As published in ATC of
Report of the Portfolio Committee on
Public Enterprises on the Annual Reports of the Department of Public
Enterprises and State-Owned Enterprises, dated 15 November 2006:
The Portfolio Committee on Public
Enterprises, having considered the 2005-2006 Annual Reports of the Department
of Public Enterprises and State-Owned
Enterprises (Alexkor, Denel, Eskom, South African Airways, South African
Forestry Company Ltd and Transnet),
reports as follows:
1.
Introduction
1.1.
The
Committee considered the 2005-2006 Annual Reports of South African Forestry
Company Ltd (SAFCOL) on 20 September, Transnet on 10 October, Department of
Public Enterprises (DPE) on 11 October, South African Airways (SAA) on 18
October, Eskom on 24 October, Alexkor on 25 October and Denel on 1 November
2006.
1.2.
The
DPE briefing occurred at a meeting of the Portfolio Committee on Public
Enterprises and the Select Committee on Labour and Public Enterprises. The Eskom briefing occurred at a joint
meeting of the two Committees and the Portfolio Committee on Minerals and
Energy. Such joint sittings, we have
consistently held, need to take place more often.
1.3.
The
Committee’s 2004 and 2005 “Report on the Annual Reports of DPE and the
State-Owned Enterprises” were detailed, as have been our two previous reports
on DPE’s budget. We have tried to avoid repeating ground already covered in our
previous reports. Our observations and views in this report make fuller sense
if the previous reports are taken into account.
1.4.
The
approach in this report is to first present an overview of the presentation
made to our Committee on each Annual Report, and then offer our responses to
the report. Where there are responses that are more general to the SOEs, they
are carried in section 10 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 presented to the Committee can be
obtained from the Committee Secretary, Mr Chris Thisani.
1.5.
The
Committee’s major concerns in considering Annual Reports are set out in section
A5 in our 2004 “Report on Annual Reports” and in sections B4 to B10 in our 2005
Report, and will not be repeated in unnecessary detail here. Essentially, as
explained, for the financial year under review, we are seeking to establish:
· What were key elements of the
shareholder compact signed with the government?
· What were key elements of the
strategic/ business/ corporate plan for the year under review and how do they
relate to the shareholder compact?
· What were the key targets (or
measurable objectives) in the plan and how do they relate to the shareholder
compact?
· How was the budget allocated to
achieving targets and how was the budget used? Where an SOE was allocated money
from the national fiscus, how precisely was that money used?
· What was the progress on achieving
the targets set by SOEs?
· Where targets were not achieved,
what were the reasons for this?
· What lessons have been drawn from
the failure to achieve targets and how has this impacted on the programmes for
the current and future financial years?
· What are the financial results?
· What is the response to the issues
raised in the Portfolio Committee’s report to Parliament, the “Report on Annual
Reports”?
1.6.
Obviously,
the Committee does not seek mechanical responses to the above and related
questions. The questions are meant to provide a framework for presentations on
Annual Reports. To give us a perspective
on progress achieved it is also necessary to at least, in some measure, respond
to the Portfolio Committee’s “Report on Annual Reports” of the previous year.
1.7.
While
the main focus of the briefing to the Committee has to be on the past financial
year, some issues relating to the current financial year and the future plans
of the SOEs will inevitably have to be dealt with as well.
1.8.
The
Annual Reports of DPE and most of the SOEs were tabled in Parliament by the end
of August, a month ahead of the deadline set in the Public Finance Management
Act (PFMA). This was requested by the Committee in our 2005 Report, and we
express our appreciation to the Minister, the DPE Director-General (DG) and the
leadership of the SOEs for their co-operation. We have consistently requested
the SOEs to submit their overviews of their Annual Reports at least seven days
before they brief the Committee, and would appreciate greater co-operation in
this regard, especially as they are informed of the dates of their briefings
about two months ahead of time. Given the way the parliamentary system for
approval of Committee programmes works, it is very difficult to secure dates
for the briefings earlier than two months ahead. The final dates are, however,
negotiated with the SOEs.
1.9.
Overall,
to differing degrees, the reports presented to the Committee were much better
than last year. They were more focused and directed and responded more directly
to the concerns of the Committee, including those raised in our 2005 report.
The Committee welcomes the progress.
2.
Absence of Board Chairpersons from
Annual Report Briefings
2.1.
Unlike
last year, when all the Board Chairpersons turned up for the briefings on their
respective SOE’s briefings, this year only two did. This was mainly due to an
oversight by DPE’s Parliamentary Liaison Office through whom the Committee
negotiates with the SOEs on the dates for their respective briefings. However,
the Committee Chairperson also wrote directly to the Board Chairpersons, and
the Board Chairpersons are, in any case, aware that they have to attend their
Annual Report briefings held in September or October each year, and the CEOs
know too that the Board Chairpersons have to attend, so we are not altogether
clear why the Chairpersons, except for one who apologised, failed to turn up.
2.2.
In
terms of section 49 of the PFMA, it is the Board of an SOE that is ultimately
accountable for an SOE. The Committee conferred with a senior Treasury official
and Parliament’s legal section who confirmed that the Board chairpersons should
attend the briefings together with the CEOs. It is the Board of an SOE, after
all, that is appointed by the Minister, and it is with the Board that the
Minister negotiates and concludes a shareholder compact. It is the Board that
is ultimately responsible to ensure that the SOE’s mandate is effectively
fulfilled. One of the tasks of the Portfolio Committee is to assess how
effectively a Board is functioning in terms of its oversight of the SOE’s
executive, and there are certain questions that can only be responded to by a
non-executive Board member; for this among many other reasons the Board has to
be represented by a non-executive member, preferably the Chairperson.
2.3.
The
attendance of the Board Chairpersons was discussed with the Minister last year.
It was agreed they would attend the Annual Report briefings. To facilitate
this, the Committee agreed to finalise the dates of the briefings in early
August each year with the co-operation of DPE’s Parliamentary Liaison Office.
This was done. The Committee is clear that if a Board Chairperson is completely
unable to attend, the Board should be represented by another senior
non-executive member. We cannot understand why it was not possible for a single
non-executive Board member to attend the briefings of most of the SOEs.
2.4.
Essentially,
the Board Chairperson has to take the Committee briefly through his/her report
in the Annual Report and provide an overview of the SOE’s performance during
the financial year under review. The CEO deals with the details of the
performance of the SOE.
2.5.
The
Committee feels that consideration needs to be given to whether there is a need
for the pending Shareholder Management Bill to provide clarity on the
presentation by SOEs of Annual Reports to Parliament.
2.6.
Of
course, the Committee appreciates that Board Chairpersons and other Board
members have many major responsibilities, but we cannot accept that appearing
once a year before the Committee is too onerous. The Committee has unanimously
decided that in future we will not consider the Annual Report of an SOE if the
Board Chairperson or another non-executive Board member is not present with the
CEO.
3.
Department of Public Enterprises
3.1.
The
Department of Public Enterprises (DPE) was represented by Director-General
(DG), Ms Portia Molefe; Deputy Directors-General, Ms Sandra Coetzee, Mr Litha
Mcwabeni and Ms Katherine Venier; Chief Financial Officer, Ms Sandy Hutchings;
Chief Operations Officer, Ms Rashida Issel; Chief Director: Financial Analysis,
Mr Slingsby Mda; Parliamentary Liaison
Officers, Ms Dudu Mhlongo and Ms Reneva Fourie; and Ministerial spokesperson,
Ms Gaynor Kast.
3.2.
To
some extent, inevitably, the financial year under review was discussed during
the 2006 Budget Review of DPE on 10 and 11 May this year and is covered in the
Portfolio Committee’s report on the Budget published in the ATC of 31 May 2006;
this report will seek to avoid repeating issues already covered in that report,
unless absolutely necessary.
3.3.
The
changes to the programmes, structure and staff of DPE were covered in our
report on DPE’s budget.
3.4.
Ms
Molefe said that DPE had sought to be more direct and focused in its overview
of the Annual Report in response to the Committee’s request in our report last
year.
3.5.
Ms
Molefe reported that shareholder compacts had been signed with Transnet and Eskom.
The compact between Denel and the department will be signed after the review by
the Minister. Compacts with SAA and SAFCOL will be finalised as soon as their
respective new Boards have been appointed. The compact with Alexkor will follow
the resolution of the land claims case.
Once all these compacts are signed, DPE will present them to the
Committee.
3.6.
DPE,
again, received an unqualified audit. DPE has instituted a system of monthly
reporting on issues that may lead to qualified audits. These would relate
mainly to “infringements on the procurement policies”.
3.7.
The
budget for 2005/6 was R2,093 billion. R2 billion constituted the transfer to
Denel. The Department spent 99,8% of its budget. The expenditure per standard
item reflected as a percentage of the total expenditure for the year was:
Transfers and subsidies (96,41%), Compensation of Employees (2,04%), Goods and
Services (1,51%) and Payments for Capital Assets (0,05%). DPE has decided on a three-year plan of capitalisation
for SOEs. This includes all SOEs, except Transnet and Eskom. This gives more
certainty to all parties involved, including Treasury.
3.8.
DPE’s
staff at the end of the financial year comprised 157. This was made up of 76.7%
African, 13,7% White, 6,4% Coloured and 3,2% Indian. The senior management
level comprised 44% females. There were no people with disabilities employed by
the end of the financial year. A person with disabilities has since been
employed. The staff turnover rate is 15,2%. A major training programme of the
staff, including the secretaries, is being undertaken to increase efficiencies
at every level. “You can’t have PAs typing slower than managers, and they also
need basic writing skills”, said Ms Molefe.
3.9.
DPE
set out the targets in its Strategic Plan for 2005/6 for each of its programmes
and what it was able to achieve. A copy of the slide presentation on this is
available from the Committee Secretary, Mr Chris Thisani.
3.10. Achievements in the Administration
Programme include:
· Tightening of reporting procedures
and submission of all monthly, quarterly and Annual Reports to the relevant
structures.
· Refining of strategic recruitment
skills to target scarce skills and talents.
· Procurement procedure and policy
finalised. Staff training on procurement and petty cash processes have been
completed.
· Departmental compliance with
National Treasury Regulations and
· Adoption of a Registry with a full
set of records, including an electronic filing system that has been approved by
National Archives and will be implemented in the Department.
3.11. Achievements in the Analysis and
Risk Management Programme include:
· Developed a 5–year analysis report
on the historical performance of SOEs.
· Identified Strategic Key Performance
Indicators for Eskom and Transnet.
· Publication of a booklet on the
status of risk management in SOEs.
· Finalised a draft position paper on
the risk management framework that also include risk guidelines.
· Established the SOEs risk forum.
3.12.
