State-Owned Companies update; DPE 2019/20 Quarter 3 performance

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Public Enterprises

26 February 2020
Chairperson: Mr K Magaxa (ANC)
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Meeting Summary

The Department of Public Enterprises presented the operational and financial performances of major state-owned entities within its portfolio, and reported that most of them were not doing well. A notable exception was the South African Forestry Company Limited (SAFCOL), which was doing so well that the Department had encouraged it to invest some of its money into other ventures to enhance its profitability further.

The Department itself indicated that it had under-spent on most of its programmes. There was a big gap when it came to the compensation of employees, and this was an area which it needed to address, mainly by dealing with the appointment of employees, which was long overdue.

DENEL’s performance for the year was unsatisfactory. Its revenue was lagging behind by almost 40% of its corporate plan. The reason for this was the snowball effect from the liquidity challenges that DENEL had been facing, which had resulted in its inability to operate optimally almost throughout the financial year. Some suppliers were no longer able to provide input to DENEL, while others were demanding payment upfront before they could supply the business, and this had had a significant impact on the operations of the company.

SAA had been under business rescue since December, and the Department was in the process of trying to ensure that the business rescue plan was finalised, which would then allow it to establish how much funding the airline would require in order to be sustainable going forward, and to lay out the details on what the airline would look like, which aircraft it would be deploying, and what the size of the organisation would be. None of its subsidiaries, including Mango, was performing well, and SA Express had also found itself in involuntary business rescue.

Although Transnet remained a profitable business, its regional performance was worrying. It had experienced a market share loss in its rail transport business to competitors, and there had also been poor maintenance of infrastructure, which had resulted in restrictions occurring within the Johannesburg-Durban line. The country’s constrained economic performance had also had a direct impact on the performance of the rail business.

Under the operational performance of Transnet, it was reported that the Durban port, which had once been rated as the third best on the continent, had now slipped to 13th place, mainly due to long waiting periods and slow ship turnaround times.

ESKOM was a hot point of discussion, with Members describing it as a hopeless case. They said they were unclear as to how the entity’s business rescue process would affect the unbundling process which had been announced by the President.

Some Members expressed the view that SOEs were vanity projects which were draining state coffers and taking money away from education, healthcare and the police, while others argued that privatisation would not do anything to help the government’s vision of a developmental state. There were also questions raised about the role of business rescue practitioners in state businesses, and why it seemed that they were not accounting to the Committee.

The Department said that they would have to come back to update the Committee on progress with the initiatives to sustain ESKOM,  as well as some of the issues concerning other SOEs which had been raised during the presentation.

Meeting report

Department of Public Enterprises: Third quarter performance

Mr Kgothatso Tlhakudi, Acting Director General (ADG): Department of Public Enterprises (DPE), said that in Quarter 3, the Department had achieved 59% of its key performance areas (KPAs). This was in relation to the 80% target which the Department had set -- and still hoped to achieve by the end of the year.

There were areas within the Department which required more effort, such as the Business Enhancement Systems which look after socioeconomic programmes, as well as two core areas -- the energy and resources, and transport and defence.
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Referring to the strategic framework of the Department, and said they were slightly behind with that particular project. The Department was trying to develop an integrity management framework for state-owned enterprises (SOEs). He said that initially this was intended to be an open tender but due to the sensitivity of the work, as well as the need to keep the work within government, the decision was made by the Department to go with the Government Technical and Advisory Centre (GTAC), an agency of the National Treasury. The Centre was contracted a bit late, but the DPE had communicated with GTAC that the work needed to be completed before the end of the current financial year.

The Department’s SOEs had undertaken Corporate Social Investment (CSI) work, and the Department had been monitoring that to ensure its effectiveness, as well as to ensure that it was protecting their licence to operate by targeting communities which were close to their operations. He said that the work was done, but the report had not been submitted on time and on that basis the work was registered by the Department as being done.
The Department wanted to assess the socioeconomic impact of these projects over a long period of time through a scientific study to see whether or not it had made good progress with the money being spent over the years. A service provider had been appointed -- although this had been done late -- and the work would be concluded within the next financial year.

Mr Tlhakudi spoke about the localisation framework, and explained that what the Department was seeking to do there was to leverage its SOEs and ensure that more of their procurement was spent locally. The work would be concluded within the current financial year, and the process was being handled internally due to the Department not being able to get a cost-effective bid for the work. The Department had budgeted about R2 million for the work, while the bid they had received from an external service provider had been for R9 million.

The Department would normally aim to conclude the shareholder compact early at the annual general meeting (AGM), but it had not been able to do so this time around and because it was seeking to ensure that the shareholders’ commitments also spoke to the key issues of SOEs. He explained that there were some targets that the board had requested to be reviewed. The review was still under way, and would be concluded in the coming weeks.

The Department needed to consolidate Alexkor’s Johannesburg-based operations with its operations in the Richtersveld, since the Johannesburg operation had become a cash drain on the rest of the organisation.

The DPE had an economic modelling unit which was responsible for looking at the multiplier effect of the Department’s projects -- mainly capital programmes -- and reporting on the effect that the money that it had been spending had had on the local economy. This team would often go into remote locations in order to conduct database studies.

Financial Performance

Mr Tlhakudi said he would be looking at the appropriations per programme and comparing them against the actual expenditures of the different programmes.

