Budgetary Review and Recommendation Report of the Portfolio Committee on Public Enterprises, dated 22 October 2014

The Portfolio Committee on Public Enterprises (the Committee), having considered the performance and submission to National Treasury for the medium term period of the Department of Public Enterprises, reports as follows:

 

1.     Introduction

 

1.1        Mandate of Committee

 

The mandate of the Committee is to consider legislation referred to it; exercise oversight over the Department and its eight state-owned companies (SOCs); consider international agreements referred to it; consider the budget vote of the Department of Public Enterprises; facilitate public participation in its processes; and to consider all other matters referred to it in terms of legislation and the rules of the National Assembly.

 

1.2        Description of core functions of the Department

 

The Department of Public Enterprises has a distinct mandate of shareholder management on behalf of the state. It has a responsibility to ensure that SOCs drive investment, productivity and transformation in the sectors within which they operate. The Department also seeks to unlock growth, drive industrialisation, create jobs and develop skills. 

 

1.3        Purpose of the BRR Report

 

Section 77(3) of the Constitution stipulates that an Act of Parliament must provide for a procedure to amend money bills before Parliament. This constitutional provision gave birth to the Money Bills Amendment Procedure and Related Matters Act (No. 9 of 2009). This set out a process that allows Parliament to make recommendations to the Minister of Finance to amend the budget of a national department.

 

The Money Bills Amendment Procedure and Related Matters Act therefore make it obligatory for Parliament to assess the Department’s budgetary needs and shortfalls vis-à-vis the Department’s operational efficiency and performance. This is done taking into consideration the fact that the Department has oversight responsibilities over eight state-owned companies, namely Alexkor, Denel, Eskom, Pebble Bed Modular Reactor (PBMR), South African Airways (SAA), South African Express (SAX), South African Forestry SOC (SAFCOL) and Transnet. There is a policy decision to transfer Broadband Infraco to the Department of Telecommunications and Postal Services, hence the Department of Public Enterprises would not be tabling an annual report for Broadband Infraco.

 

1.4        Method

 

This report culminated from a very intense and thorough analysis and interaction with the Department and state-owned companies through briefings, oversight visits and interaction with relevant stakeholders. These included a briefing from the Department of Public Enterprises on its annual report, a briefing from the Office of the Auditor-General on the audit outcomes and a deliberation on the analysis done by the support staff on the performance of the Department in terms of its service delivery targets and financial performance.

 

 1.5       Outline of the contents of the Report

 

The budgetary review and recommendation report of the Committee contains the following:

 

§  Overview of the key relevant policy focus areas.

§  Summary of previous key financial performance recommendations of the Committee.

§  Overview and assessment of financial performance.

§  Overview and assessment of service delivery performance.

§  Finance and service delivery performance assessment.

§  Committee observation and response.

§  Summary of reporting requests.

§  Committee recommendations.

 

 

2.     Overview of the key relevant policy focus areas

 

2.1        Policy Context for the Mandate of the Department

 

The Department of Public Enterprises (DPE) provides oversight over eight SOCs. These SOCs derive their mandates from the Department of Public Enterprises and other policy Departments. The Department of Public Enterprises designed programmes responsive to their oversight namely; energy and broadband, manufacturing enterprises, transport enterprises, economic impact and policy alignment and strategic partnerships.

 

All the SOCs are incorporated as companies in accordance with the provisions of the Companies Act, 2008. Except for Denel, all the SOCs are established in terms of their own legislation relating for which they were founded. DPE is both the founder and the administrator/custodian of all legislation relating to the establishment of SOCs.

 

In terms of section 62 (2)  of the Public Finance Management Act (PFMA) of 1999, as amended, the Minister of Public Enterprises has, inter alia, the responsibility of ensuring that SOCs comply with the PFMA legislation and policies of the Department. The shareholder Ministry acts on behalf of Government’s strategic objectives. This evolution is underpinned by an over-arching shareholder management process aimed at providing enduring strategic rationale for SOCs. Expansion of the role of SOCs within the current economic management framework has required the Department to introduce measures to ensure that SOCs contribute to the developmental outcomes, as outlined in the National Development Plan (NDP).

 

The policy evolution can be contextualised within the reason for the establishment of the Department. In the annual report 2013/14 the Director-General acknowledges that the Department was established initially as a privatisation and corporatisation office. This reflected the government’s policy to restructure its ownership and participation in the economy. The disposal or privatisation of state assets was also leveraged to encourage participation of the historically disadvantaged in the economy. As an Office, limited resources (both financial and human) were provided to oversee the disposal of the state’s assets. The process of privatisation was largely informed by the need to reduce government debt, as most of the state companies were incurring losses. As the government introduced and implemented transformative policies, the role of SOCs in driving the developmental agenda strongly emerged. As a result, the mandate of the Department has evolved to reflect the change in the policy approach.

 

The Director-General further states that the evolution of the mandate has exerted extreme pressure on the capacity of the Department and has exposed some weaknesses in the current operational model. As a government department, the DPE operates within the Public Service Act and Regulations. This constrains the Department’s ability to effectively compete in the labour market. This has resulted in relatively high staff turnover at senior management level and inability to attract high calibre individuals.

 

The Director-General concedes that, despite the highlighted challenges, the Department has remained functional with strong institutional structures that oversee implementation and compliance. This has been reflected in the clean audit record achieved by the Department over the past eight (8) years, with the exception of the 2012/13 external audit, on which the Department achieved an unqualified audit opinion. This was as a result of a technical error on the Department’s annual financial statements, rather than a collapse of controls.

 

2.2        The National Development Plan (NDP)

 

The National Development Plan (NDP) aims to eliminate poverty and reduce inequality by 2030. The plan spells out that, to accelerate progress, deepen democracy and build a more inclusive society, South Africa must turn political emancipation into economic wellbeing for all. Realising such a society will require transformation of the economy and focused efforts to build the country’s capabilities. It further states that, to eliminate poverty and reduce inequality, the economy must grow faster and in ways that benefit all South Africans.

 

The Department of Public Enterprises responds to the NDP through ensuring that SOCs are critical vehicles for economic growth and development. The Department’s vision to drive investment, productivity and transformation in its portfolio, SOCs, their customers and suppliers so as to unlock growth, drive industrialisation, create jobs and develop skills responds and aligns with the National Development Plan, New Growth Path and the Industrial Policy Action Plan (IPAP).

 

The NDP further acknowledges that South Africa’s development is affected by what happens in the region and the world. Success will depend on the country’s understanding and response to such developments. In addition to a detailed scan of the demographic projections, the plan discusses five notable trends: global economic shifts, technology, globalisation, climate change and African economic growth. Long-term shifts in global trade are reshaping the world economy and international politics. It is likely that world economic growth over the next decade will be lower that it was during the previous one. This will require greater policy focus, effective implementation of industrial policies and improved skills development. South Africa’s experience of globalisation includes tangible benefits and increased complexity. The challenge is to take advantage of opportunities while protecting South Africans - especially the poor - from risks associated with trade and investment patterns. Several structural weakness must be overcome if Africa is to translate rapid growth and higher demand for commodities into rising employment and living standards. The high domestic cost of broadband internet connectivity is also a major hindrance.

 

The Department of Public Enterprises beyond its oversight role must strengthen its intergovernmental coordination capabilities with other Departments in order to respond appropriately to changes in dynamic global environment. This goes beyond memoranda of understanding (MOUs) to a Cabinet approved framework that requires joint programme implementation to attain better policy responses. The Department should focus efforts on how to ensure regional cooperation and identify areas in which complementary national endowments offer opportunities for mutual beneficial cooperation. SOCs should also reduce the global emissions footprints as the effects of climate change place a burden on health, livelihoods, water and food, with disproportionate impact on the poor, especially women and children. The Department of Public Enterprises has improved its planning framework for better policy coordination efforts for global climate change effects. All South Africans should be able to acquire and use knowledge effectively. To this end, institutional arrangements to manage information, communications and technology (ICT) environment need to be better structured to ensure that South Africa does not fall victim to a “digital divide”.

 

The NDP articulates that, accountability in state-owned enterprises has been blurred through a complex, unclear appointment processes and at times, undue political interference. It further recommends clarifying lines of accountability by developing public-interest mandates that set out how each state-owned enterprises serves the public interest, ensuring appointment processes are meritocratic and transparent, and improving coordination between policy and shareholder departments. The Minister in the annual report states that, the Department of Public Enterprises exists to support the Shareholder Representative in playing her role, performing her duties, exercising her responsibilities and discharging her obligations. In doing so, she require the Department to operate at four levels: to distil government policy and strategy into a Shareholder’s Compact, or performance agreement, with each of the Companies and provide careful, incisive and detailed scrutiny of the way in which each Company performs against agree targets. Secondly, to assist and support Companies to achieve targets and help remove blockages in their operating environment. Thirdly, to undertake interventions to harness the combined capacities and capabilities of all the Companies and other key players to unlock inclusive growth, drive industrialisation, create jobs, develop skills and “deracialise” the economy. Lastly, to join her in engaging other relevant players in the policy and regulatory terrain to obtain certainty and secure the most conducive circumstances for the Companies within which to operate and succeed.

 

The Portfolio Committee on Public Enterprises has a responsibility to attain the vision set out in the National Development Plan through oversight of State Owned Companies. The Minister accountable for ensuring that the Department develops appropriate planning, monitoring and oversight frameworks to monitor SOCs. This will also require that the Department develops a Cabinet approved framework that will enable better coordinating mechanism through an appropriate intergovernmental relations system that leverage its developmental mandate with other national government departments and other spheres of government such as provincial and local government. This mechanisms of coordinating responses towards the achievement of the NDP through appropriate institutional frameworks must be presented to the Portfolio Committee for engagement and recommendations. This will capacitate the Department of Public Enterprises in its role and mandate.

2.3        State of the Nation Address (SONA)

The President in his State of the Nation Address 2013 stated, by the end of March this year, starting from 2009, government will have spent about 860 billion rand on infrastructure. Various projects are being implemented around the country. The construction of the first phase of the Mokolo and Crocodile River Water Augmentation has commenced and it will provide part of the water required for the Matimba and the Medupi power stations.

Government will shift the transportation of coal from road to rail in Mpumalanga, in order to protect the provincial roads. Thus the construction of the Majuba Rail coal line will begin soon. The President further states committed to improve the movement of goods and economic integration through a Durban-Free State-Gauteng logistics and industrial corridor. Government have also committed to improve the movement of goods and economic integration through a Durban-Free State-Gauteng logistics and industrial corridor. In this regard, substantial work is now underway to develop the City Deep inland terminal in Gauteng. Initial work has commenced in the expansion of the Pier 2 in the Durban Port. And thirdly, land has been purchased for the development of a new dug-out port at the Old Durban airport.

The President states that, to improve the transportation of iron-ore and open up the west coast of the country, we have expanded the rail capacity through the delivery of 11 locomotives. The first phase of the expansion – to increase iron ore port capacity at Saldanha to 60 million tons per annum – was officially completed in September last year.

In the energy sector, government has now laid 675 kilometres of electricity transmission lines to connect fast-growing economic centres and also to bring power to rural areas. In addition, government signed contracts to the value of R47 billion in the renewable energy programme. This involves 28 projects in wind, solar and small hydro technologies, to be developed in the Eastern Cape, Western Cape, Northern Cape and in the Free State. We established an 800 million rand national green fund last year.  To date, over 400 million rand investments in green economy projects has already been approved for municipalities, other organs of state, community organisations and the private sector across all provinces. We have also rolled out 315 000 solar water geysers as of January this year, most of which were given to poor households, many of whom had never had running hot water before. The state of nation pronounce that government has scored successes in extending basic services through the infrastructure programme. Close to 200 000 households have been connected to the national electricity grid in 2012.