Achievements
in the Legal, Governance and Secretariat programme Programme include:
· The settlement of litigation matters
with Ramafolo and Conference Call.
· The review of the Procurement
Policy.
· Internal Stakeholder Workshops on
the Shareholder Management Model.
· Remuneration Guidelines.
· Corporate Plan and Quarterly
Reporting Compliance.
· Board appointments at SAFCOLl, Eskom
and Denel.
· Skills profiling of SOE Boards.
· Legislative Compliance Register.
· Policy Compliance Monitoring (for
example BBBEE) through Corporate Plan, Quarterly Reporting and Section 54(2)
reporting.
3.13. Achievements in the Corporate
Finance and Transactions Programme include:
· Financing Strategy supported by
research and benchmarked data.
· Implemented generic guidelines and
service level agreements between departments and SOEs.
· Transaction support and execution,
including the Metrorail sale of business to the South African Railways Commuter
Corporation (SARCC) and the SAA purchase of shareholding from Transnet.
3.14. DPE also set out the targets for
each of the SOEs and what was achieved, but much of this is covered in the
sections below. With SAA directly answerable to DPE, Ms Molefe said that the
department has to expand its knowledge of aviation issues and has just
appointed an aviation expert. Among the issues DPE is engaging Eskom on, is
what the appropriate margin for surplus electricity should be. The
restructuring of the electricity distribution industry remains challenging. Ms
Molefe stressed that Denel is doing well in implementing its turnaround
strategy, despite showing negative financial results. It is a 5-year turnaround
strategy and “one should only expect Denel to start showing positive figures
after year 3”. DPE and Denel were also awaiting the “finalisation of the
Defence Review by the Department of Defence to decide on which areas of Denel
should be maintained for strategic reasons”. The DG said that Alexkor is in
“deep trouble” and if the state services it provides are not transferred to
provincial and local government soon, they will have to be stopped, which will
include the closure of the hospital. In respect of the Pebble Bed Modular
Reactor (PBMR), the DG referred to the “vexed problem” of nuclear power and the
questions that remained unanswered about its role in the economy. A clear
strategy for SAFCOL will be finalised by the beginning of the new financial
year.
3.15. The Joint Project Facility (JPF) was
established in the previous financial year. The main challenges faced by the
JPF in the year under review were around getting clear terms of reference for
projects and to “identify project managers who could actually start
implementing the projects.” The main achievements include:
· All the project teams were
established by the close of the financial year, and all the terms of reference
were signed off by the CEO Forum.
· A Continental Investments Task Team,
comprising key SOE managers involved in
· Broadband infrastructure: The team
advised the Ministry on the Second National Operator and the SOE sale of the Full
Services Network (FSN).
· SOE non-core property portfolios
were identified.
· Key pieces of SOE land have been
identified for integrated development.
3.16. It was reported that in terms of the
Continental Investments Project the role of the SOEs in
3.17. The DG expressed disappointment at
the failure to secure a client for the Call Centre pilot project.
3.18. Ms Molefe reported two new SOEs were
to be created - PBMR and Infraco.
3.19. The Committee welcomes the much more
direct and focused report given by DPE; it is a significant advance on last
year’s report. Particularly helpful was
DPE’s response to the request in our 2005 “Report on Annual Reports” for
the Department to set out its targets for the financial year under review, how
the budgets allocated to programmes with those targets were used, and what
progress was achieved in meeting those targets. Overall, it seems to us that
DPE made effective progress in achieving its targets for 2005/6. Of course,
some of the targets and achievements were too general, so that it was difficult
for us to evaluate progress effectively. It was not also always clear why certain
targets were not achieved, what lessons were drawn from this and how they
impacted on programmes and targets for the current financial year. The targets
could, in certain cases, be more precise and the reporting more specific. There is room for improvement in our exchange
– from both sides – and we need to work on this. But it is clear that DPE did
much better in the year under review than previously, and capacity challenges
notwithstanding, is in a good position to do better in the current and future
years.
3.20. We note references in DPE’s Annual
Report to “the role of the state as a shareholder of a special type”; “an
activist department”; “ambitious and sophisticated plans are all just words,
unless they are given life by the people”; and the like, and would like to
pursue issues related to this further. The Committee awaits the finalisation of
the Ministry’s position paper on the role of SOEs in a developmental economy,
and will arrange a briefing on this at an appropriate time. The position paper
will hopefully provide greater clarity on the role of SOEs and contribute to
our refining our oversight role.
3.21. The Committee congratulates DPE on
its unqualified audit for the third
time in a row. Of course, the R2 billion transfer to Denel skewed the
budget, but from what we can tell, the money for DPE’s standard programmes was
used very productively.
3.22. As observed before, the Committee is
struck by how representative DPE’s staff is.
3.23. As trivial as this may seem, we
think it is important, and note with genuine approval the DG’s comment in
section 3.8 above: “You can’t have PAs typing slower than managers, and they
also need basic writing skills”.
3.24. The Committee notes the DG’s
observations about nuclear energy. MPs are being engaged regularly on this. We
will pursue this matter further.
3.25. The Committee is not exactly clear
why there are difficulties in securing a client for the Call Centre and what
role, if any, the SOEs can play in this regard. We will pursue this matter
further.
3.26. The Committee will arrange a briefing
on the Remuneration Guidelines for SOEs.
3.27. It was not just the Overview Slide
Presentation of the Annual Report that was much better than last year, but the
Annual Report, in the view of the Committee, was much more user-friendly,
accessible and informative. The
Committee welcomes this.
3.27.
4.
Alexkor
4.1.
Alexkor
was represented by Chairperson of the Board, Mr Nchakha Moloi; CEO, Mr Mzamani Mdaka; CFO, Mr Mario
van der Walt; Human Resources Manager, Ms Wilna Gilbert-Cloete; and Company
Secretary, Ms Cheryl Singh.
4.2.
Alexkor’s
vision, mission and structures remain basically the same as covered in last
year’s report. The challenges also largely remain the same. However, the land
claim has been settled and the agreement is to be formally signed shortly.
4.3.
In
the financial year under review, the Alexkor management had been strengthened
and become stable, said Mr Moloi. “This and the settlement of the land claim
soon make it possible for us to have long-term planning”.
4.4.
Alexkor’s
strategic objectives included:
· Establishing a mineral reserve base
followed by a LOM (Life of Mine) plan
and a reliable business plan.
· Increasing production through full
utilisation of existing plants, equipment and labour.
· Reducing unit costs and cut-off
grade to R26/ton and 1.5/100 cubics respectively.
· Assisting in capacity building and
amalgamation of marine contractors.
· Developing a proper succession plan
and filling in key management positions (mine, metallurgical and environmental
managers).
· Improving the level of diamond
marketing to realise more value from the product.
· Establishing reliable IT and
Financial Control Systems.
· Ring-fencing and transferring of
non-core assets to eliminate subsidies.
· Introduce remote mining techniques
to reduce over-reliance on diving operations.
4.5.
Mr
Mdaka reported that “good progress” had been achieved on the 2nd , 3rd ,
4th, 6th and 9th objectives set out in
section 4.4 above.
4.6.
Mr
Mdaka reported that the number of “sea days” for marine mining was reduced to
34, the lowest from 79 in 2002/3. In the six months of the current financial
year, there have been only eight sea-days. Diamond production decreased from 49
577 carats in the previous financial year to
43 207 carats in the last financial year. This decrease is even more
significant given that the previous financial year covered nine months. Diamond
production income decreased from R143,9 million during 2004/5 to R129,1 million
during 2005/6. The net operating loss increased from R1,5 million in the
previous financial year to R38,1 million. In terms of International Financial
Reporting Standards two major non-cash
adjustments were made: Restating of the Rehabilitation Liability from R0.6
million to R160 million, and increase in post-retirement medical liability to R11,4 million. The net loss after tax is
R205,5 million. Alexander Bay Trading operated at a loss of R4,1 million and
non-core activities cost Alexkor R6,9
million. Alexkor’s net operating costs increased from R151,8 million in the
previous financial year (lasting nine months) to R197,6 million in the 12-month
2005/6 financial year.
4.7.
Among
the operational challenges identified are the following:
· Mining is an inferred resource
· Inadequate exploration.
· Ageing mining equipment.
· Continuous decline in sea-days.
· Continued subsidisation of non-core business
activities.
· Fixed cost structure of salary, town
maintenance and hospital-related expenditure.
· Recruitment and retention of
qualified and skilled human resource.
4.8.
The
company employed 1 851 people in 2005/6. There were 246 in mining, 110 in
farming, 25 in health services, 31 in municipal services, 39 on temporary
contract, 1 164 marine contractors and 236 other contractors. Currently Alexkor employs 1 282. The marine
contractors have been reduced from 1 164 to 485 currently because of the
adverse sea and weather conditions. Most of the divers have left Alexkor to
look for work elsewhere.
4.9.
Alexkor
has implemented three shifts to fully utilise the current plant capacity and
reduce unit costs. It has moved human resources from non-production to production
units. The company has also begun to sell its diamonds through the Diamond
Bourse. Alexkor has the support of the Minister, DPE and the Department of
Minerals and Energy to acquire mineral rights in other parts of the country and
is exploring this.
4.10. Negotiations to transfer Alexkor’s
state functions to the provincial and local government continue. The transfer
of health services is targeted for 1 April.
4.11. Alexkor is to be split into two
autonomous corporatised units: Alexander Bay Mining and Alexander Bay Trading.
4.12.
Alexkor
requested R230,1 million from government for its recapitalisation programme for
capital infrastructure, exploration and marine mining as follows:
· Exploration programme R109,6 million
· Working capital R41,6 million
· Maintain operations R40,4 million
· Improve marine mining R38,5 million
4.13. Subsequent to the briefing, it was
established that National Treasury has allocated R80 million to Alexkor in the
Adjustment Estimates of National Expenditure. R50 million is for establishing
4.14. Alexkor’s strategic outlook
includes:
· Short-term focus is on improving
financial performance through productivity improvements and reduction of both
operating costs and break-even grade cut-off.
· Implementation of additional remote
mining techniques.
· Exit from non-core activities.
· Restructuring of Alexkor’s balance
sheet.
· Acquisition of mineral rights in
other parts of the country.
· Recapitalisation of land and marine
operations.
4.15. Much of what the Committee said in
our report last year still holds, and we will not repeat it here. While the
Committee appreciates the unique difficulties Alexkor faces, we are concerned
about the state of Alexkor. In our 2005 report we said that Alexkor could do
better despite the uncertainties created by the land claims dispute. This is
also our view now. But we also feel that, despite the poor 2005/6 results,
Alexkor is much clearer now, compared to last year, on the possible directions
the company could take. The report to us displayed greater strategic planning
than was the case last year.
