Minister of Public Enterprises update on SOE performance

Meeting report

Ms Letsatsi-Duba (ANC), chair of the Portfolio Committee on Public Enterprises, opened the session by welcoming the Minister of Public Enterprises, Ms Lynne Brown, members of the committee, and members of the public and press.

Mr Singh (IFP), prior to the beginning of the Ministers presentation, asked how much time she had to present and take questions before she had to leave.

Minister Brown responded by saying she would until all questions were answered.

Minister of Public Enterprises update on performance of State Owned Entities
Minister Lynne Brown began by outlining what members could expect from the presentation to follow; mainly, she would provide notes regarding the current performance and challenges facing State Owned Companies (SOCs). Some of the issues include financial stabilities, outputs, and guarantees. She would later go into more detail.

She explained that the performances of SOCs are influenced by the performance of both the domestic global economies. Since 2007, South Africa’s domestic economy has grown on levels much lower than anticipated in Government’s economic policy framework. This context must be taken into account when one considers the operational environment of SOCs as it has a strong influence on their financial sustainability. Their performances, therefore, are intimately linked to this context of low economic growth.

After the global economic crisis, Government issued an instruction that required SOCs to be implementers of Government policy and support the implementation of the countercyclical policy framework. Since 2007, SOCs have driven the investment strategy of the State. Most of the SOCs have undertaken investments at an accelerated rate in a declining economic environment.

The SOCs are also faced with challenges ranging from financial and operational sustainability to policy decisions that have an adverse impact on the viability of the SOC operations.

Another major problem she highlighted was acting appointments, and in some cases vacancies, of CEOs in SOCs. In Denel the CEO position is awaiting Cabinet process; if a decision is reached, it first has to be taken through cabinet first before being finalized. SAFCOL Board has undertaken an open recruitment process. At Alexkor the CEO and CFO recruitment has already begun. At Eskom, the CEO recruitment process has also already commenced.

She would now look at the SOCs individually:

ESKOM
Eskom operates in a complex and highly regulated environment and the policy decisions determine whether the SOC will be operationally or financially sustainable or not. She highlighted the following as the key challenges facing Eskom: the uncertainty regarding the role of the company in the future build programme, the negative impact of the IPP programme on its balance sheet, and its environmental compliance costs.

In regard to IPP’s, she stated that they are committed to the energy mix which includes coal, renewables, nuclear and gas. IPPs were conceived when growth was forecast above 5%, however in recent times we have seen a decrease in the electricity demand. She stated that recently Eskom has had an excess of 4000 Mega Watts of electricity, even though its export of electricity has increased by 663% in the last 8 months.

The movement towards greener energy will naturally result in the closure of coal plants; this process, she argued, will be complex and demand close management. The closure of coal plants will result in a significant amount of workers will lose their jobs. A potential answer the Minister provided to this would be a programme that reskills the workers to work in the green energy sector.

 Eskom estimates a total of R340 billion will be required to fully meet environmental compliance obligations placing significant upward pressure on the overall electricity price. In addition, she highlighted the risk of high costs of primary energy, urging that this must be regulated thoroughly, or the cost will be moved onto the consumer.

The regulatory uncertainty regarding NERSA Multi-year Price Determination (MYDP) decisions poses a significant challenge to Eskom’s revenues and the SOCs ability to meet its debt payment obligations. NERSA only approved 2.2% price increase in its latest determination, and the court case regarding the legal challenge on RCA determination still remains unresolved.

Despite these challenges, Eskom has continued to maintain a positive financial performance with the company posting a net profit of R4.6bn in the 2015/16 financial year. The company is projected to post a profit for the financial year ending in March 2017. It has also implemented a number of interventions to eliminate the electricity challenge experienced towards the end of 2014, and has added over 2 000MW of new generating capacity. They have also developed an aggressive maintenance plan which will significantly improve the energy availability factor.

TRANSNET
Minister Brown described Transnet as an important company that supports the re-industrialisation of the South African economy through improving the performance of strategic corridors. Since 2007, Transnet has implemented an expansion programme that responds to South Africa’s industrialization requirements. The company has also started processes to explore new revenue streams to improve its long term sustainability.