The Department of Public Enterprises should in its plans reveal how it supports the delivery of the complementary infrastructure. This should be coordinated, implemented, monitored and reported supported through approved institutional framework such as Presidential Infrastructure Coordination Commission (PICC), and forums with a mandate to coordinate Strategic Infrastructure Programmes (SIPs).

2.4        The Presidential Review Committee (PRC) on State Owned Enterprises

 

The Presidential Review Committee on state owned enterprises concluded its work in the year of reporting. The PRC’s mandate was linked to the Medium Term Strategic Framework (MTSF) (2009-2014). The PRC had 21 terms of reference based on four work streams namely: development and transformation, governance and ownership, business case and viability and strategic management and operational effectiveness. The PRC identifies four key areas that contribute towards a well-run and successful State Owned Enterprise (SOE). The Department of Public Enterprises has a responsibility in implementation of the recommendations of the PRC and in assessing these four areas: strategy setting and portfolio, government and management, standard monitoring methods and management and operations.

 

In its last Budgetary Review and Recommendation Report (BRRR) 2013, the Portfolio Committee recommended that the Department integrates the four areas raised in the PRC into its planning process. Whilst the investigation of SOCs conducted by the PRC was not confined to SOCs within the Department of Public Enterprises’ portfolio, it is important for the Department to develop a mechanism in which these will find expression in their mandate. In this regard, there is need for the Department to institutionalise the PRC’s recommendations. The Department must ensure that as part its Strategic Plan and Annual Performance Plan development process a mechanism should be spelt out on how it will contribute to the PRC recommendations. This process should be aligned to programme implementation within the department’s organisation structure.

 

2.5        Delivery agreement targets for 2013/14 and 2014/15 (Outcome-based approach)

 

In relation to Government’s 12 Outcomes, the Department is primarily contributing to creating an efficient, competitive and responsive economic infrastructure network (Outcome 6), which forms the basis of the delivery agreement signed in October 2010. This delivery agreement forms the core of the performance agreement between the President and the Minister. Furthermore, the Department, through the activities of its SOCs, contribute to other outcomes such as decent employment through inclusive growth, skills development and rural development.

 

The following is the Department’s contribution towards achieving the fours (4) outcomes that have been prioritised by government:

 

(1)   Creating an efficient, competitive and responsive economic infrastructure network (Outcome 6)

 

The MTSF was adopted during the recession. One of the key objectives was to stabilise the economy and place it on a different growth trajectory. At the centre of this objective was: implementation of the capital expenditure programme that would address the capacity constraints experienced by the economy during high growth periods between 2005 and 2007; to act as a stimulus to jump-start the economy. In this regard, Eskom’s build programme, as well as the Transnet capital expenditure programme, formed the core of the government’s infrastructure investment strategy.

 

The progress that has been made to accelerate infrastructure investment in the economy is highlighted below.

 

(i) ESKOM

 

(a) Funding of the Eskom build programme up to 2018

 

Funding of the build programme emerged as one of the major challenges with roll-out of the build programme in the electricity sector. This is as a results of tariffs not being sufficient to cover operational costs as well as provide a reasonable return on investment to allow the utility to fund investment in additional generating capacity. Over the past five years, the Department has supported Eskom to secure tariff adjustments that will support its financial sustainability as well as provision of guarantees to keep the financing cost lower. As at 31 March 2014, R271.6 billion (90.5%) of the R300 billion borrowing programme had been secured. The R300 billion borrowing programme is based on the original funding requirements as at April 2010 and covers the period 1 April 2010 to 31 March 2017.

 

It should be noted that additional funding requirements, including those resulting from the lower than expected MYPD 3 tariff determination, are not included in this borrowing programme. The draw downs for the year ending 31 March 2014 against the R300 billion funding plan is R44.7 billion, bringing the cumulative amount that has been drawn to execute the build programme to R188.7 billion. Additional funding for the period until 31 March 2018, as a result of the MYPD3 decision amounts to R301 billion which still needs to be secured.

 

(b) Progress on delivery of build programme (Medupi, Kusile, Ingula, Transmission Lines and Renewable Projects)

 

Eskom spent R58.2 billion on capital expenditure in 2013/14, reflecting a sustained increase in the capital expenditure in support of Government outcomes. The following are the key achievements of the build programme:

§  Eskom completed the return-to-service project during the reporting period. All three power stations (Camden, Grootvlei and Komati) are fully operational. The last unit of this project – Komati Power Station’s Unit 3 – was commissioned in September 2013. This brought the total amount of generating capacity for return-to-service added to the grid since 2005 to 3 731MW. This has been one of the factors that have played a crucial role in averting the collapse of the national electricity grid.

§  The refurbishment projects have made good progress, despite the ongoing challenge of outage constraints. All the Kriel units have now been refurbished, with the final unit (Unit 5) being synchronised on load on 15 March 2014. Furthermore, three of the six Matla units have been refurbished, with the third unit (Unit 5) synchronised on load on 25 March 2014. Delays were experienced at Duvha due to outage movements.

§  As at 31 March 2014, Medupi had a day variance of 24.48 days (within the target of 30 days late variance). Eskom remains on track for synchronisation during the second half of 2014. Commissioning of the first unit has started and Eskom is working with contractors to ensure that agreed schedules and processes are adhered to. Key challenges include finding solutions for the control systems.

§  Kusile achieved a day variance of 12.9 days (within the target of 30 days late variance). The station is scheduled for synchronisation by the end of 2015. The key challenge is finding a solution for control systems to avoid a repetition of the delays experienced at Medupi. Four medium term contracts have been signed for coal supply to Kusile Power Station during the commissioning phase. The conclusion of long term coal and limestone supply agreements for Kusile Power Station remains a focus area.

§  Work continues at Ingula, but the tragic incident that cost the lives of six contractors has affected the schedule. The delay has been estimated at 18 months. At the end of the reporting period, Ingula had a day variance of 11.6 days (within the target of 30 days late variance). Work to install turbines and generators will begin soon.

§  Construction of the 100MW Sere Wind Farm is progressing well, with 69% of the tower foundations and 17% of the turbines completed.

§  Approximately 811km of power lines and 3 790MVA of sub-station capacity were also commissioned during the course of the year.

§  Mega Generation Projects reported construction progress as follows as at 31 March 2014” Medupi -60%; Kusile - 30%; Ingula - 72%; and Sere Wind Farm - 47%.

 

(c) IPP contracts that have been signed

 

The electricity industry is undergoing reforms targeted at: enhancing participation of the private sector; attracting additional investment to address current capacity challenges; enhance the use of renewable energy. The first project under the Department of Energy (DOE) renewable independent power producers (RE-IPP) programme was connected to the grid on 27 September 2013 and the first IPP was commissioned on 15 November 2013. A total of 467.3MW is currently available to the system from these independent power producers (IPPs). The DOE approved an additional 1 457MW, pursuant to the third window submissions. No contracts have yet been signed for this capacity. Further PPAs, totalling 1 005MW, for DOE Peaker Plants were entered into on 3 June 2013 and became effective on 29 August 2013 (DOE Peaker Programme). Commissioning of these plants is expected during the 2015/6 financial year.

 

(ii) TRANSNET

 

The 2014/15 financial year is the third year of Transnet’s roll-out of the Market Demand Strategy (MDS) that is underwritten by a rolling capital programme worth over R300bn. In the past five years, Transnet has invested over R120bn in infrastructure and capital projects, most of which has been committed to the rail business. This is crucial to enhance the efficiency of the logistics system and to reduce the cost to move goods, which will contribute to the overall competitiveness of the economy. Key projects executed by the company over the past five years included the following:

 

(a) GFB locomotives

 

During the 2013/14 financial year, Transnet awarded a R50 billion contract for acquisition of 1 064 locomotives (599 new dual-voltage electric locomotives and 465 diesel locomotives) – this makes it the largest locomotive acquisition contract in the history of South Africa. Not only will this acquisition of locomotives enable Transnet to increase its rail volume capacity, but the procurement process has been structured in such a way as to allow for maximisation of localisation benefits. The transaction is expected to boost the country’s manufacturing capacity while also transforming the rail industry. Nine of the 95 electric locomotives were delivered in the 2013/14 financial year. Local assembly of the locomotives commenced on 4 February 2014 at Transnet Engineering in Koedoespoort. The remaining 23 of the 43 Class 43 diesel locomotives were received in the 2013/14 financial year.

 

(b) Iron ore line expansion up to 60,0mt

 

The last 26 of the 32 locomotives needed to facilitate the increase in iron ore capacity to 60,0mt were tested and accepted into operations during the 2013/14 financial year. The pre-feasibility study to expand capacity from 61mt to 82,5mt has been completed. Phase 1D (being the addition of a 3rd tippler and associated rail works) has been approved by the Transnet Board of Directors, at a cost of approximately R1,6 billion. The 3rd tippler will ensure that 60mt can be exported on a sustainable basis, as the existing two tipplers currently do not allow for any down time.

 


(c) Coal line expansion up to 81,0mt

 

Infrastructure work required to expand the coal line from 68mt to 81mt commenced during the 2013/14 financial year. The work is expected to gain momentum during the 2014/15 financial year, with construction of the consolidation yards at Saaiwater and Blackhill yards.

 

(d) Durban Container Terminal (DCT)

 

Transnet has commenced with the reconstruction and deepening of seven steel sheet piled berths at Maydon Wharf, in the Port of Durban. Construction of the first berth was successfully completed and is now fully operational. The contract for the remaining six berths was awarded recently and on-site construction is expected to commence in the near future.

 

(e) Durban Dig-Out Port

 

The Durban International Airport (DIA) site acquisition from ACSA was concluded during the 2012/13 financial year at a total cost of R1,85 billion. The DIA site is proposed to be developed into a dig-out port to address demand requirements in the container, liquid bulk and automotive sectors up to 2040.

 

(f) Cape Town Container Terminal

 

Expansion of the Cape Town Container Terminal aims to increase capacity from 0.9 million TEUs to 1,4 million TEUs to address growth in demand for containers in the Western Cape region. The capital project to deepen berths and increase container handling capacity to 900 000 TEUs has been completed. Consideration is now being given to increasing the container handling capacity to 1, 4 million TEUs.

 

 

(g) Ngqura Container Terminal

 

The Nqgura Container Terminal was launched in 2012. The port is positioned as a trans-shipment hub and a gateway for container traffic into Southern Africa. The second phase A of the project, to expand capacity from 800 000 TEUs to 1.5 million TEUs, has commenced and is expected to be completed during the 7-year MDS period.

 

(h) New Multi-Product Pipeline (NMPP)

 

Significant progress has been made on the NMPP with favourable weather conditions having enabled accelerated construction work to take place. The project has, however, faced some challenges with regard to industrial action and tank construction work. In spite of these challenges, the project is expected to be completed during 2015.

 

(i) Port of Durban

 

During the period under review, ship turnaround time was slightly below the target of 59, largely due to inclement weather. The gross crane moves per hour (GCH) on Pier 1 and Pier 2 are below target, with Pier 1 at 24 moves (target is 28) and Pier 2 at 25 moves (target is 30). Anchorage waiting time was also below target, at 57 hrs (target is 46). Infrastructure upgrades are being implemented to improve functioning of the port.

 

(j) Port of Cape Town

 

The ship turn-around time was 29,6hrs better than the set target of 30hrs. The gross crane moves per hour were better than target, at 34 moves against a target of 32. Anchorage waiting time was below target at 57 hrs (target was 46 hrs). Average ship turn-around time in Cape Town and Durban improved from the previous year. The Port of Durban improved anchorage waiting time from the previous year, which is important for customer satisfaction. Cape Town’s performance was marginally lower than in the previous year.

 

 

(k) Volumes Transported by Rail

 

Transnet has continued to move volumes above 200 mt per annum, despite the lacklustre performance of the economy. During the period under review, 210.43 mt were showing a 1.3% increase in volumes compared to the previous financial year.