4.16. The Committee welcomes the imminent
settlement of the land claims dispute, and will be in a better position to
assess Alexkor’s performance with the finalisation of the dispute.
4.17. The Committee would like a more
concrete report than the “good progress” referred to in section 4.5 on the
strategic objectives set out in section 4.4 above.
4.18. At next year’s Annual Report
briefing, the Committee would like a report on how the R80 million allocated
from the national fiscus is being spent.
4.19. The Committee has consistently
acknowledged the valuable role Alexkor plays in fulfilling functions that
should be carried out by provincial and local government, and has stressed the
need to ensure that the transfer of these functions is done in a way that at
least maintains the standard of services provided. While holding to this, and
also recognising the difficulties, the Committee feels that there needs to be
greater progress in transferring the functions to government, and is
particularly concerned about the DG’s suggestion that the services would be
terminated if the transfer does not take place by the beginning of the new
financial year, as reported in section 3.14 above. The Committee will pursue
this matter further with the Minister and DPE.
4.20. Of course there are financial
restraints, but the Committee welcomes Alexkor’s focus on remote mining methods
that would reduce dependence on weather and sea conditions. We will be keen to
hear what progress has been achieved at next year’s briefing on Alexkor’s
Annual Report.
4.21. The Committee has raised its
concerns about this in previous reports and notes the beginning of operations
by the women-owned company in Witvoorkop working with a contracting company.
4.22. The Committee is clear that it is
not for us to interfere in the internal operations of the SOEs. But the
Committee has been approached by a group representing small marine miners who
have raised concerns about the way the small marine miners system in Alexkor is
functioning. The issues they raise are around broader policy and impinge on
whether Alexkor is acting in way that is consistent with government policy.
Following exchanges with Mr Moloi and Mr Mdaka, DPE and representatives of the
group raising the issues, it has been decided to pursue the matter. A
subcommittee comprising Mr Peter Hendrickse and Mr Martin Stephens will work
with DPE to address this matter and report back to the Committee within six
months. Mr Moloi and Mr Mdaka welcomed this.
4.23. Alexkor’s diamond production results
are analysed in terms of carats produced. While this is correct, it does not
give the Committee a full enough sense of the activity undertaken. The carats
produced by land mining are directly related to the tonnes of diamondiferous
ore moved, which also relates directly to costs incurred. The total tonnage
moved is therefore an essential figure and must include a statement of the
carats produced per tonne. The costs should also be related to tonnes moved so
that the cost per tonne of ore can be compared to the revenue produced per
tonne. When comparative figures for a number of years are viewed, an overall
cost reduction over the period will immediately become apparent as well as
whether or not productivity and efficiency are improving. The same holds for
marine mining – of course, the measurement here would be the area of seabed
dredged per carat recovered and the costs incurred per area of seabed dredged.
Alexkor agreed to make the necessary information available at future briefings
on its Annual Report.
4.24. In our report last year, we stressed
the need for DPE to engage more actively with Alexkor. Deputy Director James
Theledi’s report suggested that this has been happening. We will pursue this
further with DPE.
4.25. With the uncertainties around the
land claims addressed, Alexkor will be expected to present a much clearer and
longer term strategic plan when it presents its Annual Report to the Committee
next year. We also expect to see steady improvements in its performance from
now.
5.
Denel
5.1.
Denel
was represented by Chairperson of the Board, Dr Sibusiso Sibisi; Chief
Executive Officer, Mr Shaun Liebenberg; Chief Financial Officer, Mr Talib Sadek
; Group Executive: Strategy Implementation, Ms Lana Kinley; Group Executive:
Corporate Affairs, Ms Poppie Baloyi; and Group Executive: Human Resources, Mr
Hugo Ivy.
5.2.
Dr
Sibisi said that the Board believes that Denel is very much on the right path
and has “a profound sense of comfort” with Mr Liebenberg and his management
team and feels that the team is “eminently suited” to turn around Denel’s
fortunes.
5.3.
Mr
Liebenberg said that the “momentum of the company is in the right direction,
and 12 months after the introduction of the turnaround strategy, we are 100%
comfortable that the process we are following, the direction we are taking, is
giving us the right indicators. We see a number of indicators in terms of staff
behaviour, revenue lines, cost reductions, etc, giving us the sense that the
process is absolutely correct.” He said that “for the first time in the past
two to three months, we can actually see it in people’s eyes that they believe
the direction we are taking is correct”. “We also get this sense”, he said
“from the Department of Defence (DOD), Treasury, Armscor, the armed forces and
others - the entire stakeholder community – that they are picking up on this
momentum” and “the signs of recovery are definitely in the air”.
5.4.
“The
number of deals and tenders we are involved in is picking up, compared to this
time last year…. But this is a long sale cycle environment. We are not in the
commodity industry, where you put an advert in the newspapers and the next day
your revenues are up…. Turning the revenues around is a 3 to 7 year process.…
Whereas last year (2004/5) we began with orders to the tune of 30%, this year
(2005/6) we started with 45% and next year we hope to reach 50%. We hope to
increase our order coverage 10 to 15% each year.”
5.5.
The
first deal concluded is with SAAB which purchased 20% of Denel’s
Aerostructures. Within the past two weeks a deal was signed with Carl Zeiss to
buy 70% of Optronics. If this had not happened, Optronics would probably have
had to close down in a year. Denel bid for a $2 billion contract in
5.6.
Mr
Liebenberg said that they are negotiating for the local defence industry, not
Denel alone, to secure at least 70% of the government’s acquisition budget. In
the
5.7.
Denel’s
strategy is based on six pillars:
· Transformation and People:
¨ Transform Denel’s people into a
motivated, innovative, empowered workforce with a commercial and
performance-based mindset within a truly representative and diverse
environment.
· Engage State Agencies:
¨ Participate in forums to ensure
stakeholder alignment (DPE, Department of Defence, Armscor, industry) in areas
of industry structure, acquisition policy, industrial participation.
¨ Participate in the formulation of a
Defence Industrial Sector Strategy.
¨ Communicate strategic principles and
plans to ensure buy-in of all stakeholders.
· Secure Privileged Access:
¨ Secure 70% local spend of the
defence acquisition budget as a policy decision (via a defence council).
¨ Visibility of the defence budget to
enable long-term planning.
· Evaluate Commercial Viability (Fix
or Exit):
¨ Evaluate business viability:
capacity utilisation, sales, margins, overheads, markets, strategy.
¨ Exit unviable businesses and product
lines.
¨ Restructure viable business:
consolidate and right-size (focus on efficiencies, costs, overheads,
productivity).
¨ Define acceptable hurdles: gross
profit, EBIT (productivity, capacity utilisation).
¨ Business plan: “low risk” budgets
and plans.
¨ Creation of new companies to ensure
risk mitigation, governance and business focus.
· Create Equity Partnerships /
Alliances:
¨ Identify potential partners and
engage to find synergies.
¨ Conclude equity transaction.
¨ Identify strategic alliances to
increase market share.
· Raise Capabilities and Productivity
to World Standards:
¨ Identify, initiate and co-ordinate
management interventions to ensure capability & productivity gains.
5.8.
The
first pillar, “Transformation and People” is the foundation pillar on which the
other five rest. Denel undertook a major survey of its staff. Some 4 300
people, about 45% of the workforce, took part. “The results were shocking.
People are very negative in respect of how they see leadership, senior
management, career opportunities, remuneration, transformation, racial
acceptance and so on.” Denel is determined to change this, and more recently,
as suggested in 5.3 above, there have been some positive developments.
5.9.
Among
the broad achievements of the past year were the following:
· Mapped global defence environment.
· Positioned Denel /
· Five-pillar macro strategy (on
foundation stone of “Transformation and People”).
· Buy-in for strategy from all
stakeholders.
5.10. The year also saw the re-engineering
of Denel:
· Cost reductions, including staff
reductions.
· Business processes improved.
· Business viability and product
offering investigated.
· Potential for partnering / alliances.
· Roadmap with integrated stakeholder
community.
5.11. Denel disposed of non-core assets
Ariviacom, Irenco Plastics, Dendustri,
Voltco, Irenco Electronics (Observer Technologies).
5.12. Denel is to dispose of the of
Bonaero Park, SPP, Cosource Group, Oliver Tambo Airport vacant land and other
unutilised land by the end of this
financial year.
5.13. The aim is for Denel to be an
investment holding company with between eight and twelve independent businesses
with their own balance sheets and their own Boards. The businesses would be
established in terms of technology niches; and equity or strategic partners
will be found for each. Denel previously existed as one company and it was
difficult to establish which businesses were doing well and which not. Now it is possible to evaluate capacity
utilisation, sales margins, overheads and other aspects of each of the
businesses. Some of the product lines are unviable. Businesses which are
marginal are to be restructured. “We’re looking at how we can turn around the
businesses in terms of efficency, productivity and cost reductions. We’re
looking at a low-risk budget, de-risking ourselves in the turnover budget.
We’re putting activities in place now, the financial results will follow
later”.
5.14. A number of high-level CEOs and CAs
were appointed to the new companies. There is now an audit committee in each of
the businesses in addition to the main audit committee.
5.15. A performance management system is
to be implemented. A radical change to the remuneration policy is underway
which will take into account the performance of an individual’s contributions
to the development of a business.
5.16. Denel suffered a net loss of R1,3
billion as against R1,5 billion during the 2004/5 financial year. Revenue came
down from R3,6 billion to R2,7 billion. Turnover was reduced by R869 million
due to lost markets and rescheduled orders. Denel received R2 billion from the
national fiscus for its recapitalisation. Operating costs moved from R1,57
billion to R1,15 billion. R515 million was provided for contract risks. The
restructuring provisions cost R59 million. There was low production in certain
plants and an under-recovery of labour by R150 million. Capital and reserves
improved from a negative R16 million to a positive R607 million, making Denel
solvent.
5.17. Of the R2 billion received from the
Treasury, Denel used R1,5 billion to repay a bank loan and the balance is being
used for operational expenses, product development and capital expenditure
during the current financial year. The Treasury allocated a further R847
million to Denel for its recapitalisation in the Adjustment Estimates of
National Expenditure in October. Denel’s
total recapitalisation will cost R5,17 billion. R3,68 billion is needed for the
“sins of the past”. Treasury has allocated R2,85 billion to Denel to date.
According to Mr Liebenberg is not likely that Treasury will provide all of the
remaining R2,3 billion to Denel. Denel will have to find ways of raising this
money itself. Denel’s borrowings consist mainly of a corporate bond of R825 million
which matures on
5.18. Mr Liebenberg explained that it is
difficult to turn around the gross margin in the company quickly also because
“we are sitting with contracts that are up to seven years old that were
contracted at extremely poor margins”.
