ATC180510: Report of the Portfolio Committee on Public Enterprises on Budget Vote 9: Public Enterprises, and the Annual Performance Plan for 2018/19 of the Department of Public Enterprises, dated 10 May 2017

Public Enterprises

Report of the Portfolio Committee on Public Enterprises on Budget Vote 9: Public Enterprises, and the Annual Performance Plan for 2018/19 of the Department of Public Enterprises, dated 10 May 2017
 

The Portfolio Committee on Public Enterprises, having received a briefing from the Department of Public Enterprises on the Annual Performance Plan and on the budget vote on 2 May 2018, reports as follows:

 

1.      Introduction

                                      

Guided by the Rules of Parliament, promulgated in terms of the Constitution, the Portfolio Committee on Public Enterprises plays an oversight role on the Ministry, Department and the Entities. The Committee has to scrutinise the Strategic Plan and annual performance plan of the Department and its Entities in order to see if the funds requested are aligned to the objectives as stated in the respective Strategic Plan documents.

 

1.1      Background

 

The state has a developmental role to play and uses state-owned companies as the primary tools to deliver on its developmental role. The developmental role should support a number of economic and development goals, including delivery of strategic infrastructure that will unlock growth potential in the country; support of the wider economy and marginal business sectors and support of economic recovery where needed. The state requires strategic, organisational and operational capacity to play its developmental role. State-owned companies (SOCs) fulfil the state’s operational role in this requirement, acting as the implementing agents for national strategy.

 

 

 

 

 

2.      Annual Performance Plan of the Department of Public Enterprises

 

The Department of Public Enterprises presented an annual performance plan for 2018/19 financial year informed by the Strategic Plan that was presented to the Committee. The department described the overarching policy and strategic direction and priorities of Government, as articulated in the State-of-the-Nation Address by the President, Budget Speech, and National Development Plan.

 

2.1      Mandate of the Department of Public Enterprises

 

The Department of Public Enterprises is the shareholder representative for government at the state-owned companies in its portfolio. The department’s mandate is to fulfil oversight responsibilities at these state-owned companies to ensure that they contribute to the realisation of government’s strategic objectives, as articulated in the National Development Plan (NDP), the medium-term strategic framework (MTSF), the New Growth Path (NGP) and the Industrial Policy Action Plan (IPAP). State-owned companies are crucial to driving the state’s strategic objectives of creating jobs, and enhancing equity and transformation. The department does not directly execute programmes but seeks to use state ownership in the economy to support the achievement these objectives.

 

2.2      Strategic Objectives of the Department

 

The Department introduced its new strategy in 2015 based on the need to accelerate the stabilisation of SOCs and reposition them to deliver on the Government’s commitments outlined in the NDP as well as the MTSF 2014-2019. The two documents continue to provide a planning framework for the Department and the development of economic strategies in South Africa to reshape the economic landscape for better development outcomes.

 

The Department’s revised strategy is informed by the need to accelerate the execution of interventions that are necessary to turn around the economy and address the structural challenges outlined in the nine-point plan, as well as create a long-term goal on the management of SOCs. Supporting the restructuring of the economy through the effective use of the state’s investment in SOCs will remain the department’s primary objective, but it will also ensure that SOCs have capacity to do so.

 

According to the Department’s strategy over the remaining period of the current administration, the Department will pursue a limited set of objectives that will maximise its contribution to the restructuring of the economy, including accelerating transformation in the SOCs’ value chain. The strategic objectives of the Department are not defined per programme, but are based on the outcomes that cannot be realised by a single programme. This is intended to promote cooperation within the organisation and create the basis for the creation of a matrix organisation.