 

The volume growth was attributable to the following:

§  General freight (GFB) volumes of 88mt reflected a positive growth of 6% compared to the previous year.

§  Export coal volumes of 68.2mt were 11% below budget and 1% below the previous year.

§  Export iron ore volumes of 54.3mt were 12% below budget and 3% below the previous year. The 8.4% shortfall on the budgeted volume of 229.72mt was mainly due to export coal and export iron ore.

 

Key reasons for the deviation of a 19mt (88.4%) shortfall on total rail volumes were as follows:

§  A 7.3mt shortfall on export iron ore due to customer production problems and a decline in export iron prices due to slow global economic growth.

§  The 8.8mt export coal volume shortfall was partly due to a decline in export coal prices, customer related equipment failure, as well as internal and external operational constraints (such as locomotive failure and power failure, including RBCT cable failure and cable theft).

§  The GFB sector accounted for the remaining shortfall of 3.2mt. A range of factors affected volume performance, including slow domestic growth, industrial strikes, customer loading and offloading challenges and wet weather conditions.

 

(l) Migration of transportation of coal from road to rail

 

The coal business under-achieved on its annual target of 95.151mt. The actual achievement for coal was 83,13mt in 2014, which represents a 12.6% under-achievement.

Road to rail migration efforts are as follows:

§  Freight Rail’s market development initiatives target retention and growth of traditional rail customers in the mining and heavy manufacturing sectors (e.g. export coal and iron ore), including companies that beneficiate mining commodities. Other major customers are in the fuel, chemicals, agricultural and timber sectors.

§  The business is targeting new customers in the FMCG, textile and light manufacturing industries, where there are opportunities for ‘rail friendly’ commodity types to be shifted from road to rail.

§  The rail migration programme that focuses on Eskom coal is progressing well in support of the road to rail programme.

 

(m) GFB Productivity

 

On-time train departures improved by 24% compared to the previous year and by 5% compared to budget; this was due to diligent monitoring and follow-up on the root causes of deviations. On-time arrivals also improved by 4.5% compared to the previous year, but declined by 31% compared to budget, partly due to en-route system-failures. Diligent monitoring and follow-up on the root causes of departure and arrival problems will continue. The gradual delivery of 43 Class diesel locomotives for General Freight and focused attention on operational efficiency and volume growth resulted in an 8% improvement in asset utilization, compared to both the prior year and budget.

 

 (2) Outcome 4: Decent employment through inclusive growth

 

The Department was identified as one of the contributors required to support implementation of the outcome 4 delivery agreement. Infrastructure investment was identified as one of the job drivers in the NGP. The industrial capabilities that exist within SOC such as Denel are being leveraged to support the development of advanced manufacturing in the South African economy, in line with IPAP.

 

(a) DENEL

 

The turnaround of Denel has been crucial to preserve advanced industrial capabilities within the State’s portfolio. The company has continued to support the needs of the South African Defence Force, which has played a crucial role in developing capability to secure other markets. In June 2013, the company reported a R21 billion order book, which increased to R30 billion by December 2013. This will enable the business to meet its plan of doubling revenues to R8 billion by 2018/19. One significant order secured by the SOC in the 2013/14 financial year was a R10 billion contract by the South African Department of Defence to produce 238 Hoefyster infantry fighting vehicles (IFV) for the South African Army. The programme is critical in maintaining the country’s advanced defence manufacturing capabilities. Importantly, 70% of the components for the vehicles will be developed and manufactured in South Africa, with 2 000 jobs to be created at Denel and in the related South African defence industry.

 

In 2013/14 Denel revived its space and satellite capabilities, after entering into a collaborative relationship with the South African National Space Agency (SANSA). This will not only ensure that the country’s space and satellite capabilities are enhanced, but will provide local industry with the opportunity to tap into the growing and strategic global space and satellite industry. The SOC has delivered and supported the deployment of the Rooivalk combat support helicopter in combat operations in the Democratic Republic of Congo (DRC). The deployments were done under the United Nations Organisation Stabilisation Mission (MONUSCO) and have proven to be a game changer in peace enforcement operations.

 

(i) Localisation and transformation

 

The Department has continued to monitor implementation of the Supplier Development Plans of both Eskom and Transnet. Furthermore, the Department has incorporated localization targets into the shareholder compacts of these entities; to ensure that their procurement expenditures advance the industrialization programme of Government. The proportion of both components and services sourced locally by these SOCs has gradually increased since the introduction of the Competitive Supplier Development Programme (CSDP).

 

In the 2013/14 financial year, Transnet achieved 92% local content procurement as a percentage of total spend. This is an exceptionally good performance for the year, especially if you take into consideration that the local content target was only 70% of total spend. Transnet also exceeded the supplier development target by achieving 37% commitment of contract value to be invested in the country: the target was only 35%. Transnet’s performance in regard to supplier development would have been significantly higher if the SOC was not bound by the Preferential Procurement Policy Framework Act (PPPFA). Engagement with National Treasury on the PPPFA is ongoing in order to find a solution that will allow SOCs to maximize their procurement spend. BBBEE spend amounted to 94% of Total Measurable Procurement Spend (TMPS); this was against a target of 70%. Spend on Black Women Owned and Black Youth Owned remains low. The Department is, however, continuing to engage Transnet to find ways to improve spend on these two groups.

 

(3) Outcome 5: A skilled and capable workforce to support an inclusive growth path

 

SOCs within the DPE portfolio committed to support the National Skills Agenda through implementation of various skills initiatives, with a specific focus on scarce and critical skills. These initiatives include alignment of skills development programmes to the National Skills Development Strategy (NSDS) and National Skills Accord in support of the New Growth Path (NGP) and the National Development Plan (NDP). To ensure alignment to these interventions, the Department has established partnerships with the Department of Higher Education and Training (DHET), the Economic Development Department (EDD) and the Department of Trade and Industries (DTI). This is crucial to ensure that the skills development capacity of SOCs is leveraged to develop core and critical skills to meet the economy’s requirements.

 

The commitments made by SOCs and partnerships with relevant government departments has resulted in the enhancement of provisioning of scarce and critical skills by SOCs to address skills gaps within SOCs, as well as closing the national scarce and critical skills gaps. Thus SOCs’ alignment to the National Skills Accord focuses on the following commitments:

§  Commitment 1: Expand the level of training using existing facilities more fully.

§  Commitment 2: Make internships and placement opportunities available within  workplaces.

§  Commitment 5: Improve funding of training and the use of funds available for  training and incentives.

§  Commitment 8: Improve the role and performance of FET Colleges.

 

These commitments have been translated to form part of the targets that are included in the shareholder compacts concluded with the Executive Authority. In the 2013/14 financial year, and in line with the National Skills Accord, SOCs collectively committed to enrol 2 764 new artisan trainees of which: 1 040 trainees were to be enrolled at Eskom; 1 550 were to be enrolled at Transnet; and the remainder were to be enrolled at South African Airways, South African Airways Express (SAX), Alexkor and SAFCOL.

 

Transnet’s enrolment includes 1000 additional artisan trainees funded through the R175 million from the National Skills Fund (NSF) to be trained over a period of three years, which will optimise their training facilities in addressing the national skills gaps and with a special focus on supporting SIPs. To this end, a Memorandum of Understanding (MoU) was concluded between the Department and the DHET in October 2013.

 

Other commitments made by SOC include: training of technicians and engineers supported through bursary schemes and internship programmes; enrolment for training of cadet pilots; and training of learners in scarce and critical skills in areas such as train drivers at Transnet, energy field workers at Eskom, forestry workers at SAFCOL and airport crew members at both SAA and SAX. In addition, Eskom has also committed to ensuring that at least 2 500 matriculants and 2 500 graduates in the pipeline are trained in artisan trade skills and supported in work experiential learning programmes through Eskom and its supplier network.

 

As at 31 March 2014, a total of 2 109 new artisan trainees were enrolled at SOCs in the Department’s portfolio, of which: 1 569 artisans were enrolled at Transnet; 94 new artisan were enrolled at Eskom; 306 new artisan trainees enrolled at Denel (237 of the trainees enrolled for training through Denel Technical Academy partnerships with private companies); 147 artisan trainees enrolled at SAA; 36 artisan trainees enrolled at SAX; 4 and 6 artisan trainees enrolled at Alexkor and SAFCOL, respectively. A total of 459 technician trainees (Transnet – 339; Eskom – 100; Denel – 12; Broadband Infraco – 6; SAFCOL- 2) and 367 engineering trainees (Transnet – 138; Eskom – 179; Denel – 41; Broadband Infraco – 4; and SAFCOL - 4) were enrolled in various programmes supported through bursary schemes and internship programmes. Other SOCs scarce and critical skills enrolments include 55 new cadet pilots enrolled for training at SAA (34) and SAX (21), with 2 176 new learners enrolled in sector specific scarce and critical skills learning programmes to address sector skills shortages.

 

In addition, Eskom has enrolled 172 matriculants in artisan trade skills and 195 graduates in various work experiential learning programmes within Eskom and its supplier network. Thus, as at March 2014, Eskom and its suppliers had 2 718 matriculants and 1 607 graduates in the pipeline, who are being trained and placed in various learning programmes.

 

(4)        Outcome 7: Vibrant, equitable and sustainable rural communities with food security for all

 

 

(a) ALEXKOR

 

The SOC has delivered on government obligations to the Richtersveld community, with a R120 million upgrade of the Alexander Bay Township infrastructure (roads, electrical and water reticulation and waste water treatment) being completed on 31 March 2013 and the town’s registration confirmed on 22 November 2013. This means that the town, which was previously a mining compound, is one of the new towns in South Africa and part of the Richtersveld Local Municipality. The value of property in the town that will be transferred to the community is estimated at R200 million.

 

The jointly-owned mine, which had previously seen its diamond production decrease substantially due to the land restitution process, has seen an improvement in carat production from 35 000 carats to over 50 000 carats. This has been on the back of a newly commissioned R50 million processing plant at Muisvlak near Port Nolloth, which has created 200 jobs for the community. During the period under review, the Minister approved the strategy for the SOC to become a diversified mining company; this will include coal supply in support of the national energy security imperative. The Department is working closely with the SOC to ensure success of the strategy and significant projects will be announced in 2014/15.

(b) SAFCOL

 

In 2012/13, the Department revised the SOC mandate to enable product diversification and further vertical integration. The SOC will announce the new corporate strategy within the ambits of the revised role in 2014/15. As at the end of the financial year, SAFCOL spent R6,591 million on socio-economic development initiatives. This represents 3.3% of the Net Profit After Tax (NPAT) - a significant achievement compared to the Shareholder Compact (SHC) target of 1%. SAFCOL continues to create jobs in communities surrounding its plantations through the Extended Public Works Programme (EPWP). SAFCOL completed 11 socio-economic development initiative projects during the 2013/14 financial year.

Details of the completed projects are as follows:

§  Emhlabaneni Primary School (classroom and ablution block)

§  Esihlengeni Combined School (supplied 20 new computers and installed table tops, ICT burglar proofing and electrical work)

§  Mayflower Disability Centre (retaining walls and burglar proofing)

§  Dinethemba and Daviddale ECD centres (wash basins and ablution blocks)

§  Tshitavhadulu Community Hall (new building)

§  Mantjolo Market Stalls (market stalls and ablution facility)

§  Ntabamhlophe Primary School (3 ablution blocks)

§  Thathe-Vondo Guest House (renovations)

§  Leroro Shelter (burglar proofing)

§  Diepdale Youth Centre (site establishment has been completed and excavation of trenches is 90% complete)

§  Desk Manufacturing Project (industrial machines and tools have been procured).