However, she noted that there are several policy decisions that threatens the company’s sustainability. The example she used was the Corporatisation of Transnet National Ports Authority (TNPA): Transnet, she argued, is faced with the major policy challenge as the National Ports Act requires the corporatisation of TNPA. This poses a serious risk to the strength of Transnet Group’s balance sheet; and if implemented, it could jeopardize the implementation the SOCs investment programme as outlined in the Market Demand Strategy.

The collapse of demand for commodities and the subsequent decline in export volumes also has had a major impact on the sustainability of the company. The funding model explored by the company needs to be reformed. Diversification through expanding networks beyond the national borders and pursuing adjacent market such as manufacturing of locos is important for the sustainability of the company.

Yet, Transnet has continued to expand its networks. The company is committed to spend over R200bn in infrastructure over the next 10 years. Minister Brown applauded these commitments, claiming that most companies are substantially cutting off their capital budgets. She argued for the importance of maintaining State ownership in Transnet, and ensuring their sustainability.

SA EXPRESS
Minister Brown described SA Express as her “problem child” – but she reassured members that they are close to finding a solution for it. The serious challenges they face are more structural than operational. These challenges will require the reorganization of the State Ownership in the airline industry; however, operational improvements will also be required to set the Airline on a sustainable path.

In terms of its financial stability, SA Express is faced with profitability and liquidity challenges. It is unable to fulfill its debt payment options: they were expected to pay R150 million to lenders by 24 February 2017. However, the Department of Public Enterprises (DPE) is urging SA Express to renegotiate with RMB and Nedbank to pay a reduced amount of R58 million and pay the outstanding balance though installments based on financial projections until January 2018. Both Nedbank and RMB are considering this negotiation.

With regards to its operation challenges: many of SA Express’ aircrafts suffer from maintenance issues, which keep them on the ground. They own retired aircrafts which means it is difficult to find the required spares. They also face an unprofitable route network, poor on time performance, increased flight delays, and a loss of critical skills – an inability to demonstrate to the Auditor General (AG) ability to continue to operate.

Minister Brown stated that the DPE has urged SA Express to replace its fleet immediately. PFMA application was received, however it was not approved. She also stated that the DPE remains positive that SA Express can solve the problems they face, but they are realistic that it will be a process that will take time.

DENEL
Minister Brown described Denel as the Government Flagship on how to implement a turnaround strategy. It too provides an important lesson for the State on how to optimize partnership with the Private sector – they establish 51-49 partnership agreements, ensuring that they remain control over the IP. Over the past 3 years, Denel has posted profits and the trend has remained upwards. In 2015/16 financial year, the company posted a profit of R395 million - this is the largest profit that the company has ever posted since the implementation of the turnaround strategy.

However, there are some challenges facing Denel which relates to liquidity and overreliance on foreign markets.

 In terms of its liquidity challenges: ensuring sustainable funding solutions is critical. Its current funding strategy, Minister Brown argued, is not sustainable and it has exposed the business to regular cash flow shocks. A long term recapitalization plan must be found to ensure liquidity and sustainability.

Denel has increasingly become reliant on foreign business for its sustainability. 60% of its revenues are derived from exports. This results in Denel cannibalizing its own long term future in order to ensure short term cash flows. The State needs to guarantee Denel’s role as a prime contractor of strategic defence and security products.

Denel, for the first time ever, was ranked among the world’s top 100 global defense manufacturers. It is the second largest defense company in the Southern hemisphere; and a valued partner in the UN’s efforts to combat the scourge of land mining. The company has grown exponentially in the last few years, more than doubling its revenues from R3.9 billion in 2013 to R8.2billion in 2016. Export revenue now makes up 58% of the total revenue. Denel spends approximately R500million per annum on Research and Development.

ALEXKOR
Minister Brown stated the Alexkor business sustainability from diamond deposits is a challenge going forward. She argued that their business model needs to be revisited to diversify the business by venturing into other minerals options including coal (both mining and washing). Alexkor could possibly branch out of the sector on condition that parliament would allow the change of mandate in the interest of diversification.

Alexkor and the Richtersveld Mining Company formed a Pooling and Sharing Joint Venture (PSJV) in 2012 as part of the implementation of the Deed of Settlement. Alexkor PSJV has invested over R60 million into the land mining operations which were previously abandoned. This has resulted in creation of over 150 job opportunities and indirect employment opportunities. Alexkor PSJV partnered with the local school to sponsor the salaries of teachers with emphasis on mathematics and science, over R934 thousands has been spent on the salaries of teachers in 2016.

