South African Forestry Company Limited (SAFCOL) Annual Report 2009/10

Meeting report

The Committee elected Mr Peter Maluleka (ANC) to the vacant committee chairperson position.

South African Forestry Company Limited (SAFCOL) Annual Report 2009/10
Ms Nomfanelo Magwentshu, introduced herself as the new Chairperson of the Safcol Board.

Mr Kobus Breed, CEO of Safcol, briefed the Committee on Safcol’s annual report. He said that Safcol had received an unqualified audit opinion and was comprised of a 100% shareholding in Komatiland Forests which provided 95% of Safcol’s revenue, an 80% shareholding in Ifloma which was a partnership with Mozambique holding 20%, a 100% shareholding in Shannon properties which rented out properties and was under land claim and would be disposed of.

A new board had been appointed on 28th September 2010 and a new Chairperson and a new Financial Director had been appointed.  Safcol still had a minority shareholding ranging from 16 to 25% in four of the five companies which had been earmarked to be privatised, Siyaqhubeka Forests in KwaZulu Natal, Amatole Forests in the Southern Eastern Cape, MTO Forestry in the Southern and Western Cape and Singisi Forest Products in the Eastern Cape. The sale of the fifth, Komatiland Forests, had been placed on hold by government. Total area under plantation was 124,000 hectares in South Africa and 140,000 hectares if one included the Mozambican operations through the Ifloma subsidiary.

He said Safcol had made a loss of R469 million (before fair value adjustments of the plantation assets). The loss was mainly attributable to not achieving its sales targets. Cash on hand had decreased from R432 million in 2008 to R126 million in 2010. As an agricultural company it had to annually revalue its assets at fair value prices. Sales prices had a big impact on fair value and in 2010 a negative adjustment of R342 million rand occurred.

It had been certified a level 3 B-BBEEE contributor. It had identified business communities dependent on the work of Safcol and seven forestry contractors had been developed and 256 jobs had been created. It had signed a social compact with communities.

Mr Leslie Mudimeli, Senior Executive in Corporate Communications and Liaison – Safcol, expanded on this. He said Safcol had spent R6.6 million on communities. R3.5 million of this was on infrastructure such as classrooms, science laboratories, computer centres and libraries at schools and on a victim care centre and early childhood development centre.

Mr Breed said Safcol had built a show house to promote timber frame houses and future projects would be in “green energy” and charcoal and Safcol had established a bee keeping co-operative project.

He said he anticipated losses in the forthcoming year and that production was still lower than capacity. The cash outflow in the last six months had been R34.6 million.  Safcol was working on a turnaround plan, reviewing its business process and examining the case for vertical integration and its implications. It had to decide on whether to expand or sell its share in Ifloma. He said the land claims process was very slow and that 61% of the land leased by Safcol was affected by claims.

Safcol's key strategies were to become financially and commercially sustainable, enhance its developmental contribution through economic transformation and rural development. Key risks and challenges were:
• Natural disasters, especially fires, but including drought and wind and pests.
• Baboons expanding into forestry plantations had become a big issue.
• Reduced planting areas because of mining and environmental pressure
• Land security. Land claimants and community expectations.  
• A weak residential housing market
• A maturing low margin industry and
• Slow and uncertain economic recovery.

Ms Magwentshu said that the main issue was that the business was in trouble. The board was meeting on 6 December to discuss the turnaround plan, to review the vertical integration of Safcol, to make a decision on Ifloma whether to disengage or to continue and in what form. It also needed to engage with the Department on what would happen to Komatiland (her understanding was that government was moving away from privatisation) and it was waiting on the Minister of Public Enterprises for confirmation of this. It needed to engage with Department on the remaining shareholding in the four forestry packages already privatised and to consider expanding the developmental role to see if land claimants could become partners in Safcol.

Discussion
Dr G Koornhof (ANC) asked how far discussions with the Department had gone to resolve land claims as only three out of 35 claims have been settled. He wanted the Safcol exit strategy to be addressed. Why did management believe that 2011 would be the most challenging year?

Ms C September (ANC) asked what needed to be changed to remove the uncertainty that surrounded Safcol. What were Safcol’s policy objectives? Safcol was very important from a developmental perspective. What was the action plan for forestry?

Mr P Van Dalen (DA) asked if Safcol had any long term supply contracts that it could not get out of. He said the CEO’s remuneration included a settlement package of R3.9 million for privatisation in 2008. Could he clarify why he was given this package and should this not be returned as privatisation had not occurred?

Ms G Borman (ANC) asked if Safcol was covered regarding possible litigation costs. Were the six people in Ifloma Mozambican or South African?

Mr K Dikobo (AZAPO) asked what family was involved in the purchase of Amathole. How would Safcol address reducing the damage baboons were causing?

Mr M Nhanha (COPE) said the structure of Safcol’s top management made it appear to be a British company and created the impression that transformation was not being taken seriously at Safcol. He suggested that the next move should be to make a formal proposal that Safcol come back with a clear plan to address this issue. Could a bursary table be explained more clearly? Why did Safcol have two additional audit companies, did it not have an internal audit function and did it not consider the added cost? He said he was from the Amathole district and that forestry operations affected the condition of the roads and consequently tourism in the area.

Mr Breed said that the majority of personnel in Ifloma were Mozambicans with only four expatriates.

He said the Board attendance figure was influenced by one board member who served on the Nelson Mandela Foundation who had had numerous overseas visits in the course of the year. Board attendance overall was a satisfactory 70%.

Mr Mudimeli said the police had identified the need for a victim care centre in the Livubu district.

Mr Breed said the Amathole sale was to a family business which had an empowerment partner and had followed the formal process and consisted of a package of three small farms.