Programme 1

The overall expenditure for the programme was about R110 million, versus the R163 million which had been allocated. There was a big gap when it came to the compensation of employees, and this was an area which the Department needed to address, mainly by dealing with the appointment of employees, which was long overdue. The contracting of goods and services was located within this programme, and it was one of the areas which had contributed to the under-spending. The contracting of SOEs was located within this programme, and the Department was facing problems when it came to getting a service provider on board.

Programme 2: Associate Governance and Assurance

There were challenges regarding under-spending under the programme. Compensation of employees was an area which needed attention.

Programme 3:
The Department was facing a similar challenge in this programme as it was with Programme 1 regarding goods and services, as well as the challenge of under-spending. It also had challenges relating to the supply chain, which meant that some of the money allocated to this programme would not be able to flow

Programme 4: Compensation of Employees

By the end of the quarter, the Department had spent nearly R112 million of the R170 million which had been allocated. It would probably spend about R150 million by the end of the financial year, which would result in a R20 million under-spending for this programme.

Programme 5: Goods and Services

The Department had an under-spending of about R40 million for this programme. This under-spending was for reasons which had been mentioned previously in programme 3. By the end of the quarter, it was about R100 million behind in its spending. The Acting DG said that the Department had set a target to spend about R283 million by the end of the financial year.

Summary of Expenditure

The Department reported that most of the money that went through the Department had been transferred to SOEs, and ESKOM had received a large portion of the money. South African Airways (SAA) had received about R5.5 billion in the medium term budget policy statement (MTBPS), DENEL R1.8 billion and SA Express about R300 million.

Operational Performance of State-Owned Enterprises (SOEs)

DENEL


Mr Weekend Bangane, Acting Deputy Director-General (DDG), DPE, said that DENEL’s performance for the year was unsatisfactory. Its revenue was lagging behind by almost 40% of its corporate plan. The reason for this was the snowball effect from the liquidity challenges that DENEL had been facing, which had resulted in its inability to operate optimally almost throughout the financial year. He reminded Members that DENEL had received recapitalisation in August/September, and prior to that almost all its business units had been at a stand-still. Catching up was happening very slowly. He explained that some suppliers were no longer able to provide input to DENEL, while others were demanding payment upfront before they could supply the business, and this had had a significant impact on the operations of the company.

DENEL’s profitability had been affected because the business was not making money on the top line, and it had a large fixed cost in the form of personnel, that had to be maintained. All these factors could be expected to result in significant losses by the end of the financial year.

DENEL still faced some liquidity issues, and the R1.8 billion bail-out that the entity had received may not have solved all of its challenges. It had actually requested a R2.8 billion recapitalisation which they had not receivedand so it was expected that the solvency of the business would be under stress at the end of the financial year. Going concern challenges were expected to be an issue in the next financial year as well.

All of DENEL’s business units, big and small, had not achieved their targets.

Mr Bangane said that since liquidity had been an issue for DENEL, the DPE had instructed the shareholders to use the R1.8 billion that the entity had received to pay off at least 50% of its creditors, since it depended largely on local suppliers, and when DENEL was in distress, its suppliers also went into distress. The shareholders had delivered on this instruction and had thus been able to reduce DENEL’s creditors’ bill significantly.

At one point, DENEL had owed its suppliers close to R1 billion, and as a result the level of trust between it and its suppliers had deteriorated significantly. It had had to pay its suppliers on delivery, which meant that it could no longer leverage its resources to achieve other objectives.

The cash generated from activities at DENEL was negative due to the fact that operational activities were sub-optimal across the business, and the business was still incurring huge costs.

DENEL’s operational excellence was also affected by the relationship it had with its suppliers. Since suppliers were no longer delivering, it had resulted in the entity not being able to deliver to its clients timeously. The DPE had used the international benchmark to review DENEL’s performance, and it had indicated that in the defence environment, if an entity had achieved 75% of its milestones, that counted as significant achievement. In that light, DENEL was still performing below the international benchmark.

Mr Bangane said that he was aware that every time the Department presented on DENEL, it seemed that there was doom and gloom across the business. He told Members that despite this, there were still pockets of excellence within the business. To emphasise the point, he referred to a demonstration which had taken place in Limpopo in the previous week, and said that most of the capabilities, such as the vehicles and aircraft which had been on display, belonged to DENEL.

DENEL had a significant role to play when it came to projecting the power of the country to the rest of the world. He highlighted that in 2019, it had managed to qualify in a short-range air-to-air missile projection, and explained that this was one of the complex fifth generation missile systems. Being able to qualify meant that the missile was ready to be put on sale. In 2019, DENEL had been confirmed as having the longest artillery range in the world. He emphasised that these achievements demonstrated that DENEL did have capabilities, but the issue of funding was what would determine whether or not it could afford to keep both these capabilities as well as its position in the world, since funding was what created certainty amongst the critical skilled workers within the business.

He pointed out that DENEL had managed to secure the Egypt contract whilst competing with global companies, and Pakistan was looking to work with DENEL on a range of capabilities. This was due to the excellence with existed within the organisation, and thus its future needed to be defined carefully. 

