REPORT OF THE PORTFOLIO COMMITTEE ON
PUBLIC ENTERPRISES ON THE BUDGET HEARINGS OF THE DEPARTMENT OF PUBLIC
ENTERPRISES 2008/2009, DATED 11 JUNE 2008.
The Department of
Public Enterprises presented its budget to the Portfolio Committee on Public
Enterprises on 27 and 28 February 2008.
The Department of Public Enterprises’ mandate is to provide shareholder
management of the nine State-Owned Enterprises (SOEs) – Alexkor, Broadband Infraco, Denel, Eskom, Pebble Bed
Modular Reactor (PBMR), South African Forestry Company Ltd (SAFCOL), South
African Airways (SAA), South African Express Airways (SAX) and Transnet – with
the aim of achieving economic growth and efficiency in strategically important
economic sectors, including transport, energy and communications.[1]
The department of Public Enterprises is essentially an oversight and
coordinating Department which acts on behalf of the state in its capacity as a
shareholder of the various state owned enterprises. In essence the mandate of
the Department is to ensure alignment of the SOE business strategies with the
Sector department policies and regulatory authorities while ensuring that SOEs
are sustainable businesses that provide economic benefit to the country.
In order to fulfill its mandate, the Department envisages SOEs that:
are efficiently managed and meet domestic and international industry
operational benchmarks;
play a role in the industry in which they operate that ensures an optimal
allocation of responsibilities between the public and private sector;
undertake investment programmes with a “reserve margin” to accommodate faster
economic growth; and
leverage their investment programmes to the benefit of the South African and
African economies on a sustainable basis.[2]
Linked to its vision is the Department’s mission to:
provide SOEs with clear mandates;
provide consistent and strategic performance management of SOEs; and
provide simple and unambiguous governance systems.[3]
endeavours to systematically leverage SOEs’ investment in infrastructure to
ensure maximum benefit to the South African economy.
The current priorities of the Department are to monitor and plan, delivery and
financing of the infrastructure expansion programmes of Eskom and Transnet, the
turnaround programmes of Denel and SAA, the establishment of Broadband INFRACO,
the growth strategies of Alexkor, and the design and development programme of
the PBMR.[4]
The Department has a pivotal role in monitoring, evaluating and facilitating
Eskom’s response to the difficulties with the electricity supply.
The total budget allocated to the Department is R3, 007 862 billion and
transfers to State Owned Enterprises (SOEs) amount to R2, 842 billion. Pebble
Bed Modular Reactor accounts for R 1, 750 billion of the transfer payments.
Transfers will also be made to Alexkor (R130 million), South African Express
(R585 million) and Broadband INFRACO (R377 million). Over the Medium Term
Expenditure Framework (MTEF) period (2007-2011) transfers to the SOEs will
total R9.5 billion, of which a total of R1.4 billion made up of R933 million to
Denel in 2007/08 and R481 million to SAX in 2008/09 is of a capital nature.
During the hearings the Committee engaged each of the various departmental
components including the office of the DG and the CFO. What follows is a synopsis
of individual presentations.
Administration
The programme is responsible for the overall direction and management
of the Ministry and the Department and the provision of administrative support
services to the Department. The priorities of the programme for 2008/09 are the
following:
process automation;
training and development;
performance management of staff;
annual risk assessment and audits of DPE; and
energy efficiency campaign throughout DPE offices.[5]
The breakdown of the budget on priority areas is as follows:
|
ITEMS R thousand |
BUDGET 07/08 (R000) |
BUDGET 08/09 |
|
COMPENSATION
OF EMPLOYEES |
29 014 |
33 979 |
|
GOODS AND
SERVICES |
31 629 |
30 982 |
|
TRANSFERS
(Sponsorships, donations and 16 days of activism) |
620 |
650 |
|
CAPITAL |
1 432 |
375 |
|
Sub-Total:
Operational |
62 075 |
65 336 |
|
TOTAL |
62 695 |
|
The transfers increased from R620 thousand in 2007/08 to R650 thousand in
2008/09. There was no significant change in the programme except for an
increase in compensation of employees. Equipment contracts, telephones,
stationery, training, recruitment advertising and software licences are located
in this program under item “Goods and Services”.
Legal, Governance, Risk and
Transactions (LGRT)
The purpose of the programme is to provide effective legal services,
corporate governance and risk management systems and the implementation of
legal aspects of strategically important transactions.
