Denel Report by Martin Stephens MP; Committee Annual Report; South African Airways Bill: deliberations

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
21 February 2007
REPORT BY MARTIN STEPHENS MP ON DENEL: CONSIDERATION; ANNUAL REPORT OF COMMITTEE FOR 2006: ADOPTION; SOUTH AFRICAN AIRWAYS BILL: DELIBERATIONS

Chairperson: Mr Y Carrim (ANC)

Documents handed out
Report by Martin Stephens on Denel
Annual Report of Portfolio Committee on Public Enterprises for 2006 [available at Tabled Committee Reports once adopted]
Report on the Minister’s response regarding Parliament’s involvement in the decision to convert SAA into a public company
Committee Programme for 1^st Term
Proposed Amendments to South African Airways Bill
Proposed Preamble to the SAA Bill
South African Airways Bill [B35-2006]

Audio Recording of the Meeting

SUMMARY
The Chairperson expressed frustration concerning the lack of support the Committee received from the Committee Section. The Committee was unanimous in its resolve to delay voting on the South African Airways Bill and other Committee matters until they had a permanent Committee Secretary.

Mr M Stephens (DA) presented his report on Denel. The report summarised the distinction between background and foreground Intellectual Property. He outlined that Denel had a golden share and a 30% holding of ordinary shares in Denel Optronics. The strategic advantage of the golden share and owning the background Intellectual Property meant that Denel Optronics may not relocate the company without prior consent. It also provided that Denel employees gained technical knowledge and expertise during the research and development process. The Committee welcomed the report.

The Committee adopted its 2006 Annual Report without amendments.

The Committee also approved a report, which contained the Minister of Public Enterprises’ responses to the Committee’s intention to be involved in the decision to convert South African Airways into a public company. It highlighted that the Minister would introduce a Shareholder Management Bill. This Bill would give Parliament a role in the formation and change in status of any State-Owned Enterprise, such as South African Airways. Members were generally satisfied with this response. Concerning the Bill, the Committee received draft preambles from the Department of Public Enterprises, a State Law Advisor and an external advisor. The Committee decided to adopt all the clauses except the preamble and Clause 10. The outstanding matters would be addressed in the ANC study group.

MINUTES
Introductory Discussion Regarding Committee Support
The Chairperson accused the Committee Section of not delivering adequate support. He stressed that this undermined the Committee’s ability to function effectively. He vowed to work at a slow pace and not to process the SA Airways Bill until a full time Committee Secretary was employed. He suggested that someone be seconded to the Committee.

M P Hendrickse (ANC) commented that the Committee’s threats and pleas had been continuously ignored. He called for the Committee to suspend all its work until a permanent secretary was appointed.

The other Members voiced their support and nodded in agreement.

Mr C Gololo (ANC) raised the possibility of appointing a Committee Secretary from outside Parliament.

The Chairperson argued that Eskom or Transnet should be approached (to second someone) because Parliament could not deliver. He revealed that other Committees were equally understaffed and that Parliament was currently conducting interviews. He reasoned that the new appointees were usually overwhelmed because of their inexperience and the inadequate training provided by the Committee Section. Lastly, he underlined the importance of an efficient and competent Committee Secretary.

Ms N Kondlo (ANC) stated that going outside Parliament to look for a Committee Secretary would only be a short term intervention.

The Chairperson replied that this was a better alternative than having someone new who had no idea what a Portfolio Committee was.

Mr E Kholwane (ANC) wondered whether those committees that were well capacitated could be called upon to assist the understaffed committees.

The Chairperson replied that certain committees had more capacity and resources because of their workload. He felt that this Committee only needed one Committee Secretary because the Committee Assistant performed all the ancillary duties.

Mr Hendrickse proposed that the Committee meet with Ms Keswa, who is the Divisional Head of the Committee Section.

The Chairperson supported this idea.

Mr Hendrickse asserted that this problem was allowed to continue because this Committee refused to neglect its duties.

Ms Kondlo argued that there should be deployment if some Committees had a surplus of staff. Also, she advanced that this Committee be mandated to conduct its own interviews.

The Chairperson replied that Parliament would never agree to the latter request. He stated that the Committee would proceed with the meeting but would review the rest of its programme in light of the staffing issue.

Report by Martin Stephens MP on Denel
By way of background, the Chairperson reminded Members that Mr Martin Stephens (DA) was tasked to clarify with Denel the status of any new Intellectual Property (IP) developed in Denel Optronics (DO) after the sale of 70% of the shares to Zeiss Optronics (ZO).