South African Airways (SAA)

Mr Bangane acknowledged that SAA had been under business rescue since 6 December 2019, and that the team had appeared at a joint session of the Committee and the Select Committee on Public Accounts (SCOPA). The Department was in the process of trying to ensure that the business rescue plan was finalised, which would then allow it to establish how much funding the airline would require in order to be sustainable going forward, and to lay out the details on what the airline would look like, which aircraft it would be deploying, and what the size of the organisation would be. 

Prior to the business rescue plan, the situation at SAA had not been good. The airline had not been generating a good profit, when direct costs were factored in. The routes of the airline were not doing well -- the Cape Town route had declined, and the East London and Durban routes were deeply in the red. The strike which took place in the third quarter of 2019 had not done anything to build confidence within the airline.

On the regional route front, the trend across all routes was negative. Despite Harare being shown as positive, there were challenges around repatriating revenues from Zimbabwe.

The Accra to Washington route was the only positive one of the airline’s international routes, and that particular route had improved in performance. SAA had introduced the New York route, flying the Airbus A350 900 from Johannesburg to JFKennedy airport, and the Department needed to monitor the impact of this new route going forward.

The Department needed to get a route network where the airline might be losing money on one leg of a route, but could make money on the other. The Department had had a discussion with one of the leading airline executives on the continent who had said that he had used the same strategy -- closing 70% of his routes in order to ensure that on the remaining routes, a little bit of money was lost but the routes could still be profitable. That was the type of redesigning of the airline that the business rescue practitioner (BRP) would reflect in the business rescue plan. 

Reporting on the subsidiaries of SAA, Mr Bangane said all of them had not been doing well, which has impacted the airline brand as a whole, including Mango, and the business had to be improved. Although it had been commented that the Chief Executive Officer (CEO) would fix these problems, he said that one person would not be able to fix the whole business -- it was the business culture which had to change.

ComAir had had to take their aircraft elsewhere due to some challenges, but there was now a setup in the country in which they were bound to take work away from SAA. This was one of the problems which the Department had created for itself, but was something it hoped that the BRP would be able to provide a sustainable solution to. Perhaps bringing in expertise and management from the private sector was what the business needed in order to get the business going, since the demand for services which the businesses offered was great, and went beyond the airline.

Mr Bangane said Mango had had on-time and reliability issues which had impacted the brand. He explained that low-cost airlines were operated on the basis of quick turnarounds and running a high occupancy rate and when these objectives were not being achieved due to thin margins, the profits of the business were bound to start going away, and this was what was happening at Mango.

SA Express had also found itself in involuntary business rescue. One of its service providers had taken it to court for not paying its obligations, and the court had ordered that the entity be placed under business rescue. The Department had had a meeting with the BRP to ensure that the airline could be saved, and added that the entity was in a much deeper hole than SAA, despite its size. It had not been doing well on both its international and domestic routes and competition was fierce, particularly from Airlink, which was also a franchise holder of SAA.  It was making a loss on its regional routes and was supposed to be operating 16 aircraft, but could operate only five due to customers who had tried to fly with SA Express but had experienced delays and flight cancellations, which had led to them choosing to fly with other airlines.

Transnet

Although Transnet remained a profitable business, its regional performance was worrying. The entity now had a permanent CEO, and the Department hoped that the board would move faster to ensure that all key executive positions were filled across the group so that more attention could be given to its operational performance.

The shareholder compact was worrying, in that about 2% of the targets had been achieved in Quarter 3. Transnet had set itself high targets for the pipeline and rail tonnage, and this had had a direct impact on the economic performance of the business. In terms of its rail performance, it had experienced a market share loss to competitors, which was bound to become a challenge to the kind of performance that the entity had been experiencing. There had also been poor maintenance of infrastructure, which had resulted in restrictions occurring within the Johannesburg-Durban line. There had also been washaways of networks after the rains that the country had had, and the country’s economic performance had also had a direct impact on the performance of the rail business.

Port Efficiency Performance

Mr Bangane described some of the challenges at the Durban port. He said Durban Pier 1 was reported to be the worst performer due to trucks clogging up that part of the port because of the inability to move them fast enough. Other challenges in the Durban port were high ship turnaround times and long waiting periods
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Overall, the Department was not meeting its targets where ports were concerned. It hoped that the CEO and her management team would start paying attention to these challenges.

Durban port used to be a premier port, holding the number 3 spot on the continent, but their rating had since slipped to 13th place, with many shipping companies choosing other destinations such as Mombasa, Walvis Bay, and Beira in Mozambique, because of quicker turnaround times. The Department’s diagnosis of why ports were experiencing these problems, pointed to the low reliability of port equipment, corruption where equipment was concerned and the shortage of resources, including optimal gang deployment. The Department had met with organised labour, and a number of internal issues had been raised, but it was still unclear whether or not these were issues that would have a big impact on the Department.

ESKOM

Ms Makgola Makololo, Acting Deputy Director General: Energy, said that Eskom’s shareholder compact had four key areas which the Department contracted with the entity, and they were listed as follows:

  • financial performance;
  • operational and environmental performance;
  • new built; and
  • socio-economic impact.

ESKOM’s generation performance within the last quarter had decreased sharply, and evidence of this was the significant load-shedding that the entity had had since November 2019 and the implementation of Stage 6 load-shedding in December 2019. This decline in ESKOM’s generation output was mainly due to the low reliability of the plants, which had led to breakdowns affecting over 16 000 to 17 000 megawatts in December.