5.19. In view of its many financial
challenges, Denel found it “daunting” to convert from generally acceptable
accounting practice (GAAP) to International Financial Reporting Standards
(IFRS). “We had to train people to be IFRS-competent”. This mainly explained
the delay in finalising the financial statements and the Annual Report.
5.20. At the end of the financial year
Denel had a staff of 8 200. This was made up of 29% Africans, 53% Whites, 17%
Coloureds and 1% Indians. Women made up 23% of the staff. At senior management
levels there were 79% Whites, an increase from the previous year’s 73%. The
increase resulted from the re-designation of jobs that came about with the
unbundling of businesses. During the
2005/6 financial year, the staff was reduced by 1 249. There were 490
resignations and 759 retrenchments. Denel has a comprehensive Social Plan which
was negotiated with the trade unions. Of the 759 retrenchees, 265 were provided
with start-up capital of R10 000 each after the submission of an approved business
plan and they ventured into own businesses. 717 retrenchees received funds to
continue with further studies for themselves or for their dependents. 322
received financial counselling. Mr Liebenberg said that “we will probably see a
further reduction of workers in Denel, but not in the defence industry as the
companies outsourced to will need those workers”. The unions are being
“actively engaged” on these issues.
5.21. The decline from 22% BEE procurement
to 18,6% was an outcome of the new verification process which revealed that
several companies defined as BEE were actually “fronts” for White businesses
and the drop in IT procurement which
drew in several BEE companies.
5.22. Mr Liebenberg said that as the
“interrogation of the financial viability of the businesses deepened, we must
accept that skeletons will come out of the closet. Issues that have been hidden
for 20 to 30 years and more will be exposed. It might sound like bad news, but
in fact it’s good news, because we are cleaning up the business. There are some
transgressions of the Companies Act and the PFMA that might emerge…”.
5.23. Although Denel made substantial
progress towards compliance with the PFMA and the Companies Act, it did not
fully comply. In terms of section 45 of the Auditing Profession Act, the joint
external auditors were required to report statutory non-compliance to the
Independent Regulatory Board for Auditors (IRBA) even though Denel did not
experience any material loss. Denel has responded to the auditors on all the
issues raised and the auditors submitted an updated response to the IRBA,
stating that Denel has put and/or is putting processes in place to address the
non-compliance issues. In some instances, the auditors confirmed that the
matters have been resolved to their satisfaction while in others Denel has
given an undertaking to address the non-compliance issues during the current
financial year. The non-compliance issues and Denel’s responses are detailed in
the Director’s report in Denel’s Annual Report. Denel is committed to fully
complying with the PFMA and the Companies Act.
5.24. In response to issues raised from
the Committee’s 2005 Report regarding Denel’s relations with
5.25. The Committee continues to find
Denel the most technically challenging of the SOEs to come to terms with; our
views are therefore somewhat tentative. Of course, Denel operates in a very
challenging and unpredictable environment, and has formidable financial and
other difficulties that will take several years to effectively overcome, but
the Committee feels that Denel’s broad direction and strategy generally are
sound. There is certainly greater clarity on the strategy compared to last year
and reasonable progress in its implementation. The Committee appreciates the
very comprehensive and detailed report provided by Denel. The leaders of Denel
are obviously very determined to see Denel succeed and their commitment augurs
well.
5.26. The Committee welcomes the greater
co-ordination that is taking place among the different state agencies in the
defence sector. We also welcome the greater co-operation between these
roleplayers and private sector stakeholders in the defence industry.
5.27. The Committee recognises that
strategic and equity partners for Denel businesses will be mainly foreign-owned
companies but stresses the need to ensure that partnerships are effected in a
way that does not lead to foreign control of the defence industry. In the case
of Carl Zeiss’ 70% ownership of Optronics, the Committee is concerned that the
outcome of Research and Development should be retained by Denel. The Committee
needs to understand how intellectual property rights are being protected. It
seems to us that all new intellectual property should be automatically licensed
to Denel for non-commercial purposes. The Committee mandates Mr Martin Stephens
to pursue these issues further with Denel and report back to the Committee
early in the new year.
5.28. While appreciating the shortages of
skills, particularly among Blacks, especially Africans, in the highly technical
areas in which Denel operates, the Committee feels that more needs to be done
to improve responsibility, including in terms of gender.
5.29. The Committee will pursue further
the following issues:
· Progress on the transactions
referred to in sections 5.4 to 5.6 above.
· Denel’s compliance with the PFMA and
the Companies Act, especially relating to issues raised in 5.23.
· BBBEE procurement.
· Denel’s relationship with
· The role of the Defence Evaluation
and Research Institute.
5.30. Of course, Denel is in a particular
phase of its re-engineering and the challenges are complex, and there are many
broader indicators, but to better evaluate Denel’s progress, the Committee
would like Denel to, over time, provide
more precise measures of its productivity and efficiency improvements.
6.
Eskom
6.1.
Eskom
was represented by Chief Executive, Mr Thulani Gcabashe; Finance Director, Mr
Bongani Nqwababa; Generation MD, Mr Ehud Matya; General Manager: Distribution,
Mr Izak du Plessis; General Manager: Human Resources, Mr Jan Wiesse; Executive
Manager in the Office of the Chairman, Mr Fani Zulu; and Public Affairs
Advisor, Ms Prudence Pitsie.
6.2.
The
theme of the Annual Report is “A Strong Platform for Growth” which, Mr Gcabashe
said, refers to Eskom’s belief that it is in a strong position to enhance the
economic growth of the country. He said Eskom is well positioned to meet the
rising demand for electricity, given its financial strength, technical skills,
planning capacity and operating performance.
6.3.
Eskom’s
“sustainability reporting” covers four areas: financial; socio-economic; technical;
and occupational hygiene, safety and environment.
6.4.
Eskom
still remains the world’s lowest cost producer of electricity despite sharp
increases in primary energy costs and the implications of managing aging plant.
Eskom attributes this to tight cost control and good working capital
management.
6.5.
Mr
Gcabashe explained that the disruption of power supplies in the
6.6.
Mr
Gcabashe stressed that the reserve margin is very tight, with the surplus
capacity largely exhausted. “It’s probably going to be a while before we gain
excess or surplus capacity again”.
6.7.
Key
challenges during the 2005/6 year were:
· Managing the tight reserve margin.
· Planned major refurbishment of
existing infrastructure.
· Capacity expansion programme.
· Safety.
· Availability of certain skill
categories.
· Slow progress on EDI restructuring.
6.8.
However,
the opportunities identified include:
· Developing a platform for economic
growth.
· Developing skills base in
· Supply chain value improvement.
· Begin to diversify our energy mix.
· Keep price of electricity
competitive.
6.9.
Eskom
electrified 106 968 houses. The previous year it was 222 314. The CEO said that
this was mainly due to the decrease in funds allocated by the government for
the electrification programme. Eskom estimates that there are about 12 million
houses. About 8,7 million have been electrified. About 3,3 million houses need
to be electrified. About 2,5 million of these fall within Eskom’s supply areas.
About 10 000 schools still need to be electrified.
6.10. The demand-side management programme
led to savings of 171MW, exceeding the target of 152MW. The success of the
supply management campaign in the
6.11. Mr Gcabashe said that Eskom’s
financial performance for the year should be measured against a sales volume
growth of 0, 8% and the start of its very ambitious capital expansion
programme. Eskom’s profit for the period was R4, 6 billion, compared to last
year’s profit of R 5,4 billion over a 15- month period. The return on assets
was 9,19%. Mr Gcabashe said that Eskom has a gearing ration of 0,18% (0,17% in
2004/5), which, with its ever improving credit rating, puts it in a very sound
position to fund the capital expansion programme. Eskom spent R10,8 billion on
capital expansion, compared to the previous year’s R8,9 billion.
6.12. To fund its capital expansion
programme, Eskom registered a R65 billion multi-term note programme and
launched the first bond (ES33), the longest term bond in South Africa of R2,5
billion. Eskom also issued a seven–year maturity bond of €500 million. R1,6
billion was securitised in May 2006. Debt management strategies in poor
communities such as in
6.13. Of the R11,1 billion that Eskom
spent through BEE entities, R1,3 billion was spent through Black women-owned
enterprises. 24% of the total spend was spent through SMMEs.
6.14. Mr Gcabashe responded at length to
recent press reports that he had failed to act on a major case of corruption
involving senior managers at Eskom. He emphatically rejected the allegations.
He explained Eskom’s fraud prevention strategy in detail. He also said that he
was aware of the matter since late 2003, but significant evidence only emerged
in a report he received in June this year. The matter was acted on immediately.
A disciplinary inquiry was held and the managers concerned suspended. The
matter was reported in September to the police who are finalising their
investigation. Eskom’s preliminary estimate is that fraud of about R20 million
is involved. At present there is no
evidence that the figure is R129 million, as has been suggested in the media.
Eskom is also pursuing the possibility of civil litigation to recover the
money.
6.15. At the end of the financial year,
Eskom employed about 31 000 people.
Blacks made up 70% and women 24,7%. People with disabilities made up
2,5%. At managerial level, Blacks made up 60,1% and women 31,8%.
6.16. Of Eskom’s 2 163 bursars, 89% are
black and 55% are women. Eskom aims to train 4 000 learners in various
technical fields by the end of 2007. The
development and training spending of R543 million amounted to about 6% of
Eskom’s Human Resources spending.
6.17. As covered in our previous reports,
Eskom intends to spend about R97 billion over the next five years on capital
expansion. This includes a new coal-fired base load station, new pumped
storage, transmission line and open cycle gas turbines in
6.18. Over 20 years, Eskom intends to add
47 000MW. Over the next five years, the megawatts to be added are:
· 2006 796
· 2007 1,864
· 2008 2,250
· 2009 1,550
· 2010 1,152
6.19. The challenges Eskom have to address
include:
· Sourcing human capital / talent.
· Contractor and supplier development.
· Enhancing procurement processes.
· Environmental Impact Assessments
(EIAs)
· Land and servitude acquisition.
· Mid-life maintenance programme in
parallel with capacity expansion
programme.
6.20. Mr Gcabashe explained that Eskom is
discussing with Transnet the need to expand railway lines to some of its power
stations to ensure easy access to coal. Eskom would fund the new lines and
Transnet would operate them.
6.21. Mr Gcabashe will not be seeking a
renewal of his contract when it expires in December 2007. The Board has adopted
a succession plan that will see a new Chief Executive appointed six months before
the current Chief Executive leaves office.
6.22. The Committee was informed that the
revised succession strategy would be approved by the Board at the end of
October 2006.
6.23. Obviously, the financial year under
review has been very challenging for Eskom especially with the power outages,
particularly in the
6.24. Eskom’s financial performance is
impressive, especially in view of its very challenging year and the magnitude
of its capital investment programme. That Eskom’s credit rating has improved,
is also very impressive.