Mr Stephens voiced satisfaction over his engagement with Denel. His presentation outlined the distinction between two elements of IP: background and foreground. The foreground IP is the more commonly recognised element. It consisted of the actual patented and registered product. The use of this IP was restricted and was usually owned by those who sponsored the research and development. Background IP consisted of the scientific knowledge, technical expertise and general know-how gained in the process of developing a product. The use of this IP was not restricted because all those who participated in the research and development process owned it.

The advantages of Denel owning the background IP meant that the continued accrual of background IP to Denel and its workforce and the retention of research and development in South Africa.

He highlighted that Denel had a golden share and a 30% holding of ordinary shares in DO. The strategic advantage of the golden share meant that DO may not relocate the company without prior consent. It also provided that Denel employees gained technical knowledge and expertise in the research and development process. The 30% shareholding would not provide any benefit to Denel because most research and development companies ploughed back profits into the company.

Discussion
The Chairperson thanked Mr Stephens for a thorough and timely report. He invited comments.

Mr C Wang (ANC) queried whether Denel would make a further capital investment in the company.

Mr Stephens answered that this would not be in Denel’s interest because of the losses previously suffered and the probability of no future dividends.

Mr Gololo asked whether this meant that Denel would not make a profit.

Mr Stephens clarified that his discussions with Denel did not with deal with the company as a whole but centred on its status in Denel Optronics. He added that the situation might be different in other companies where Denel had foreground IP.

Mr Hendrickse sought to establish whether DO would be self-sustaining.

Mr Stephens replied in the affirmative.

Mr E Kholwane (ANC) wanted to know why ZO was so interested in the venture if there was no money to make.

Mr Stephens pointed out that ZO wanted access to the highly trained and experienced work force at Denel.

The Chairperson was pleased with the presentation and suggested that this document be circulated to the Minister of Public Enterprises, Denel’s Chief Executive Office Shawn Liebenberg and the Department of Public Enterprises Director-General, Portia Molefe.

Annual Report of Portfolio Committee on Public Enterprises for 2006
This report was adopted without amendments.

Committee Report on the Minister’s response regarding Parliament’s involvement in the decision to convert SA Airways (SAA) into a public company
The Chairperson felt that that the engagement with the Minister was fruitful and that it broadened his perspective. It was unprecedented for a Minister to accept the recommendations of a Committee and agreeing to deal with its concerns in forthcoming legislation.

The Chairperson read out the report and highlighted that the Minister would introduce a Shareholder Management Bill. This Bill would give Parliament a role in the formation and change in status of any State-Owned Enterprise (SOE), such as SAA.

He reminded Members that they had resolved to address any amendments they proposed to the SAA Bill in the pending Shareholder Management Bill. Lastly, he re-iterated that the Committee would not vote on the Bill and asked them to comment on the report.

Discussion
Mr Hendrickse preferred that the Committee’s recommendations be added to this report before the Minister’s response. More importantly, he wanted a provision that provided that any changes to SAA would have to be done in accordance with the pending Shareholder Management Bill.

The Chairperson agreed with the former suggestion and asked the Department to comment on the latter.

Mr Litha Mcwabeni, Deputy Director General: Corporate Structures and Services, Department of Public Enterprises (DPE), stated that this point should be sharpened and more specific. He opined that the phrase ‘any changes’ was too general because some changes would not be fundamental to the issues of ownership.

The Chairperson concurred with this view. He believed that the report contained the thrust of what the Committee had already agreed upon.

The Chairperson stated that the issue of foreign ownership had not been addressed and explained the Minister’s thinking. The Minister opposed any provision in the SAA Bill that prevented foreign ownership. The Minister felt that this would discourage investors. He also argued that there were sufficient Treasury Regulations to give comfort on this matter. To strengthen this point, he had cited the example of Barclays Bank which needed to negotiate with the Treasury before acquiring ABSA Bank. The Minister maintained that he would not be hesitant to invoke these regulations. Lastly, the Minster indicated that Australia had similar Treasury regulations.

The Chairperson took a cautious approach and did not feel that he was technically competent to address this matter. He did not completely agree with the Minister’s response and asked the Members whether they were willing to compromise on this issue.

Mr Hendrickse asked the Department to provide examples from other countries which had limitations on foreign ownership that applied to the airline industry.

The Chairperson asked Mr Mcwabeni to provide such details within 48 hours.

South African Airways Bill: deliberations
The Chairperson had asked Mr G Hoon, State Law Advisor, and an external advisor to prepare draft preambles for the Bill. The Department had also drafted its own preamble. The Chairperson praised the Department. He believed that their preamble was an improvement on an earlier version. However, he revealed that he had consulted with an expert who advised him that the words ‘since’ or ‘whereas’ should appear in a preamble. Therefore, he rejected the form but not the content of the Department’s preamble.