The network distribution and transmission performance had also deteriorated. This was due to the level of switching which the entity was doing as a result of the load-shedding, which was affecting the life of ESKOM’s infrastructure. The impact of the switching on the network would be seen in the short to medium term, and that the Department would have to reinvest in those assets in order to sustain the level of switching which the entity was currently having to do.

The load-shedding had also had a significant impact on ESKOM’s sales, since load-shedding meant that less electricity could be sold. The sales had been on a decline since 2007, and this was a concern for the Department since it would lead the ESKOM utility into a debt spiral.

Municipal debt was reported to have declined. and the Soweto collections over the last quarter were reported to have improved. Soweto payment levels prior to the third quarter were at about 10%, but through disconnections and the intensification of collections in the period from September to December 2019, ESKOM had managed to increase payments from Soweto to 20%. However, the outcome of these disconnections and the attempt to implement the prepaid system, along with the load-shedding, had been the protests by residents. 

Some of the matrices that had improved on ESKOM’s financials were due to the government support that the entity was receiving. To date, the government had given ESKOM R30 billion out of the R49 billion which it had to give to ESKOM before the end of March for the current year, with an additional R56 billion for next year, and R33 billion in the subsequent year.

The government was still to make a decision on the fundamental debt solution. There had been some improvements in cost savings, but these had been offset by the high utilisation of the diesel plants, which were expensive for ESKOM to run.

Ms Makololo said that on the restructuring side, there had been some progress with the implementation of the restructuring, with ESKOM committing to producing profit and loss statements by the end of this year. She added that ESKOM’s legal unbundling was still to take place. ESKOM had committed to appointing subsidiary-level boards at the end of February and the relevant CEOs in order to create a separation in the business, to increase visibility and to increase accountability.

Reporting on the operational performance, the Department said that ESKOM had provided it with a response plan which ESKOM would be implementing to deal with the load-shedding. The prognosis was that it would take a significant amount of time to fix ESKOM’s plants and bring the plants’ availability to an acceptable level. The government was committed to finding short-term measures to close the energy gap according to the measures which had been announced by the Minister of Mineral Resources and Energy.

The projection was that, in terms of the shareholder’s compact, ESKOM would achieve only 50%-55% of its key performance indicators (KPIs)

Alexkor

Ms Makololo said the report on the investigation that the Department had instituted into Alexkor and the Pooling and Sharing Joint Venture (PSJV) had been finalised around July/August 2019, and a decision was made to appoint an administrator at Alexkor and to relieve the board that was there at the time. The administrator had been appointed for a period of six months, which would end at the end of March 2020. Part of the scope that was provided to the administrator was to review the governance arrangement between Alexkor and the PSJV since the Department, as a shareholder, had very limited insight into the PSJV, despite having to provide funding in order to sustain the operations.

There had been significant decline in the performance of the PSJV, and the report by the administrator had raised concerning issues around the arrangements. The CEO of the PSJV had been placed on suspension while an investigation was being completed. Currently, the government was faced with having to make a decision around the appropriate way to house the marine mining rights that the government owned, and also to decide whether the government was getting significant profits and whether the communities in the current PSJV were benefiting to the extent where the joint-venture was meant to benefit both parties.

Ms Makololo said that both the final report from the administrator and the proposal to the government on what would be the appropriate way to house the marine rights, were expected at the end of February.

SAFCOL

Acting DG Tlhakudi said that the South African Forestry Company Limited (SAFCOL) was able to sustain itself and was not causing the Department problems although it was capable of performing much better. In quarter 3, the number of targets which the entity had not achieved were pointing in the wrong direction.

He reported that the Mozambican operations required some attention, as unplanted areas had increased, and a new area of a thousand hectares was supposed to be planted in Sofala, and the entity had fallen behind on the target. There was a glimmer of hope for a timber door line. There had been reinvestment into Timbadola, SAFCOL’s sawmill in Limpopo, where the entity had been conducting studies and had received a bankable business case approved, and Section 54 processes had been concluded.

The fibre project still needed to get a partner going.  

There were no disabling injuries reported within the quarter.

The DG said that SAFCOL was behind in its spending on corporate social investments. The entity had a target to spend R7.5 million, and it was important that it spent this money because some of the land they were operating on was under land claims, and the Department felt it was best that the business develop a good relationship with the communities so that when land claims were eventually concluded and the land was handed over, communities would prefer SAFCOL as their partner in terms of rescue operations.

The entity was performing well in terms of training, although the spending on training could improve slightly.

Financial performance of SOEs

DENEL

The Department reported that DENEL had a R1.3 billion loss in the quarter. It had a high fixed-cost structure due to the fact that it was not making enough sales. This was an area which needed to be improved in order to ensure that the business’s revenue could accommodate the fixed-cost structure. DENEL’s debt had come down significantly due to the cash injection which the business had received.

ESKOM

ESKOM’s net loss for the quarter was at about R6.2 billion. The utility was said to still be a work in progress and, as mentioned in the allocations, there was a medium term period where the entity would rely on the government in order to be able to get out of the position in which they found themselves.

Its financial position had marginally improved in the quarter, and this was because the DPE had helped a great deal. There was about R14 billion of redemptions that were due in the period, and the financial position of ESKOM in terms of its debt was R455 billion.