 

2.6        Overview of revised Strategic Plan and Annual Performance Plans including key changes from 2013/14 and 2014/15 Plans

 

The Department has achieved 83% of its planned targets, which is a 19% improvement from the 2012/13 financial year. The Department has restored its clean audit opinion which is a reflection of the department’s increased focus on performance information and management of performance contracts with senior management.

 

2.7        Overview of key developments in the organisational and service delivery environments of Department for 2012/13 and 2013/14 MTEF cycle

 

In the 2013/14 financial year, a number of policies were introduced that had an impact on the operational environment of some SOCs. The most prominent was the National Broadband Policy, as known as South Africa Connect. The policy seeks to alter broadband industry structure in order to drive investment to enhance connectivity. The policy has a direct impact on Infraco’s operational environment as one of the State entities that operate within the ICT sector.

 

3. Summary of 2013/14 key financial and performance (BRRR recommendations of Committee 2013)

 

Based on the analysis of the department’s budget for the year 2013/14, the following recommendations were made:

 

The Committee recommended that the Minister of Finance should consider:

§  allocating the necessary resources to ensure the successful implementation of the South African Airways’ Long Term Turnaround Strategy;

§  allocating additional funding to capacitate the Department and address the human resource constraints that the Department still experience, considering the distinct shareholder management responsibility of the Department;

§  developing a framework for funding SOCs rural development programmes.

The Committee recommended that the Minister of Public Enterprises should:

§  review the annual performance plan of the Department to ensure that the pre-determined objectives are measurable and quantified;

§  ensure that there is a direct correlation and alignment between the annual performance plan and the annual reporting format;

§  capacitate the internal audit function in the Department to ensure an improved record keeping and compliance with the legislative framework;

§  consider introducing relevant systems as well as considering evidential requirements during the annual strategic planning process in order to ensure that all predetermined targets are achieved;

§  increase oversight over state-owned companies through robust and regular interaction with CEOs, Board Members, Audit Committees, regular visits to the construction sites of major infrastructure projects as well as to offices and sites of the entities;

§  ensure that emphasis is placed on monitoring that the SOCs’ implementation of Government’s policy objectives is realised, especially their outcomes as they have an impact on peoples’ lives;

§  consider introducing the Shareholder Management Bill which will empower the department to carry out its oversight responsibilities over state-owned companies more effectively, especially in providing guidance on how to align SOCs’ strategic priorities with government policies;

§  consider providing the Committee with shareholder compacts signed with state-owned companies in order to enhance the oversight role of the Committee;

§  consider institutionalisation of the recommendations of the Presidential Review Committee on SOCs;

§  ensure that there are improvements in integration, harmonisation and alignment of planning and implementation across all three spheres of government and state-owned companies;

§  ensure that the guiding frameworks for SOCs are completed timeously and implemented so as to provide a stable working environment. The Department should ensure that the SOCs comply with these frameworks.

 

4. Overview and assessment of financial performance

 

The Department spent 92.6 per cent of its budget in the 2013/14 financial year, and received an unqualified audit report.

Table 1

Programme

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

R million

Audited

Audited

Audited

Main

Adjusted

Revised

Main

Estimates

Administration

88.2

108.6

115.4

127.1

131.0

131.0

152.1

160.5

Legal and Governance

14.7

19.5

23.5

23.8

22.3

22.3

24.0

25.5

Portfolio Management and Strategic Partnerships

437.1

218.0

1 228.2

85.9

140.8

140.8

83.7

93.3

Total

540.0

346.1

1 367.0

236.9

294.1

294.1

259.8

279.3

 

Between the 2010/11 - 2013/14 period, allocations decreased by 18.3 per cent due to certain state-owned companies, such as Denel and Broadband Infraco, receiving non-periodic payments.  This explains the fluctuations in spending, particularly, within Programme 3: Portfolio Management and Strategic Partnerships over this period.  The budget decreased by 82.7 per cent from R1.4 billion in 2012/13 to R236.9 million. The Department received an Appropriated Budget of R236.9 million at the beginning of the 2013/14 financial year, which was adjusted upward with R57.3 million to an Adjusted budget of R294.1 million. The budget decreased by R10.7 million or 11.7 percent to R259.8 million in the current financial year, 2014/15.  The Department’s budget is expected to increase by R19.5 million or 7.9 per cent to R279.3 million in the 2015/16 financial year.

 

4.1  Financial performance 2013/14

 

In the first quarter, April to June 2013, the Department spent R44.8 million or 18.9 per cent of the R236.8 million budget aappropriated for the 2013/14 financial year.  R44.5 million was spent on current payments, Compensation of Employees amounted to R31.1 million while Goods and Services amounted to R13.5 million.  The majority of expenditure took place within the Administration programme mainly on compensation of employees and goods and services of R25.9 million. This was followed by expenditure of R12.4 million under the Portfolio Management and Strategic Partnerships programme and R6.5 million under the Legal and Governance programme. Expenditure was primarily spent on compensation and goods and services.  The Department spent R44.8 million by the end of the first quarter while scheduled drawings amounted to R57.8 million, underspending by R13.1 million for the quarter.  This was mainly due to vacant posts and committed projects no being finalised. The shortfall was expected to be resolved during the Adjusted Budget as the Department projected to revise their drawings. 

 

The above indicates poor planning of drawings from the revenue fund as after the first three months the Department already projected to revise its drawings.

 

By the end of the second quarter, April to September 2013, the Department spent
R85.2 million or 29 per cent of the Adjusted Budget of R294.1 million.  The original budget of R236.9 million was adjusted upward by 57.3 million to an Adjusted budget of R294.1 million.  Transfers and subsidies account for R57.4 million of the budget, of which R0.1 million was transferred to households.  Thus the available budget of the Department was R236.7 million for operations.  The Department spent R85.1 million or 35.9 per cent on operations, the majority of which was on Compensation of Employees and Goods and Services.  R52 million was spent under Administration programme mainly on Compensation of Employees and Goods and Services. Portfolio Management and Strategic Partnerships programme spent R23.4 million and Legal and Governance programme spent R9.7 million.  Both programmes primarily spent on Compensation of Employees and Goods and Services.  The Department spent R85.2 million at the end of the second quarter, while scheduled drawings was
R117 million, an expenditure shortfall of R31.8 million.  This was mainly due to projects in Portfolio Management and Strategic Partnerships that was scheduled for the second half of the year. Payments were anticipated to be made from October onwards.

 

Excluding Transfer and Subsidies of R57.3 million, the Department has an available operational budget of R236.7 million of which R142.4 million or 60.2 per cent was spent by the end of the third quarter of 2013/14, the majority being spent on compensation of employees and goods and services.  The Administration programme has spent 65.5 per cent by the third quarter of the 2013/14 financial year, mostly for compensation of employees and goods and services.  Actual expenditure to the end of December 2013 for Legal and Governance amounted to R16.4 million of the available budget of
R22.3 million or 73.6 per cent of the budget has been spent.  Expenditure in this programme increased by R0.8 million or 5.4 per cent, year-on-year. The increase is primarily due to additional spending on compensation of employees and inflation related increases.  The Portfolio Management and Strategic Partnerships programme received R140.8 million and had spent 69.3 per cent by the end of December 2013.  This was mainly driven by the transfer of R57.3 million for the indemnity claim against Denel Aerostructures.  By the end of the third quarter, actual expenditure was
R199.9 million compared to scheduled drawings of R231.6 million, under spending by R31.7 million to projected drawings.  This was mainly due to vacant posts, and also invoices not received from suppliers although funds have been committed.

 

Preliminary expenditure at the end of the fourth quarter of 2013/14 amounted to
R272.5 million or 92.6 per cent of the Adjusted Appropriated Budget of R294.1 million.  Transfers and subsidies account for R57.5 million of the available budget, of which R57.6 million or 100.3 per cent was spent, mainly on public corporations and private enterprises due to the R57.3 million transferred to Denel Aerostructures.  Of the operational budget of R236.7 million, the Department spent R214.8 million or 90.7 per cent, mainly on compensation of employees and goods and services. The Administration programme spent the largest at R132.9 million mainly on compensation of employees and goods and services.  The next largest was under the Portfolio Management and Strategic Partnerships programme of R58.7 million, followed by R23.1 million under the Legal and Governance programme primarily for compensation of employees and goods and services.

 

The Department spent R272.5 million to the end of the 2013/14 financial year, while a budget of R294.1 million was available, under spending by R21.7 million.  The variance was mainly due to under spending on Compensation of Employees as a result of slow filling of posts due to scarcity of specialist skills in the market.  Under-spending on Goods and Services was a result of delays in some projects such as National Corridor Performance Measurement (NCPM) project, the telecoms benchmarking study, harmonising procurement policy and planning frameworks in Eskom and Transnet, the review of the Rooivalk Programme and Denel’s Strategic Equity Partnership Study.

 

The original budget of R236.9 million was adjusted upward by 57.3 million to an Adjusted budget of R294.1 million.  An additional R57.3 million was allocated to Denel for the eighth indemnity claim by Denel Aerostructures under the 2007 indemnity agreement with government for the A400M contract. Total virements between programmes and shifts within programmes amounted to R5.2 million during the Adjusted budget process.

 

During the Adjustment Budget the Department effected shifts and virements amounting to R5.2 million.  Programme 1 shifted funds from Compensation of Employees and Goods and Services amounting to R246 000 to Transfers to Households and Compensation of Employees.  Programme 2 shifted funds from Compensation of Employees and Goods and Services amounting to R1.7 million to Programme 1 for Compensation of Employees and Programme 2 for Compensation of Employees.  Programme 3 shifted funds from Compensation of employees and Goods and Services amounting to R3.2 million to Programme 1 and Programme 3 for Compensation of employees.

 

After the Adjustment Budget, the Department made the following virements:

 

An amount of R600 000 was viremented for Compensation of Employees from Programme 3 to Programme 1 for the following purpose:

§  R200 000 to Communications sub-programme;

§  R5 000 to Ministry sub-programme; and

§  R395 000 to Human Resources.

 

An amount of R3.070 million was viremented for Goods and Services and Capital Expenditure from Programme 3 to Programme 1 for the following purposes:

§  R1.7 million to the Chief Financial Officer for audit fees and travel administration costs;

§  R510 000 to Strategic Planning, Monitoring and Evaluation for project funding; and

§  R860 000 for IT for software and computer equipment (CAPEX).

 

An amount of R1.1 million was viremented for Goods and Services from Programme 1 to Programme 2 for projects. A total of R4.8 million was shifted between programmes at the end of the 2013/14 financial year.

Table 2. Final total and programme expenditure.

 

Programme

Adjusted Appropriation R'000

Virements R'000

Final Appropriation R'000

Actual Expenditure R'000

Variance R'000

Programme 1: Administration

131 032

3 670

134 702

133 294

1 408

Programme 2: Legal and Governance

22 338

1 100

23 438

23 159

279

Programme 3: Portfolio Management and Strategic Partnerships

140 769

(4770)

135 999

116 015

19 984

Total

294 139

-

294 139

272 468

21 671

 

The Department had an available budget of R294.1 million for the 2013/14 financial year, with actual expenditure amounting to R272.5 million or 92.6 per cent, and under-spending amounting to R21.7 million.  The under-spending of R21.7 million is mainly made up of current expenditure in the operational budget. 

 

Programme 1 had an available budget of R134.7 million, with actual expenditure amounting to R133.2 million or 98.9 per cent of the budget, under-spending by R1.5 million. 

 

Programme 2 had an available budget of R23.4 million, with actual expenditure amounting to R23.2 million or 98.8 per cent of the budget, under-spending by R279 000.

 

Programme 3 had an available budget of R136.0 million, with actual expenditure amounting to R116.0 or 85.3 per cent, under-spending by R20.0 million.  Under-spending in this programme is attributed to delays in the implementation of some major projects, as stated above. 

 

The Department received an unqualified audit report for the 2013/14 financial year, with no additional finding. 