SAFCOL
Minister Brown stated that SAFCOL’s business sustainability is affected by tough markets and its inability to access new market due to its limited product offering. She argued that the business is over reliant on sawlog product and needs to develop an alternative product line.

The resumption of its operations in IFLOMA Mozambique is critical in realizing its African ambitions. The operations in Mozambique have been under care and maintenance since 2014/15, where over R250 million has been invested into the operations without returns. It however remains an attractive proposition - what it requires is management and board focus.

Land claim settlement processes remain a challenge to SAFCOL, as it affects the company’s relationship with neighboring communities. This too has a serious impact on the potential partnerships that SAFCOL aims to undertake with these communities.

Conclusion
Minister Brown stated that the analysis of the performance of SOCs demonstrates that these companies are contributing positively to the South African economy, and that they are advancing the developmental and transformative objectives of the State. She claimed that all of the SOCs within her portfolio have continued to operate and meet the mandates that they were established for.

The popular narrative that SOCs are a drain to the State and the South African economy is therefore called into question. SOCs in the portfolio have been able to maintain positive external audit outcomes - with the exception of SAX.

Improving Governance is at the core of the SOC reform and will remain an important part of their performance assessment. DPE continues to strive to minimise vacancy rates at the board and executive levels. DPE has developed a logical planning, monitoring and evaluation framework that outlines the key steps in the exercise of the oversight mandate. 

Our SOCs are financially viable and have not defaulted on any loans guaranteed by the Government of South Africa. They continue to raise funding in both domestic and international markets at favorable and competitive rates. Finally, they are creating direct employment of approximately 120 000 people.

Members' questions and comments
Ms Mazzone (DA), stated that members must address “the elephant in the room”: the state of capture report, which leveled serious allegations and identified worrying problems, such as violations, collusions, and corruption. She demanded the DPE tell members what steps are being taken to hold the accused to account. Furthermore, she wished to know how this will be prevented in the future. She requested Minister Brown give her own independent judgments of the allegations in the state of capture report as it relates to the operation of SOEs (particularly Eskom).

Ms Mazzone raised the Eskom CEO advertisement. She argued that only those who have managed other SOEs would be able to apply for the CEO position at Eskom, as the requirements demand that the prospective employee must have managed a company that generates the levels of revenue that only SOEs are able to reach – thus, prospective employees with experience with privately owned companies can rarely meet the requirements. She claimed that the best strategy moving forwards was to bring “new blood” into vacant positions in SOEs – the advertisement must be extended, or there will just be a reshuffling of employees from one SOE to another.

She continued by raising a point of SOE sponsorships; specifically, referencing Eskom and their sponsoring of breakfast for the New Age. She argues that money must remain within, and spent to in such a way that the consumer is not left with a burden in terms of pricing for essentials like electricity – prices of essentials must be at its lowest cost. She also referenced the R850 000 of sponsorship by Eskom and Transnet to the Progressive Professionals Forum. She requested the Minister give her opinion on ongoing sponsorships.

Next, she expressed her confusion over the Ministers claims of excess power supply at Eskom: stating that in February it was reported that there was a significant shortfall of electricity, and on some days the risk of loan shedding – she wished to know how and why these deficits occur if Eskom is supposed to have an excess of 4 Mega Watts.

In reference to Denel: she stated that the truth behind the scandal of Denel Asia must be uncovered. She explained that some members of the committee have tried to arrange a meeting with the board of Denel and treasury, but it has not yet materialized. She asked the Minister if she would be willing to chair the meeting if it is eventually arranged – where people will be testifying under oath.

She raised her final point, regarding SAA, specifically as to what kind of roll-on effect will SAA’s poor financial performance have on SA Express, and other local airlines like Mango. She asked the Minister to explain what the route forward is for SA Express to prevent the airline from being permanently grounded.

Mr Marais (DA) raised an issue regarding SAFCOM and the claims, stating that the process has now become too long; we need to solve these problems quickly to allow SAFCOM to operate without “an axe over its head”. The second issue he raised concerned SAFCOM’s investment in Mozambique; he asked the Minister if she believed that this issue is only solely to do with management and focus problems, or is it something else as well?