Transnet

The Department said that Transnet’s financial position remained positive, but its regional performance was quite worrying. However, its financial position was still looking relatively good.

SAFCOL

The entity’s net profit was R194 million, but this figure was worrying. The business did not have any debt on its balance sheet. The Department was trying to get SAFCOL to make investments so that it could make greater profits.

Alexkor

Mr Tlhakudi said that the financial position of the entity was quite dismal, and the business was under administration. The Department did not have the business’s results for the third quarter -- the chief financial officer (CFO) had resigned, and a temporary one was currently in place.

The Johannesburg operation was dependent on the funding which the Department had allocated in 2012/13, and those funds were running out, so the entity needed an administrator and board who could mop up the Johannesburg operations, and move them to the Richtersveld.

SA Express

The Acting DG reiterated that the entity was under business rescue, and thus there were no numbers available. The Department had reemphasised to the business rescue practitioners that the business had to remain a state-owned business, and that the Minister remained the executive authority, since the Minister had to account in terms of the Public Finance Management Act (PFMA).    
                                                                                 
Discussion


Ms J Mkhwanazi (ANC) referred to programme 2 of the DPE’s third quarter performance, and asked if the Department could justify the cost drivers on the programme and also explain what their benefit would be going forward. The issue of vacancies was very worrying and was something which needed to be discussed in a meeting with the executives. The Committee needed to be placed at ease on the process of the Shareholder Management Bill and the progress of the programme.
 
She asked the Department for clarity on the deed of settlement for the Richtersveld community. When would the Committee receive ESKOM’s roadmap, as the roadmap would empower the Committee in playing its oversight role? What was the programme and progress by the DPE with regard to the SAA technical team and SAA Chefs in respect of the repositioning of SOEs?  She commented that what was happening at Transnet was highly disappointing, and asked what the Department was doing to ensure that the business did not regress any further. She requested that the Department take the Committee through the administrator’s progress on ESKOM.

Mr M Waters (DA) said he felt that every bailout for an SOE took money away from education, health and the police. Many of the SOEs, such as DENEL, were vanity projects which the country did not need. He pointed out that SAA’s losses were reported as “only” being R297 million, and asked why it had needed the R5.5 billion bailouts from the state if their losses were far less. He also asked how the Department knew the value of SAA’s losses when they had not submitted their financials for the quarter. Why did the Department not have access to SAA’s financials for the third quarter?

He moved on to SA Express, and asked about the loss to the value of R590 million which had been reported, and asked how the Department had determined that loss when no financials had been provided. If the Department had seen the financials, why had the Committee not been given access to them?

Mr Waters pointed out that DENEL had received a R1.8 billion bail out in 2019. If the losses recorded were cumulative, they would amount to R2.7 billion in 2020 alone, and if this was the case, why was the Department trying to portray DENEL as a success when it was running at a loss? Given the losses of the first three quarters, what was the Department anticipating DENEL’s deficit to be at the end of the financial year?

Lastly, he asked what the projected bailout for the four entities for this year would be. 

Ms V Malinga (ANC) asked why the Department was not allocating funds to those SOEs which could make money, instead of continuing to throw money into the pit hole of ESKOM. She wanted the Department to be honest about whether or not there was a solution to the situation that ESKOM was in. She commented that the situation at ESKOM was far more complex than was being portrayed, and it went far beyond the municipal debt problems. Some municipalities had requested that ESKOM handle its own transactions, but it had declined. Why was this the case? She said ESKOM had been changing its board chairpersons, and now the Business Rescue Practitioner (BRP) people were there. She said that everyone who came into ESKOM came with the intention of making money, since they realised that there was money to be made at the expense of country. She criticised the fact that after three months, the BRP still did not seem to have a plan, and said it was problematic that that while there was a problem of a low supply of energy in the country, the entity that was supposed to report to the Department was reporting to someone else.

She commented on the “roadmap to ESKOM” which had been referred to in the presentation, and asked if it spoke to the unbundling of ESKOM, which the President had spoken about. She added that it had been three months, and the BRP had not appeared before the Committee, and also asked what the practitioner’s credentials were.

She told the Department that it was not useful to make impressive presentations -- what was important was that it was honest about what they wanted the Committee to assist with. She also questioned why ESKOM had started using diesel even though diesel was more expensive in comparison to coal. SAA and SA Express had been audited, yet money kept on being poured into the entities. She asked why some routes of both airlines did not get combined in an effort to cut down on losses.

Referring to Alexkor, Ms Malinga asked why the Department had appointed a CEO who was not doing anything in the business, and then dismissing him with only one month left if they were truly expecting results. The administrator had reported how much of a burden the CEO had been. 

She expressed her disappointment at the deterioration of Transnet, and asked why there had been no supervision at the ports. If the Department was relying on reports from officials for evidence of operations at the ports, they could possibly be misled since reports could easily be “cooked up.”

It seemed that there was no hope for the SOEs, and she was worried that every party would use the public’s disgruntlement with ESKOM as political ammunition, going into the local government elections.

Ms D Dlamini (ANC) said that DENEL’s board and management had made many promises for the entity but none of these had been reflected during the presentation. Referring to SAA, she asked what would happen to the licences for all the routes that had been cancelled. The Johannesburg to Durban and Cape Town routes were supposed to make the airline a lot of money, and she did not understand why the Durban route had been cancelled. She also asked if SAA could not rule that all government departments use SAA in order to stabilise the airline. British Airways was making a lot of money on those routes, as their flights were always full.

