquisition negotiations.
Finalisation of Aventura.
Transnet Housing.

The Committee finds this programme the most technically challenging, and at this stage has no specific views to offer. Our general views on the issues covered in this programme are carried elsewhere in this report.

I. Overview
Overall, the Committee feels that the Department has made significant progress over the past year, but, of course, there is space for improvement, as the Committee has suggested in various parts of this report.

The Committee feels that there is a fairly good range of skills in the current senior management team of the Department. In view of the expanded role of the Department, it seems to the Committee that the capacity of the Department might have to be enhanced. The Committee notes the significant number of vacant posts. The Department is still trying to finalise which vacant posts are funded and which are unfunded. The Committee would like the Department to be more clear at next years budget briefings about the full range of skills and capacities it needs to more effectively fulfil its programmes and the implications of the vacant posts for its ability to fulfil its role.

Of course, the Committee understands the stress being put on ensuring the commercial success of the SOEs and recognises the positive effects this will have on the poor and disadvantaged, but, at times, senior managers in the SOEs seem to present the commercial and socio-economic objectives in an unnecessarily "stagy" way. There needs to be a better balance between the commercial and socio-economic objectives of SOEs. The Committee will spell out its views in greater detail through further engagement with the Department.

The Committee believes that the department should, over time, consider strengthening its oversight role further. The Committee will engage with the Department more on this.

The Committee believes that the Department should more actively monitor SOEs to ensure that their BEE projects are broad based. The Committee feels it will be useful to get a detailed breakdown of the beneficiaries of the SOEs BEE programmes. The Committee will arrange for a briefing from the Department on this before the year is out.

There were various issues raised in the "Annual Report on the Reports of the Department of Public Enterprises and Transnet, Eskom and Denel" that need to be addressed, and the Committee will engage the Department on this during the year.

While the DA has obvious policy differences with the direction the Ministry and Department are taking, it acknowledges that the Ministry and Department are dealing with the portfolio fairly competently, given the enormous challenges. The DA would like to see greater investment in human resource development in the SOEs. The DA feels too that the performance of SOEs should be more clearly benchmarked against that of the private sector. The DA feels strongly that the Minister should not abandon privatisation.

J. Appreciation
The Committee expresses its appreciation to the Minister and Acting DG and her team for their co-operation in processing the budget briefings.

The Committee expresses its appreciation to Mr N van Zyl of Parliament’s Research Unit for the background report on which this report drew.