Public Enterprises Budget: Committee Report

Meeting report

Report of the Portfolio Committee on Public Enterprises on Budget Vote 10: Public Enterprises, and on the SP and APP for 2022/23 of the Department of Public Enterprises
The Chairperson said this meeting was about considering and adopting the Committee budget vote report. The recommendations were the most important part of the report, and each Member would be given a chance to comment and make suggestions.

Mr Disang Mocumi, Secretary of the Portfolio Committee, Ms Lee Bramwell, Committee Researcher, and Mr Rodney Mnisi, Committee Content Advisor, took the Committee through the draft Budget Report.

They said that the Department of Public Enterprises (DPE) had an agreed and assigned dual responsibility to direct and support improvements in the financial, commercial and operational performance of the state-owned companies (SOCs) and their contribution to the South African economy. The Department was also responsible for positive contribution to the transformation of the South African economy in line with the National Development Plan (NDP) to create a better and sustainable economic environment for all South Africans.

The Department aimed to drive investment, productivity, and transformation in its portfolio of SOCs, customers, and suppliers to unlock growth, drive industrialisation, create jobs, and develop skills. The Department's portfolio had seven state-owned companies: Alexkor, Denel, Eskom, South African Forestry
 Company (SAFCOL), South African Airways (SAA), South African Express Airways (SAX), and Transnet.
 
Policy priorities for 2022/23
The DPE's priorities for the medium term expenditure framework (MTEF) period were:

-Oversight model: Develop an enhanced and internationally benchmarked SOC oversight model.

-Private sector participation: Mobilise the private sector to stimulate capital investment.

-Research-based restructuring of SOCs: DPE research capacity needed to be improved to attain the goal of developing world class SOCs.

-Restructuring office: The restructuring of SOCs require skills not found in the public sector. This office would then be staffed by professionals sourced through partnerships with the private sector, either through sourcing contracts or initiatives such as Thuma Mina.

-Innovative funding solutions: Development of strategies on the management of existing capital and attraction of new capital to fund the enormous infrastructure and industrial development effort required of government.

-SOC leadership model: Development of dedicated leadership development programmes.

-Corruption and malfeasance: An internal unit would be established to ensure that historical malfeasance was correctly addressed.

-Performance tracking solution: In order to obtain reliable and immediate data on performance on SOCs, the DPE would ensure that enabling infrastructure was developed.

-Innovative empowerment and community development solutions: The SOCs’ approach to corporate social investment (CSI) and empowerment needed to be reviewed and aligned with the developmental needs of communities and comply with environmental regulations.

-Localisation and industrialisation: The buying power of the SOCs would be used to ensure the various procurement leverage programmes of government were utilised to ensure localisation of critical industrial capabilities.

-The programmes of the Department covered administration and corporate management, SOCs' governance assurance and performance, and business enhancement, transformation and industrialisation

(Refer to report for more information).

Budget
Over the medium term, the Department would focus on strengthening its oversight capacity and ensuring that SOCs under its authority were contributing to investment in key infrastructure. Overall, the Department’s budget decreased by 34.03 per cent in nominal terms, from R36.3 billion in 2021/22 to R23.9 billion in 2022/23.

(Refer to presentation for more details)

Recommendations
The Committee recommended that the Minister of Public Enterprises should, within the
2022/23 financial year, ensure that the Department of Public Enterprises:

- Report to the Committee on the establishment and operationalisation of the Presidential SOE Coordinating Council, including the work the council would be doing in the implementation of the recommendations of the 2014 report by the Presidential Review Commission on SOEs. Some of the recommendations were that government should develop a Shareholder Management Bill, the shareholder model, SOE remuneration standards, etc, to empower the government in its oversight of SOCs. The Department should report on the progress of the Shareholder Management Bill per quarter.

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

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

- Prioritise the development of programmes with SOCs aimed at equipping young people with appropriate skills for the economy to address youth unemployment.