The priorities of the programme for 2008/09 are:
South African Government Shareholder Management Legislation;
Alexkor Deed of Settlement implementation;
Aventura closure;
KLF disposal;
SOE and Shareholder Risk Assessments;
General legal counsel for the Department; and
Provision of legal support for Shareholder transactions.[6]
The breakdown of the budget on priority areas and planned activities is as
follows:
|
ITEMS R thousand |
BUDGET 07/08 (R000) |
BUDGET 08/09 (R000) |
|
COMPENSATION
OF EMPLOYEES |
13 954 |
13 550 |
|
GOODS AND
SERVICES |
10 108 |
14 613 |
|
TRANSFERS
(Alexkor) |
73 000 |
130 000 |
|
CAPITAL |
16 |
-
|
|
Sub-Total:
Operational |
24 078 |
28 163 |
|
|
97 078 |
158 163 |
Transfers to Alexkor increased from R73 million in 2007/08 to R130 million in
2008/09. Operational expenditure increased in 2008/09 due to additional
payments of legal costs for Alexkor and SAFCOL transactions.
Joint Project Facility (JPF)
The purpose of the programme is to identify synergies and co-ordinate
and develop cross-cutting projects that leverage the assets, activities and
capabilities of the SOE to the benefit of the SOE and the economy as a whole.
The priorities of the programme for 2008/09 are:
Aerospace: Strategy formulation;
Rest of
Autumn school 2008 roll-out;
Competitive Supplier Development Programme (CSDP): finalise Eskom, Transnet,
PBMR supplier development plans;
Environmental Issues: Finalise guidelines for Strategic Important Developments
(SIDs);
Advanced Learning Programme: Module development;
Property: guide non-core property disposals; and
SA Power Project: strategy for a globally competitive power cluster to support
the build programme.[7]
The JPF endeavors to identify synergies to develop cross-cutting
projects that leverage the assets, activities and capabilities of the various
SOEs to the benefit of the entities themselves as well as the South African
economy. The aim is to positively influence not only the South African economy
but that of
The breakdown of the budget on priority areas and planned activities is
as follows:
|
ITEMS R thousand |
BUDGET 07/08 |
BUDGET 08/09 |
|
COMPENSATION
OF EMPLOYEES |
2 315 |
5 017 |
|
GOODS AND
SERVICES |
12 053 |
23 806 |
|
TOTAL |
14 368 |
28 823 |
The expenditure
increase is meant to meet the objectives of the unit, which include the
commencement of the SA Power Project and the implementation of the Competitive
Supplier Development Programme in 2008/09. The Power Project will leverage the
Eskom build programme to enhance the country’s manufacturing industry,
technology and skills base. Sub-programmes under this programme include the
Competitive Supplier Development Programme.
Energy and Broadband Enterprises (EBE)
The purpose of the programme
is to align the corporate strategies of Eskom, PBMR and Broadband INFRACO with
government’s strategic intent and monitor their performance in respect of
financial and operational matters.
Portfolio Management;
Implementation of the National Electricity Emergence Response Plan;
Fast track Geyser Replacement Programme;
Capacity Expansion Programme implementation (Generation & Transmission);
Implementation of Single Buyer Model – monitor Co-generation and IPP
implementation;
Generation, Transmission & Distribution Infrastructure Maintenance &
Refurbishment;
Monitoring of Eskom Nuclear Build Programme; and
Monitoring of progress of International Submarine Cable rollout.[8]
The breakdown of the budget on priority areas is as follows:
|
ITEMS R thousand |
BUDGET 07/08 |
BUDGET 08/09 |
|
COMPENSATION
OF EMPLOYEES |
6 474 |
6 915 |
|
GOODS AND
SERVICES |
3 133 |
3 665 |
|
TRANSFERS
(PBMR and Broadband InfraCO) |
2 502 273 |
2 127 000 |
|
Sub-Total:
Operational |
9 607 |
10 580 |
|
TOTAL |
|
2 137 580 |
Transfers decrease from R2.5 billion in 2007/08 to R2.1 billion in 2008/09. The
transfer payment to PBMR decreases from R 2.5 billion in 2007/08 to R1.75
billion in 2008/09. A transfer payment of R377 million is allocated to
Broadband Infraco for the first time in 2008/09.
Manufacturing Enterprises
The purpose of the programme is to monitor strategies of Denel and SAFCOL
against government’s strategic intent, develop proposals around how SOE can
play a catalytic role in the development of the manufacturing cluster and
monitor and advise on SOE financial and operational performance.