6.25. Subsequent to Eskom’s briefing, the
Cabinet finally decided on six Regional Electricity Distributors (REDs). A
seventh national RED will not be established. The Minister and DPE had
previously informed the Committee that the national RED would be established.
Eskom was meant to play a major role in this. The Committee will seek clarity
on the implications of Cabinet’s decision for Eskom.
6.26. The Committee is concerned about the
decline in annual figures of newly electrified houses referred to in section 6,
9 above. At this rate, as Mr Gcabashe also concedes, we will not be able to
reach universal access by 2012. The Committee will discuss this issue further
with the Portfolio Committee on Minerals and Energy to arrive at a better
understanding of the fiscal and other challenges, and the role our two committees
can play in addressing the issue.
6.27. Eskom’s employment equity figures
have improved marginally on last year’s figures. In respect of internal
promotions, women declined from 44,4% in 2004/5 to 39,7% in 2005/6.
6.28. Where possible, the Committee, in
co-operation with the Portfolio Committee on Minerals and Energy will arrange
for a briefing on the following issues:
· Eskom’s climate change strategy and
its programme on renewable energy.
· Progress on Environmental Impact
Assessments.
· Eskom’s strategy on safety.
6.29. Of course, the Committee is aware
that in an organisation of the size and complexity of Eskom, it will inevitably
be challenging to deal with fraud and other corruption. The Committee will,
however, monitor developments in regard to the matters relating to fraud
referred to in section 6.14 above, and is interested in what remedial action
Eskom will take to avoid a recurrence of similar transgressions.
6.30. Overall, the Committee feels that
despite its many challenges, Eskom performed well in the financial year under
review.
7.
South African Airways (SAA)
7.1.
SAA
was represented by Chief Executive Officer, Dr Khaya Ngqula; General Manager:
Business Development, Ms Nomfanelo Magwentshu; Acting Chief Financial Officer,
Mr Gareth Griffiths; Chief Risk Officer, Mr Vishnu Naicker; and the Head:
Corporate Communications, Ms Jacqui O' Sullivan.
7.2.
SAA
was separated from Transnet on 1 April subject to the fulfillment of certain
suspensive conditions. It was sold to DPE for R2,05 billion.
7.3.
Dr
Ngqula referred to the continuing volatility of the airline industry and raised
issues similar to those covered in our previous reports. During 2005,
international passenger traffic growth slowed to 7,6%, half the growth of the
previous year, and freight traffic grew by just 3,2%.
7.4.
In
the CEO’s Report in SAA’s Annual Report, Dr Ngqula said that the “2005/6
financial year was one of consolidation and intense preparation for SAA’s
historic admission to the Star Alliance of major international carriers…. As
part of our ‘People, Patronage and Profit’ strategy, enhancing customer
service, re-aligning the skills of our staff to the needs of the business and
cutting costs also remained firmly on the agenda”.
7.5.
Dr
Ngqula provided an overview of the airline industry during the 2005/6 financial
year:
· A turbulent year for the airline
industry.
· Global airline industry losses approximated
$6 billion in 2005.
· Oil price was a wild card, cutting
into airlines’ efficiency gains and profits.
· Oil prices were volatile and remain
uncertain.
· Airlines need to:
¨ Reduce cost and improve efficiency.
¨ Consolidate and join global
alliances.
¨ Take into account the threat of
low-cost carriers.
7.6.
The
major issues that emerged in the industry in
· Increased competitive threat from
other airlines.
· Increased partnering and code-share.
· BASA (Bilateral Air Service
Agreement) constraints (e.g.
· Strong market growth.
· Franchise opportunities.
· Aircraft maintenance opportunities.
· Increasing Cargo opportunities.
7.7.
The
key issues for SAA domestically:
· Strong pax growth (only 5% of South
Africans fly).
· Low-cost carriers position
strengthening.
· Competition intensity driving yields
down.
· Fuel costs bite.
· Strong voice of Labour.
· Growing online bookings.
7.8.
Among
SAA’s strategic achievements during the 2005/6 financial year were the
following:
· Historic admission to the Star
Alliance.
· Bambanani II embedded across the
organisation.
· IT system implementation complete –
Amadeus, Pegasys, Rapid.
· Strong leadership and management
team in place.
· Marketing achievements – ATP (Mens
World Tennis Professional Tour), SAA Tennis Open, SAA Open.
7.9.
SAA
increased its carriage of cargo by 5,1% to 185 000 tons. A new strategy has
been developed to double freight revenue to R4,5 billion in five years.
7.10. SAA opened new routes to
7.11. SAA has retrained a significant
section of the workforce in improved
customer service and developed a new 3-year customer service plan.
7.12. “SAA’s on-board product”, reported
Dr Ngqula, “is rated among the world’s best regarding comfort, quality and
choice. For the second year running, Skytrax voted SAA’s business class
lie-flat seat the world’s best”. SAA won the “Best Airline to
7.13. SAA has about 11 000 employees. 44%
of senior managers are Black. Other reliable figures were not made available to
the Committee.
7.14. SAA made a net profit of R65 million
as against R648 million in the previous financial year. Although passenger
numbers went up by 4,5% to 7,2 million, revenue increased by only 0,8% and
yields fell by 3,5%. Competition from low-cost carriers led to a drop in
domestic fares by 11% and, together with fuel cost increases, contributed to a
decline in operating profit from R927 million to R425 million. Once-off costs
included R700 million for fuel costs not covered by levies, R300 million
related to the strike and R100 million to the Competition Commission. Excluding
fuel, costs increased by 5,5%. Fuel
costs, however, increased by 51,5%. The operating margin decreased from 5,4% to
2,2%. There was a net decrease in working capital of over R1 billion. Turnover
increased marginally from R15,3 billion in the previous financial year to R15,6
billion in 2005/6. Total airline income increased from R17,1 billion to R19,4
billion. The new system of accounting for air traffic liability releases led to
profit being favourably impacted by R400 million. Capacity (measured by
available seats per kilometer) increased by 5,6% and the load factor remained
constant at 70%. The Bambanani initiatives led to cost savings of R500 million
– falling short of the R750 million target.
7.15. Transnet was paid back R1,6 billion
of the R4 billion Compulsory Convertible Subordinated Loan. Transnet will
convert the balance of R2,4 billion to ordinary equity. SAA repaid R1,4 billion
aircraft-related debt. SAA’s non-current assets decreased from R5,9 billion to
R4,5 billion due to the sale and leaseback of two A340-600s. This was to
eliminate residual value and currency risk associated with the ownership of
aircrafts. The two airbuses were then leased back.
7.16. SAA has bought back the 5% shares
owned by the pilots and is now completely owned by the state.
7.17. SAA hedges between 50 and 75% of its
foreign currency exposure on a 12-month rolling basis. SAA hedges between 40% and 60% of its jet
fuel price exposure on a 12-month rolling basis.
7.18. SAA will be raising R3,2 to R4
billion equity to restructure its balance sheet. SAA’s recapitalisation
strategy will focus on future growth expansion, lowering the costs of capital,
improve gearing and cover ratios as well as mitigating currency risks.
7.19. Of supplier contracts of R66
million, R33 million was committed to BEE. SAA’s BEE strategy will be finalised
this year.
7.20. SAA launched its strategic plan for
corporate social investment, “The Wings of the Nation”. Over R14,5 million was
spent on projects. A major focus is on enhancing mathematics and science
skills. The Vulindlela Aviation Awareness Programme takes a mock-up of the
inside of an aircraft to rural areas to raise understanding of the industry.
7.21. SAA will focus on the following
strategic initiatives:
· Realising Star Alliance benefits.
· Continued focus on Bambanani II.
· Improving customer service.
· Implementation of network strategy -
Low-cost carrier, Legacy business, international business.
· Gearing Cargo and SAA Technical for
growth.
· Restructure, retain or sell
subsidiaries and non-core functions.
· Recapitalising SAA and finalising
unbundling from Transnet.
7.22. SAA was about to launch its low-cost
carrier, “Mango”. Currently, low-cost carriers account for 30% of the market.
“With the entry of low-cost carriers, the airline industry will never be the
same again”, said Dr Ngqula. He dismissed suggestions that “the government or
taxpayer is going to be subsidising our low-cost carrier. The opposite is true.
This will probably be shown in the next few months. The low-cost carrier will
probably subsidise SAA.”. He explained that the low-cost carrier would be run
as a separate business with its own Board and management, and will lease
aircraft from SAA.
7.23. The Committee notes the difficult
financial position of SAA. The Committee is also aware of the volatility of the
airline industry globally and the parlous situation of established airlines the
world over. But it is difficult for us to tell how much of SAA’s difficulties
flow respectively from factors beyond its control, “legacy issues” and
weaknesses in the present management. Understanding this is not helped either
by the generally unfavourable media coverage SAA receives. To arrive at a
reasonably sound view, the Committee would have to draw in the services of a
suitably experienced aviation expert. In the absence of such technical support,
the Committee can only tentatively conclude that in the context of the
volatility of the airline industry globally and the nature of the challenges
confronted by airlines the world over, SAA seems, with all its difficulties, to
be performing satisfactorily. There is certainly room for improvement, as the
CEO also acknowledges – and the Committee would like to see more concrete
evidence of this in next year’s report.
7.24. The Committee notes that a new
customer service plan has been adopted. The members of the Committee who fly
often are skeptical of claims of improvements in customer service, and are
interested to know how SAA measures these improvements. MPs within and outside
the Portfolio Committee have been regularly raising problems about SAA,
customer service-related and other, that they or their constituents have
experienced – and these issues have been raised with greater frequency over the
past six months or more. For the briefing on its Annual Report next year, the
Committee requests SAA to spell out clearly what it’s customer service plan is,
how it is being implemented, what its specific goals are, and how it is being
monitored and evaluated. Should there be any independent assessments of the
plan and its progress that can be made public, the Committee would be
interested to be given a copy and be briefed on it. The Committee will focus a
significant part of next year’s briefing on SAA’s customer service plan; and
should it be necessary, will call a special briefing on this before then.
7.25. The Committee had raised the need
for SAA to consider launching a low-cost carrier two years ago – but our
suggestion was not well received. When this was pointed out to Dr Ngqula, he
replied: “Well, things change very fast in this industry. Three months is a
long time….”. In effect, he suggested having a low-cost carrier was not right
two years ago, but it is fine now. We are not convinced that it should not have
been launched earlier. But no matter. It is important to make a success of
“Mango”. There are many questions the Committee has about “Mango”, and we will
pursue this further. At next year’s briefing on SAA’s Annual Report the
Committee would like a full briefing on the progress of “Mango”.