 

No further additional matters were identified by the Auditor-General.

In the 2013/14 financial year the Department incurred fruitless expenditure amounting to R530 000 due to hosting conference’s surrounding the BRICS summit, which had to be cancelled at short notice, which was out of the control of the Department. The Department incurred irregular expenditure amounting to R711 000. The official was dismissed that was found guilty of misconduct.  

 

4.2        Financial Performance of Entities

 

The Department’s overall objectives are to provide an effective shareholder management system and to support and promote economic efficiency within each of the state-owned companies (SOCs).  The performance of SOCs has been varied in the period under review.  It is also important to note that the economic environment under which SOCs operate has been negative.

 

(i)         Alexkor

 

Alexkor’s performance has been hampered by the implementation of the Deed of Settlement – in particular the court interdict intended to preserve the resources and attendant benefits on behalf of the Richtersveld Community.  For the 2013/14 financial year, Alexkor received an unqualified audit with findings on predetermined objectives and compliance, unimproved from the 2012/13 financial year.

 

(ii)        Denel

 

The challenges at Denel Aerostructures that led to a negative impact on the overall financial position of the Group are being contained. For the 2013/14 financial year, the Group posted a profit of R194 million, an increase of R123 million on the profit posted in 2012/13, an indication that Denel’s turnaround strategy is continuing to yield the desired results.

 

(iii)       Broadband Infraco

 

Broadband received an unqualified audit opinion for the 2013/14 financial year, with no change on the previous audit findings. 

 

 

(iv)       SAFCOL

 

SAFCOL reported a profit of R511 million in 2013/14, compared to a profit of R74 million in the 2012/13 financial year.  This is an indication of the efforts of the company to implement the turnaround strategy are being effective.

 

(v)        Eskom

 

Eskom realised a group net profit of R7.1 billion for 2013/14, an increase on the R5.2 billion in the 2012/13 financial year.  Eskom submitted a regulatory clearing account application to the Energy Regulator who has allowed Eskom to recover some costs associated with the MYPD 2 determination, necessitating an increase of tariffs of 12.69 per cent in the new financial year.  These costs were associated with the tight supply of electricity and the delays in the new build programme, which sees Eskom building three new power stations.  Although Eskom received a clean audit opinion, it will have to manage a weak credit rating, tight supply of electricity and completion of the build programme within the coming year.  Cabinet also approved a package of support a strong and sustainable Eskom in order to ensure energy security.  The package will include, amongst others, an equity injection, debt, and independent power producers.

 

(vi)       Transnet

 

Transnet improved on their profit of R4.1 billion in 2012/13 by R1 billion to a profit of
R5.2 billion in the 2013/14 financial year.  This is impressive given that it was the second year in which the Market Demand Strategy was rolled out.  Transnet will focus on implementing the R312 billion Market Demand Strategy in the coming years.

 

The Department, SAX and SAA are in negotiations with the National Treasury on funding the recapitalisation of the airline as required by the turnaround strategy.  The entities have not tabled their annual reports to-date.

 

4.3        Auditor-General Report

 

Although the Department received an unqualified audit report, the Auditor-General raised the following matter in the 2013/14 audit opinion:

 

No other issues were raised in the Department’s audit opinion. 

 

With regards to the entity’s the Auditor-General found an improvement in the audits of the SOCs.  SAFCOL moved from a qualified audit to and unqualified audit with findings, while DPE and Eskom improved to an unqualified audit with no findings.  Denel remained unchanged with an unqualified audit with no findings, while Alexkor and Transnet remained unchanged with unqualified audits with findings.  The Department needs to ensure that Alexkor and Transnet implement the AG’s recommendations to ensure improvement in the audits for the 2014/15 financial year. 

 

4.4        Department of Public Enterprises’ financial performance for 2014/15

 

The Department has an available budget of R259.7 million for the 2014/15 financial year, of which R48.7 million or 18.8 per cent of the budget has been spent by the first quarter of the 2014/15 financial year. 

 

Transfers and Subsidies account for R0.1 million of the budget of which the Department has transferred R0.1 million, mainly to households.  This means the Department has an operational budget of R259.7 million, of which R48.6 million or 18.7 per cent was spent, mainly on Compensation of Employees.

 

The operational budget was mostly spent under the Programme 1, which spent R29.2 million mainly on Compensation of Employees and Goods and Services.  The second largest element was under Programme 3 amounting to R14.6 million, with Programme 2 spending only R4.9 million, primarily on Compensation of Employees.

 

The Department has spent R47.8 million compared to the scheduled drawings of
R61.6 million originally planned, leaving a lag of R13.8 million at the end of the first quarter.  The delay is mainly due to delays in projects and the change in the administration post elections when a new Executive Authority was appointed in the Department.  The lag is expected to be resolved as the Department is monitoring and interrogating the situation on a monthly bases.  The lag is expected to be resolved in the Adjustments Estimates.

 

The lag in expenditure is a common occurrence for the Department, as the lag in actual expenditure from planned expenditure also occurred in the 2013/14 financial year.

 

Being an oversight department, the major cost driver is Compensation of Employees. Most under-spending has been within Compensation of Employees due to high staff turnover in senior management positions, which the Department has not been able to fill.  The Department states the lack of specialist skills for the lack of filling vacant posts.  Given this trend, the Department should be weary of shifting more funds to Compensation of Employees when the majority of under-spending takes place here.

 

4.5        2015/16 MTEF financial allocations

 

The Department has not made any additional requests for funding over the coming 2015/16 Medium Term Expenditure Framework period.  However, equity may be given to Eskom, which will be transferred from DPE to the entity.  This may have an impact on the DPE’s budget over the MTEF period.

 

The Department proposes to re-prioritise funds from Programmes 2 and 3 to Programme 1 to accommodate revised requirements.  The re-allocation of funds is given below:

 

Table 3

From

 

To

 

Programme 2

R

Programme 1

R

Compensation of Employees

1 300 000

Compensation of Employees

1 300 000

Programme 3

 

 

 

Compensation of Employees

820 000

Compensation of Employees

711 000

 

 

Goods and Services

109 000

Total

2 120 000

 

2 120 000

 

Thus Programme 1 Compensation of Employees increases by R2 million and Goods and services increases by R109 000.

 

The Department has requested rollovers from the 2013/14 Goods and Services budget from National Treasury for nine projects/contracts amounting to R5.02 million in order for them to be completed in the new financial year.

 

 

 

 

 

4.6        MTEF financial allocations for 2014/15

 

Table 4. Current Estimates for the 2014/15 R’million

 

Programme Allocation (R'm)

2013/14

2014/15

Variance

Variance %

Programme 1: Administration

127.1

135.2

8.1

6.4%

Programme 2: Legal and Governance

23.8

26.1

2.3

9.7%

Programme 3: Portfolio Management and Strategic Relationships

85.9

98.5

12.6

14.7%

Total

236.9

259.8

22.9

9.7%

 

As seen above in table 3, the projected allocation for the 2014/15 financial year amounts to R259.8 million, an R22.9 million or 9.7 per cent increase.  Programme 3: Portfolio Management and Strategic Relationships sees the biggest increase of 14.7 per cent from R85.9 million in 2013/14 to R98.5 million in 2014/15. Programme 1: Administration and Programme 2: Legal and Governance increases by 6.4 per cent and 9.7 per cent respectively.

 

This allocation is subject to confirmation and approval by the Minister of Finance during the National Budget in 2014.

 

4.7        Concluding comments on financial performance

 

There has been a significant decrease in the Department’s budget from R346.1 million in 2011/12 to R259.8 million in 2014/15.  This is mainly due to the decrease in the transfers to SOCs.  Over the medium term, expenditure is expected to increase from R259.8 million in 2014/15 to R302.1 million in 2017/18, based on projected inflationary increases.

 

In the previous 4 financial years the Department was able to spend more than 97 per cent of the available budget. However, in the 2013/14 year, the Department only spent 92.6 per cent of its budget, due to the failure to fill critical posts and the delay in the completion of some projects.

 

 

5. OVERVIEW and assessment of service delivery performance

 

5.1        Service delivery performance for 2013/14

 

The Department of Public Enterprises is not a direct service delivery department, but provides a distinct mandate of shareholder on behalf of the state. The Medium Term Strategic Framework identifies ten (10) priorities of government. In order to achieve these 10 priorities of government, twelve (12) areas of impact/outcomes have been identified by the Presidency’s Department of Performance Monitoring and Evaluation (DPME). The Department of Public Enterprises is responsible for Outcome 6 in line with the delivery agreement signed between the Minister and the President. The outcome relates to the following:

 

The department indirectly contributed to outcomes on:

 

These outcomes contribute to targets based on economic growth, employment creation, infrastructure development, and rural development. This is how the department has contributed in terms service delivery:

 

5.2        SOC skills development monitoring

 

Collaboration was enhanced with DHET, EDD, DTI and SOCs to ensure alignment of SOC interventions to the national skills agenda. In addition, an MOU was concluded between DPE and DHET to formalise collaboration between the two departments in order to optimise SOC training facilities. This is coordinated through the DPE/DHET-led SOC Skills Development Steering Committee, which is co-chaired by the Department and DHET.

 

Collaboration between the two departments resulted in DPE assisting Transnet to secure R175 million in funding from the NSF for optimisation of Transnet Engineering training facilities to train an additional 1000 artisan learners in various trades over a period of 3 years. This project was launched by Minister at the Saltriver facility in the Western Cape on 31 of October 2013. During the launch, Transnet signed partnership agreements with three (3) FET colleges in the province, as part of its efforts in strengthening Further Education and Training (FET) college support. The Department successfully negotiated with the NSF to earmark a pool of funding for optimisation of training facilities of Denel, SAA and Eskom. In addition, a Funding Proposal was developed and submitted to Energy and Water Sector Education and Training Authority (EWSETA) to source funding for the Eskom Law Graduate Employment Scheme project.

 

5.3        Corporate Social Investment (CSI)

 

DPE-SOC: The CSI Forum, chaired by Deputy Minister, was established to coordinate SOC CSI initiatives. The CSI Forum & Working Group held a workshop and approved SOC CSI Flagships Project and a roll-out plan in the area of Education & Health, including Enterprise Development/Socio-Economic Development. Through collaboration with the University of Stellenbosch and provinces, the Telematics satellite-based system (a subject improvement learner/teacher based support system) was rolled out at rural schools. The first Telematics sponsored by Broadband Infraco was installed and launched by Minister Gigaba, Premier and MEC of Education in Limpopo Province at Seshego Secondary School. Deputy Minister of Public Enterprises Magwanishe and Deputy Minister of Communications Stella Ndabeni launched the installation in Eastern Cape Province. A computer lab was also donated by TATA Africa (Pty) Ltd. Denel sponsored 4 boreholes at Jikindaba Secondary School in Ingquza Hill Municipality to assist villagers to access water. Telematics installed and launched by Dep. Minister in Eastern Cape Province donated by Eskom Foundation, with mobile science-kits to St John’s College at Umtata.

 

The CSI Summit was held in partnership with the University of Fort Hare, at their main campus in Alice, as part of the programme of support for the institution’s project for its centenary in 2016.

 

5.4  Enterprise Development

 

Enterprise and Supplier Development (ESD) Workshop was held with all SOC Procurement Units in partnership with EDD and NYDA on the Youth Employment Accord to discuss the current enterprise development initiatives to support designated groups, including the proposed flagship projects i.e. Youth Cooperatives and Sector-specific Incubation Hubs.

 

5. 5       Partnerships with SOCs and other key stakeholders

 

The first DPE-SOC Youth Camp was held and 100 learners doing Maths & Science at mainly rural schools in the Free State province participated. In addition, five Youth Career and Information Expos were hosted, in collaboration with SOCs and more than 10 000 Grade 10-12 Maths and Science learners were in attendance. Further, more than 2000 maths pocket dictionaries were also donated to various school libraries to support learners doing Mathematics. Female engineers, artisans and technicians from SOC conducted motivation talks during the various visits to promote Maths, Science and Engineering studies.