Mr Mudimeli said the certification of Ifloma was 0% as a lot of Environmental Impact Assessment  had to be done to get certification. Certification was either 0 or 100% and nothing in between.

Mr Breed said Safcol was contesting a challenge to a prior privatization land claim valued at R3.2 billion. Safcol was confident it would be able to defend it.

He said long term contracts would end on 31 March 2011 and an agreement over pulp wood with Sappi would end in July 2011. This was originally an entitlement but was now a commercial transaction.

He said the settlement was in terms of an arrangement to retain staff when government had decided to sell Komatiland and sell Safcol. When that had not happened, government reached a settlement with the CEO and the CFO on that arrangement.  His salary reduction was based on deferred bonuses.

Mr Mudimeli said baboons were causing substantial damage. Safcol worked with industry working groups with the NSPCA, the Parks Board, nature conservation bodies, universities and was doing research on how baboons damaged trees and what the trigger for their actions was, as there was no nutritional value in the damage. It was investigating ways and means to control it. Young males had been identified as stripping the trees. In conjunction with all the role players mentioned it had embarked on a program to catch the young males and eliminate them. Relocation had been looked at. It stemmed from a population increase amongst baboons which forced troops to expand from their previous territories into the plantations.  

Dr Koornhof asked what number of baboons was eliminated

Mr Mudimeli said troops were between 15 and 35 and that the total was approximately 200.

Mr Breed said it was a big problem and that troops moved between plantations. And Safcol would not know what happened on other property. In Zimbabwe it was so bad that it had taken to poisoning the baboons with the consequent deleterious effect on other fauna which fed on the poisoned baboon meat.

He said the fair value adjustment was a paper exercise and the R750 million was not a total evaluation. The total asset value was R3.2 billion which had reduced to R2.9 billion.

He said the physical trees under plantation had increased. The loss of trees under plantation was because of the devastating 2007 fires in which 17,500 hectares had been damaged and destroyed. A normal harvest was 4000 hectares which meant four years of harvesting had been affected. It had replanted all 17,500 hectares that had been lost and the figure for the area that needed replanting currently stood at 3 % (compared to an industry standard of 5%).

He said Safcol was expecting lower negative returns in the forthcoming year.

He said the Forestry Charter had been gazetted, approved, monitored and evaluated and Safcol was proud of its Level 3 achievements. He acknowledged that the senior levels were a challenge but they were working on a plan.
 
Mr Nhanha said he wanted to a copy of the transformation plan

Mr Dikobo said Safcol was a state owned entity where transformation should have a high priority. He noted that trade unionists were not on the board.

Mr Mudimeli said he would send the bursary information table which would reflect more information about the fields of study and who received the bursaries.

Mr Breed said the two audit company service providers were for specialised forensic work within a forestry environment . The forensic auditors were only employed as and when needed. The forensic audit had involved an employer utilising Safcol's service provider to service a car and the employer had been fired.

He said forestry operations traditionally did impact on roads and that minimal repairs had to be done.

Operations were managed by the entity but that Komatiland were fully accountable. Safcol had one director on the board and it would be best to address it at that level.

Mr Mudimeli said land claims were cumbersome and difficult and Safcol had tried to unclog the bottlenecks through a project to facilitate the process. It was fraught with difficulties as communities fought each other as the process neared the settlement stage while land rights were vested in various government departments.

Ms Caroline Richardson of the Department of Public Enterprises said that Safcol was assisting as far as it could. She added that the Department was constrained financially to settle land claims.

Mr Dikobo asked how the land claims were prejudicial to Safcol.

Mr Mudimeli said it impacted negatively on Safcol. Communities had revolted if their claims had not been satisfactorily resolved.

Mr Breed said communities became unhappy and fires occurred in plantations.

Ms Richardson said in 2007 the government privatization process was put on hold because of the land claims process. It consequently placed Komatiland Forest and Safcol on hold for a five year window period while land claims were being addressed. This situation still remained. This had resulted in the uncertainty. The Minister wanted to bring certainty about Safcol’s role. All looked at various options and there were discussions over what would become of Safcol - for example, converting it into a developmental agency. The Minister had tasked the Department to come up with options. What would be the most effective developmental role for Safcol in terms of its reach and impact if it was privatise? What would be needed for it to play a role? This report was due for completion in June 2011, while being cognisant of the review of state owned entities report due out at the end of February. All this would impact on Safcol’s position which was predicated on the fact that Safcol had to return to commercial viability.

Ms Magwentshu, regarding Mozambican certification, said that Safcol was not required to be certified but they did do it anyway.

A member of the Department said that the remaining shares in the entities Safcol had sold off were earmarked for empowering communities surrounding these plantations through a community trust.

Mr Breed said in 2009 there had been restructuring which referred to privatization and the split of Safcol into a number of forestry packages.

Dr Koornhof said three years ago the Department had taken a decision on privatisation to keep it on hold and for the last three years Safcol had suffered losses and this uncertainty was affecting 2000 people who worked for Safcol.   He recommended that the Committee request a meeting with the Ministry to discuss the issue and fast track the process. What was crucial was the long standing issue and taking the process and fast forwarding it.

Ms September said the Committee should do its own independent homework on what should be done. The land claims was stopping privatisation. Safcol had a role to play in reducing poverty. Safcol should put a strong case forward.

Mr Breed said he had been invited to interact with the Department of Agriculture, Forestry and Fisheries and with the Department. Safcol believed it had a role to play in a developmental state.

Ms Borman asked what the practical nature of the compacts was.

Mr Breed said it took the form of joint committee forums where all parties were represented and issues were discussed at meetings.

Meeting adjourned.