 

 

 

Table 1: The DPE Strategic Objectives

 

Strategic Goal	Strategic Objectives
Strengthening the role of the Shareholder	Promote the development of a strong shareholder
Ensure SOC financial sustainability	Promote independent financial stability of SOCs
Ensure SOCs maintain commercially viable operations	Promote commercial viability of SOCs operation
Delivery of capital projects	Accelerate capital project delivery
Supporting the acceleration of transformation of the South African economy	Accelerate transformation of the South African economy
	Accelerate development of skills to support the needs of the economy
Advancing the re-industrialisation of the South African economy	Position SOCs to support the re-industrialisation of the South African economy
	Provide strategic leadership, management and support services to the Department

 

The Department’s ability to achieve its strategic objectives is dependent on the economic environment and its ability to conduct oversight over the SOCs. Critical in this regard is the development of the overarching legislative framework that will govern SOCs. It is critical that a board oversight mechanism be put in place to ensure that SOCs’ boards execute their fiduciary duties accordingly. Boards should be capacitated to fulfil their function. The role of executive directors is to ensure that SOCs are financially sustainable, commercially viable and that they meet the development agenda. The Department should clarify roles between the shareholder and SOCs’ boards in its shareholder contracts. Government as shareholder requires maximum returns, excellent productivity, a low debt/equity ratio and, simultaneously, maximum investment in infrastructure and service delivery at the lowest cost. Without balanced performance these competing objectives may not be achieved and the sustainability of the state-owned company may be threatened.

 

2.3     Policy Priorities for 2018/19

                                

The Department of Public Enterprises oversees six state-owned companies, namely Alexkor, Denel, the South African Forestry Company, Eskom, South African Express Airways and Transnet. The President made the following pronouncements in his state-of-the-nation address in February 2018:

 “… Many of our state-owned enterprises are experiencing severe financial, operational and governance challenges, which have impacted on the performance of the economy and placed pressure on the fiscus. We will intervene decisively to stabilize and revitalize state-owned enterprises. The recent action we have taken at Eskom to strengthen governance, root out corruption and restore its financial position is just the beginning. Government will take further measures to ensure that all state-owned companies fulfil their economic and developmental mandates.  We will need to confront the reality that the challenges at some of our SOEs are structural – that they do not have a sufficient revenue stream to fund their operational costs.  These SOEs cannot borrow their way out of their financial difficulties, and we will therefore undertake a process of consultation with all stakeholders to review the funding model of SOEs and other measures.  We will change the way that boards are appointed so that only people with expertise, experience and integrity serve in these vital positions.  We will remove board members from any role in procurement and work with the Auditor-General to strengthen external audit processes. As we address challenges in specific companies, work will continue on the broad architecture of the state-owned enterprises sector to achieve better coordination, oversight and sustainability. This is the year in which we will turn the tide of corruption in our public institutions …”.

 

In response to the priorities outlined by the President, the Department of Public Enterprises will focus on the following going forward:

• Review current boards
• Improve efficiency
• Restore SOC financial sustainability and reduce dependence on the fiscus
• Stamp out corrupt practices at SOCs
• Ensure that SOC mandates are aligned to the State’s developmental agenda.

 

2.3.1     Strengthening oversight capacity

 

Since the beginning of the 2016/17 financial year, the Department embarked on a restructuring and re-alignment process.  This process has been finalised and the new budget structure was approved by the Department of Public Service and Administration (DPSA) and National Treasury in the 2017/18 financial year.  The 2018/19 APP will be implemented based on the new budget structure.

 

2.3.2     Increasing investments of state-owned companies

 

The capital expenditure programme in state-owned companies, under the oversight of the department, is an important policy instrument to accelerate economic growth. The programme is intended to enhance the capacity of infrastructure networks, such as rail and electricity, to improve the competitiveness of the economy in the medium to long term. The department as a shareholder determines key infrastructure projects to be pursued that contribute to national policy imperatives and it ensures that state-owned companies invest in such infrastructure. Investments by state-owned companies have significantly increased from approximately R25 billion a year in 2005 to more than R160 billion in 2015. This has largely been driven by Eskom and Transnet, which invested more than R90 billion in 2015.