 

5.6        Strategic Partnerships

                                                 

The past year has seen progress in the roll-out of the CSDP. A major achievement has been the conclusion of a R50 billion Transnet locomotive fleet procurement contract, which was announced on 17 March 2014. This will add a further R68 billion of localisation benefits to the South African economy. A DPE-SOC Industrialisation and Localisation Forum was established with the purpose of; sharing best practices in strategic sourcing; supplier development and localisation across SOCs in the Department’s portfolio as well as to spearhead good governance and facilitate collaboration and provide thought leadership to advance the CSDP.

 

The Department also championed and supported the establishment of the Industrialisation Supplier Development Association (ISDA), which will provide the Shareholder with direct feedback regarding the effectiveness of SOC’s supplier development programmes, as well as provide ideas about how the impact of these programmes can be enhanced.

 

A study was completed into the adequacy and competitiveness of service provision to the automotive industry by Transnet and Eskom. The results of the study were presented to the Minister, Transnet and the National Association of Automotive Manufacturers of South Africa (NAAMSA); a Task Team was established; and a high level work programme has been developed for implementation in the new financial year.

 


5.7        Funding Mechanisms

 

The Africa Strategy was developed to provide an over-arching framework that will guide SOC investment into the region. The strategy was launched in March 2014 and it is seen as the market entry strategy that SOCs can align themselves to while developing their own Africa Strategies. The strategy further aims to provide assistance to SOCs regarding market assessment and the execution of their own African strategic objectives.

 

Facilitation of the innovative funding solution was implemented via signing MOUs with Development Bank of Southern Africa (DBSA). The purpose of the MOU between DSBA and DPE is to support the origination, feasibility, preparation and funding of major projects and specifically those managed by SOCs under the portfolio of DPE. The memorandum was approved in the first quarter of the financial year 2013/2014, although it was targeted for the third quarter. Consultation was initiated within DPE prior to the signing. Continuous meetings with DBSA formed part of the implementation process.

 

Some of the fruitful results of this MOU include the signing of agreement by the European Union and South African government through the Development Bank of South Africa on Infrastructure Investment Programme for South Africa (IIPSA) amounting to 100 million. The aim of this programme is to deal with the lack of infrastructure development that the Southern African Development Communities (SADC) region is experiencing. IIPSA will support the development of both national and regional infrastructure projects. The key principle underlying this funding agreement includes financial leverage and procurement.

 

5.8        Project Oversight

 

During the year under review, the unit managed to achieve its target pertaining to the establishment of the Project Management Office (PMO), which will be implemented in the new financial year. The PMO aims to provide project management support services on state integrated projects. Furthermore, it aims to standardise reporting by SOCs, particularly at Eskom and Transnet. The function of the PMO is to ensure a common approach and consistency of information when the costs, timelines, project definitions and project information is updated, aligned and transferred to a common project management platform. Business plans for Strategic Integrated Projects (SIPs) were approved on 27 November 2013. The team was instrumental in: de-risking the Junior Miners Fund; optimizing the Mokolo Pipeline 2 projects; lowering the water tariff by more than 10%; and saving R9 billion on investment during the third phase of this project.

 

 

5.9        Annual Performance Plan: Total number of targets for 2013/14 and total number achieved (First Quarter Assessment 2014)

 

In line with performance information by Programme the Department in its APP in the Administration programme, the Department did not deviate in all achieving planned targets with deviation in only one relating to procurement processes of an irregular expenditure of R711 000. The legal and governance did not deviate on all planned targets with only not meeting targets set for the review on Eskom BHP special pricing agreement and position paper on Eskom and Transnet copper theft challenges. Energy and Broadband achieved all targets with only one target in industry benchmarks for Eskom and Broadband Infraco not met. Manufacturing Enterprises met most of its targets with the exception of negotiation and approval of SAFCOL’s shareholder compact and definition of SAFCOL’s role as a state-owned forestry company. The transport enterprises programme met most of its targets with the exception of a target on multiple branch lines’ approval of PFMA application, assessment of logistics costs in the economy and increased operational efficiency of strategic freight corridors.  Economic impact and policy alignment programme did not achieve target set on transformation framework. The sub programme on strategic partnerships failed to business plans and service improvement plans, and also couldn’t come up with Private Sector Participation Framework as planned.

 

6          Performance per Programme

6.1        Programme 1: Administration: Provides over-arching management and key supporting functions and processes in order for the Department to achieve its strategic objectives. The programme consists of Ministry, Management (Office of the Director-General and the Deputy Director General Corporate Management), Corporate Services (Information Management and Technology and Security and Facilities Management), Human Resources, Communications, Office of the Chief Financial Officer, Inter-governmental and International Relations, Strategic Planning, Monitoring and Evaluation, Internal Audit and Office Accommodation.

 

Expenditure in this programme amounted to R133.294 million in 2013/14, compared to R115.367 million in 2012/13. This increase was mainly due to inter alia, the fully functional Inter-Governmental Relations, sub-programme that was established in 2012/13, the appointment of the DDG: Corporate Management in the Management sub-programme, a number of large projects undertaken by Human Resources, audit fees, office accommodation, further alterations to office premises, furniture and equipment to accommodate staff complement and travel costs for provincial engagement.

 

6.2        Programme 2: Legal and Governance: Provides systems that align state owned companies with corporate governance best practice and Government’s strategic intent. Expenditure in the programme amounted to R23.159 million in 2013/14, compare to R23.477 million in 2012/13. There was no substantive change to expenditure on this programme during the period under review.

 

6.3        Programme 3: Portfolio Management and Strategic Partnerships: This programme consists of 5 sub-programmes and overall expenditure for the programme was as follows: Expenditure in this programme to R116.015 in 2013/14 compared to R1.228 billion in 2012/13. The decrease was mainly due to payment for financial assets disbursed to Alexkor and Denel, amounting to R1.050 billion, as well as an amount of R118.313 million paid in respect of an indemnity claim for Denel/SAAB Aerostructures in 2013/14 for payment of the eighth indemnity claim. Underspending on this programme is attributed to delays in the implementation of some projects, as reflected in overall expenditure of the Department above.

 

A breakdown of expenditure per sub-programme is provided below.

 

6.4        Sub-Programme: Energy and Broadband Enterprises: aligns the corporate strategies and performance of Eskom, Pebble Bed Modular Reactor (PBMR) and Broadband Infraco with Government’s strategic intent and performance targets.

 

Expenditure in this programme amounted to R15.990 million in 2013/14, compared to R13.944 million in 2012/13. The increase in expenditure in this sub-programme was mainly due to the unit being fully resourced. However, two planned projects were not finalised, due to the Terms of Reference being revised subsequent to a review of the business requirements of the SOC, which resulted in the under-spending in this unit. The projects will be rolled out in the 2014/15 financial year.

 

6.5     Sub-Programme: Manufacturing Enterprises: aligns the corporate strategies and Government strategic intent and performance targets. It develops proposals for SOCs’ role in the advance manufacturing.


Expenditure in the sub-programme amounted to R68.097 million in 2013/14, compared to R1.178 billion in 2012/13. The decrease in expenditure in this sub-programme amounted to R68.097 million in 2013/14, compared to R1.178 billion in 2012/13. The decrease in this sub-programme was mainly due to payment for financial assets disbursed to Alexkor and Denel amounting to R1.050 billion, as well as an amount of R118.313 million paid to Denel in 2012/13 in respect of an indemnity claim due to Denel/SAAB Aerostructures. An amount of R57.250 million was disbursed to Denel in December 2013 in respect of the eighth indemnity claim. Under-spending in this sub-programme was a result of delays in the commissioning of a number of projects such as the Review of the Rooivalk Programme and Denel’s Strategic Equity Partnership Study, which only commenced late in the year and which was finalised in 2014/15.

 

6.6     Sub-Programme: Transport Enterprises: aligns the corporate strategies and performance of South African Airways (SAA), South African Express (SAX) and Transnet with Government’s strategic intent and performance targets. Expenditure in the sub-programme amounted to R20.030 million in 2012/13. The decrease in expenditure in this sub-programme was due to a delay in a number of planned projects, such as the NCPM and a review of logistics costs in the economy, which were postponed until the next financial year. The NCPM project required alignment to Transnet’s Corridor Framework.

 

(i) Sub-Programme: Economic Impact and Policy Alignment: align shareholder oversight of SOC in relation to overaching government economic, social and environmental policies; and implements strategic interventions in order to contribute towards the achievement of national objectives in support of economic growth and transformation. Expenditure in the sub-programme amounted to R9.686 million in 2013/14, compared to R9.990 million in 2013/14, compared to R9.990 million in 2013/14. There was no substantial difference in expenditure in this unit: the under-spending was mainly due to delays in the commission of some projects that had a total allocated budget of R5 million.

 

 

 

(ii) Sub-Programme: Strategic Partnerships: establishes and builds focused strategic partnerships between SOCs, strategic customers, suppliers and financial institutions.

Expenditure in the sub-programme amounted to R7.256 million in 2013/14, compared to R5.973 million in 2012/13. The increase in expenditure in this sub-programme is attributed to expansion in the human resources as additional projects being undertaken by the project. Under-spending in the sub-programme is attributed to project that were planned to be outsourced, but were implemented internally. The project on harmonising procurement policies and the planning framework at Eskom and Transnet (to enable collaboration and to optimise the supplier development and transformation initiative) was postponed.

 

6.7   Key reported achievements

 

(i) Administration

 

In the 2013/14 financial year, the Programme focused on improving processes and systems to facilitate effective planning and performance monitoring within the organisation. During the year under review, the Organisational Monitoring and Evaluation Policy was developed to enhance organisational performance and align it to individual performance. Furthermore, the Department successfully completed its planning cycle, which defined its new strategic objectives as per the NDP.

 

The programme’s capacity was enhanced by the appointment of a Deputy Director-General, Corporate Management to provide strategic direction within the programme and improve systems in order to enhance organisational performance. The capacitation of this office strengthened the Office of the Director-General considerably and contributed to faster turn-around times in terms of the Department’s internal processes. The filling of new posts emanating from the new structures approved in the 2012/13 financial year gained momentum in the period under review. The Department significantly reduced its vacancy rate from above 10% in 2012/13 to its current level of below 2%. Strengthening of the executive management team was achieved by filling all vacant Deputy Director-General positions. This reduction can be attributed to an aggressive recruitment drive that was implemented during the 2012/13 and 2013/14 financial years and which was supported by the introduction of the “use it or lose it” policy in terms of filling vacancies. This policy requires that a vacant position is filled within three months by a unit or the post is transferred to a unit where a need for additional capacity exists.

 

The Department initiated a project to identify its strategic capabilities and skills gaps relating to its ability to deliver on the set objectives. This project will be anchored by a Talent Management Programme aimed at identifying core and critical skills needed by the Department to deliver on its strategic objectives. These processes will ensure that high performers in critical positions are retained, in line with the developed Attraction and Retention Policy. SMS members’ contract positions in the Department were converted to permanent positions to support the attraction and retention of talent

 

The Programme continued to manage the Department’s image and mitigate against reputational risks that arose during the financial year under review. The Programme heightened its efforts to position the DPE as an activist shareholder with a positive brand profile through targeted media events. The Programme maintained consistent visibility in the different media and this broadened the distribution of messages from the Department to all corners of the country.

 

The use of different media platforms, especially new media and social media, became a regular feature. The Department’s global interface website, www.dpe.gov.za, was re-launched with updated information and accessible navigation features. Stakeholder management was boosted with the successful revival of the SOC Communicator’s Forum and through this structure regular events were held throughout the country. Internal communication programmes also became a regular feature of the Department’s activities, with its schedule of events involving staff including the launch of the Learning Forum, to which external experts are invited to discuss topics, including the NDP.

