1. The Committee considered the 2004-2005 annual reports of the Department of Public Enterprises (DPE) on 11 October 2005, Transnet on 12 October, Eskom on 19 October and Alexkor on 26 October, and an interim report from Denel on 18 October.
2. The Committee also received a separate briefing from South African Airways (SAA) on 12 October on its annual report, but since SAA is still part of Transnet, the Committee reports on SAA as part of Transnet.
3. The annual reports of Denel and Alexkor had not been tabled in parliament. Alexkor explained that their Annual General Meeting (AGM) was still to take place. Alexkor presented a draft of their annual report and financial results. Alexkor will be having its AGM on 4 November 2005. Mr Shaun Liebenberg, CEO of Denel, explained that as he had just taken over, he was unable to meet the 30 September Public Finance Management Act (PFMA) deadline. A new Board Chairperson and Chairperson of the Audit Committee had also been appointed and they had identified certain shortcomings in the financial statements. In the interest of reflecting clear, accurate and transparent financial results, it was necessary to delay the presentation of the annual report. Final adjustments are being made to the financial statements, and the annual report will be released at the AGM in mid-November and tabled in Parliament shortly thereafter.
4. Safcol’s (South African Forestry Company Ltd) financial year coincides with the calendar year. In view of this, Safcol’s annual report was not tabled in parliament by the 30 September deadline. As from next year, Safcol will adjust to the normal financial year as required by the PFMA. Safcol will be having its AGM on 15 November, and will brief the Committee on its report early in the new year.
5. The Committee finalized its report on the 2004 annual reports of DPE and the SOEs in November last year. The report was published in the ATC on 22 February 2005. The current report has to be understood in the context of last year’s report and will not cover ground covered in last year’s report. In respect of DPE, issues covered in our budget report to parliament, which was published in the ATC of 13 April 2005, will not be covered in this report, unless necessary. In the case of Alexkor, some of the issues that were raised are not covered in this report as they were dealt with in our report on our study tour there, published in the ATC of 16 March 2005.
6. The approach in this report is to first present a brief overview of the presentation made to our Committee on each annual report, and then offers our responses to the report. Where there are responses that are more general to the SOEs, they are carried in section H of the report. Of course, this report provides no more than a summary of the presentations made to our Committee. To get a fuller and better understanding of the presentations, copies of the documents put before the Committee can be obtained from the Committee Secretary, Mr Chris Thisani.
7. The report is much longer than we would have like it to be. Unlike last year, we have paid greater attention to SAA because it is soon to become a separate SOE and we have also covered Alexkor. Ideally, we should focus much less on a summary of the presentations made to us and more on what our Committee’s responses are. But we are still trying to come to grips with where our SOEs are, and this report is meant to collectively assist us in that regard. It is also meant to contribute towards defining our oversight role and shaping our strategy and programmes. As we get to better understand the SOEs, so will it become less necessary to be detailed about their presentations. Of course, there is another value to the detail – the report is published in the ATC, and MPs who do not serve in our Committee and other interested parties can get an overview of the annual reports of DPE and the SOEs. Still, we might want to consider whether we should do a shorter, separate report on DPE and each of the SOEs rather than one longer report in future?