 

The implementation of Eskom’s build programme, a key example of investment in public-sector infrastructure, has played a pivotal role in addressing the energy challenges experienced in the past two financial years, with the company commissioning additional units to boost its base load and peak capacity. In 2015/16, Eskom’s continued implementation of the electrification programme meant that the number of households connected to the grid had increased to 90 per cent (including municipal electrification).

 

Transnet continues to spearhead the delivery of government’s economic growth objectives with regard to the Operation Phakisa programmes, with particular focus on growing GDP and creating jobs through the ocean economy, and has allocated R2 billion towards improving port infrastructure. The implementation of the market demand strategy continues to be a key driver in improving the performance of ports. Despite economic challenges, spending on the capital and infrastructure investment programmes, which is designed to expand freight logistics infrastructure, remains stable. In 2018/19, state-owned companies are expected to spend R90 billion on replacing existing infrastructure and creating additional capacity.

 

2.4      Challenges facing state-owned companies

There are external and internal factors that affect the performance of state-owned companies. These include the following:

 

2.4.1 Internal factors

Governance - Weak and inexperienced boards and management; negligible board and executive fiduciary accountability for poor performance; limited direction, oversight and leadership from board/shareholder and inaction or consequence against corruption.

Financial - Inefficiencies (operational and financial) and fragmented (financial) resources across all SOCs.

Operational - Delays and cost overruns in the delivery of capital expenditure programmes and failure to keep pace with technological improvements in certain industries.

Strategy - Strategies that do not keep up with a rapidly changing competitive environment and poor alignment of strategy to national objectives.

 

2.4.2 External Factors

Governance - Conflict and misaligned mandates given to SOCs; limited clarity on the roles of various stakeholders; unclear reporting or accountability lines and current oversight model lack uniformity.

Policy and regulation - Policy gaps, misalignment and uncertainty and weak regulation; no clear criteria defining where the state should own SOCs and no standardised approach to shareholding within the State.

Financing - State has limited resources to invest in SOCs whilst meeting all its other priorities; funding of the developmental mandate to be separated from the commercial mandate, with clear provision made by the State for developmental activities.

 

 

 

 

 

 

 

3.         Programmes of the Department

3.1        Programme 1: Administration

 

The purpose of this programme is to provide strategic leadership, management, and support services to the Department. 

 

The Department’s core functions require significant administrative support, and a substantial portion of the budget is in the Administration programme, which has cross-cutting sub-programmes providing for intergovernmental and international relations, strategic planning, monitoring and evaluation, and communications.  

 

Over the medium term, the majority of the allocation is within compensation of employees, which will provide technical and administrative support to the Department. Expenditure on compensation of employees constitutes 54.2 per cent over the medium term.  Over the medium term, expenditure on compensation of employees grows by 6.0 per cent from R80.2 million in 2017/18 to R95.5 million in 2020/21.  The number of personnel is expected to decrease from 144 employees to 136 employees over the medium term.

 

Spending on consultants is expected to decrease by 15.9 per cent over the medium term due to Cabinet-approved reductions, however, consultants remain 9.8 per cent of the budget over the medium term. Goods and services constitute 43.7 per cent of the budget over the medium term. Travel and subsistence constitute 6.2 per cent of the budget, and increases by 11.1 per cent over the medium term, which is required by the programme to carry out its oversight function of the state-owned companies situated throughout South Africa.

 

3.2        Programme 2: SOC Governance Assurance and Performance

 

The purpose of this programme is to provide state-owned companies’ governance, legal assurance, financial and non-financial performance monitoring, evaluation and reporting systems, in support of the shareholder to ensure alignment with government priorities. 

 

The objectives of the programme are to ensure effective shareholder oversight of state-owned companies on an ongoing basis by:

• Providing governance and legal systems
• Developing and maintaining shareholder risk profiles and mitigating strategies for government’s state-owned companies
• Monitoring, evaluating and reporting on financial and non-financial performance of state-owned companies, and proposing intervention measures when required.