The priorities of the programme for 2008/09 are:
Portfolio Management;
Develop Denel end-state in partnership with DoD, National Treasury and Denel;
Review of acquisition policy in 2008/09. Facilitating the achievement of the
60% to 70% local defence procurement target over the next 3 years;
Establishing DoD/Industry supplier fora by the end of July 2008 to enhance
communication and alignment between industry, Armscor and DoD in defence
acquisitions;
Assist with the establishment of Defence Evaluation & Research Institute
(DER) in 2008/09;
Development of a missiles export strategy in 2008/09 to leverage technology and
increase access to markets;
Establishment of a defence export council by the end of September 2008 to
facilitate export marketing support; and
Provide sector support in KLF disposal.[9]
The breakdown of the budget on priority areas is as follows:
|
ITEMS R thousand |
BUDGET 07/08 |
BUDGET 08/09 |
|
COMPENSATION OF EMPLOYEES |
5 041 |
5 788 |
|
GOODS AND SERVICES |
5 316 |
5 853 |
|
TRANSFERS (Denel) |
1 155 000 |
- |
|
CAPITAL |
16 |
- |
|
Sub-Total: Operational |
10 373 |
11 641 |
|
TOTAL |
|
11 641 |
The transfers to Denel cease in the current year. A sum of R1, 55 billion was
invested in the previous financial year.
Transport Enterprises
The purposes of this programme
include overseeing the activities of Transnet, SAA, SAX in terms of corporate
strategy and structure, operational performance, industry structure, corporate
governance and policy, financial and risk management, corporate transactions
and benchmarking. The programme is also responsible for developing proposals on
how SOEs can play a significant role in the development of the associated
manufacturing cluster through leveraging their capital and investment
programmes via the Competitive Supplier Development Programme.
The priorities of the programme for
2008/09 are:
Portfolio management;
Branchlines position paper;
Ports and Rail master plans approval & implementation;
Railway supplier study;
Monitor Transnet Build Programme;
Monitor New Multi Product Pipeline (NMPP) implementation;
Implementation of SAA turnaround strategy;
Strategic repositioning of SAA Technical; and
Optimal commercial relationship between SAA and SAX.[10]
The breakdown of the budget on priority areas is as follows:
|
ITEMS R thousand |
BUDGET 07/08 |
BUDGET 08/09 |
|
COMPENSATION OF EMPLOYEES |
5 212 |
6 243 |
|
GOODS AND SERVICES |
4 367 |
14 426 |
|
TRANSFERS (SAA and SAX) |
744 400 |
585 000 |
|
CAPITAL |
16 |
- |
|
Sub-Total: Operational |
9 595 |
20 669 |
|
TOTAL |
|
605 669 |
Transfers decrease from R744.4 million (allocated to SAA in 2007/08) to R585
million (allocated to SAX in 2008/09). However operational expenditure
increases substantially as the department will be sourcing specialist technical
expertise to assist with various priority projects in the sector which will be
undertaken in the coming year.
Expenditure Trends over the MTEF
Period
The summary of expenditure
estimates per programme including transfers in the MTEF is as follows:
|
ITEMS
R thousand |
2007/08 |
2008/09 |
2009/10 |
2010/11 |
|
Administration |
62 695 |
65 986 |
69 542 |
73 987 |
|
Energy and Broadband Enterprises |
2 511
880 |
2 137
580 |
1 973
236 |
153 253 |
|
Legal, Governance, Risk and Transaction |
97 078 |
158 163 |
157 402 |
29 049 |
|
Manufacturing Enterprises |
1 165
373 |
11 641 |
11 853 |
12 604 |
|
Transport Enterprises |
753 995 |
605 669 |
19 207 |
20 040 |
|
Joint Project Facility |
14 368 |
28 823 |
34 451 |
27 053 |
|
Total for programmes |
4 605
389 |
3 007
862 |
2 265
691 |
315 991 |
Over the MTEF
period, expenditure is expected to decrease at the average annual rate of
59.1%, from R4.6 billion in 2007/08 to R316 million in 2010/11. This of course
may change drastically depending on State commitment to capitalise various SOEs
– not least of which is Eskom.
The significant decline in 2010/11 indicates the ending of transfer payments to
SOEs, with the only ongoing funding of R140 million allocated to Broadband
InfraCo.
Expenditure in administration is expected to grow moderately over the
MTEF period at an average annual rate of 5.7% to R74 million in 2010/11 broadly
in line with inflation but also reflecting the centralisation of services such
as training bursaries, IT and leases on equipment.[11]
Over the MTEF period, LGRT expenditure covers the anticipated legal costs
associated with a number of transactions, including the disposal of the
Komatiland Forest (KLF) by SAFCOL. Expenditure is expected to decrease over the
MTEF period from R96.8 million in 2007/08 to R29 million in 2010/11, at an
average annual rate of 33%, due the finalisation of the Alexkor settlement.[12]
Expenditure on JPF is projected to grow to R34.4 million in 2009/10, an average
annual increase of 23.5% over the MTEF period, mainly due to additional
capacity and outsourcing of technical and specialist expertise required to meet
the objectives of the JPF over the MTEF period.