1. As proposed in our report last year, the Committee organised several workshops over the year to better equip us technically to carry out our oversight role. Of course, there is still much more to do in this regard, and our technical empowerment has to be seen as an ongoing process.
2. The Committee does not currently have a full-time researcher, although we have received research support through an assistant that has been drawn in.
3. Following the decisions taken in last year’s report, the Committee Chairperson has been in touch with the other committees whose portfolios overlap with ours to discuss the senses in which our respective roles are distinct and also overlap, and the need for the committees to co-operate more effectively. This has also been raised in the economic cluster of committees, the Committee of Chairpersons and other forums. While there has been some progress in this regard, more certainly needs to be done. The Eskom annual report was considered jointly by the Minerals and Energy Committee and our committee – and this is most welcome. Denel’s interim report was considered jointly with the NCOP Select Committee on Labour and Public Enterprises.
4. The Committee’s concerns in evaluating annual reports largely derive from the PFMA, and were set out in section A5 of last year’s report in quite some detail. Essentially, we are concerned with the relationship between the measurable objectives in the strategic or business or corporate plans, how the budget allocated for the achievement of these objectives was used, progress achieved in fulfilling these objectives, and the financial performance of the organizations. This is within the overall concern to evaluate the contribution being made to reducing the cost of business, making South Africa more competitive, encouraging economic growth and social development, and bridging the gap with the "second economy".
5. The Committee is guided in our approach to considering annual reports by the report commissioned by the Speaker’s Office, "An Operational Plan for the National Assembly on Legislative Oversight through Annual Reports," and National Treasury’s "Guidelines for Legislative Oversight through Annual Reports." The DPE and the SOEs are requested to acquaint themselves with these documents should they want to better understand the approach of the Committee. These documents can be obtained from the Committee Secretary.
6. Following discussions within the Committee of Chairpersons and our Committee, we feel that for us to more effectively carry out our oversight role, annual reports would have to be tabled by 30 August, not 30 September, each year. We are usually away from parliament for a two or three week constituency period during mid-September to early October – and immediately upon our return we are expected to plough through weighty, technically challenging reports, business plans and financial statements. We usually have a brief five-weeks or so before parliament rises for the year in mid-November in which we are expected to process these reports and table our own report on these reports to parliament. If the Committee received annual reports by the end of August, it would give us more time to prepare for the briefings on the reports, engage independent experts to evaluate the reports, and organize public hearings in which we could engage civil society stakeholders and the public on the issues raised in the report and the performance of DPE and the SOEs. We could also have a debate in the House on our report on the annual reports. Certainly, the comprehensive and valuable proposals set out in the two documents referred to in section 5 above will be very difficult to implement in any reasonable measure if reports are tabled at the end of August. The PFMA is likely to be amended next year, and the Committee mandates the Chairperson to pursue the need for and feasibility of an amendment that will require annual reports to be tabled by the end of August with all the relevant authorities and stakeholders.
7. Of course, the Committee acknowledges that DPE and the SOEs prepare their annual reports not for parliament alone, but a wide range of stakeholders. There are legislative, regulatory, public relations, normative and other considerations that influence the form and content of the reports. Overall, the Committee feels that the reports could be more user-friendly, and in some cases, briefer. At least, they should include an accessible and easy-to-read overview or executive summary. To some extent, the approach taken by DPE and the SOEs in the power point and slide presentations to the portfolio committee might serve as a guide.
8. For the Committee to evaluate annual reports properly, we need to be fully acquainted with the strategic or business or corporate plans for the previous financial year, the budgets allocated for the plans (and in the case of DPE, the relevant sections of the Estimates of National Expenditure) and the annual reports, and, in particular, the relationship between these documents. Given the Committee’s lack of research and other technical support, we are not, at this stage, able to effectively use these documents. This reinforces the imbalances of technical skills between the Committee, on the one hand, and DPE and the SOEs, on the other. We will, of course, over time, develop our technical capacity. We are determined to do so. But we have to be rigorous in exercising our oversight role now. We know it may be difficult, but we want representatives of DPE and the SOEs to make their presentations to us more accessible, simple and jargon-free, and hence more transparent, so that we can exchange with them more effectively. Overall, the presentations, in this regard, were much better this year than last year – but, more, we believe, can still be done in this respect. We also would like the presentations to the Committee to be much more pointed in setting out the measurable objectives decided on, the deadlines set, the budgets allocated, and the progress achieved in the form of tables or other accessible and easy-to-follow means, as some organizations appearing before us did indeed seek to do. We request all the organizations to kindly do this for next year’s briefings on the annual reports; and if this is not done, we expect the process of our exchange with the organizations to be considerably slowed down and laborious; in other words, it is in all our interests that this be done!
9. Of course, we appreciate that there are many challenges in finalizing shareholder compacts with SOEs. But once the compacts are finalized, we would like the Minister, as we pointed out in our last year’s report and our report on DPE’s budget this year, to table the shareholder compacts in parliament so that we are able to monitor the SOEs and carry out our oversight responsibilities more effectively. If the compacts are too long and complex, perhaps a summary of its key aspects can also be tabled?
10. The Committee strongly feels that organisations that present their annual reports to us must respond to the relevant issues we raise about them in our last annual report on their annual reports. If there are views and any requirements we have set out in our reports that are unfair or outside of our mandate or in some other way questionable, then the organizations must engage with us about this. But respond they must, to the issues we raise – and we will be more demanding about this at next year’s consideration of the annual reports.

1. The Department was represented by Director General (DG), Ms Portia Molefe; Deputy Directors General, Ms Sandra Coetzee, Mr Tebogo Mphuti and Mr James Theledi; Chief Operations Officer, Rashida Issel; Parliamentary Liaison Officer, Ms Dudu Mhlongo; and Ministerial spokesperson, Ms Gaynor Kast.
2. The financial year under review saw the consolidation of a new leadership in the Ministry and Department. Much of the year was spent on refining the mandate, vision and mission of DPE, and providing greater clarity to the SOEs on their mandate and greater certainty on policy. The Department’s mandate, as covered in our budget report in April, is to work with the relevant policy departments and regulators to provide oversight and strategic direction for the SOEs reporting to it. "DPE is really a backroom office", said Ms Molefe. "Our front office is the SOEs. A large part of our work entails interacting with the other departments and the regulators."
3. The Department and its programmes were restructured to reflect its new mandate. This was covered in our Budget Report. The Department’s reorganized programmes are:

• Administration
• Analysis and Risk Management
• Governance and policy
• Corporate Strategy and Structure
• Corporate Finance and Transactions