Mr Marais shifted his focus to Alexkor and the communities surrounding the mine who have yet to receive any benefits. He claimed that the poverty in these communities in the Northern Cape is worse than anywhere else in the country, and that this issue must be resolved immediately.

Mr Marais concluded by asking a question in Afrikaans which this monitor was unable to translate.

Mr Cele (ANC) asked the Minister if any of the SOCs, particularly the ones in more rural areas, have any specific plans to ensure growth, involvement and participation of the communities based around them.

With regards to SA Express and Denel in particular, Mr Cele asked how does DPE ensure that such entities are managed correctly and by the right person. He expressed some skepticism over the operations of these entities, specifically SA Express, who’s current CEO, he claimed, has no experience in the aviation industry, and is operating the entity “like it is nobody’s business”.

Lastly, Mr Cele asked the Minister what steps are being taken to ensure that Denel, whom operate in a critical sector and perform a crucial role in protecting our country (and Africa as a whole), are operating at a sustainable level, specifically at the level of production quality.

Mr Singh (IFP) asked the Minister to provide some insight into the framework that governs the relationship between government and the individual SOCs. In addition, he requested the Minister give an update on the stake holder management bill. With regards to shareholder compacts, Mr Singh was concerned that this committee had yet to receive the latest information – he acknowledged that the Minister could not reveal confidential information, but requested that she give the members a brief update. He raised the possibility of 25% of all aircrafts being sold to the private sector – he asked the Minister if this figure is factual, and if she could speak to this in more detail.

He spoke of the state of capture report, and mentioned that he was glad that the Minister had earlier this year expressed her wish for a commission of enquiry, and her hope that the President would put through the motion and appoint the commission; Mr Singh asked if the Minister has taken any further steps in persuading the President to put the process in motion.

He raised an issue regarding the 4 power stations that have been closed: he asked the Minister, while in the process of moving towards greener energy solutions, if she could take use through the process of these closures and how DPE aims to deal with the problems that will accompany these closures.

Mr Singh spoke of the Denton’s report, and the officials who were revealed to be giving business to themselves. He asked the Minister if there has been any internal investigation to find out whom exactly these officials are, and if she could explain to members what consequences these officials would face.

Mr Tseli raised his concerns regarding municipal debt; he referenced the R9.5 billion that is due to Eskom. He asked the Minister if she could update the committee on the progress of recovering the R9.5 billion.             

He continued and raised an issue regarding the challenges of the CPA; he raised concern about interacting with a body that has been declared unlawful, and that this interaction cannot assist the process. He asked the Minister if she could keep the committee updated with any progress that has been made.

On a positive note: Mr Tseli stated that he is impressed by the positive work that have been done in the SOCs in general, particularly in the area skills development.

Mr Dlamini (EFF) asked the Minister what price Eskom is paying the IPP’s for coal, and how big is the difference between that price and the price sells to the consumer. In addition, he asked how long the contract is between Eskom and the IPP’s. Finally, what is Eskom’s BEE policy, and do the IPP’s fulfill it?

Mr Dlamini raised concern over Eskom’s ownership of mines; he asked that since they do not appear on their balance sheet, does that mean they do not own them; and if they do own them, why do they not appear on the balance sheet.

He raised nuclear energy, specifically Eskom’s wish to move from coal to nuclear energy. Mr Dlamini was skeptical about Eskom’s ability to produce and mange nuclear energy – he argued that there track record with coal is enough to convince him that they would be as inefficient after they make the move o nuclear energy.

Ms Letsatsi-Duba asked the Minister if she could provide an update on the Denel Asia issue. In addition, she asked the chair to give details on how Eskom plan to fund their move to nuclear energy.

Minister's response
Minister Brown stated she would answer questions that deal with structure first. Presently there is a proposal to move from the current revue methodologies model which revues all SOCs to a shareholder management model. But this proposal, and the process of moving from one model to the other, is going to take a long time; and it could mean the restructuring of all SOCs forever, with drastic effects. She reassured members that many issues are being brought to the table and considered closely. She made reference to the Chinese reform process, which took 15 years – she concluded her point by saying that it is crucial that they get their principles right.