Trends between 2004 and 2008
The Department’s expenditure less
transfers increased from R69.7 million in 2004/05 to R130 million in
2007/8.Combined transfer payments to SOEs grew at an average annual rate of
95.2%, from R602 million in 2004/05 to R4.5 billion in 2007/08. Between 2004/05
and 2007/08, Denel received R3.7 billion, Alexkor received R170.2 million, PBMR
R4.9 billion, SAA received R744. 4 million; and R627 million was provided for
the establishment of Broadband INFRACO. The joint project facility (JPF)
received R25.8 million between 2006/07 and 2007/08.[13]
Summary of Financial Position of
SOEs
The successes of the SOEs themselves inter-alia depend on the collective
strength of their respective balance sheets. The SOEs registered the following
performances:
Alexkor
Operating loss
decreased to R27.3 million in 2006/07, from R209.7 million in 2005/06;
Diamond production declined from 43,207 cts in 2005/06 to 33,765 cts in
2006/07;
The Pooling and Sharing Joint Venture is poised to develop a long term business plan for a viable
mining venture.
Broadband INFRACO
It has recently been
established and has incurred initial operating expenditure;
SITA has been live on INFRACO network since 18 January 2008.
Denel
Operating costs as a
percentage of revenue went down from 146% in 2005/06 to 115% in 2006/07;
In 2006/07 financial year, gross profit improved from the previous years and
was positively impacted by increased sales and a decrease in provisions
relating to onerous contracts and contract losses;
Net loss went down from R1.363 billion in 2005/6 to R549 million in 2006/07.
This amounts to a better than expected result for Denel.
Eskom
operating costs
increased and derivative instruments continue to be a concern;
operating efficiency has deteriorated in the third quarter due to the high
level of unplanned outages due to the aging fleet of generators and the higher
level of demand;
Eskom’s build programme is on track to deliver some 1 155MW to the system
during 2008.
PBMR
The gross amount
received by PBMR as at 31 March 2007 is R 4, 210 billion. This is made up of
contributions from Eskom (R818 million), Industrial Development Corporation of
National Nuclear Regulator (NNR) Stop-Work Order was lifted on 22 December
subject to some conditions;
NNR licence was received for Accelerated Cooling Facility (ACF) on 17 January
2008;
Helium test facility achieved 100,000 accident free hours.
SAFCOL
revenue for the year
increased in 9 months from R326 million in 2005/06 to R653 million;
profit for the year increased in 9 months from R168 million to R800 million;
operating costs as a percentage of revenue decreased in 9 months from 88% to
72%.
SAA
it registered a loss of
R883 million in 2006/07;
profitable domestic and regional operations are overshadowed by losses on
intercontinental routes;
Mango brand was successfully launched.
SAX
It registered a profit
of R102 million;
The regional operations are well suited to lower demand routes.
Transnet
The company
achieved most of its targets and is on target to roll out an R80
billion five-year investment plan;
The capital and reserves figures are looking good but gearing ratio has
fallen to below the 50% threshold set by debtors;
The Freight Rail division has failed to achieve on most of the Key
Performance Indicators;
In general the company has made significant progress in implementing its
turnaround strategy;
The 2006/07 financial year was a year
of strength and growth across all the important financial measures.
CONCLUSION
The Committee is of the view that SOEs are in effect state investments capable
of being leveraged towards contributing to the attainment of strategic economic
goals such as job-creation, skills development and rejuvenation of industrial
manufacturing sectors in the economy. The department has done well to position
SOEs so as to enhance the strategic roles of various SOEs in attaining some of
these goals.
The individual units of the Department have not previously been called to
account during the budget process in the form and detail required by the
Committee this year. As such, the Department was asked to provide and has
provided additional information on the following:
Details of bursaries and loans given to staff
and progress report on recovering the money.
Disciplinary matters.
Transfer of staff to other departments and government entities.
Theft of a part of a locomotive in
The above reports can be obtained from the
secretary to the Committee.