Ms Ursula Fikelipi, Director: Corporate Legal Services (DPE) did not want to argue vigorously against this. It was the Department’s intention to use plain and clear language. She mentioned that the preamble in the Promotion of Equality Act used similar plain language and did not contain either of those words.

The Chairperson stated that the Committee should look at the other proposed preambles and see whether they were any better.

Regarding the Department’s proposed preamble, Ms Kondlo remarked that the second paragraph should be substituted with the first. She elaborated that the intention to retain SAA in state hands was better emphasised in the second paragraph.

The Chairperson also observed this and concurred with her sentiment. He speculated that the Department was taking a cautious approach.

Ms Fikelipi responded that the Department wanted to introduce a general policy in the first paragraph. The second paragraph went into more detail and explained the role that SAA played in the economy.

Concerning Mr Hoon’s proposed preamble, Mr Mcwabeni highlighted that it contained a technical problem because it referred to Africa as a region. He continued that paragraph 1 (in the Department’s preamble) outlined the imperatives and clarified why SAA should be retained in state hands.

The Chairperson summarised the Department’s view. It was not starting from the premise that SAA should be owned by the state. The Department believed that the specific needs of a developmental state, such as South Africa, and at this particular time in our history required that SAA be retained by the State. He explained that Ms Kondlo had the opposite perspective. She started from the premise that in any situation SAA would be owned by the state and therefore the other issues come into being. He concluded that her argument was flawed because the content of the Bill was consistent with the Department’s preamble.

The external advisor had provided the Committee with two preamble options. Mr Gololo and Mr Hendrickse favoured option 1.

Concerning the external advisor’s proposed preambles; Mr Mcwabeni rejected option 2 because it raised issues of volatility. He also found option 1 problematic. He rationalised that paragraph 3 was a defensive argument because it implied that the state would own the airline by default. Paragraph 4 was also problematic because it created different interpretations about what constituted direct control over SAA. He preferred Mr Hoon’s proposed preamble.

The Chairperson agreed that there were arguments on both sides and asked Members to deliberate further. This had been a useful discussion and there was no need to discuss the preamble further due to its limited meaning. He would confer with the Department and asked them to refine the preamble proposed by Mr Hoon.

Mr Hendrickse offered that the refined preamble be produced in 4 paragraphs.

The Chairperson agreed. He complained that the Department flouted the rules of procedure when amending legislation in the National Assembly. He warned that the Committee would in future adjourn or cancel meetings if this problem persisted. Lastly, he asked why certain words had been added to Clause 6 (3) of the Bill.

Ms Fikelipi explained that this was an error. The Department had used a different version of the Bill.

The Chairperson went through the Bill and asked the Committee to make amendments and adoptions.

Members adopted Clauses 2, 4, 5, 8 and 9 without amendments. The definition section of the Bill and Clauses 3, 6, and 7 were amended and then adopted. The preamble and Clause 10 were not adopted.

In the definition section of the Bill, Mr Hendrickse proposed that the definition of Minister should be amended and read: the Minister responsible for public enterprises. Thereafter this section was adopted.

In Clause 3, the Committee omitted ‘in respect of SAA Shares’. They motivated that it was superfluous and then adopted the clause.

In Clause 6 the, Committee omitted subsection (2) and replaced it with ‘For the purposes of section 33(1) of the Companies Act, none of the objects ancillary to the main objects of SAA are excluded’. The Chairperson reminded the Department to remove the additional words in 6(3). The Committed also adopted this clause.

In Clause 7 the Committee omitted ‘section 6(1)’ and substituted it with ‘section 6’. The Committed adopted this clause.

In Clause 10, Mr Hendrickse wanted an addition that made this Bill subjected to the pending Shareholder Management Bill.

The Chairperson stated that the inclusion of this would imply that there was no trust between the Committee and the Department. It would not be correct to bind the executive given the volatility of the airline industry.

Mr Mcwabeni indicated that this would have commercial implications and that the National Treasury would not be able to inject capital into SAA in the absence of an Act.

The Chairperson concluded that the preamble and the issue of Clause 10, which was raised by Mr Hendrickse, were the only outstanding matters. The Department would refine the former and submit it to the Chairperson. Members would debate these matters further at the study group and arrive at a decision. The Chairperson made a final proposal that the Committee not proceed with its work until they had a permanent Committee Secretary.

The Chairperson thanked everybody for their participation.

The meeting was adjourned.