She addressed Mr Dlamini Directly, saying that she he had asked a question she had also received a written version of and that he can expect her response on Friday.

She addressed board appointments, and gave members an insight into the process. First, DPE advertises the position, they consider the applicants and create a shortlist of those who are most qualified. This shortlist is given to an independent company who look for any potential conflicts of interest. She stated that she had approached a number of high level employees within the SOCs of her portfolio, requesting they themselves check for conflicts of interest. In the end, 4 resigned – she used this example to show members that she is not being lazy about this issue.

With regards to the public protector report and the PFMA violations, it remains her view that there should be an enquiry, and that all the matter must be brought to the table. However, she acknowledges that it is the President prerogative to appoint a commission of enquiry; as such, she has not done anything after the release of the report other than wait for the President to act on it.          

With regards to SAA: she explained that it is not in her portfolio, and thus she cannot comment on it.

She stated that she had signed off on Denel Asia as it met the obligations of section 54 of the PFMA. However, the National Treasury has not signed off. Until there is a unanimous agreement, Denel are not allowed to trade. This, she argued, puts them in a difficult position, as arms trading in the east, the market that they were going into it, are the highest growing one in the world currently.

In response to Ms Mazzone: she agreed that there should be a meeting between Denel and National Treasury; she too has written to them but has yet to receive a response, and she will continue to try and contact them.

She continued: the managing director of Denton’s has said publically that they have a draft, which she has read, and the draft has given rise to the final report. The draft was intended and presented as a provisionary analysis, an attempt to make the preliminary report more coherent and accurate, and to provide recommendations. She has already said that Eskom must investigate internally; because the reports are not sitting with Eskom, or DPE, but with someone else.

Other than the Denton’s report, which the Minister recommended for the committee members to read, she also recommended the Deloitte report of 2008 – it is an important report, as it deals with all the issues of delays in the build programme, and the delays in the escalation of finances.

Keeping with Eskom, Minister Brown agrees that Eskom do not need to advertise themselves – they’re big enough, and people already know who they are. However, she does not feel it is appropriate to call a complete ban on advertising and sponsorships, but rather she has encouraged SOCs like Eskom to do these things more cautiously. Eskom, like many of the SOCs, has its own internal sponsoring committee, and they have done things like fund mobile libraries to go to schools, or provide financial support to old age homes. While these initiatives do some good, the Minister acknowledges and agrees that the sponsoring of the breakfasts is “another story”.       

She addressed excess and deficits raised by Ms Mazzone. Eskom has, on average, an excess of 4 Mega Watts; what this means, the Minister explained, is that at times there are fluctuations, where they may have a deficit of 3 Mega Watts on some days, but on other have an excess of over 4 Mega Watts. She explained that inclement weather can cause these fluctuations.

She described SA Express as being “in ICU” but still operational. She highlighted that a main priority must be the maintenance and efficient operation of the planes, as well as a recuperation of the leadership structure. She and DPE are doing everything to ensure SA Express makes a recovery.

In reference to land claims and Alexkor, Minister Brown described the situation as an incredibly difficult and complex matter. Alexkor has built the town, brought in water and electricity, and other bulk infrastructure, and are on the verge of handing the town over to the municipality. There have been a number of entrepreneurship programmes that they have sponsored, as well as farm land that they own on which people can farm communally. It is a difficult situation because the community is angry. The deed of settlement was specific as to what must be in place to pay out the money: that it must come from the property company.

Minister Brown stated that DPE is doing everything to keep SAFCOL afloat. They also recognize that they are working in a very difficult environment – but it seems as if all the companies who also operate in the same area are stable. In reference to the issue in Mozambique: the told members that she had urged SAFCOL to pull out of Mozambique. However, before they underwent this process, she would afford them the opportunity to put together a report that details both the costs and the benefits of staying versus leaving; and the benefits of staying far outweighed the costs. Minister Brown maintained that there have been positive outcomes from Saldanha. The one issue she can raise has to do with small business participation; we must allow them to participate and grow. She concluded that in order to bring about real and meaningful economic changes, we must develop our methodologies.