- Provide the Committee with shareholder compacts on an annual basis, and quarterly reports on how the companies were performing in achieving targets.

- Ensure that SOCs accelerate investment and procurement programmes, promote industrialisation and support small and medium enterprises (SMEs) that were owned by women, youth and people with disabilities.

- 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. The SOCs should have credible empowerment and demographic targets.

7.8. Ensure competent executive and board appointments at SOCs through conducting security clearances, integrity checks, and lifestyle audits.

- Engage National Treasury, the Department of Defence and Military Veterans and Denel to finalise a concrete plan to save Denel. An urgent decision was necessary on this matter.

- Collaborate with the Department of Rural Development and Land Reform to address long outstanding issues relating to Safcol land claims, and provide regular progress reports (twice a year) to the Committee.

- Ensure that the liquidation of South African Express Airways is speedily concluded, and that former employees are paid what is due to them.

- Develop a state aviation strategy that would enable the sustainability of the national carrier with the Department of Transport.

- Work with the Departments of Cooperative Governance and Traditional Affairs, and of Rural Development and Land Reform, to ensure that the Richtersveld Mining Company and Communal Property Association were properly constituted to facilitate the successful implementation of the deed of settlement, and delivery of socio-economic development programmes to the beneficiaries.

- Address the financial and governance issues facing the state-owned companies within the Department’s portfolio, and provide regular feedback to the Committee.

- Work with the Department of Cooperative Governance and Traditional Affairs and other relevant parties to resolve the municipal debt owed to Eskom, and provide feedback to the Committee on this process quarterly.

- Ensure that all vacant positions were permanently filled within the Department of Public Enterprises by the end of the financial year.

- Work closely with National Treasury to ensure that the procurement processes within SOCs were fluid enough to enable the SOCs to respond swiftly to market demand.

- Report every quarter to the Committee on progress being made in regard to the above recommendations.

Deliberations
Mr S Gumede (ANC) acknowledged that a few recommendations had been added to the report that was presented. The additional ones were generally in line. He supported the Denel recommendation. 7.16 talks about reporting every second quarter -- he recommended that it be quarterly. Perhaps some damage would have been done, and it would be very difficult for the Committee to catch up. The Committee was already at a disadvantage because the report was given only at the end of the financial year when the budget was spent and little could be changed. The other recommendation was that the estimates for 2023/24 be reviewed. He doubted that the estimates would take place. The money estimated was too little for it to undertake activities within the SoEs.

With Denel, there was talk about restructuring -- how long would this restructuring take? The assumption was that it would occur during this financial year, but the same had been said in the previous financial year. Some people may interpret that the Portfolio Committee was killing Denel in the sense that it had started by doing away with non-core businesses. It was now trying to complete the sale of all the non-core businesses. He argued that Denel was not Denel without the non-core businesses.

The business units were being cut down from six to three. Who knew if they would be cutting to one? It was not guaranteed. The only thing that needs to be done here is recapitalisation. It would be a better way. Look at the R3 billion that had assisted in settling the guaranteed debt. How much was still left? Would it ever be completed? Recapitalise Denel, bring back all those non-core and the business units that were now being cut. The core business was operating at 30% of its average capacity and may even go back to 10%. These were concerns but the main thing was that Denel was the entity that the Committee could not survive without. It was critical that the Committee meet with Treasury and other stakeholders to look at Denel. It was critical, as skills were being lost. They were gone -- and gone for good. He was happy with the recommendations he had commented on but wished to emphasise revisiting the estimates.

Mr G Cachalia (DA) said that the recommendations did not deal with any pressing problems facing the SOCs in a meaningful way. The recommendations spoke generically about ensuring, developing, addressing and reporting, but not about the actual worsening problems. As such, he was unable to support the recommendations of the report. He disagreed with many of them from a practical point of view, which he had previously articulated to the Committee. For example, there were localisation and commercial imperatives versus developmental state imperatives when facing a crisis in all SOES. Given what had been seen at Eskom, Denel, South African Airways (SAA) and Transnet, the things proposed would not change anything and consequently made it a flawed wish list.