She said Transnet used to be the country’s hope, but now it was a sad case. She asked the Department to speak on the causes of ports’ inefficiency. She added that it appeared that everything in the SOEs was a loss.

Mr S Gumede (ANC) asked if the challenges experienced by DENEL were a result of incompetency within the management. If it had had a proactive management, would they not have come up with strategies aimed at improving its situation?

He asked if the Department had seen any improvements at Alexkor since the entity had been under administration.

He reminded the Department that the Committee had received the turnaround strategy which the Department was going to implement with ESKOM in order to improve the situation, and considering the debtors involved, he asked what the financial implications of the possible splitting up of the entity would be. What would the solution be if the plan did not work – would the government be in a position to give another bailout? It seemed as if there was competition between the BRP and the Department, and he asked from whom the BRP was taking instructions.

Finally, he asked what the Department’s overall strategy to rescue the SOEs was.

The Chairperson said that the Committee was crippled by the absence of the shareholder, since they could not respond to some of the questions which the Committee had posed. The issue that was central to ESKOM was the issue of the roadmap, which would allow the Committee to conduct meaningful oversight as the legislative arm of the state.

He referred to Alexkor, and said that it was important that the forensic report which had been produced at entity be tabled in order for the Committee to judge whether the administrator had been in a position to execute his job in the presence of the CEO, or if he had failed at it.

Although the section on DENEL in the presentation had been explained quite well, there were a few issues which still needed to be accounted for, such as the military equipment which DENEL had not delivered.

The Chairperson said that he was not too worried about taxpayers having to pay for SOEs, because he understood that a lot of damage had been done, and these SOEs needed to be fixed. Using the problems of the SOEs as a reason to privatise was not going to help the developmental vision of the state.

He referred to a meeting that the SAA’s BRP had had with SCOPA, and said that during the meeting it was SAA’s shareholders who were speaking on the BRP’s behalf, so he wanted the Department to clarify what the relationship of the BRP was. He said that the BRP had to account to the Committee because they were receiving R3.5 billion from the Development Bank through the Minister, and this had to be accounted for.

Department’s response

Mr Tshepo Makhubela, Acting Deputy-Director General: Legal, DPE, responded to questions relating to the BRP. He said that the business rescue process was defined in the Companies Act for a non-public entity, and said the problem was when the entity was public but also managed by the PFMA, which took precedence over the Companies Act. According to the Companies Act, once the BRP was appointed, they took control over the management of the business and the management would then report to the BRP. Despite this, the shareholders’ rights still applied and the Minister remained the executive authority. The BRP also had to give progress reports to the court on the rescue process.

He explained that the reason the BRP had not spoken at SCOPA was because they were still busy with the report. Once it was completed it would be published, and once published it could go to creditors, and if they approved it, it could be implemented.

Following up on the BRP situation, Mr Gumede said that it was difficult for the Committee to go somewhere else in order to meet with the three BRP men who had attended the SCOPA meeting, because these people were not accountable to the Committee and instead were accountable only to the courts. He asked the Department if they did not find themselves in competition with BRP, as in the work situation the board and management were with them, and this would make it problematic for the shareholder to exercise its rights.

Ms Mkhwanazi said that since the Minister would always have supervision over the entity, perhaps he had to account to the Committee on what happened under BRP.
 
Ms Malinga said that since the BRP had been brought in by the DPE, the Department should also be able to bring the BRP before the Committee in order to account. She said it was worrying that the Department still had to wait for so many things in relation to the BRP.

The Chairperson asked the Department to explain what the plan was that the BRP would be developing, and how many months it would take to develop it. Did the BRP have the power to pronounce policy changes within SAA before the shareholder did?

Mr Makhubela responded that the BRP plan was due at the end of February, after which it would be published. It would then be discussed with the stakeholder and taken to the creditors’ meeting.

Regarding policy changes, he said that the Act was very clear that the shareholders had the right to reject the plan, or propose an alternative plan. The BRP had to consult with the Department on the development of the plan as well.

Mr Waters asked what the point of putting a business under rescue was, if the shareholder could reject the plan.

Mr Makhubela said that the business rescue process was a consultative one, and shareholders needed to have a say because they ultimately had a vested interest in the business, and they had to ensure that their interest was protected in the rescue process.

Ms Makololo said that the questions being asked on ESKOM were valid, and it was appropriate for the Committee to be concerned about the state of the entity. ESKOM faced a multitude of problems and there were a multitude of interventions which the Department had identified and implemented. The solution to dealing with ESKOM was in four parts, as indicated in the turnaround plan that the board had presented in November 2018. The board had said they wanted an increase in tariffs to reflect the cost of producing electricity, and that they were committed to reducing costs within the business, which required a substantial amount of retrenchments.

The third part of the plan had been about asking the government for a solution, and at the time the board was asking the government to take on R100 billion of their R450 billion debt. The board had recognised that ESKOM’s business model was not sustainable, and had asked the business to make changes going forward. The President had appointed an ESKOM sustainability team to look at the board’s proposal, since the amount of debt ESKOM was asking the government to take over was quite substantial, and the task team had come up with the same recommendations as the board had come up with. The difference in the two recommendations was the timing of the restructuring -- the sustainability team had suggested that the unbundling process could be done immediately, while the ESKOM board felt it had to be done over time.