 

The programme has four sub-programmes, namely:

• Management, which comprises the office of the deputy director-general that provides strategic leadership and management for the programme’s personnel.
• Legal, which provides external legal services and support, including transaction and contract management support, to sector teams and the commercial activities of the state-owned companies within their portfolio.
• Governance, which develops, monitors and advises on legislative, corporate governance and shareholder management systems for the department and its portfolio of state-owned companies. The sub-programme develops and implements risk and compliance management guidelines and systems for shareholder risk.
• Financial Assessment and Investment Support, which analyses state-owned companies’ capital planning, operational performance, execution of capital programmes and proposed restructuring proposals, and advises on appropriate action.

 

The sub-programme Management constitutes the smallest unit of the programme at 7.6 per cent of the budget over the medium term.  The largest unit is Financial Assessment and Investment Support at 35.6 per cent of the budget, followed by the sub-programme Legal at 30.2 per cent and Governance at 26.6 per cent of the budget. The overall budget for the programme increases by 8.2 per cent from R35.9 million in 2017/18 to R45.4 million in 2020/21.

 

Over the medium term, 75.0 per cent of the budget for programme 2 is allocated for spending on compensation of employees over the medium term, with the number of personnel expected to increase from 32 employees in 2017/18 to 33 employees over the medium term.  Compensation of employees increases by 11.9 per cent over the medium term, from
R24.8 million in 2017/18 to R34.7 million in 2020/21. Expenditure on consultants is expected to decrease by 10.4 per cent over the medium term from R7 million in 2017/18 to R5 million in 2020/21. Legal services increased by 11.8 per cent over the medium term, while travel and subsistence increased by 12.6 per cent from R1.5 million in 2017/18 to R2.1 million over the medium term. 

 

3.3        Programme 3: Business Enhancement, Transformation and Industrialisation

 

The purpose of the programme is to provide sector oversight to ensure that state-owned companies contribute to the advancement of industrialisation, transformation, intergovernmental relations and international collaboration services.  The programme will also support the shareholder in strategically positioning and enhancing the operations of state-owned companies.

 

Over the medium term, the programme’s budget increases by 6.4 per cent from
R78.4 million in 2017/18 to R94.6 million in 2020/21.  The increase is due to the Department strengthening its ability to execute its oversight mandate and increase its capacity to perform its oversight function.  Through this programme, the department will contribute to the enhancement of the performance of SOCs on an ongoing basis by:[1]

• Conducting reviews, research and modelling of pipeline and new business enhancement opportunities within SOCs
• Assessing operations of SOCs and developing mitigation instruments in conjunction with policy departments, regulatory bodies and industry
• Conducting research, modelling job creation and transforming instruments for SOCs to inform compact alignment imperatives, promote SOCs’ contribution to inclusive economic growth, unlock bottlenecks affecting SOCs and inform evidence-based policy formulation.  

 

The sub-programme Energy Resources exercises shareholder oversight over Eskom, Alexkor and the South African Forestry Company Limited (SAFCOL).  The budget for Energy Resources is expected to decrease by 16.9 per cent over the medium term, from R27.7 million in 2017/18 to R15.9 million in 2020/21.  Over the next three financial years until 2020/21, the programme constitutes 20.9 per cent of the total programme expenditure.

 

The sub-programme Research and Economic Modelling conducts cost-benefit analysis reviews on business enhancement and transformation initiatives, and develops economic sustainability models for proposed work packages and projects. The budget increases from R6.0 million in 2017/18 to R15.5 million in 2020/21, which constitutes an increase of 37.2 per cent in nominal terms.  Over the medium term, the sub-programme constitutes 14.3 per cent of the programme’s budget.

 

The sub-programme Transport and Defence exercises shareholder oversight over Transnet, South African Express Airways and Denel. The budget for the sub-programme constitutes 26.3 per cent of the programme budget over the medium term.  The sub-programme budget decreased in nominal terms by 3.7 per cent from R25.8 million in 2017/18 to R23.1 million in 2020/21. 