Ms O Maotwe (EFF) said that the recommendations were not supported as they were. The main reason was serious misalignment between what the Department sought to do and what the SOEs were doing. From the beginning, there seemed to be understanding of the mandate of SOES, which was to make a positive contribution to the transformation of the South African economy. She was impressed with the mission to ensure that SOEs were financially sustainable, adequately funded and operationally robust. There was secure investment and funding for strategic industrial investment. When they got to the SOEs as presented -- Transnet, for example -- it talked about inviting private partnerships. That was not what Transnet was doing; Transnet was transitioning from its market demand strategy, characterised by accelerated capital investment, towards the Transnet 4.0 strategy, which focused on repositioning Transnet and the country’s freight system for competitiveness within the fast-changing technology-driven context of the 4th Industrial Revolution. It includes geographic expansion, product and services innovation, diversification, and expansion of Transnet's manufacturing business scope. The key objective of the efforts was directed towards increasing the connectivity density and capacity of the integrated ports, rail and pipeline networks.

This report says to the Committee that for Transnet to achieve its mandate, it would have to invite private partnerships. That was not true. The point had already been missed, so this SOE would be misled and it would fail. The Department needed to go back to the drawing board, look at the SOEs and understand what they were meant to do -- even visit the Acts that gave effect to these SOEs. There were Acts governing the establishment of these entities and they were very clear on what the entities sought to do and achieve, not the things written in the report. Secondly, the report loosely talks about allocating money to Eskom, Transnet and so on, but the Committee was not being told what that money was there to do. She had heard a mining company was receiving a chunk of money from Eskom in one of the committee meetings. When she asked why it was getting money from Eskom, she was told that Eskom wanted to curb job losses in the country, but Eskom was laying off people. Therefore, the Committee needed to be told that this money was going to Eskom to do this programme, and the programme costs this much, and it should support the entity's strategic mission. It could not just be that the Department was getting money. Also, it was a concern that 10% of the budget was going towards travel costs. Where were they travelling to, and what did they seek to achieve with their travelling?

Finally, with the recommendations, nothing talked about how the Department would assist each entity in achieving its strategic mission. What was more concerning was Denel. There was talk about restructuring Denel into three units -- engineering, maintenance and overhaul -- but it currently had seven business units. What was going to happen with those seven units? Which ones were going to be joined? If they said they were restructuring into engineering, which engineering? Land, aeronautics, dynamics -- which one exactly, because by the time they woke up, the main core businesses of Denel would have been disposed of while claiming to rescue Denel.

The report, as it stands, would not be supported. Perhaps the Secretary could tell the Committee why the recommendations were not addressed/achieved so that they did not overlap this year? Who took accountability and what was happening to the Department for not addressing the recommendations put forward by the Committee? She would not comment on every one of them. All of them meant nothing and were just generic. It was like the Committee was just here to push paper and not add value. It needed recommendations that were very clear that it would not allow Transnet to be privatised because, at this rate, that was where they were going by inviting the private sector into Transnet. For example, it needed to clearly say how they were going to get out of load shedding by Eskom. They needed to clearly say that they did not agree to the sale of South African Airways (SAA) for R51. The report would not be supported.

Ms J Mkhwanazi (ANC) said that following from Mr Gumede, she stood in support of the report's recommendations. The recommendations talk to the issues raised in the previous meeting and the issues that need to be reconsidered by the Department going forward. For example, 7.1 talks to the issue of monitoring and oversight over SOEs, their performance and structuring. The Committee raised the issue of the progress of the Shareholders Management Bill. The explanation was given because there needed to be a new Bill from the restructuring process. Secondly, for example, 7.6 talks to the issue of accelerating investment and procurement programmes that promote industrialisation in small and medium enterprises as part of the core business of the SOEs and the issues raised by the Committee. The issue of Denel was also covered in 7.9. The issue of land reform had been raised in 7.9. The issue of South African Express Airways was covered in 7.10. The issue of the financial and government issues was covered in 7.13. In addition to what Mr Gumede said concerning 7.17, the Department should report every second quarter on the progress. She supported the view that the reporting be changed to as frequently as possible. With that, she supported the recommendations.