1. The Department’s new three-year strategy will be subject to a mid-term review this November, and the Department would be interested to engage with the Committee on some of the issues that emerge from the review. Much of the financial year under review was also spent on defining a new shareholder management model. Departments do not have a set of common standards on shareholder management. Consideration is being given as to whether there is a need for generic legislation on shareholder management or whether amendments to the PFMA might be able to cater for this. In any case, the new shareholder management model is to be finalized by February 2006, and will begin to be implemented in phases from 1 April 2006.
2. Among the achievements in respect of the administration programme were the following:

• Implementation of Employment Equity Plan
• Implementation of fraud prevention plan
• Implementation of automated procurement systems
• Implementation of manual ‘accrual basis" monthly management reports to improve expenditure management and cash flow
• Launched the Telkom Initial Public Office Reference Manual

1. Ms Molefe explained that the employment equity plan needs to be reviewed in terms of the Department’s performance management system. She said that "there seems to be a correlation between the bonus cycle for senior managers and reporting on employment equity figures. Managers are more likely to employ people from designated groups in the period immediately prior to the bonus cycle. However, DPE has no way of tracking how long these people remain in those positions. The solution would be to create an environment that is conducive to employing people from the designated groups."
2. Achievements in the Analysis and Risk Management programme included:

• Implementation of the Holt Evaluation Model for financial benchmarking of SOEs
• Quarterly Reports on SOEs performance
• Closure of SAA hedge book
• Approval of SOEs infrastructure plans
• Publication of a report on the financial performance of SOEs and a report on risk management in SOEs

1. In respect of the Governance and Policy programme, the following were among the achievements:

• Remuneration and benefits guidelines for SOE CEOs and Board members
• Guidelines for the development of shareholder compacts
• Appointment of new Board members for SOEs

1. Ms Molefe explained that there is an absence of specific legislation governing shareholder compacts with the SOEs. The compacts drafted have sought to take account of different laws and regulations applying to a particular SOE and have become too detailed and bulky. Attempts are now being made to simplify and shorten them, and not cover all the relevant legislation and regulations applying to an SOE; the SOE has to abide by these anyway.
2. Achievements in the Corporate Strategy and Structure programme included:

• Energy Review of generation policy in conjunction with Department of Minerals and Energy; approval of Eskom’s PFMA application for an open cycle gas turbine; and Cabinet approval for the developmental electricity price.
• Transport Approval of Transnet’s 4-point turnaround strategy; and revision of National Ports Authority Act to retain the National Ports Authority within Transnet and removal of the regulatory function
• Defence Reviving South Africa’s aerospace industry through the allocation of work packages for selected components for the A400M aircraft; and change strategy for Denel
• Forestry Concluded business sale and shareholder agreements on the divesture of SAFCOL from Mountain to Ocean Forestry and Amatola

• Telkom Paid out R2,4 million to Khulisa Trust and R3,1

• Alexkor Ongoing negotiations with Richterveld community; and Community Public Private Partnership package approved.
• Eskom: Finalised Request For Proposal for disposal of Eskom Finance Company
• Transnet Work plan for separation of SAA from Transnet
• Denel Approval of equity sale by Denel in Arivia.com; and acquisition negotiations for Airbus aircraft for the South African National Defence Force
• Aventura Land transfer to Forever Resorts

• Energy New electricity generation by independent power producers

• Transport Private sector participation (PSP) in the ports sector

• Defence Denel’s change strategy

• Forestry Supply and demand analysis of the forestry sector

• ICT Assess state investments in ICT: Arivia, Telkom and the second network operator

• The challenges in finalizing shareholder compacts
• The new benchmarking programme to track the operational efficiency of SOEs, including financial benchmarking with such methods as the Holt Evaluation Model
• Guidelines for the disposal of the SOEs non-core assets
• SOEs investment map and the "investment dashboard"

D. Transnet

• Redirect the business
• Restructure the balance sheet
• Ensure corporate governance and risk management
• Develop human capital

1. Transnet had made further advances towards becoming a focused freight transport company, with rail, port and pipeline operations. It functions through Spoornet, NPA (National Ports Authority), SAPO (South African Ports Operation) and Petronet. Transnet has also decided to retain Transwerk, which is the rail engineering and maintenance division, and Protekon, which provide project management and engineering skills. The technical work to unbundle SAA from Transnet will be completed by March 2006. The passenger rail services will be transferred to the Department of Transport and negotiations in this regard are in the final stages. Transnet had received approval from the Minister, in terms of the PFMA, to dispose of a number of its non-core assets.
2. At 13% of GDP, transport and logistics costs are far too high compared to our competitors, and have to be reduced. Tariff increases averaged 2,6% , below the 4% inflation for 2005 financial year. But the answer does not lie just in tariff reductions. Transnet has to fully implement its turnaround strategy to ensure that it reduces transport costs on a sustainable basis.
3. From a loss of R6,3 billion in the 2004 financial year, Transnet made a profit of R6,8 billion in the 2005 financial year. Key aspects of an understanding of Transnet’s finances include the following:

• In 2004 there was a R4,2 billion impairment, mainly relating to aircraft. In 2005 impairment of assets amounted to R153 million.
• In 2005 R6 billion was paid to unwind SAA’s hedge book.
• The iron ore contract was re-negotiated and pricing is no longer based on the rand-dollar exchange rate and world iron ore prices but is now Rand-based. Accordingly, the embedded derivative liability of R3,9 billion was reversed.
• In 2005 there was a fair value profit of R4,7billion relating primarily to the reversal of the embedded derivative liability of R3,9 billion and the mark to market (?) shares.