The Department has registered inter-alia the following successes:
The steel sourcing project was completed;
A proposed strategy to leverage the 20-year power build to develop national
industry is underway;
Working with the Department of Environmental Affairs and Tourism (DEAT), it
developed a framework for the identification and treatment of Strategically
Important Developments (SIDS);
It has revised B-BBEE guidelines to align with the Department of Trade and
Industry (DTI) generic codes;
It has availed a self-assessment toolkit on its website;
The moratorium on the sale of non-core properties has been lifted;
A property viability study and spatial viability study for Rosherville (Eskom)
has been completed;
It has established a cross-cutting artisan training initiative;
The Department of Public Enterprises (DPE) has applied to the Department of
Labour (DoL) for the establishment of a Public Enterprise Employment and Skills
Development Agency (ESDA). The ESDA will facilitate SETA funded work-place
placements for the FET college graduates with SOE suppliers to enable the
graduates to obtain trade certificates;
Transnet Pension Fund Amendment Act has been promulgated;
SAA, SAX and Broadband INFRACO Bills have been processed and promulgated;
The Richtersveld settlement has been concluded; and
The ports and rail master plan has been drafted.
However the Department is facing the following challenges:
The delays in the finalisation of the Nuclear Policy could delay the
implementation of this element of Eskom’s Build Programme. The Department of
Minerals and Energy should be engaged so that the Nuclear Policy could be
finalized;
The Department has to more
vigorously oversee the maintenance practices across all SOEs;
It has to balance the risk of weakening the balance sheet against the very
large investment programmes particularly in relation to Eskom and Transnet;
The development of cost reflective tariffs which are economically more
efficient against the inflationary effects and impact on the poor;
Skills scarcity and supplies could delay SOE capital/build plans;
The Department has to procure more effective interfaces as regards those state
departments that relate to the core business of SOE, such as the Department of
Defence, as it relates to Denel.
The Department has received an unqualified audit opinion in the last year. The
emphasis of matter relates to the vacancy rate. It should however be borne in
mind that the Department is not a service delivery department. However the
vacancy rate in particular units is cause for concern. A case in point is the
manufacturing unit which has a particularly high vacancy rate in higher post
levels.
Alexkor
The Committee commends the department on the settlement reached with the
Richtersveld community. It is of the view that the mining plan and operations
must proceed with earnest and that Alexkor will require significant
capitalization over the next few years.
Broadband INFRACO
The Committee has been supportive of the strategic aims and objectives of
Broadband INFRACO. However synergies in policy and approach must be prioritized
in government between the Department of Public Enterprises and the Department
of Communications. There are concerns around participation by
telecommunications companies in INFRACO’s Africa West Coast cable, funding
constraints, timelines and the risk associated with the Nepad / DoC Uhurunet
Cable.
Denel
While the restructuring initiative seems to be showing some positive
indicators and the Committee was informed during the hearings that progress has
been made in supply negotiations with the Department of Defence, the Committee
will continue to watch developments in Denel with keen interest.
Eskom
While Eskom has in its latest Annual Report reflected a positive financial
position, this aspect of the company will have to be closely managed and
monitored given the necessary investments into more generation and transmission
capacity. In this regard it is important to note that the scale of the
investment in infrastructure in the next 20 years is unprecedented. It is set
to approximately double its current electricity supply capacity. This
significant increase in investment will mean higher tariffs to users and an
increase in government spend and will require Eskom to reduce costs and
introduce corporate efficiencies. Consumer behaviour must be addressed and the
impact on the economy of the current phased load shedding must be monitored and
managed.
In the planning of future generating capacity the Committee is of the view that
while coal-fired technology may be more cost efficient more consideration
should be placed on alternative clean (e.g. nuclear) or renewable (e.g. solar)
technologies. While these technologies are more expensive, the cost to the
quality of the air, health and the devastating effects of global warming should
be factored into the planning process. These are not aspects that can be
removed from considerations of economic growth and prosperity of the nation.
PBMR
The shareholder compact requires finalization and the regulating framework
within which the company operates must be streamlined and policy developed in
this regard.
SAA
Customer services, the financial position and efficiencies need to be improved.
The restructuring process should be finalized. There is insufficient yield and
revenue management.
SAX
The financial position is sound and the prospects are good. It demonstrates
continued good performance. There are opportunities to expand SAX’s business
model further into the SADC region.
Transnet
Safety and efficiencies in Transnet Freight Rail need to be enhanced
significantly. Tariff increases to fund the build programme should be within
reason. The Committee will watch this matter closely.
[1] ENE 2008: 625
[2] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 04
[3] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 05
[4] ENE 2008: 626
[5] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 24
[6] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 32
[7] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 34
[8] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 26
[9] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 28
[10] Public Enterprises 2008 – 2011 Strategic Plan and Financial Overview: 30
[11] ENE 2008: 631
[12] ENE 2008: 633
[13] ENE 2008: 629