 

The sub-programme Business Enhancement Services develops and coordinates the implementation of SOCs’ strategies to leverage localisation programmes; provides intergovernmental coordination and support to programmes and SOCs in relation to economic development programmes, as agreed with provincial and local governments; and maintains a register of commitments made by SOCs and lobbies for the implementation of special programmes focusing on skills development, transformation and the youth.  The sub-programme’s budget constitutes 38.5 per cent of the programme’s budget over the medium term.  The sub-programme’s budget increases in nominal terms by 28.5 per cent from R18.9 million in 2017/18 to R40.2 million in 2020/21.

 

Compensation of employees constitutes 70.4 per cent of the programme’s budget over the medium term, with goods and services accounting for 29.6 per cent.  Compensation of employees increases by 9.4 per cent from R51.9 million in 2017/18 to R68.1 million in 2020/21.  Personnel in the programme is projected to increase from 63 employees in 2017/18 to 64 employees over the medium term.  Goods and services will remain constant over the medium term at R26.5 million.  Consultants increase by 2.5 per cent over the medium term from R16.1 million in 2017/18 to R17.3 million in 2020/21.  Consultants accounts for 3.2 per cent of the budget over the medium term.

 

 

 

 

 

 

 

3.4      Budget 

 

Over the medium term the Department will focus on strengthening its oversight capacity and ensuring that SOCs under its authority are contributing to investment in key infrastructure.

 

In 2017/18, the Department initiated an organisational process aimed at realigning its functions to enable it to perform its oversight role with greater efficiency.  The Department expects to implement its realigned organisational structure from April 2018.  Therefore, it should be noted that the programme and sub-programmes have changed in the 2018/19 Budget.

 

Table 1. Estimate of Expenditure over the medium term

 

Programme	Budget				Nominal Rand change	Real Rand change	Nominal % change	Real % change
R million	2017/18	2018/19	2019/20	2020/21	2017/18-2018/19		2017/18-2018/19
Programme 1: Administration	152,4	152,0	162,2	172,8	-  0,4	-  8,3	-0,26 per cent	-5,46 per cent
Programme 2: State-Owned Companies Governance Assurance and Performance	35,9	39,1	42,3	45,4	3,2	1,2	8,91 per cent	3,24 per cent
Programme 3: Business Enhancement, Transformation and Industrialisation	78,4	82,9	88,6	94,6	4,5	0,2	5,74 per cent	0,23 per cent
TOTAL	266,7	274,0	293,1	312,8	7,3	-7,0	2,74 per cent	-2,62 per cent

Source: National Treasury (2017)

 

Table 1 describes the changes in allocations from the years 2017/18 and 2018/19, and the outer years of the MTEF. From this, the following can be concluded:

• Programme 1: Administration, has a nominal decrease of 0.26 per cent in 2018/19, with a real decrease of 5.46 per cent. Programme 1 accounts for the largest allocation of the Department’s overall budget with 55.5 per cent of the budget in 2018/19.
• Programme 2: State-Owned Companies Governance Assurance and Performance, receives the smallest allocation of 14.27 per cent in 2018/19. The programme increases by 3.2 per cent in nominal terms in 2018/19 or in real terms by 1.2 per cent.
• Programme 3: Business Enhancement, Transformation and Industrialisation, accounts for the second largest allocation of the budget, accounting for 30.26 per cent of the budget in 2018/19.  Programme 3 allocations have increased by 4.5 per cent in nominal terms and 0.2 per cent in real terms from R78.4 million in 2017/18 to R82.9 million in 2018/19. 

 

Overall, the Department’s budget increases by 7.3 per cent in nominal terms from R266.7 million in 2017/18 to R274.0 million in 2018/19.