1. Transnet’s turnover increased by 6% to R46,2 billion and operating expenses increased by just 2,7%, while inflation averaged 4%, so Transnet experienced real growth. All the core businesses experienced real growth. Profit from operations before net finances and impairments increased by 35,5% to R5,9 billion. The operating profit margin increased from 0,4% in 2004 to 12,6% in 2005 – the highest in 6 years Capital and reserves are up from R9,8 billion to R16,9 billion. Derivative liabilities have been reduced from R14,1 billion to R1,2 billion. The gearing ratio has been reduced from 83% to 67%. Transnet wants to reduce it to between 50 and 55 % over the next five years. Transnet believes that its volatility is over and it expects relatively stable operating profits with margins above 12% in the next few years. Capital expenditure of R5,6 billion was spent during the year, of which R3,7 billion was spent on expansion projects. Cash flow from operations increased by R2,6 billion to R7,5 billion, an increase of 51%.
2. Transnet has an actuarial liability of R4,7 billion on its Second Defined Benefit Fund, and will have to fund this amount in the next 5 years or so. Transnet hopes to find a solution to this by the end of this financial year.
3. Transnet’s progress since last year in respect of the first pillar of its 4-point turnaround strategy, re-directing its business, includes:

• Re-engineering core business processes: efficiency, cost reduction, service delivery, market share increase
• Top management in place
• Restructuring of corporate office towards being more focused and slim near completion
• Investment Plan of R40 billion approved

1. Progress in respect of the second pillar, restructuring the balance sheet, includes:

• Approval of exit of most non-core assets
• Closure of SAA hedge book and removal of embedded derivatives
• Unwinding of MTN share transaction structure in progress
• SAA recapitalization agreed at R2,4 billion

• Board’s Governance, Remuneration and Risk Management committees now functioning
• The executive committee and sub-committees now fully functional
• Risk committees established at business units
• Enterprise Risk Management Framework in progress
• Fraud Prevention Plan and Ethics Programme established
• Financial management and control strengthened
• Internal audit outsourced

13. In respect of the fourth new pillar, human capital, progress includes:

• Decision taken to appoint executive
• Organisational design and development process approved
• Talent management policy established
• Employment equity policy updated
• Training and development
• Performance management and reward

15. NPA secured a profit before tax of R2,7 billion, a 26,1% increase on 2004.

NPA spent R1,1 billion on capital expenditure The major capex spend on projects related to the construction of the Ngqura port and expansion of the container and car terminals at Durban port. NPA is to spend more than R1,billion on capital expansion in the 2006 financial year mainly at the Durban, Richards Bay and Ngqura ports.

16. SAPO’s profit before tax was R1,9 billion, compared to R348 million in

2004. However, about R1 billion of this was a once-off gain from the ending of the embedded derivative and fair value adjustments. There was an impressive 27% increase in volumes of vehicles handled and a 12% increase of containers. SAPO invested R591 million in infrastructure. SAPO aims to spend over R1 billion in Capex in 2006, mainly on equipment at its main ports operations.

17. Petronet’s profit before tax increased by 39,3% to R333 million. Its return on

assets of 15% is in line with international benchmarks. The coming regulation may have an impact on Petronet but it is too early to specify details. Petronet is planning a new multi-product pipeline that will cost between R3 and R5 billion depending on the gauge of the pipeline.

18. Of Transnet’s R40,8 billion capital expenditure over the next 5 years, R16,1

billion is to be spent by Spoornet, R15,4 billion by the NPA, R5,1 billion by SAPO and R4,2 billion by Petronet. Transnet expects to be able to fund about R28 billion of this from its own sources and will have to borrow about R12 billion from the capital markets. It will also have to fund about R13 billion to pay the bonds and loans that are maturing in the next 5 years. Hence Transnet may have to borrow R25 billion over the next five years. "However, this is the worst-case scenario", said Ms Swazi Tshabalala, "and does not take into account the gains that are expected to be made through re-engineering our businesses, selling our non-core assets and implementing other aspects of our turnaround strategy. The reality is likely to be different, possibly vastly different, from this projection of R25 billion."