Mr F Essack (DA) said he was relatively new to the Committee and had just had sight of the report ten to 15 minutes before the meeting, so he could not study it in detail. Nevertheless, the report was comprehensive. He pointed out that the report on Denel remains damning. It was not rocket science that Denel was bankrupt. There was poor liquidity, with the operational expenses not being able to be funded. What were the concrete plans? There was nothing concrete in the recommendations. Year on year, looking at last year’s report, nothing much had changed. If one considered the disposal of non-core businesses, the matters had been served to the Committee before. Again now, the recommendations alluded to a wish list. Considering SAA, it had been seven months since it had taken off, but it had already incurred a R16 million loss since it had taken off again. With SAFCOL's irregular expenditure, how was the Committee expected to support this report? In a nutshell, he was unable to support the report.

Ms C Phiri (ANC) said that the recommendations were appreciated. The researchers had compiled a very good report. She supported it as it was recommended.

Mr N Dlamini (ANC) agreed with Ms Phiri’s sentiments that good work had been done. One should not at any time want to dispel the realities of Covid-19. Given the circumstances, he supported the report as it was.

Ms J Tshabalala (ANC) seconded the acceptance of the report as a true reflection of the oversight matters noted and needed to be attended to. The report was well structured and captured exactly what transpired because it was an oversight report for observations and recommendations. Issues of operations, technicalities of finances and discussion were for when dealing with specific entities and with matters of plans that needed to be produced. For purposes of this report, one of the recommendations on Denel, she had been covered by Mr Gumede. Treasury, Defence and the Department of Public Enterprises should meet as soon as possible and ensure interaction with each other for the future. Whatever Treasury was reporting, be it to the Auditor-General, what needed to happen for the future of Denel from a policy point of view was important. Observation 6.1.15 states the Committee noted with concern the lack of urgency by the National Treasury to inject capital to rescue Denel. The Committee firmly believed that the country could not afford to lose the advanced industrial manufacturing capabilities, so Denel could not be liquidated. This strengthened the argument that she just made. The recommendations she agreed with were that the Department must report to the Committee every second quarter on progress made concerning the recommendations. She agreed with the recommendations. All the recommendations were a direct discussion of what had transpired in all the oversight done.

Adoption of draft Budget Vote

The Chairperson noted the reservations of Mr Cachalia and Ms Maotwe, but the majority of the Members had adopted the recommendations and added some other issues. Generally speaking, the Members of the Committee had adopted the recommendations, and the secretariat had captured issues that Members raised.

Mr Mocumi said that the issue of recommendations going from one year to the next was basically things happening within the Executive. For example, if the Shareholder Management Bill had not been delivered within a particular financial year, it was moved to the next year. There was nothing that the Committee could do about it but ensure that it kept recommending and asking the right questions to the Department. All the other issues were things the DPE was moving on, and others would be completed in the next financial year. For example, the issue of land claims at SAFCOL had been there for more than nine years, and the Department of Rural Development and Land Reform needed to be followed up in terms of policy development. The Committee made recommendations but did not have the power to control the response rate of the Executive for implementation.

The reservations of the EFF and DA (that they did not support the report) would be included in the minutes of the day but not in the report.

Committee Minutes

The Committee considered and adopted its minutes of 23 March 2022 and 11 May 2022.

Closing Remarks

The Chairperson stated that the Budget Vote debate would take place Friday, 20 May 2022.

The meeting was adjourned.