 

Compensation of employees amounts to 62.0 per cent of the total budget over the medium term, with goods and services amounting to 36.8 per cent over the medium term.  Of the goods and services budget, the use of consultants constitutes 12.6 per cent while travel and subsistence accounts for 6.1 per cent of the budget over the medium term period from 2017/18 to 2020/21.  Compensation of employees is set to increase at an average annual rate of 8.1 per cent, from R156.9 million in 2017/18 to R198.3 million in 2020/21, which constitutes the Department’s largest cost driver.  Travel and subsistence increased from R13.4 million in 2017/18 to R19.6 million in 2020/21; while consultants decreased from R46.2 million in 2017/18 to R36.1 million in 2020/21.[2]

 

4. Report of Auditor-General on the Annual Performance Plan of the Department of Public Enterprises for 2018/19 financial year

The Auditor-General reviewed the annual performance plan of the Department of Public Enterprises. The outcomes of the review include findings on Programme 2 (Governance Assurance and Performance) and Programme 3 (Business Enhancement and Industrialisation). The findings relate to the indicators not being well defined and verifiable, and certain targets not being specific and measurable. 

 

5. State-Owned Companies Performance

State-owned companies are experiencing governance and financial challenges that have affected their performance and weakened their governance structures. Some of the governance and leadership challenges are as a result of the state capture that has repurposed state-owned companies from being catalysts for economic growth to being instruments of self-enrichment for a parasitic, corrupt network. These include the following:

 

1. Leadership and governance challenges in state-owned companies:

These are the governance challenges that the department will address in state-owned companies:

 

1. Eskom 

• Corruption in the business eroding needed cash and credibility of the institution;
• Risk of recurring qualification due to PFMA transgression and going concern;
• Executive management in acting positions;
• The position of the former GCE is subject to application in Labour Court and High Court; and
• Recommendations emanating from the Parliamentary Inquiry into Eskom to be acted on.

 

1. Transnet

• Lack of action and consequences for widely reported allegations of corruption;
• Lack of credibility and determination to address the issues of fraud, misconduct and corruption in the entity;
• Poor consequence management and inability to close on cases against corruption; and
• Repeated audit findings on and growth in irregular expenditure.

 

1. South African Express Airways

• Poor financial performance due to continued losses resulting in a going concern of the airline;
• Poor Board performance in executing the fiduciary duties as required by the Companies Act;
• Delays in the finalisation of commercial agreements with SAA that continue to erode any revenue opportunity for the airline;
• Unavailability and unreliability of aircraft resulting in poor service levels to customers, and loss of market share and competitiveness in sustaining routes;
• Loss of critical skills as a result of inability to attract and retain these due to guarantee conditions; and
• Lack of credible leadership (Board level) to implement consequence management, and hold employees accountable for all forms of fraud and misconduct at the airline.

 

5.1.3.1  Strategic intervention needed at South African Express Airways

• Appointment of a new Board;
• Appointment of strategic positions of GCEO and CFO (the positions of GM: Technical and Commercial are also critical);
• Recapitalisation of the airline (i.e. either through equity injection; Strategic Equity Partners, etc);
• Finalisation of the Corporate Optimal Structure to ensure that Aviation state assets are optimised;
• Finalisation of all outstanding cases of fraud, misconduct and corruption; and
• Prohibiting SOC employees to do business or trade with the airline.

 

1. SAFCOL

• The board has not dealt effectively with the challenges at the SOC;
• The board did not have the requisite skills and capacity to deliver;
• Instability at management level with entire Executive Committee positions vacant;
• Land claims and relations with neighbouring communities – 61% of land claimed and expected to increase;
• IFLOMA status and relations with Mozambique;
• Execution and funding of Capital programmes;
• Privatised plantations minority shareholdings;
• Competition issues – SAFCOL dominant player in the Limpopo and Mpumalanga regions; and
• Instability at Executive Management.