19. Dr Khaya Ngqula, CEO of SAA, explained in detail the challenging nature of

• People: Develop and nurture world-class talent through enhanced training and performance management
• Patronage: Provide seamless travel experience to customers and deliver excellent internal support services
• Profit: Provide sustainable return on invested capital to investors

• Redesign of organizational structure
• Collapsing management structures
• Focus on risk management
• Customer services training of all employees
• Sales organization restructure and sales forces training

22. A new SAA leadership group is in place, based on the following principles:

• A focus on people
• A focus on strengthening risk management
• An aggressive focus on customer service throughout the organization
• A culture of excellence with profit and cost control

25. Ms Ramano explained that SAA was concerned about the increasing price of oil. For the current financial year there was an estimated increase of R1 billion in the fuel bill, without increases in fares. Transnet also pointed out that by international benchmarks, they have about 3000 too many people employed.
26. Most of the financial gains have come from operational efficiencies, said Chief Financial Officer, Ms Tryphosa Ramano. By restricting the travel of senior management and other staff members, it is estimated that SAA saved R100 milllion, including the cost of accommodation and meals. "For our gains to be sustainable, it’s simple. Do what we learned in Accounting 101. Increase revenue, reduce costs, focus on profits, improve productivity and efficiencies. But this will require a change in mindset."
27. Ms Ramano explained that the previous management had sold aircraft far below their market value in transgression of the PFMA and had taken bonuses in (??Technical) of R100 million when the company experienced a loss of R8 billion. These matters had been referred to the government to act on.
28. Questioned by the Committee, Ms Ramano explained that the recent SAA strike caused a loss of approximately R150 million. "Had we conceded to the strikers original demands, the company would have lost R1,6 billion of value in the long term", said Ms Ramano. Dr Ngqula conceded that management did not handle the strike well and should have communicated better with its customers and the public. "This was the first strike ever in SAA’s history. We were not properly prepared for it. And strikes are very complex, very painful. We learned valuable lessons from it."
29. SAA’s key priorities over the medium term include reviewing its business model to compete with the low-cost carriers, "revolutionizing its fleet", developing alliances and partnerships, and simplifying travel arrangements for passengers. At present, 75% of SAA’s revenue comes from passengers, 9% from cargo and 16% from other income. SAA wants to increase its transport of cargo to 20 % by 2010. Most airlines get approximately 40% of their revenue from cargo. 59% of SAA’s revenue is derived from international passengers, 25% from domestic passengers, and 16% from regional passengers. Currently, 25% of SAA passengers are on the Voyager programme. SAA wants to increase this to 35% in 5 years time. SAA also wants to increase the utilization of aircraft.
30. Challenged by the Committee, Transnet explained that they are determined to keep job losses to a minimum with the sale of non-core assets and other aspects of restructuring. "We did not start by saying we have financial losses, let’s see how many jobs we can get rid of to save money", said Ms Ramos. "We started with the need to restructure Transnet, and the jobs that are necessary are decided in this context." Transnet is in constant negotiations with the unions about these issues and is committed to implementing its Social Plan. Some of the non-core businesses are running losses and will be liquidated unless they are sold. The current Head Office staff of more than 400 will be reduced by 250. Other possible job losses are difficult to tell at present. The fulfillment of Transnet’s capital expenditure plans will contribute to economic growth and job-creation, it was stressed.
31. Ms Ramos explained that negotiations for the sale of the MTN shares held by the MCell Trust on behalf of the Second Defined Benefit Fund to Umthunzi Telecoms Consortium, were terminated following a failure to reach agreement.
32. Ms Ramos explained that there were 4 cases of non-compliance with the PFMA. These relate to an Air Tanzania exchange control approval matter, lack of executive authorization for investment in Spoornet Zambia, lack of shareholders’ agreement for participation in a port-related joint venture in Ghana, and the use of deposits by the Housing Division of Transnet. All of these occurred in prior years and did not have a material impact on Transnet. All of the matters are being attended to.
33. Ms Ramos emphasized that "while the results are pleasing, we still have a long way to go. There are no short-cuts, and the turnaround strategy will take about 5 years to properly implement".
34. The presentations made to the Committee were clear and accessible and the Committee expresses its appreciation. It was a more confident, clear and positive Board and management team from Transnet that the Committee met this year. The Committee feels that considerable progress has been made in refining and implementing the turnaround strategy since the previous financial year, and welcomes the focus on human capital as a major pillar of the strategy. In fact, the Committee has been more concerned than we have suggested in our reports, that Transnet will have major capacity challenges in implementing its ambitious strategy, and we are now more at ease with Transnet’s clear acknowledgment of the challenges and commitment to deal with them. This is not to say, of course, that the capacity challenges will be easy to meet; but the first major task in responding to them is surely to acknowledge the depth, scope and nature of the problem? Transnet has certainly done that – and we wish them well as they tackle it.
35. The Committee is concerned about pending job losses, but feels otherwise that, overall, Transnet’s strategy is fairly clear and basically correct. There are many commendable aspects to it. Without detracting from the considerable value that the current leadership brings to Transnet, the Committee cannot understand why key aspects of this strategy were not decided on and implemented 5 years ago! It would have been enormously beneficial for the country if this had happened.