7.26. SAA reported that its hedging
activity now delivers a positive cash flow. But a positive cash flow is not
necessarily a barometer of the success of a hedging policy. Given the huge
hedging losses SAA suffered in the past and the need to avoid this happening
again, the Committee would like a more detailed briefing on SAA’s hedging
policy.
7.27. Time and other constraints prevented
the Committee from pursuing certain issues further. These will be raised
through DPE’s Quarterly Reports to the Committee and will, if necessary, be
taken further at next year’s briefing. These issues include:
· Increases in transport of cargo.
· Challenges in expanding routes in
· The implications of the decision of
the Competition Commission.
· The new system of accounting for the
release of the air traffic liability releases.
· The functioning of South African
Airways Technical (SAAT).
7.28. The Committee feels that for us to
get a better sense of SAA’s progress we need a fuller and more concrete report
next year on gains in respect of cost reductions and efficiency improvements.
The Committee notes that while SAA’s costs (excluding fuel) increased by 5,5%
its major competitors internationally have been regularly experiencing negative
cost growths. Dr Ngqula said that ideally SAA should be showing -10% increase in costs. The aim is to save
R753 million in this financial year.
SAA’s cost reductions and efficiency improvements will have to be a
major part of next year’s briefing.
7.29. While recognising that the Airports
Company of South Africa (ACSA) and
other third parties are responsible, the Committee would like SAA to
report on progress in respect of lost luggage and theft. The Committee welcomes
the baggage wrapping and other attempts to reduce losses of luggage and theft.
More, however, needs to be done – and the Committee is keen to see this happen,
challenging though the problems are.
7.30. The Committee congratulates SAA on
winning the awards referred to in section 7.12 above. SAA obviously has
considerable potential. It can do better. The Committee is keen to see this
happen.
8.
South African Forestry Company Ltd
(SAFCOL)
8.1.
SAFCOL
was represented by Chief Executive Officer, Mr Kobus Breed; CFO, Mr Joe
Coetzer; Group Executive: Human Resources, Mr Azwindini Mutshinya; Group
Manager: Corporate Services, Ms Linda Mossop-Rousseau and Komatiland Forests
General Manager: Corporate Services, Mr Leslie Mudimeli.
8.2.
While
the Committee has received briefings from SAFCOL on its Annual Reports before,
we have not included SAFCOL in our “Report on Annual Reports” previously
because its financial year used to be from 1 July to 30 June and and therefore
its Annual Report could not be considered together with the other Annual
Reports. SAFCOL’s Annual Report now coincides with the financial year cycle as
required by the PFMA. As SAFCOL’s report covers the “transition year”, it
refers to a 9-month period. Our report on SAFCOL takes the form it does because
this is the first time we are reporting on it.
8.3.
SAFCOL’s
vision is that it will be managed in a way that ensures it will be recognised
as a world-class company in the timber industry. Doing this it will:
· Earn acceptable returns for its
shareholder.
· Be recognised a top employer.
· Promote innovation and technical
excellence.
8.4.
SAFCOL’s
mission is to grow its business in the forestry and forest products industry through technical and
business excellence and sensitive customer service, and achieving recognition
as a leader in the forestry industry. The company embraces a policy of equal
opportunities, providing rewarding and challenging careers for all its
employees and proactively ensuring employment equity. In its activities, SAFCOL
will ensure compatibility with the protection of the environment in which it
operates and hence a green heritage for
8.5.
SAFCOL’s
core values are service excellence, sustainable business practices, employment
equity, integrity and fairness.
8.6.
In
terms of SAFCOL’s Memorandum of Association, the company’s main business is:
· Timber growing and harvesting, both
domestically and internationally.
· Domestic and international
sawmilling and log and timber processing, including the manufacture of timber
and timber-derived products.
· Domestic and international marketing
of raw and processed timber in all its forms and timber-derived, agricultural
and other products obtained from the land at its disposal.
· Development and management of ecotourism
activities and facilities.
· Cultivation and harvesting of
agricultural and agricultural related products, including the harvesting of
natural vegetation.
8.7.
In
1996 the government revised its forest policy and decided that the private
sector should manage commercial forests. SAFCOL and Department of Water Affairs
and Forestry’s (DWAF) plantations and assets were amalgamated into five
packages. Four were sold since August 2001.
· The combined Southern KwaZulu-Natal
Plantations of SAFCOL, its Weza Sawmill and DWAF’s
· SAFCOL’s
· SAFCOL’s Amathole Forestry Company
was sold to Amathole Timber Holdings, which include a BEE participation of 10%.
· MTO Forestry, comprising all the
state plantations between
8.8.
As
covered in the DPE 2006 Budget briefing, the Competition Commission prohibited
the merger between
8.9.
SAFCOL
summarised lessons learned from its privatisation experience:
· Tradability of shares needs to be
considered:
· Employee Share Option Plans (ESOPs)
in a non-listed company are difficult to achieve.
· It is essential to match Black
empowerment partners with local communities (National Empowerment Fund) (NEF).
· Business Plan undertakings (BPUs)
need to be tightly drawn up, with severe penalties if the provisions are not
achieved.
· There needs to be clearer
verification of representations to ensure that fronting does not occur.
· Monitoring of all agreements should
reside with the entity from which the disposal took place.
· The appropriate roles and
responsibilities for the different entities should be identified – process
preferably to be driven by SOE with clear guidelines from government.
8.10. The Minister and DPE are working towards
finalising a new mandate for SAFCOL by the beginning of the new financial year.
In consultation with DPE, SAFCOL’s Board has begun work on a strategic plan.
8.11. SAFCOL now has three operating
subsidiaries, Komatiland, IFLOMA and Abacus Forestries. IFLOMA is in
8.12.
Mr
Breed said that direct lumber sales to customers increased to 79% of total
sales, compared to the 59% in the previous year. However, he said that “the
demand for saw log volumes far exceeded the available timber. The increasing demand for softwood is
expected to continue in the foreseeable future – resulting in increasing saw
log prices due to normal market forces. The increasing demand is due to the
growth in the economy and the reduced saw log volumes available. A widening gap
between the long-term contract and spot market prices is being addressed,
taking into account sound commercial considerations and Competition Law
requirements”.
8.13.
He
said that approximately 1,6 million to 1,7 million cubic metres of logs will be
available annually for marketing in the next three to five years. The volumes
will increase gradually to a sustainable volume of 1,9 million to 2,0 million
cubic metres in the next 18 to 20 years, barring any major negative impacts
such as fires and droughts.
8.14. Mr Breed said that in terms of
SAFCOL’s agreement with the government, clear felling of the commercial
plantations can continue at the
8.15. SAFCOL posted a net profit of R168,7
million during the 9-month financial year under review compared to R232,7
million in the previous financial year.
Profit before tax was R240,8 million compared to the previous year’s
R344 million. Increases in fair value adjustments of the plantations added
R170,97 million to pre-tax profit. A
non-recurring profit of R6,43 million realised from restructuring and
privatisation transactions is also included in the profit before tax. In terms
of profitability, for forestry companies worldwide the weighted average cost of
capital is about 14%. SAFCOL achieved a 15,4% return on capital employed.
Revenue declined from R640,6 million to R359,9 million because of the disposal
of MTO and Amathole, the closure of the Blyde Sawmill and a 9-month financial
year.
8.16. SAFCOL directly employs 1 806 people
in
8.17. Mr Breed explained that the majority
of SAFCOL’s 25% share in the privatised companies is for disposal to employees
by means of an ESOP and the National Empowerment Fund for the benefit of
surrounding communities. SAFCOL has been working with DWAF during the past year
on the development of the Broad-Based Black Economic Empowerment (BBBEE)
Forestry Charter.
8.18. SAFCOL has expanded its
capacity-building programme. The Platorand Training Centre has provided skills
training to more than 4 600 of SAFCOL’s staff and contractors. Auditing,
mentoring and assistance are provided to emerging contractors (SMMEs). Training
is provided in the forestry, artisan, administrative, marketing and wood
technology fields. R1,3 million has been allocated for bursaries. 376 people
attend Adult Basic Education Training classes.
8.19. Mr Breed noted that “there is a lack
of younger people coming through to forestry, and this is a gap that has to be
filled, and we will have do this aggressively”.
8.20. SAFCOL is in the process of
reviewing its Code of Ethics in line with government’s objectives. The Group is
a member of Ethics SA.
8.21. With the focus on privatisation,
SAFCOL did not invest in saw milling, but with its changing mandate, has
decided to invest R60 million in the Timbadola Sawmill to upgrade technology.
SAFCOL will invest 1,4% of its saw log sales in research. It also plans to
establish a research and seed centre on the Nyalazi Plantation in
8.22. SAFCOL is also exploring forestry
options in
8.23. Mr Breed said that new members were
to be appointed to SAFCOL’s Board shortly.
8.24. Mr Breed stressed SAFCOL’s
considerable potential. The “forestry side of our business is world class. We
are often visited by international consultants who say that we are world
leaders in forestry for timber processing”.
8.25. For a variety of reasons, including,
at one stage, the possibility that the government might exit from SAFCOL, the
Committee has not being paying enough attention to SAFCOL. Given the government’s “strategic shift of
emphasis” on SAFCOL and the likelihood of it remaining in state hands for now,
the Committee will pay increasing attention to SAFCOL. This means that we will also
need to better understand SAFCOL and its role as well as the forestry industry
as a whole.
8.26. As raised in our previous reports,
the Committee welcomes government’s decision to keep SAFCOL in state hands.
Obviously, the “strategic change of emphasis” will call for an adjustment from
SAFCOL from a “privatisation mindset”. With the clarification of SAFCOL’s
mandate by the beginning of the new financial year, the company will be able to
plan better. The Committee will in future, starting with next year’s briefing,
expect SAFCOL to be more precise about its objectives and progress in achieving
them. We also request SAFCOL to provide a more clear and user-friendly overview
of its Annual Report when it briefs the Committee next year. As we develop our
understanding of this sector, we will also be able to engage more rigorously
with SAFCOL representatives at the briefings.
8.27. The Committee is concerned about the
impact of the shortages of saw wood on
small saw millers, some of whom have reached out to us to raise their
concerns. The Committee would like a fuller report next year on the challenges
in this regard.
8.28. Of course, the Committee, recognises
the legacy issues and the difficulties, but feels that more needs to be done to
ensure that SAFCOL is more demographically representative at senior management
levels.
8.29. The Committee will pursue further
the following issues:
· The effect of forestry on water
courses.
· The role of contractors.
· The application of BBBEE.
8.30. Of course, SAFCOL’s role and
strategy have to be more clearly defined, but, in the circumstances, it seems
to be performing well. It could do better. We note Mr Breed’s comments about
its “world class” potential. We want to see that potential fulfilled.