The movement from coal to greener energy via IPP’s is a process that the state has embarked on. It is also a process that must be handled effectively – for example, they must be sensitive to the fact that there are thousands of workers who could be at risk of losing employment.

In response to Mr Dlamini, Minister Brown stated that she believes Eskom owns those coal mines. She stated that they pay for the land and the equipment, and all other capital investments.

She also stated that the movement towards nuclear energy is affordable, but an appropriate financial plan has yet to be finalized. However, they are no more coal mines under construction; they are solely looking into alternative energy sources and production.

In reference to the Denel Asia issue: she explained that they have not traded yet, and this is a problem as they are missing out on participating in a big trade area.

Both Eskom and the DOE have to submit a scheme as to how the turn to nuclear will be funded. In response to the question: ‘Why are building nuclear if we have an excess of electricity?’, Minister Brown explained that we only have an excess until around the year 2025; thereafter we predict to have other forms of energy. She reminds members that all of these issues and process are governed by the Integrated Resource Plan.

Minister Brown agrees with Ms Mazzone that there is a need for new blood within SOCs. However, she maintained that the advert put out for Eskom CEO is broad enough.

Members' questions and comments
Mr Dlamini expressed his dissatisfaction with Ms Browns response regarding the ownership of the coal mines. He stated that her argument does not clear things up for him, and he believes Eskom could face further problems in the future.

In addition, he requested the Minister provide him with current figures of the IPP and its current status; he also requested the Minister to provide insight on what we can expect in the future.

Mr Singh thanked the Minister for providing detailed responses on frameworks. However, he stated that we must “separate the men from the boys”, referring to some of the SOEs as clubs which were started just for take of having SOEs. He argued that this issue must be addressed.

He seconded Ms Mazzone’s appeal to the Minister to chair the meeting, and repeated the urgent need for a meeting between Denel and National Treasury.

He remarked that it is unlikely that the debt from municipalities can be sustained – the debt owed to Eskom by municipalities defaulting on payments. He referenced Soweto as an example.

Ms Mazzone urged the Minister to attend more committee meetings, as these sessions prove to be constructive as they open the space for critical and open dialogue.

She went on to speak about a “shake-up” of some SOEs, arguing that it is necessary and critical that this is done. She asked the Minister if there are people who disagree with this.

She also raised several points with regards to the independent company who reviews applications for positions within SOCs; she wished to know who these companies are, and if they make their reports available to the public. She argued that the processes and documents relating to the appointments of board members must be transparent, and that she has tried in the past to these reports in the past but has been denied access to them. She also requested the Minister give the names of the 4 previous SOC employees who had resigned from Eskom. Finally, she requested the Minister share members the exact repercussions that came about after the release of the Denton report.

Minister's response
Minister Brown replied to Mr Dlamini that all capital costs are paid by Eskom – this means they own it.

She also agrees that these meetings are crucial, and she will make time to come to more – but Wednesdays are not ideal for her.

She could not answer some of the questions as it would mean revealing confidential questions. She also argued that it is not necessary to reveal more details on the 4 employees who had resigned.

Mr Tseli suggested that it would be appropriate for the Minister to keep Committee updated on the progress on the concerns that have been raised. He suggested that rather than give a general briefing during these sessions, the Minister should use these meetings as a means to report on the progress on the concerns raised by members.

Ms Letsatsi-Duba raised radical economic transformation, and asked if DPE has devised a clear strategy to address this issue.

Minister Brown was allowed to leave due to another engagement.

Committee Oversight visits
Dr Luyenge (ANC) reminded members of their coming oversight trips to Eskom, SAFCOL, and other SOEs in Johannesburg and Mpumalanga. They would also meet with communities who are struggling with land claim procedures.

Ms Mazzone stated that these oversight trips need to be organized much better. She argued that it is wholly inappropriate for members of the committee to receive ‘emergency’ phone calls regarding oversight trips. Rather, these trips must be organized well in advance, and members should receive formal emails once a month such that they can plan their schedule efficiently. She recommended that the specific reasons for each visit must be given well in advance.

Ms Letsatsi-Duba agreed.

Mr Dlamini agreed with Ms Mazzone’s plea for no more phone calls, describing them as “an ambush”.

Ms Letsatsi-Duba stated that she will request Eskom to send more information regarding their visit.

The meeting was adjourned.