 

The Department hosted a BRICS senior officials meeting in Pretoria, which was chaired by the Director-General. This meeting emanated from the BRICS summit held earlier in Durban, at which member countries agreed to enjoin BRICS Ministers responsible for shareholder oversight over SOCs to explore ways of cooperation and the exchange of information and best practices. A Joint Declaration was agreed on and it will be considered by the BRICS Ministers in the 2014/15 financial year. Another milestone was the MoU signed between the Department and the State-Owned Assets Supervision and Administration Commission of the State Council of China, the scope being to enhance information sharing efforts regarding shareholder management practices and other matters of mutual interest.

 

The Department has continued to strengthen its inter-governmental programme through its provincial engagement programme. Meetings were held with seven Provincial Governments, i.e.: Gauteng, Northern Cape, Eastern Cape, North West Free State, KwaZulu-Natal and Limpopo. These engagement sessions were held to establish task teams, led by the Deputy Minister and relevant MECs, which are to: enhance alignment between the investment plans of SOCs and the Provincial Growth and Development Strategies; enhance the quality and scale of relationships between SOCs and provincial stakeholders.

 

The Internal Audit unit completed all planned audits as per the approved Annual Operational Plan. Audit reports were issued to management, with comprehensive recommendations provided to address identified internal control weaknesses. The Internal Audit unit communicated results for the completed audits to the Audit Committee and the Department’s Executive. This was targeted to strengthen internal controls.

 

Vetting of staff has been strengthened and currently 90% of all staff (new and old) have completed and submitted their security vetting forms to the State Security Agency for vetting. All candidates shortlisted for interviews were subjected to pre-employment screening. Information security audits were conducted by all the units in the Department. The establishment of the ICT Steering Committee has made the Department compliant with the ICT Corporate Governance environment. ICT was also successfully transformed from an outsourced function to a fully in-sourced function.

 

(ii) Legal & Governance

 

As part of the shareholder’s oversight responsibilities, the Programme continued to engage with SOC boards through statutory meetings, such as the Annual General Meetings (AGM), and on a needs basis when key issues arose. Due to operational and financial difficulties experienced by several SOCs during the year under review, these engagements were more frequent. The programme continued to assist the Department (and Government) to exercise its shareholder influence by ensuring the appropriate appointment of suitably skilled and competent individuals to SOC boards.

 

The unit held an induction for SOC boards to apprise directors of the Government’s strategic intent for their SOC, their duties and responsibility as board members and the need for boards to subject themselves to a self-evaluation process.

To date, the Department has successfully reviewed and aligned SOCs’ constitutional documents to clarify SOC mandates, codify shareholder expectations through the logical framework and ensure clear delineation of roles between the Minister (as the shareholder representative) and SOC’ Boards. Other important tools that have been developed include: the board appointment process; and Remuneration and Incentive Standards for Executive Directors, prescribed Officers and Non-Executive Directors of SOCs.

 

The new Remuneration Standards were submitted to the Minister and tabled in Cabinet on two occasions. Based on the Minister’s recommendation, the final submission to Cabinet is expected during the term of the new administration. Notwithstanding, the unit is in the process of consulting with SOCs on the implementation of the Standards.

 

In addition to the above, some of the notable achievements of the Programme include the following:

1. Successful settlement of the R2 billion legal claim instituted by Londoloza/Paharpur against the Department and SAFCOL.

2. The appointment of a liquidator to administer and manage the liquidation of Aventura.

3. Drafting the Transformation Guidelines for the transformation of the SOC legal environment.

4. Successful negotiations to facilitate Eskom’s exit from an onerous contract in Senegal.

 

(iii) Portfolio Management and Strategic Partnerships

 

(a) ESKOM

 

Despite reduced sales, due to lower economic growth than expected, Eskom still remains financially stable, with a projected profitability of R6 billion at financial year end 2013/14. The Department continues to support Eskom in maintaining business sustainability by: supporting Eskom’s application for electricity price increases; analysing and supporting measures to close gaps that have arisen due the differences in Eskom’s application and what the Regulator ultimately approved.

 

Eskom continues to increase its investment in capital expenditure projects, with R251 billion to be spent over the next 5 years to complete the current committed build programme, amongst other things. During the period under review, Eskom added a total of 120 MW through completion of: the Return to Service programme; 694 km of new transmission lines; and 790 MVA of sub-station capacity. Eskom plans to deliver an additional 11 126MW of generating capacity into the system, which will go a long way to addressing the current constraints in the power system. The DPE and Eskom have engaged different stakeholders in an attempt to find mitigation strategies to ensure the projects are on schedule.

 

Following the PFMA approvals by the Department, Eskom signed a total of 2 557 MW of IPPs, including the DOE Open Cycle Gas Turbine power purchase agreement on 31 March 2014, in support of Government’s Renewable Energy Programme. About 300MW were already operational by the end of March 2014. DPE remains supportive of Eskom’s mandate to deliver on the electricity supply requirements of the country and ensuring stability of the electricity supply-demand balance. The Department has continuously engaged Eskom to ensure improvement in the execution of current maintenance plans, operational practices, electricity generation, transmission and distribution efficiency and maintenance of an adequate reserve margin. The Department continues to push Eskom, through the Shareholder Compact, to improve its demand savings programmes and its contribution to economic transformation, in particular procurement and critical skills development (amongst others). More than 3.4 GigaWatts in demand savings have been achieved through the demand side management programme, since its introduction in 2008/9.

 

The Department launched the Emerging Miners Strategy, which seeks to promote participation and increase black ownership in the coal mining sector. The Strategy, which is premised on five pillars, seeks to assist with the challenge of capacity to raise funding to develop mines at the early exploration stage mainly; use coal trading as an option to secure coal resources and enhance transformation and increase black ownership as a means to transform the industry amongst other things.

With regard to critical skills development, Eskom continues to maintain a healthy pipeline of learners (about 10000 annually), comprising engineering, technical, artisans and other learners in the youth programmes that provide critical work experience to unemployed youth. Furthermore, as part of the Eskom Professional Welders Development Programme (EPWDP), the company has successfully opened the Eskom Welding School of Excellence, which will contribute to the development of technical skills in the long run.

 

(b) BROADBAND INFRACO

 

Broadband Infraco plays a critical role of providing backhaul connectivity for national long distance and international connectivity and providing broadband services to under-serviced areas. Over the years, the company has been operating in an environment dogged by policy uncertainty due to the lack of a coherent national broadband policy. This uncertainty and other factors, such as the lack of an electronic communications service (ECS) and reliance on a single customer (Neotel), have impacted negatively on the company’s sustainability. This has prompted the Department to be very active in raising the policy issues faced by Infraco with the Department of Communications (DoC) and also in assisting the company to diversify its revenue stream in order to improve sustainability.

The Department contributed substantially to the development of the Broadband Policy, with a focus on ensuring an efficient way of rolling out broadband and realizing the true potential of SOCs, in particular Broadband Infraco. In December 2013, Cabinet approved the National Broadband Policy, which included the inputs from the Department, thereby giving a clear role to Broadband Infraco in the South African broadband sector.

 

The Department has been working closely with Infraco to assist the company to diversify its customer base, improve its revenues and reduce operational costs by improving maintenance of the national long distance network.

Broadband Infraco invested in the international undersea cable – Western Africa Cable System - which was launched in 2012 and will contribute to the increased capacity of linking South Africa and Europe and increase the state’s ability to provide broadband infrastructure to national projects, such as SKA. In this regard, the Department assisted the company to conclude the sale of WACS capacity to the Department of Science and Technology to the value of R600 million. Broadband connectivity with SADC countries has also increased through the completion of the cross border Points of Presence (PoPs) connections that link South Africa to Zimbabwe, Botswana, Lesotho, Swaziland, Namibia and Mozambique.

 

(c) PBMR

 

The Department consulted other government departments on the various possible options to preserve PBMR’s assets going forward. This is due to the fact that a number of PBMR assets present possible research related opportunities and broader consultation on the possibility of donating these assets to universities is currently being facilitated. A Cabinet briefing was prepared on progress regarding the PBMR project and a recommendation was also made on what to do with the project going forward. This will require that it be presented to one of the first Cabinet meetings of the new administration.

 

 

(d) DENEL

 

The SOC was returned to profitability in 2012/13, with a R70 million net profit, and it is expected to improve on this performance in 2013/14. This was on the back of a turnaround plan approved by Government in 2011/12, which required a R700 million cash injection and R1.8 billion in government guarantees. Denel has been granted the highest possible credit rating by Fitch Credit Rating Agency. This was largely as a result of improved financial performance, as well as visible support by the shareholder.

 

The business reported a R21 billion order book in June 2013 and showed a 50% improvement to R30 billion by December 2013. This will enable the business to meet its plan of doubling revenues to R8 billion by 2018/19. One significant order secured by the SOC in the 2013/14 financial year was a R10 billion contract by the South African Department of Defence to produce 238 Hoefyster infantry fighting vehicles (IFV) for the South African Army. The programme is critical in maintaining the country’s advanced manufacturing capabilities in the defence sector. In order to support the industrialisation programme of government, 70% of components for the vehicle will be sourced locally, which will support the creation of 2 000 jobs at Denel as well as the South African defence related industry.

 

In 2013/14 Denel revived its space and satellite capabilities, after entering into a collaborative relationship with the South African National Space Agency (SANSA). This will not only ensure that the country’s space and satellite capabilities are enhanced, but will provide local industry with the opportunity to tap into the growing and strategic global space and satellite industry. The SOC has delivered and supported the deployment of the Rooivalk combat support helicopter in combat operations in the DRC. Deployments were under MONUSCO and they have proven to be a game changer in peace enforcement operations.

 

(e) ALEXKOR

 

The SOC has delivered on government obligations to the Richtersveld Community, with a R120 million upgrade of the Alexander Bay Township infrastructure (roads, electrical and water reticulation, and waste water treatment) being completed in 31 March 2013 and the town’s registration confirmed by 22 November 2013. This means that the town, which was previously a mining compound, is one of the new towns in South Africa and part of the Richtersveld Local Municipality. The value of property in the town that will be transferred to the community is estimated at R200 million. The mine owned jointly with the Richtersveld Community, which had previously seen diamond production decrease substantially due to the land restitution process, has seen an improvement in carat production from 35 000 carats to over 50 000 carats. This has been on the back of a newly commissioned R50 million processing plant at Muisvlak near Port Nolloth, which has created 200 jobs for the community.

 

In the 2013/14 financial year, the Minister approved the strategy for the SOC to become a diversified mining company to include coal supply in support of the national energy security imperative. The Department is working closely with the SOC to ensure success of the strategy and significant projects will be announced in 2014/15.

 

(f) SAFCOL

 

The 2013/14 period has proven to be challenging for the SOC, with cost management being an area of focus. Reliance by the SOC on the mining and construction industries has proven to be a major obstacle towards profitability, due to slow recovery of these sectors. The Department revised the SOC mandate in 2012/13 to enable product diversification and further vertical integration. The SOC will announce the new corporate strategy within the ambits of the revised role in 2014/15.

 

(g) TRANSNET

 

The Department evaluated and approved Transnet’s PFMA Section 54 application to purchase 1 064 locomotives, which is instrumental in the drive to move more volume on rail. This approval led to the tender process for the acquisition of the locomotives, which was concluded in March 2014. Transnet awarded the tender to supply the 1064 locomotives to 4 companies, i.e. CSR Zhuzhou Electric Locomotive, CNR Rollin Stock SA, GESA and Bombardier Transportation SA. CSR Zhuzhou Electric Locomotive and Bombardier Transportation SA will supply the 599 electric locomotives, whilst General Electric SA Technologies and CNR Rolling Stock SA will provide the 465 diesel locomotives. This acquisition will also see various socio-economic benefits being derived from the Department’s Competitive Supplier Development Programme, whilst also providing opportunities for Transnet Engineering to develop itself in areas of advanced manufacturing.