8.30.
9.
Transnet
9.1.
Transnet
was represented by Group Chief Executive, Ms Maria Ramos; Group Chief Financial
Officer, Mr Chris Wells; Group Executive: Strategy and Transformation, Mr
Pradeep Maharaj; Chief Operating
Officer, Mr Louis van Niekerk; Spoornet
CEO, Mr Siyabonga Gama; SAPO CEO, Mr Tau Morwe; Transwerk CEO, Mr Richard
Vallihu; and General Managers, Mr Karl
Socikwa and Ms Moira Moses.
9.2.
Ms
Ramos explained that the shareholder compact with the Minister had been signed
the previous week.
9.3.
Transnet’s
four-point turnaround strategy and its core structure remain the same as
covered in last year’s report.
9.4.
Ms
Ramos reported on progress in each of the pillars of the turnaround strategy.
They are pithily covered in her “Group Chief Executive’s Review” in Transnet’s
Annual Report.
9.5.
Transnet’s
assets are worth about R77 billion and it employs over 65 000 people. As
explained last year, as part of its strategy to become a focused freight and
logistics company with rail, port and pipeline operations, Transnet would shed
its non-core assets. Ms Ramos reported that, in terms of the “Restructuring of
the Balance Sheet” pillar of Transnet’s strategy, SAA was separated from Transnet on
9.6.
The
process of selling Viamax, Freightdynamics, Transnet Pension Fund
Administration, VAE Perway and non-core property is underway. In future, the
housing assets, SA Express, Autopax, and “C” class preference shares will be
sold.
9.7.
The
Transnet Second Defined Pension Fund had a deficit of R1,6 billion on
9.8.
Ms
Ramos said that the two-month industrial action by the trade unions over the
terms of the disposal of non-core assets was settled amicably through a “very
forward-looking agreement”, and relations with the unions had improved. A
Strategic Leadership Forum has been established which brings together the
Transnet executive, led by Ms Ramos, and the leaders of the unions four times a
year to “promote engagement on strategic issues in a way that helps all parties
contribute to our collective success”.
9.9.
In
terms of “Re-directing and Re-engineering the Business” pillar of its strategy,
Transnet has initiated the “Vulindlela” programme to “build Transnet’s core
business units into efficient, profitable and customer-oriented entities”.
Vulindlela is initially focusing on:
· Optimising Spoornet’s iron ore line,
general freight business and the coal line.
· Improving maintenance practices and
culture.
· Containing costs, simplifying processes
and improving service delivery.
· Upgrading procurement processes.
· Improving safety.
· Attending to Spoornet’s National
Operating Centre (scheduling of trains).
9.10. Significant benefits are already
evident. For example, delivery times on the coal line have improved over 10%
since September 2005, with the introduction of a new scheduled operating
system. Outage time on the main line has decreased from 64,4 to 21,6 hours.
According to Transnet, the coal mines have at times run out of freight to be
transported, not just because of the unavailability of coal due to rains, but
also because of Spoornet’s improved efficiencies. However, Mr Lazarus Zim,
President of the Chamber of Mines, was recently reported as saying that
“industry’s potential to grow at a faster rate has been inhibited by Transnet’s
inability to manage increased tonnages….” (“Business Report”,
9.11. As reported last year, Transnet
intended to reduce its Head Office staff from 400 to 250. Ms Ramos said that
Head Office staff was now 190.
9.12. The major focus of Vulindlela is,
obviously, on Spoornet. Ms Ramos said that while the coal and iron ore lines
are crucial, “we cannot become a two-commodity business. Commodity prices are
booming, but these are cyclical and we don’t know how long they’ll last. That’s
why we‘re spending an enormous amount of time, effort and money to grow our
general freight business. It’s that business that we’re going to take from road
to rail”. General Freight represents more than 50% of Spoornet’s revenue.
9.13. 212 locomotives in addition to the
earlier 110 have been ordered for Spoornet. It takes between 18 and 24 months
for the delivery of the locomotives.
9.14. “This has been a year of intense
work on the human capital development side, and there’s going to be another
couple of years of very intense work in regard to this”, said Ms Ramos. “The
successful implementation of Transnet’s turnaround strategy lies fundamentally
in creating a work environment where our people can excel.”
9.15. Progress on the “human capital
development” pillar of the strategy includes:
· Completed redesign and staffing of
corporate centre.
· Introduced a talent management
programme.
· Begun capacity building exercise for
operational requirements and skills demand study for medium term.
· Introduced a new reward and performance
management system.
· Introduced a leadership development
programme.
· Redefined partnership with labour
for Transnet’s transformation.
9.16. “Transnet supports all
transformation instruments of government”, said Ms Ramos, “not because we have
to, but because it’s imperative to our business model and our success as a
business.” Transnet has “made significant progress in achieving equitable
representation across its divisions. Employment equity is a strategic
initiative driven by the Transnet Exco and is intimately aligned with the
organisational transformation process.” Of a workforce of approximately 55
000, Africans make up 56.9% , Whites
20,7%, Coloureds 18,8% and Indians 3,4%. 85,5% are males.
9.17. Transnet reported progress on its
“Corporate Government and Risk Management Framework” pillar. The shareholder
compact is now signed. An enterprise-wide risk management framework has been
implemented. Risk Management Committees
have been established at both Board and executive levels. The outsourcing of
the internal audit function has “probably been one of the best decisions we
have taken”. A head count has been done of every employee as part of a payroll
audit. Monthly audit reports are done of progress on business re-engineering. A
Fraud Prevention Plan has been finalised, and a process is underway for every
employee to sign a “Code of Ethics” statement. An independent fraud reporting
hotline has been installed. A “full review” has been done of “all litigation
and material contracts”. With the exit of SAA, Transnet now has to amend its
Articles of Association.
9.18. Transnet made a net profit of R4,5
billion in 2005/6. In 2004/5 the net profit was R6,5 billion – but with the R4
billion embedded derivative removed, it was in effect a R2,5 billion profit. So
compared to the previous year, Transnet made a significantly better profit in
2005/6 – an increase of R2 billion. Profit from operations increased by 57% to
R8,4 billion. The profit margin increased from 21,4% in the previous year to
32,2% in 2005/6. This is the highest in seven years Turnover increased by 7%,
representing real growth of 3%. The increase was not higher because of the
lower-than-expected Spoornet volume growth and the low volume growth at
Petronet which is operating close to capacity. Operating expenses were reduced
by 10%; at least 5% reflects productivity gains. The gearing ratio is 47%,
compared to 62% in the previous financial year. Transnet’s capital base grew by
31% to R27,6 billion.
9.19. Transnet now measures its
performance against key performance indicators as set in the shareholders
compact in terms of operating margins, revenue growth, infrastructure
investment, gearing and cash flow return on investment - and “is in line with
targets”. Overall, the study reveals that Transnet has made significant progress,
especially in terms of productivity and efficiency gains. In terms of
performance management measures against budget:
· Transnet’s operating margin exceeded
budget and reflects operating efficiency, given that the tariff increases at
3,4% were below inflation;
· Revenue increased by 6,5% of which
volume accounted for 3%. The increase was below budget by 8,2% due to not
achieving the budgeted volume increase of 5,5%, primarily because of the low
volume increase at Spoornet.
· Overall, the capex budget was
achieved although the National Ports Authority (NPA) and Petronet were well
below their budgets;
· Gearing at 47% is within the Board’s
agreed target range;
· The cash flow return on investment,
5,8%, is ahead of budget.
9.20. Spoornet’s turnover increased by 4%
to R14,4 billion. Its operating profit increased by 121% - but most of this is
attributable to the R681 million for capitalisation of maintenance in terms of
the IFRS. R3,8 billion was spent on capital investment. Total volumes increased
by 0,5% to 182 million tons. Iron ore line volumes increased by 5% to 29,6
million tons, coal line volumes by 2,7% to 68,7 million tons and general
freight volumes decreased by 2,7% to 83,8 million tons. General freight volumes
have declined for many years due to lack of capacity and service delivering.
This has been significantly impacted by poor availability and reliability of
rolling stock due to lack of investment in both maintenance and new rolling
stock. This is being urgently addressed in the re-engineering.
9.21. NPA’s turnover increased by 11% to
R5,5 billion and its operating profit was 19%. NPA spent R783 million on
capital investment. This is behind target mainly because of delays in the EIAs
process. Bulk import volumes increased by 6%. Full container imports grew by 9%
while exports did not reflect growth due to currency strength, competition and
quality issues.
9.22. South African Ports Operations’
(SAPO) turnover increased by 9% to R3,6 billion. SAPO’s operating profit
increased by 4% to R910 million. SAPO spent R776 million on capital investment.
Container volumes increased by 7%. Break-bulk volumes dropped by 5% because of
competition and containerisation. There was strong growth in volumes in the
automotive sector due to the continued strong demand. A record 28,8 million tons
was exported through the Saldanha iron-ore terminal.
9.23. Petronet’s turnover increased by 4%
to R1,1 billion. Petronet’s operating profit was R597 million (up by 31%). R220
million was spent on capital investment. Petronet complied with the “clean
fuels” requirements in January 2006. The existing refined products pipeline is
running at close to capacity while the crude line feeding Natref is operating
at 75%.
9.24. Transwerk’s turnover increased by
28% to R3,8 billion. Transwerk’s operating profit was up by 46% due to the ramp
up of the maintenance program at Spoornet.
R189 million was spent on capital investment.
9.25. Transnet spent R6,6 billion on
capital investment. Transnet’s capital investment programme of R64,5 billion
over the next five years will be spent as follows: 2006/7: R11,4 billion;
2007/8: R15,3 billion; 2008/9: R14,7 billion; 2009/2010: R12 billion; and
2010/11: R11,1 billion. R31,5 billion (about 48%) will be spent on Spoornet;
R18,6 billion on NPA; R6,3 billion on SAPO; R4,9 billion on Petronet; and R2,6
billion on Transwerk. Transnet anticipates it will need to borrow up to R25
billion to finance its investment programme and refinance maturing borrowings.
This figure could be reduced through the sale of non-core assets. Even with
this borrowing, Transnet’s gearing ratio is not expected to exceed 50%.
9.26. Last year Transnet reported that
there were four cases of non-compliance with the PFMA, specifically at SAA, and
relates all of it to the procurement systems issues. Action is in place to
address the issues and these were reported as required.
9.27. Transnet’s report to the Committee
was very clear, direct and focused. Many of the issues raised in our report
last year were addressed in the “Chairman’s Statement” and “Group Chief
Executive’s Review” in Transnet’s Annual Report.