 

1. Denel

• Allegations of Corruptions against previous board and management;
• Liquidity challenges –  Government Guarantee expiring end of September 2017; Minister of Finance agreed to roll it over for 12 months. The limited time could create lack of appetite from potential investors;
• Contract delivery slippages and delays;
• Business model of Denel not adequately cash generating;
• Limited R&D spending;
• Stakeholder and public relations issues;
• Single contract and customer dependency;
• Aging plant and equipment – need for modernization;
• Talent retention/succession planning;
• Supply chain challenges;
• Leaking of company information at Board level; and
• The Board has demonstrated limited ability in leading an organization of Denel sophistication and product profile;

 

 

1. Alexkor

• The board has not dealt effectively with the challenges at the SOC;
• The board did not have the requisite skills and capacity to deliver;
• Instability at executive management level;
• Going concern: The SOC’s operating cash balance is depleting without a stable source of income. Alexkor may not be able to finance its liabilities in the foreseeable future;
• Disruption in the deep sea operations: The deep-sea mining vessel caught fire in April 2017 resulting in the interruptions of the operations. Production is not expected for the remainder of 2018 financial year. Financial performance is likely to deteriorate;
• Relationship with the Richtersveld community: The community has divided views of Alexkor and this has led to a delay in the implementation of the settlement agreement;
• The feasibility (including legal) of collapsing Alexkor PSJV and the Alexkor board, as well as executive and operational structures should be explored;
• Lack of visibility into the affairs of PSJV;
• Duplicate costs are being incurred without additional value being created (R4 million per month would be saved); and
• Alexkor PSJV is a non-incorporated and non-PFMA compliant structure creating audit and stakeholder risks.

 

1. Interventions made by the Department

During the financial year under review, the department will implement the following:

• Change the way boards are appointed;
• Remove the role of board members in procurement;
• Stop the extraction and misuse of funds meant for development;
• Improve the turnaround time to intervene in the SOCs and improve accountability;
• Improve consequence management;
• Improve financial sustainability and eliminate dependency on the fiscus;
• Improve public trust on SOCs and reposition them as drivers of economic development; and
• Present the financial viability of all SOCs at the end of June 2018.

 

5.3        Progress made in addressing governance challenges at state-owned companies

 

The following changes have been made:

 

-           The board of Eskom has been changed. The vacancy of Mr Lamberti will be filled soon. The board is in the process of concluding the recruitment of GCEO and CFO.

-           An interim board at Denel has been appointed. The board is mandated to look at the management team and will investigate all the strange appointments made by the board, including the Parliamentary Liaison Officer of Denel and the awarding of a bursary to the son of the Premier of the North West.

-           There has been a lot of irregularities in the procurement of SAX, and the department is looking at merging the assets of SAX, Mango and SAA.  

-           The department will appoint a forensic consultant to investigate the diamond business of Alexkor.

-           There will also be work done to investigate the performance of SAFCOL.

-           The department is getting legal advice on how to terminate irregular contracts and how to get “step in rights” to intervene in the SOCs.

-           The department has initiated an investigation into all senior management officials whose family, friends and relatives are doing business with the state.

-           The resignation of individuals from SOCs does not guarantee an individual exemption from criminal prosecution.

-           The Minister is investigating a way of stopping the bonus schemes that have been rewarding corrupt practices.

-           The department will establish a monitoring and risk management team that will enhance the capabilities of the department to hold the entities accountable.

 

6.        Committee Observations

 

6.1        The Committee made the following observations:

 

6.1.1     The Committee applauded the Minister of Public Enterprises for the decisive action taken against corrupt executives and dissolving corrupt boards that have been implicated in the allegations of state capture.

6.1.2     State-owned companies have been weakened financially and the governance structures and systems have been destroyed by the state capture phenomenon.

6.1.3  SOCs have not done enough to create black industrialists and local industries and therefore there is a need for a more radical approach to advance localization and beneficiation.

6.1.4     SOCs are excluded from incentives that are provided to the private sector for job creation and they do not receive any assistance from development finance institutions.

6.1.5     The lack of implementation of remuneration standards for state-owned companies have rewarded and incentivised incompetent and corrupt executives and board members. The Committee notes with concern the lack of policy on remuneration standards for state-owned companies and consequence management relating to this.

6.1.6     The process of introducing the Shareholder Management Bill has been too slow. The Committee, however, welcomed the commitment of the Minister of Public Enterprises to prioritize this overarching legislation.    