Ms Makololo said that since then, the government’s response had been that the National Energy Regulator of South Africa (NERSA) had given ESKOM lower tariffs than what they had required, and this had created about a R150 billion gap. This was the first lever in the turnaround plan which had not yielded results, and ESKOM had gone to court to appeal the decision in order try and close the gap. It was important to mention that if the gap was not closed through tariffs, another lever would have to be implemented in order to close this gap.

She pointed out that the second lever had been where the government had not supported the retrenchment of 16 000 workers from ESKOM, which would have resulted in cost savings of R13 billion, while the rest of the savings would come from coal cost reductions from through independent power producer (IPP) contract renegotiations and capex optimisation.
 
As the R13 billion savings in employee costs had not been achieved due to the plan not being supported, ESKOM was now embarking on a voluntary severance package (VSP) process in order to reduce the number of people through natural attrition. As for coal costs, ESKOM had embarked on a process to review their contracts, the bulk of which were contracts which had been concluded in 2018 when ESKOM was running out of coal, and those companies were making super profits.

Ms Makololo said that judging from how the coal industry was performing in the country, the Department predicted that the cost of coal would not be coming down. South Africa had not investing in the coal industry since 2007, and as a result coal mines were still producing the same amount of coal as they were then, and the main suppliers of coal in the country had left. Apart from capital issues, the country had to deal with the security around mining policies in order to have expansion in coal investments.

On the Integrated Transport Plan (ITP) contracts, she said that the Ministers of Public Enterprises and Mineral Resources and Energy had convened the ITP industry, and there had been conversations around how lower tariffs could be achieved. The Department realised that the contracts from bid windows 1, 2 and 3 were high on conclusion, and after a 10 to 20 year escalation, those contracts would end up in a R10 megawatt per hour price range, and this would be quite substantial for South Africa. This was an ongoing process which the Ministers said had to be concluded by the end of March.

The downside to the cost savings which ESKOM had achieved -- an estimate of about R6 billion – was that there had been leakages in terms of over expenditure on diesel costs, as diesel plants were running above what had been budgeted for. On the issue of the R100 billion debt which ESKOM had asked government to take off their books, Ms Makololo said that at the end of the last year ESKOM had earnings before interest and taxes (EBIT) of about R35 billion, and their debt payments and servicing was about R75 billion. ESKOM could not afford to pay back pay back the capital and service the interest of its debt, and this was why the government had made the commitment to support ESKOM and ensure that they were able to meet their obligations while government was making a decision on what the fundamental solution to the debt would be.

She responded to Mr Waters’ question, saying that ESKOM would receive a R49 billion bailout by the end of March 2020, R59 billion in the following financial year, and R33 billion in 2021/22. This money was to ensure that ESKOM remained a going concern while a debt solution was being found.

Ms Makololo said that it was important to make a distinction between ESKOM debt to lenders and municipal debt. She explained that the R450 billion debt was money that the entity had borrowed from lending institutions in order to expand the building programme, as well as invest in existing stations, while the R39 billion from municipalities was a separate number, which was money meant to be coming from electricity connections. The municipal debt issue was one which was quite difficult for ESKOM to deal with on their own, and they had resorted to asking the government for help on it. The municipalities which were not paying were the same ones that were having negative audit outcomes, which meant that this was fundamentally a local government issue manifesting itself as an ESKOM challenge. She repeated that ESKOM had taken steps to disconnect municipalities which were not paying, but even this had become an issue since ESKOM had been interdicted and taken to court by various municipalities.

Ms Makololo said the government had had a ministerial task team which had raised many critical policy issues that it needed to deal with on the distribution of the sector. The task team had not really had a positive impact on the amounts that ESKOM had been able to recoup.

Responding to the question on whether or not the new Acting Chairperson of ESKOM was effective, she said that the President had announced that the he would be an interim appointment, but during this time an announcement would be made on strengthening the board. There was a need for new skills on the board to deal with the problems of ESKOM, and Cabinet was expected to make an announcement on the new board soon.

Regarding the roadmap, the Special Paper announced by the President had given an outlook of what it would take to unbundle ESKOM. The Department would have to come back to report on progress on the Special Paper, as well as the on issues which had been mentioned in the presentation.

Ms Mkhwanazi proposed that the roadmap update be the standard item for the following meeting.

Ms Malinga appreciated that Ms Makololo had provided clarity on the R450 billion owed by ESKOM. However, it was not in ESKOM’s best interest to pursue a R39 billion bill when they were still owing R450 billion.

Mr Waters asked if the R59 billion bailout mentioned was only for ESKOM, or for all SOEs.

Ms Mkhwanazi pointed out that one of Ms Malinga’s comments had not been responded to. The issue of pension funds mentioned in the news had not been responded to, and she wondered whether or not this would be responded to in the following meeting.

Ms Makololo said that the R59 billion was for ESKOM alone.

Regarding the pension funds, she said that where the R450 billion was concerned there were a number of ways to deal with the debt:

the government could decide to give ESKOM the R450 billion to settle all the lenders;
the government could make the amount a part of their R3 trillion debt, which would bring its debt to gross domestic product (GDP) above 60%, and close to 70% in the next three years; or
ESKOM could look at getting equity partners who would get a shareholding in their business for the money necessary to pay off lenders.