9.28. While the Committee was somewhat
cautious in welcoming Transnet’s progress last year, this year we are clear
that Transnet has made major, commendable progress that is sustainable. Of
course, we have limited technical expertise, but it seems to us that while huge
challenges persist, and there is still a long way to go, the progress achieved
is a very solid foundation on which to build further. Clearly, the current
leaders of Transnet have done a remarkable job – and their performance suggests
that with an effective and driven Board and management, operating within a
clear mandate from government, SOEs can be successful. Their performance, in
other words, reinforces the case to keep enterprises involved in key sectors of
the economy in state hands rather than privatising them. Without being glib
about this, it seems to us, that where there is a will, there is often a way.
9.29. In his “Chairman’s Statement”, Mr
Fred Phaswana said: “With financial stability achieved, the executive can now
focus on strengthening Transnet’s operational efficiency gains.…”. The
Committee looks forward to this.
9.30. There seems to be greater
integration and co-operation of the different operating divisions of Transnet.
Ms Ramos said that this is “the year in which we began the march towards
building ‘one company, one team, one vision’”. The Committee’s response: “Good,
march on, march on!....”.
9.31. We are particularly impressed with
the slide Transnet presented to the Committee on “Performance Measures Against
Budget” – which seems to us to be a very finite measure of performance against
targets set in the shareholder compact.
9.32. The Committee commends the Transnet
leadership, the trade unions and the Minister for the way the strike was
settled. The Committee’s concerns about job losses raised in our last report
have eased somewhat, and we hope that the disposal of Transnet’s remaining
non-core assets will not lead to significant job losses.
9.33. The Committee notes that Transnet’s
capital expenditure programme will now cost an estimated R64,5 billion compared
to last year’s estimate of R40,8 billion. The Committee’s concern about the
availability of cement, steel and other material to implement the programme is
raised briefly in section 10.8 below. The Committee will continue to monitor
progress on the capital expenditure programme through the Quarterly Reports we
receive from DPE.
9.34. Last year Transnet explained that
its aim was to reduce its gearing ratio from 67% to between 50 and 55% over five years. It has
already been reduced to 47%, and, we are told, will not exceed 50% even with
the borrowing for the capital investment programme. This is impressive.
9.35. The Committee also notes that the
Second Defined Pension Fund now has a surplus – a change from the significant
deficit of prior years.
9.36. The Committee also welcomes
Transnet’s audit of every employee and its new Fraud Prevention Plan.
9.37. Obviously, Spoornet faces many
challenges and the turnaround strategy will take some time to take effect, but
the very low increase in volumes is disappointing. In fact, general freight
decreased by 2,7% - yet this is where volumes have to grow, as observed by Ms
Ramos in section 9.12 above. Ms Ramos said that until now Spoornet has not made
a dent in road freight. Mr Gama said that Spoornet aims to move from its
present 10% to between 22 and 30% of the market over five to six years; it is
from 2008 that Spoornet will be poised for significant growth. Ms Ramos pointed
out that even in
9.38. Obviously, Transnet faces many
challenges in respect of skills. The Committee is keen to exchange in greater
depth with Transnet on this. We will also monitor progress on the
9.39. The Committee welcomes Transnet’s
progress on becoming more representative. Without being mechanical or glib, or
being unmindful of the skills shortages and mismatches, the Committee feels
that Transnet should do more.
9.40. The Committee notes that of its R7,7
billion tenders, 42% went to BEE companies. The Committee will engage in
greater depth with Transnet next year on how it is implementing broad-based
BEE.
9.41. Transnet’s performance during the
year under review was very impressive. In her “Review”, Ms Ramos said: “More
and better results are achievable.” Good! We look forward to that….
10.
On SOEs in general
10.1. We have consistently pointed out
that the Committee does not have research support from technical experts in the
energy, aviation, freight transport and other sectors in which the above SOEs are
engaged. Nor do we have other independent means of evaluating the performance
of DPE and the SOEs. We go by what we can tell, within these limitations, and
sometimes we are just guided by our instincts. Our observations and views have
to be understood in this context – and we accept that we could, in parts, be
just wrong, or there are things we just fail to see. But what can we do? We
will try to be better. But until we get the requisite support we will not be
able to exercise our oversight role fully effectively. So when DPE and the SOEs
talk about skills shortages, they should also spare a thought for us.
10.2. In view of the very limited research
support available to the Committee, it would be useful to consider other
independent evaluations of the performance of the SOEs, including by academics,
other technical experts and others. Where appropriate, customer surveys
undertaken of SOEs should be made available to the Committee.
10.3. Our overall assessment, for what it
is worth, is that DPE and the SOEs are in general more directed, focused and
driven now. Obviously, different SOEs face different challenges and are in
different stages of their re-engineering and restructuring processes, but
overall, to differing degrees, SOEs are more actively fulfilling government’s
mandate and performing better now than in the past two years. That, at least,
is how we see it.
10.4. In a nutshell, our conclusions, for
now, about the SOEs are:
·
Until
the land claims dispute is finally settled and the government is clearer about
what it wants to do with Alexkor, it is difficult for the Committee to have a
clear enough sense of how Alexkor is performing. It seems to us that Alexkor is
very challenged. We feel though that Alexkor could do significantly better even
in the current circumstances.
·
Despite
its many complex challenges, Denel’s new strategy, overall, is sound and
progress in the first year of its implementation is good. It will be a long
haul. It is too early to say whether the turnaround strategy will succeed – but
it is promising. Denel’s leaders are firmly committed to fulfilling that
promise.
·
The
power outages exposed both Eskom’s weaknesses and strengths. Despite the
challenges of the power outages and its capital infrastructure programme, Eskom
is doing well and its financial performance remains impressive.
·
SAA
operates in a very difficult, volatile and unpredictable industry, with many
factors largely beyond its control, especially fuel prices. It is difficult for
the Committee to tell how much of SAA’s difficulties flow respectively from
factors beyond its control, “legacy issues” and weaknesses of the present
management. We believe SAA can do better and its managers certainly have the
potential to ensure this.
·
With
SAFCOL being retained in state hands, it will have to adjust from its
“privatisation mindset”. The Committee waits to see what precisely the new
mandate is that government will provide – and will then be better able to
assess SAFCOL’s performance. For now, notwithstanding internal transformation
challenges, SAFCOL seems to be doing well.
·
Transnet’s
recovery over the past two years is remarkable. There is still a long way to go
to ensure sustainable progress, but a solid foundation for this has been
created. Major challenges persist, but if there is any leadership that can,
over time, triumph over these, it is the current one.
10.5. The observations made about each SOE
in 10.4 above are obviously quite condensed – and will make better sense if
read against our observations of each SOE in the section of the report above
dealing with a particular SOE.
10.6. The Committee looks forward to the
shareholder compacts the Minister concludes with the SOEs being presented to
the Committee early in the new year. It will significantly contribute to
ensuring that we are more focused, rigorous and effective in our oversight
role. It will also contribute to the SOEs becoming more specific and focused in
their briefings to the Committee on their Annual Reports. In this regard we
would like all SOEs to be more concrete about progress on specific targets in
the shareholder compacts. A slide similar to the one presented by Transnet
referred to in sections 9.19 and 9.31 above would be very useful to give the
Committee a clear sense of this.
10.7. Many issues raised during the Annual
Report briefings were not fully dealt with for want of time and other reasons.
We, obviously, cannot wait until next year’s briefings to deal with the issues.
We will attend to them through the very useful quarterly briefings we receive
from DPE, and, if necessary, through briefings from the SOEs directly or
written exchanges with them. The quarterly briefings are presented by DPE
officials. While we do not necessarily require representatives of the SOEs to
attend these, the SOEs are more than welcome to send representatives. For
certain specific quarterly briefings we may request specific SOEs to send
representatives. Essentially, the Quarterly Reports are meant to provide
progress reports on:
· DPE programmes.
· Eskom’s and Transnet’s capital
investment programmes.
· The overall performance of the all
the SOEs.
10.8. Eskom’s and Transnet’s capital
infrastructure programmes are taking place at the same time as the 2010 World
Cup, municipal infrastructure and other capital investment programmes. The
Committee would like to be briefed within the next six months on the strategies
to meet the following needs:
· the massive demand for cement, steel
and other material necessary to build the infrastructure planned by the SOEs.
· the major skills requirements.
· EIAs.
10.9. While recognising certain specific
challenges that certain SOEs have in some areas of their work, the Committee
would like more detailed and clear reports in future annual briefings on how
SOEs are ensuring that their BEE programmes are indeed broad-based.
10.10. In respect of employment equity, we
would like the SOEs to provide a full racial breakdown when they present their
statistics to the Committee; in other words, the collective term “Black” needs
to be disaggregated.
10.11. With the massive capital expansion
programmes of the SOEs, the prospects of corruption increase. The Committee
would like each SOE to spell out its anti-corruption strategies and programmes
more clearly in future Annual Report Briefings.
10.12. The Committee welcomes the
increasing co-operation of the SOEs. We also support Transnet’s suggestion that
SOEs co-operate on their Corporate Social Investment programmes and projects.
We are interested to see progress on this – and will pursue this further with
DPE.
10.13. The performance of SOEs seems to be
significantly influenced by the political direction provided by government and
the quality of leadership of the SOEs. It is crucially important that SOEs have
effective succession plans in place. There needs to be greater stability and
continuity within the SOEs that is not undermined by each change in their
leadership. Eskom seems to be adopting a good approach to the replacement of
its Chief Executive. We want to be
briefed on succession plans by DPE and the SOEs.
10.14. The Committee welcomes the SOEs
reporting in terms of IFRS.
11.
Committee’s 2007 Programme
11.1. In various parts of this report the
Committee has set out issues we want to pursue further. These issues will be
brought together in our programme for next year.
11.2. Among the more general issues we
will be pursuing next year are:
· Shareholder compacts concluded with
SOEs.
· Ministry’s position paper on the
role of the SOEs in a developmental economy.
· The remuneration guidelines for
SOEs.
· The role of PBMR.
· The SOEs anti-corruption strategies
and programmes.
· The possible contribution of SOEs to
Call Centres.
· The SOEs skills acquisition and
development strategies.
· The availability of cement, steel
and other materials for the SOEs capital investment programmes.
· EIAs and progress on the SOEs
capital investment programmes.
11.3. We will also continue with our usual
quarterly briefings from DPE, and our special briefings on the SOEs application
of BBBEE and their womens empowerment programmes.
11.4. The Committee will also be
processing the South African Airways Bill and bills on Infraco and shareholder
management.
12.
Appreciation
12.1. We extend our appreciation to the
leadership of DPE and the SOEs for their co-operation in our processing of
their Annual Reports.
12.2. We also thank researchers Ms
Desmoreen Carolus and Mr Eric Boskati for assistance with this report.