Chairperson, hon members, allow me to focus on the Special Adjustments Appropriation Bill of three entities reporting to the Department of Public Enterprises and briefly speak on the Land Bank. The hon Mbili will be dealing with the special appropriations for the Department of Sport and Recreation and the Department of Communications.
State-owned enterprises play a critical role in the realisation of our developmental objectives. They make a critical intervention in key sectors of our economy. Therefore, it is important that state-owned enterprises should operate efficiently and rely less on a constant cash injection from the fiscus.
It is understandable for government to inject cash in state-owned enterprises during their initial start-up phase. After the initial capitalisation, it is assumed that they have to rely on the strength of their balance sheet to borrow from capital markets. Obviously, we do not want to burden the state-owned enterprises with so much debt to the extent that they would have to increase their tariffs sharply to compensate for much-needed capital expenditure and investment.
The sale of noncore businesses and assets is critical to the strengthening of their balance sheet. It is also understandable for government to recapitalise state-owned enterprises under special circumstances, especially when undertaking a major turnaround strategy.
I must also caution that for such a strategy to succeed, Parliament has to exercise proper oversight on the activities of the state-owned enterprises and their turnaround strategies. Failure to do so will lead to state-owned enterprises constantly depending on the fiscus for capital injections.
The core business for Alexkor is the mining and marketing of diamonds sourced from the land and sea. The 2007 annual report of Alexkor indicates that by the end of October 2006 the company was facing increasing operating losses, resulting in a depletion of the cash reserve to the extent that government had to provide the amount of R32,9 million to enable Alexkor to continue operations. The annual report indicates that Alexkor's solvency position remains critical given the limited operating cash reserves. The report indicates that Alexkor will continue to operate at a loss until the recapitalisation programme of the joint venture with the Richtersveld community is agreed upon and implemented. The R44,7 million allocated to Alexkor in this special adjustment is meant to cover the operational expenses until the end of March 2007. It is estimated that by March 2007 an agreement would have been reached with the Richtersveld community on the recapitalisation of the joint venture agreement. We hope that the turnaround strategy considered by Alexkor on the transfer of noncore activities from the mining operations to the relevant structures will be successful.
Regarding the Pebble Bed Modular Reactor, government expects nuclear power to make a significant contribution as a primary source of electricity. Government has made a commitment to finance 51% of the capital requirements of the Pebble Bed Modular Reactor.
The development and commercialisation of the PBMR will unfold in four phases: Phase 1 would involve the design and construction of the demonstration power plant at Koeberg and the pilot fuel plant at Phelindaba. Phase 2 would involve the commercial phase, which entails the supply of power to Eskom. Phase 3 would involve the export of electric nuclear power plants to the rest of the world, and phase 4 would involve the development and supply of Pebble Bed Modular Reactors for process heat applications.
The R1,8 billion allocated to the PBMR is an interim arrangement to finance the operational expenses and meet contractual obligations until the end of December 2007.
The 2007-08 corporate plan of the Land Bank indicates that in the past years the Land Bank's net capital and reserves have been reduced substantially due to large bad debt write-offs and provisions for bad debts in line with new accounting standards.
This led to a reduction of the Land Bank's capital adequacy ratio to below 10%. In fact, the current bank capital adequacy stands at 7%. This has major implications as it impacts negatively on the bank's ability for growth and funding development. This makes private sector investors nervous as they assume a greater risk for each of the bank's loans.
National Treasury gave the bank a R1,5 billion letter of support to reduce the concerns of the financial markets. The R700 million allocated to the Land Bank in this special adjustment is meant to address the capital adequacy ratio and liquidity shortfall.
The R222 million for Denel is required to pay for a claim against the government guarantee granted to Denel. Denel is making major progress in the implementation of the turnaround strategy it has adopted. There are significant contracts that have been secured in the domestic markets. We hope that it will break even in the coming few years.
Lastly, let me thank the chairperson of the portfolio committee, Mr Nhlanhla Nene, and also the members of the portfolio committee for insisting that heads of these state-owned enterprises and entities should give a full explanation of why they need the money. Indeed, it was a very robust engagement. Thank you. [Applause.]