36. Lacking the necessary technical expertise and struck by the magnitude of the financial turnaround, from a R6,3 billion loss in 2004 to a R6,8 billion profit in 2005, the Committee was initially cautious about being too enthusiastic about the results. What exactly do the very nice figures mean? To what extent does this turnaround reflect real, material gains as against a juggling of figures to take account of new accounting standards and ways of reporting? To what extent are the results due to the fact that there were major once-off losses in 2004, such as the SAA hedges and impairment of aircraft, and so the 2005 results are not as good as the figures suggest? To what extent are the much better results a consequence of the implementation of the turnaround strategy and the re-engineering of the business units? More specifically, how much is due to greater efficiencies in operations, cost-reductions, greater productivity, increase in volumes and greater market share? Crucially, how sustainable are these results and what are the prospects of even better results? Of course, there was not the time or means to fully come to terms with these issues, but following the engagement with the Transnet team and having familiarized ourselves with some of the public discourse on Transnet’s results, the Committee feels that the results are very impressive and promising, and due in good part to the implementation of the turnaround strategy. The Committee also feels that the results provide a good foundation for the financial turnaround to be sustainable, and looks forward to seeing what the 2006 results are like.
37. The Committee welcomes the progress being made in terms of a new risk management framework for the group and the establishment of risk management committees at all levels. The Committee would, in future, like to be briefed more fully on this, and will make appropriate arrangements with Transnet to do this.
38. A major concern of the Committee over the next few years will be monitoring progress in the implementation of Transnet’s capital expenditure plans. We will discuss with Transnet the feasibility of regular reports in this regard. As a Committee, we have to consider whether we need to develop skills to be more effective in this area. The Committee welcomes Ms Ramos’ commitment to ensuring that South African companies are fully briefed about the role they can play in the infrastructure roll-out. Welcome too is the commitment to ensure that, wherever possible, non-South African companies involved in the infrastructure programme transfer skills to South Africans.
39. In view of the challenges being confronted by Spoornet, the Committee will seek to pay particular attention to Spoornet. While recognizing the difficulties, the Committee feels that greater attention should be given to increasing the general freight volumes by more than the 2 million tons proposed over the next few years.
40. The Committee exchanged at some length with Transnet about job losses. The Committee appreciates the complexities, but also feels obliged, in the public interest, to constantly raise issues about this. Our overall concerns in this regard are set out in section H2 below. We also stress the need for Transnet to ensure that, wherever possible, labour-intensive methods are deployed to roll out the capital infrastructure.
41. In respect of the sale of non-core assets, the Committee expresses its concern that the Black Economic Empowerment (BEE) targets should indeed be broad-based, and within our capacity constraints, and to the extent consistent with our oversight role, we will be monitoring this carefully.
42. The Committee finds SAA’s financial turnaround impressive, particularly because the oil price increased by 40% and the rand appreciated 14% (so reducing the income from international passengers). While recognizing the major challenges, the Committee hopes that the financial performance will be sustained and even improved. The Bambanani strategy holds much promise, and the Committee hopes it will be properly implemented. The Committee welcomes SAA’s decision to introduce low-cost flights. The Committee is keen to monitor progress in regard to increasing the amount of cargo carried. Is the target of 20% by 2010 ambitious enough, given that
    most airlines draw about 40% of their business from cargo?
43. The Committee welcomes Dr Ngqula comments about SAA’s handling of the strike. It largely overlaps with the Committee’s views. Welcome too is Dr Ngqula’s strong commitment to reducing luggage theft on SAA flights. "The theft of luggage is too high", he said. "It’s totally, totally unacceptable. You must know from me that we’re going to fix this. We can do all these good things, but if people cannot get their luggage, they’re not going to want to fly." We will be holding Dr Ngqula’s to his words, and will monitor the situation keenly. In 2004, luggage theft cost SAA R10 million.
44. Questioned by the Committee, Dr Ngqula insisted that there were sound reasons for the exit or pending exit of several senior managers. "There is no exodus of senior managers. That’s a perception created by the media", he said. The Committee is unable to express a specific view on Dr Ngqula’s response, but raises this issue because it is in the public domain.
45. The Committee welcomes SAA’s referral of the matters referred to in section 27 (?) above to the Minister. We will monitor developments in this regard.
46. Again, while not detracting from the considerable value that the current leadership brings to SAA, the Committee feels that key aspects of the current SAA strategy could well have been introduced several years ago. SAA and the country would have benefited enormously. The Committee wishes the new SAA leadership well in implementing their new strategy.
47. A bill will have to be passed in parliament to give effect to the separation of SAA from Transnet. To give expeditious effect to this, it would be very useful if the Committee is given a full briefing on the technical and other issues related to the unbundling early in the new year.
48. The Committee notes the 4 examples of non-compliance with the PFMA referee to in section 32 (?) and understands that they are being attended to appropriately.
49. In six months time, the Committee would also like to be briefed on progress regarding the following issues:

• Transnet’s Human Resources Strategy
• Spoornet’s performance
• The Second Defined Pension Fund Liability
• The tackling of corruption within Transnet

1. Eskom was represented by the Board Chairperson, Mr Valli Moosa; Chief Executive, Mr Thulani Gcabashe; Finance Director, Mr Bongani Nqwababa; Managing Director: Enterprises Division, Mr Brian Dames; Managing Director: Distribution Division, Mr Mongezi Ntsokolo; Managing Director: External Relations, Ms Nthobi Angel; Executive Manager: Office of the Chairman and Chief Executive; and Public Affairs Advisor, Ms Prudence Pitsie.
2. The newly appointed Board Chairperson, Mr Moosa, explained that Eskom’s report covered a 15-month period from 1 January 2004 to 31 March 2005. Previously Eskom’s reporting period covered a calendar year. During the year under review, Eskom changed its financial year-end to 31 March to meet the requirements of the PFMA. "So our report is on our adjustment year", said Mr Moosa, " making comparisons with the previous year’s report less easy. Still, Eskom has delivered an exceptional performance for a variety of reasons and is in exceptionally good health, from a variety of points of view. This includes its financial management and the performance of management as a whole. This puts Eskom in a good position to pursue the rather ambitious plans government has for it over the next few years. Of course, Eskom will be challenged, but when you see the results and the report, you will see that it’s an enterprise ready and able to meet the challenges."
3. The theme of the report, explained Chief Executive, Mr Gcabashe, is "Building Capacity, Embracing the Future". "This explains where we are, the capacity we need, and the challenges we’re ready to face to ensure that our future is, indeed, a prosperous one", he said. Mr Gcabashe explained that the Minister had finalized the shareholder compact with Eskom in June 2005 and there is now an alignment between the compact, the corporate plan, the budget and the activities of Eskom. Eskom seeks to " deliver significant socio-economic development and a healthy bottom line, side by side with comprehensive upliftment of all South Africans. Eskom's vision is to be the global lowest-cost producer of electricity for growth and development. This is reinforced by its strategic intent, which proclaims that Eskom will be the pre-eminent African energy and related services business of global stature". Eskom retained its position as the cheapest producer of electricity in the world for industrial users and the fourth cheapest for residential users. According to the April 2004 "NUS Consulting Group International Electricity Survey and Cost Comparison", Eskom’s cost of electricity for industrial users is 32% lower than its nearest rival, Canada. "In April this year", said Mr Gcabashe, "this gap had increased to 36%"
4. Based on "triple bottom line" reporting, with the addition of a "technical" component, Eskom measures and reports on its performance in a single integrated sustainability report covering the following key aspects:

• Socio-economic: Electrification, BEE, HIV/AIDS, people

• Financial: Profit before tax, return on assets, debt: equity, credit rating
• Occupational health,

• Technical: Plant availability, plant reliability, system minutes, supply loss indices

• Development of the Eskom sustainability strategy and performance index
• Global partnerships and alliances
• Key research projects in support of sustainable development
• Extensive demand-side management programme to promote more efficient use of electricity

1. Eskom had also invested R203 million in research and development focused on supporting sustainable development, including researching non-grid options. Most of the projects revolving around renewable energy are still in the research and development phase, especially with solar and wind energy. Mr Gcabashe said that these projects cannot be operationalised at this stage.
2. Eskom reported that its relationship with the Pebble Bed Modular Reactor (PBMR) has significantly changed, ending Eskom’s historical role as a catalyst for the project. It’s role has been redefined to being "PBMR demonstration power plant host, customer for commercial units, and a shareholder in PBMR Pty Ltd". Eskom will no longer invest in the project, and will dilute its present shareholding over time to about 5%. Eskom is more likely to become a customer of PBMR, rather than a developer. Eskom will only buy the technology if it is economically beneficial to do so.
3. As reported last year, Eskom has a very advanced and comprehensive HIV/Aids programme, and this was consolidated in the period under review. "We have now included our HIV/Aids performance in our human resources sustainability index", said Mr Gcabashe. Eskom had contributed R83 million to develop an HIV vaccine, and is to contribute a further R30 million by 2007.
4. Eskom’s profit after tax for the 15-month reporting period was R5,2 billion, compared to R3,4 billion in the previous 12 months. Revenue increased from R32,9 billion to R42, 9 billion. Capital and reserves were up from R40,6 billion to R44,8 billion. The debt:equity ratio improved from 0,18 to 3.0. The return on assets improved from 10,4% to 12,7%. Total productivity was positive to the extent of R485 million or 1,8%.
5. The key challenges for the period under review were safety, coal logistics and the availability of generator transformers. Eskom experienced an increase in the number of work-related fatalities from 5 the previous year to 18 in the period under review. Public electrical fatalities, caused mainly by illegal connections, increased from 27 to 39. Eskom is intensifying its efforts to ensure greater safety.
6. Eskom’s key focus areas for now and the next few years are:

• Safety
• Capital expansion programme
• Meeting the skills requirement
• Funding strategy
• Restructuring of distribution
• Electrical connections for the current financial year
• Meeting the 2006 winter demand

1. Eskom’s capital expenditure is aimed at addressing the future capacity needs of the country. Eskom will be investing R84,2 billion in capital expenditure over the next 5 years. Eskom, together with independent power producers, intend to provide 5,304 megawatts of new electricity in this period. The initial projects are aimed at increasing peaking capacity. In 2007, Eskom will commission two open cycle gas turbine power stations with a total capacity of 1000 MW to meet peaking demand. Independent power providers are meant to build and operate another two such stations with a total of 1000 MW by 2008. Eskom is also returning to service 3 power stations that were mothballed 15 years ago. These are envisaged to contribute 3600 MW between 2005 and 2011. The plan is to resurrect these stations one unit at a time, with Unit 6 at the Camden power station already successfully brought back to service and now operational.
2. Basically, Eskom’s capital expenditure plans revolve around:

• Generation: Simunye (Camden, Grootvlei,Komati); open cycle gas turbine; planning

• Transmission: Cape strengthening; Platnium basin; Coega supply; refurbishment
• Distribution: Refurbishment; reinforcement of plants

1. Once again, the Committee congratulates Eskom on its achievements, and reinforces the positive comments we made about Eskom in our last year’s report. We are interested to note that, unlike last year, Eskom is now more positive about the delivery of electricity in rural areas, and has made good progress in this regard, certainly more than was suggested possible during last year’s briefing. The Committee shares Eskom’s concern about the limited budget for connections during the current financial year.
2. The Committee fully supports Eskom’s focus on the more efficient use of electricity by its customers. It would be very useful if parliament as a whole was apprised on the need for this as well as Eskom’s campaign, so that we can encourage people in our constituencies to conserve energy. Our committee will raise this with the other relevant committees to see how this can be taken forward.
3. The Committee is aware that Eskom is exploring alternative sources of energy, including more environmentally-friendly and renewable forms, but we have not sufficiently engaged with Eskom on this, and will do so in future. With the massive new generation of electricity planned, there are obviously concerns about the effect of greenhouse gases and other environmental issues, and the Committee will work with the relevant portfolio committees to monitor this. The Committee understands that Eskom is to reduce its stake in the PBMR project to 5%, but will consult with the other relevant portfolio committees to establish the need for us to be more acquainted with the project.
4. The Committee expressed its concern at the power outages in Johannesburg and the need for Eskom to assist to avoid these. The Committee is aware that the Minerals and Energy Portfolio Committee had organised a briefing recently on this, and had also expressed its concern. Mr Moosa made it very clear that Eskom would do whatever is necessary. "We can’t take a narrow business approach to this issue. We also need to be proactive and work more closely with City Power and the municipality. I have already met Mayor Masondo on this and will be having a follow-up meeting. Of course, we can’t solve the problems overnight, but I’m reasonably confident we will in time do so." The Committee will be monitoring developments, and will co-operate with the other relevant committees in this regard.
5. As with most stakeholders, the Committee feels that Eskom’s capital expenditure programme will be very challenging. Eskom will need to find the capacity and resources to effectively implement its plans. Given Eskom’s excellent performance so far and its determination to succeed, there is reason to be positive about the prospects of Eskom meeting its challenges, and the Committee wishes them well. The Committee referred to comments by some technical experts that Eskom should have begun with the programme sooner and will not be able to meet its deadlines because of the long time-span to activate mothballed stations, let alone new ones. Eskom’s reply was that they can definitely meet their deadlines. "When you bring back a plant that’s been mothballed, until you’ve opened it, you’re not actually sure what state it is in, and we’ve had a few surprises, but we are now better able to anticipate and manage the process. Also, what we are doing has not been done anywhere else in the world to this degree that we know of", said Mr Gcabashe. "For the first two new stations to be built, the peaking plants, the 18 to 20 months construction period is realistic. It’s been done elsewhere. The base load stations have a longer lead time, but these too will come into operation in time to meet the country’s needs."
6. The Committee believes that MPs could play a more active role in making our constituencies more aware of the danger to life entailed in illegal connections and theft of conductors. Eskom is requested to make available pamphlets and other forms of information to the Committee for distribution to MPs constituency offices.
7. The Committee welcomes Mr Moosa’s commitment that Eskom will make available its annual report to the Minister for tabling in parliament by 30 August as from next year, as well as his positive views about the value of public hearings on Eskom that the Committee is to consider in future .