6.1.7     The corporate social investment programmes of state-owned companies have not yet adequately reached out to rural and poor communities.

6.1.8     There are concerns regarding community issues that have been exacerbated by the delay of the payment of the R45 million to the Richtersveld community.  The Committee welcomed the promise of the Minister to fast-track the processes required to be able to pay this amount to the community.

6.1.9  The Committee noted with concern that the board of Transnet and its executive are reluctant to implement the findings of in the forensic investigation reports and have not acted against employees implicated in state capture.

6.1.10   The Committee was concerned with the pace of implementing the PRC recommendations for the state-owned companies.

6.1.11 The Committee noted that the current Minister of Public Enterprises, Mr Pravin Gordhan, was appointed on 26 February 2016, and congratulated him on his appointment.

6.1.12 The Board notes the Minister’s comments that processes are underway to address the appointment of Board members to the state-owned companies.

6.1.13 The Committee notes that the Minister has requested a further six weeks to review the shareholder compacts of each state-owned company within his portfolio, which may result in some changes in the current compacts.

 

7.        Recommendations

 

The Committee recommended that the Minister of Public Enterprises should, within the 2018/19 financial year, ensure that the Department of Public Enterprises:

7.1        investigate and take action through consequence management against all board members and executives of state-owned companies who are implicated in corruption, even those who have resigned from the companies.  

7.2        consider fast-tracking the shareholder management bill to empower the Department to execute its shareholder management responsibility and oversight over state-owned companies.

7.3        consider introducing a comprehensive plan to expand the corporate social investment of SOCs to rural parts of the country.

7.4        develop a communication strategy for all state-owned companies in order to promote the companies and educate and inform the public and rural communities about the work of SOCs and opportunities that they offer.

7.5        consider working with the Department of Trade and Industry and National Treasury in addressing localization strategies.  These should include resetting of trade and investment cooperation to stimulate and support small businesses and employment initiatives, reduce barriers to trade in services (which are often labor-intensive) and investments industrial value chains.

7.6        develop a framework that would prohibit state-owned companies from challenging litigation cases which are not winnable.

7.7        provide the Committee with shareholder compacts on an annual basis and quarterly reports on how the companies are performing in achieving targets.

7.8        ensure SOCs accelerate transformation programmes, promote industrialization and support small and medium enterprises that are owned by women, youth and people with disabilities. 

7.9        ensure that SOCs find a balance between advancing their commercial and public mandates. They should not over-concentrate on the commercial mandate while neglecting the developmental mandate of transforming the economy and improving the quality of lives of South Africans. 

7.10      ensure transparency and accountability on the cost plus mines that have been financed by Eskom.

7.11      ensure issues relating to SAFCOL land claims are addressed expeditiously, and submit a progress report to the Committee on this matter by the end of the second quarter of the financial year.

7.12      ensure that issues relating to the going concern of South African Express Airways are addressed and a progress report submitted to the Committee by the end of the second quarter of the financial year.

7.13      work with the Department of Rural Development and Land Reform to ensure that the Richtersveld Mining Company and Communal Property Association are properly constituted to facilitate the R45 million payment to beneficiaries.

7.14      implement any recommendations emanating from the Judicial Commission on State Capture as set up by the President, if any, concerning the Department, during the 2018/19 financial year.

7.15      fast-track the implementation of the PRC recommendations, including the policy on remuneration standards for state-owned companies.

7.16      address the financial and governance issues facing the state-owned companies within the Department’s portfolio.

7.17      submit an action plan to the Committee on how the Department plans to address the Auditor-General findings on the state-owned companies audited financial statements by the end of the second quarter for the 2018/19 financial year.

 

8.        Conclusion

 

Having considered the Budget Vote and the Annual Performance Plan of the Department of Public Enterprises, the Committee recommends that the House passes the budget.

 

Report to be considered.

 

 

 

 

                                       

 

 

---

[1] National Treasury (2018b)

[2] National Treasury (2018b)