COSATU’s proposal was to put money into ESKOM for shareholding rights. There were a variety of things to be considered in choosing the appropriate option, and nothing had been decided on yet.

Mr Makhubela added that the issue municipal debt, and the issue of loans which were raised to build the new power stations, were different and conflating them could be dangerous in the public arena, since it gave people a licence not to pay. The Department was raising money from lending institutions because the government did not have enough capital to invest in infrastructure programmes, and the money was raised on the basis that users would pay. If politics were allowed to come into play and people were given license not to pay, the infrastructure investment programme which the President said was required to revive the economy would not be possible.

Mr Bangane responded to questions on DENEL. He started off by clarifying that the loss reported was cumulative and not per quarter, and that the Department was expecting it would be between R1.4 and R1.6 billion by the end of the year. The board had made a decision not to take any contract which did not yield a profit margin of a 7% minimum. The margins of the Egypt contact were within the requirements of the board. This had been a good contract for DENEL to take on, as there were no offset expectations from their side. Egypt would be paying R700 million on for the research and development (R&D) and DENEL would own the intellectual property (IP) that came from the contract. This meant that DENEL would be able to sell the product to other people who might be interested in it as well.

Responding to the issue of delivery on the Chad contract, he said that the board had decided that the contract would be a loss making one, and therefore DENEL should not execute it. Any prepayments that the entity had received were being returned to the client. The Chad contract had been one of the contracts which had created problems for DENEL, because technical agents were given money to the value of R7 million upfront. He reported that the board had taken legal steps to try and recoup the money.

Regarding the recapitalisation shortfall of R1 billion, whether the money would have rescued DENEL or not depended on a number of factors.

He stressed that there were systems within the entity which needed to be decided on now in order to be able to preserve the skills for the organisation going forward.

On the issue of regulation, he said that DENEL was an unusual company in its field because it exported 60% of its output, although the country’s arms export regulations made it difficult for local companies in the defence industry to ship their products to other countries. The local defence force budget could no longer support DENEL or other local companies doing similar work, which meant that DENEL had to look elsewhere for support, and this created an added level of uncertainty.

Mr Bangane said that a decision had to be made on how the company could be positioned in the international market, and the government had to decide whether they wanted to allow foreign ownership within DENEL. However, the position of the board on how DENEL could be viable had been presented to the Minister.

Mr Makhubela referred to the cost drivers in the DPE’s programme 2, and said that people costs were the main drivers within the Department. There was also an issue relating to vacancies. On the issue of SOE Bill, he said that the Department had opted to use one of the multilateral organisations to help draw the bill up. He said that contracting was proving to be a nightmare, so an alternative strategy was required from the side of the Department; The Department hoped to lay the issue to rest within the current medium term framework (MTF) period.

Progress on the deed of settlement for the Richtersveld community was that all the issues related to the deed of settlement had been completed, but the rehabilitation of the area would take a while, and there was adequate funding for this. The handing over of the town was one of the last things which had to be done in the deed of settlement.

On the issue of Transnet performance, he said that the fact that the issue was being discussed meant that effort was being put into it. The Minster had been in Durban at the end of 2019 with a team led by one of the Department’s chief directors in order to track the commitments that the business had made.

Responding to questions about the performance of the Alexkor administrator, the Acting DG said that the administrator had been given very specific deliverables. These were informed by the amount of money still available to support Alexkor’s Johannesburg operations.

Responding to Mr Waters’ question on whether SAA was a vanity project, he said that post-World War II, the Afrikaner poverty programme was addressed primarily by SOEs. Now there was a black poverty problem and other issues of inequality which plagued the country, and as it was stated in the National Development Plan (NDP), SOEs were going to be the vehicle of delivery. It could not be that when they needed to be utilised for the improvement of black lives, they suddenly needed to be sold. Even if these SOEs were sold, who would they be sold to, because poor black people did not have any money?

He explained that the losses that the Department had reported, from SOEs which had not released their reports, were coming from the management of the SOEs.

He clarified that the network routes which had be mentioned were not the finalised routes that the restructured SAA would be operating on.

He assured the Committee that the Department’s supervision of Transnet, with the limited available resources, was quite robust. The Department received quarterly reports and also conducted site visits, and the Minister was always kept informed.

He reemphasised that SOEs had been hollowed out through corruption and state capture, and sometimes things had to break down before they improved.

Mr Makhubela said that the DPE was looking at the issue of management across its SOEs, and trying to hire people into positions for the right reasons and in line with the priorities of the state. 

He acknowledged the Committee’s request to have the DENEL’s forensic report sent to Members.

He asked Members to note that when some of the SOEs were established, they had not been properly capitalised, resulting in some of the problems that they were facing right now.

With the new CEO and management coming in at Transnet, improvements were expected. The reality of Transnet was that in relation to productivity and efficiency, the entity had not been doing well for a number of years. There was typical monopoly behaviour at Transnet which needed to be addressed. Before the end of the calendar year the corporatisation of the Transnet National Ports Authority (TNPA) would take place, as it had been noticed that the profits made by Authority, which were supposed to go towards ensuring port efficiency, were instead being used in other divisions of Transnet.

The meeting was adjourned.
 

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