 

 

(h) SAA

 

Following the submission of the LTTS on 2 April 2013, SAA swiftly implemented various aspects of this strategy. Some key highlights include the conclusion of alliances with Air Seychelles, Jet Airways, Etihad, Jet Blue, Virgin Australia and Rwandair. This has allowed SAA to grow its network and extend its reach around the world. During the financial year under review, SAA also took delivery of 4 new A320s, which is part of the programme to modernise and re-fleet SAA. The airline is also in the process of acquiring long haul aircraft for its international routes.

 

The Minister of Public Enterprises has re-established the Ministerial Task Team (MTT) to monitor the implementation of the LTTS. The MTT is composed of the DDGs from the Department as well as the executive management from SAA and SAX. The MTT will report progress on the implementation of the LTTS on a quarterly basis to the Steering Committee led by the Minister, thereby enhancing the monitoring of implementation of the LTTS.

 

(i) SAX

 

SAX submitted its 20:20 Vision Strategy in July 2013, which is fully aligned with the LTTS. This was to ensure a coordinated and integrated approach to the operations of the State’s aviation assets. SAX has commenced with implementation of the Strategy. The airline is also represented on the MTT, in order to ensure that there is close monitoring of the 20:20 Vision.

 

             

The failure for the airlines SAA and SAX in reporting their annual financial statements on time remain a challenge. This makes it difficult for understanding their financial environment. It is imperative that SAA and SAX comply with the Companies Act and Public Finance Management Act in reporting financial results. Whilst the Department has restored its clean audit out of eight (8) SOCs only two (2) Eskom and Denel presented clean audit outcomes whilst SAFCOL, Alexkor, Broadband Infraco and Transnet were qualified with finding on pre-determined objectives (PDO) and compliance. An opinion for SAA and SAX could not be expressed due lack of financial statements.

 

 

(j) Economic Impact and Policy Alignment

 

(i)            Climate change, aviation biofuels and carbon tax issues

 

WWF (World Wide Fund) was appointed as technical partner to DPE on climate change. It assisted in the work towards developing the DPE position on carbon tax, as well as helping with the aviation biofuels work, particularly in terms of the socio-economic impact of aviation biofuels – this in preparation for the stakeholder work. It facilitated various multi-stakeholder workshops with industry experts from South Africa and globally, which were held to explore options for feedstock pathways as well as technology pathways for aviation biofuels in South Africa. Various multi-stakeholder workshops were held to shape the DPE position on carbon tax. EIPA enhanced the Department’s international business partnerships and a briefing memo and the scoping report (including a clear work plan for SAA’s Aviation Biofuels Programme) was approved by the DG. The Unit: improved the Department’s relationship; successfully negotiated with DOE to collaborate on aviation biofuels work going forward to ensure SAA sustainability’ and recommended formalisation of this working arrangement to the DOE and DPE Ministers. Relations have been forged with international experts in the aviation biofuels technologies industry to supplement DPE capacity, such as with expertise on aviation biofuels technologies that are not available in South Africa. Benchmarking on carbon tax was completed, SOC policy deep dives conducted, and the DPE position on carbon tax was completed.

 

(ii)           Government Department Collaboration on Water and Environmental issues

 

A revised MoU with 7 other relevant government departments was successfully concluded and signed to collaborate and align environmental, water and other policy matters that affect SOCs and Strategic Infrastructure Programmes. The MoU was signed on 25 March 2014. The Department has enhanced its partnership with DEA and other environmental authorities at local and provincial government level. Furthermore, it provided leadership and support to Eskom in its engagement to resolve the SOC’s environmental compliance challenges at various power stations, which could potentially lead to partial closure. Certain amendments to Eskom’s new Atmospheric Emission Licenses (AELs) were successfully negotiated and recommendations made to the Minister regarding Eskom’s required initiatives, therefore reducing the risk of further significant non-compliance by various coal-fired power stations in the Eskom generation portfolio.

 

6.8        Other service delivery performance findings

 

The Committee has undertaken only one oversight visit to Medupi power Station to assess progress that has been made in the construction of Medupi. The visit coincided with the countdown towards the synchronisation of the 6th unit of the Medupi Power Station, scheduled for December 2014. 

 

 6.9       Relevant external research assessing performance of the Department

The Department conducted external research utilising consultants. In the year under review an amount of R6 493 934 was spent on consultants. The Department conducted research on the following:

 

Inconsistencies were identified during the reporting of utilisation of consultants 2012/13 and 2013/14 projects as undertaken by the Department and this is depicted in the table below.

 

The projects reported in Departmental Annual Report 2012/13

Project Title

Total number of consultants that worked on the project

Duration: Work Days

Contact value

Eskom build programme Practices

4

60

279 984

Freight rail reforms II

3

264

604 913

Remuneration standards

2

182

604 913

Corporate Governance Protocol

3

91

186 905

Skills audit

2

60

13 798

 

 

 

 

 

The projects reported in Departmental Annual Report 2013/14

Project Title

Total number of consultants that worked on the project

Duration: Work Days

Contact value

An independent evaluation of Eskom’s build programme Practices

4

60

674 652

Freight rail reforms II

3

264

774 600

Remuneration standards

1

8

200 977

Corporate Governance Protocol

2

120

484 632

Skills audit

2

153

1114 000

 

 

 

 

 

The Department has seen significant increase in the contract values in similar projects with similar resources. These inconsistencies in reporting require further clarification from Department.

 

6.10      Performance results

 

The Department’s performance results is based on submission of the first quarter performance assessments to the National Treasury and Department of Monitoring and Evaluation in the Presidency.

 

Administration: out of the 12 APP targets, the Department achieve 8 targets. The targets that were not achieved are IT independent assessment, service delivery improvement plan, SOC performance review standards, approved 3 year evaluation plan and contract management policy.

 

Legal and Governance: Out of 5 set APP targets, the Department achieved 1 target. The targets not met are resolution of the 20% state shareholding Namaqualand Mines, Government Shareholder Management (GSM) Bill, risk modelling tool and SOC procurement framework.

 

Energy and Broadband Enterprises: Out of 10 set APP targets, the Department achieved 4 targets. The targets not met are analysis of annual responses, strategic intent statement, negotiation and approval of shareholder compact, recapitalisation of BBI funding requirements and MYPD 3 implication response strategy.

 

Manufacturing Enterprises: Out of 10 set APP targets, the Department achieved 4 targets. The targets not met are analysis of annual report, minister’s address in preparation of the AGM, strategic intent statement, negotiation and approval of shareholder compacts, assessment of PFMA applications and review of SAFCOL’s new strategy.

 

Transport Enterprises: Out of 12 targets, the Department achieved 8 targets. The targets not met are analysis of Transnet, SAA and SAX’s annual reports, strategic intent statement, negotiation and approval of shareholder compact, assessment of quarterly reports, quarterly assessment of Transnet’s investment programme, quarterly assessment of the airline’s fleet renewal programme, monitoring of the SAA LTTS and SAX 20:20 vision and whole of state policy.

Economic Impact and Policy Alignment: Out of 6 targets, the Department achieved 3 targets. The targets not met are Transnet pricing structure assessment, transformation measurement tool developed, transformation indicators incorporated in Shareholder Compacts.

 

Strategic Partnerships: Out of 9 targets, the Department achieved 3 targets. This programme looks like the best performer amongst the Departmental programmes in the 1st quarter. The targets not achieved are funding strategy for SOCs, private sector participation concept framework and coal mining fund.

 

6.11 Concluding comments on service delivery performance

 

The Department of Public Enterprises is not a direct service delivery department, but provides a distinct mandate of shareholder on behalf of the state. The department has within its resources been able to execute oversight responsibilities of eight SOCs. The Department has been challenged with its limited human resources and also competing for critical skills with other organisations.

 

The Department of Public Enterprises is not a direct service delivery department, but provides a distinct mandate of shareholder on behalf of the state. The department has within its resources been able to execute oversight responsibilities of eight SOCs. The Department has been challenged with its limited human resources and also competing for critical skills with other organisations.

 

The SOCs performance is still volatile due to the economic context, regulatory environment and mandates. Eskom in the past year has suffered financially due to the MYDP 3 determination. This was coupled with the policy statement on keeping the lights at all cost and a possible downgrade by rating agencies. Currently Eskom require serious interventions from government to continue with its Build Programme. The reconfiguration of government has led to Broadband Infraco being moved to the Department of Telecommunication and Postal services. The transition should be implemented and monitored carefully. SAA and SAX face governance, financial and reporting challenges. Since its conception the LTTS has not been resourced and is not implemented appropriately in line with its pillars. Transnet is counting with its counter-cyclical investment programme. The economic conditions should be monitored as changes can lead to unintended consequences. The court related issue of pension funds remains a challenge to Transnet. The implications of the Deed of Settlement will continue to challenge Alexkor and its mandate. The company needs to be supported to find sustainable ways of diversifying its operations while maintaining a positive balance sheet. SAFCOL’s operations are still threatened by land claims. Denel continues to improve on its performance. The entity still need to monitored and supported in order to remain sustainable.

 

The Department should prioritise research that assist in the implementation of the Annual Performance Plan, Strategic Plan and achievement of strategic policy thrusts. The Department did not perform well in the 1st quarter. The Department must review its set targets continuously in order to meet reporting requirements.


 

7. KEY FINDINGS

 

These were the key findings of the Committee:

 

7.1        Technical issues

 

The reporting of performance information in the annual report is a concern as it does not align to the performance management information format presented in the Annual Performance Plan. There are some performance targets that are difficult to measure, hence the Department should ensure that all performance targets are measurable. 

 

7.2        Governance and operational issues

 

The Department has been able to stabilise boards of SOCs apart from South African Airways which has experienced resignations of board members. Most of the policies relevant to SOCs reside in other policy departments. The Department must in consultation with policy departments develop a framework in which they are able to effectively contribute to the implementation of SOCs’ strategy and objectives.  In this regard a legal framework to support and enable SOCs’ performance should be developed.

 

The Department has relevant institutional policies to achieve its mandate and to obtain clean audit outcomes. However, the Department’s internal control environment been improved, and has achieved a clean audit.  

 

7.3        Service delivery performance

 

The Department has achieved 83% of its planned targets, which is a 19% improvement from the 2012/13 financial year. The Department has restored its clean audit opinion which is a reflection of the Department’s increased focus on performance information and management of performance contracts with senior management.

 

7. 4       Financial performance including funding proposals

 

The Department has improved on its financial performance and has obtained a clean audit report from the Auditor General. The department has improved its financial controls and has reduced the use of consultants, it has also kept its vacancy rate at 1.8% which is far below the threshold.  

 

 

8.         Recommendations

 

The Committee recommended that the Minister of Finance should consider:

 

8.1        allocating additional funding to capacitate the Department and address the human resource constraints that the Department still experiences, considering the distinct shareholder management responsibility of the Department; and

8.2        developing a framework for funding SOCs’ rural development programmes.

The Minister of Public Enterprises should:

 

8.3        review the annual performance plan of the Department to ensure that the pre-determined objectives are measurable and quantified;

8.4        ensure that there is a direct correlation and alignment between the annual performance plan and the annual reporting format;

8.5        capacitate the internal audit function in the Department to ensure an improved record keeping and compliance with the legislative framework;

8.6        consider introducing relevant systems as well as considering evidential requirements during the annual strategic planning process in order to ensure that all predetermined targets are achieved;

8.7        increase and strengthen oversight over state-owned companies through robust and regular interaction with CEOs, Board Members, Audit Committees, regular visits to the construction sites of major infrastructure projects as well as to offices and sites of the entities;

8.8        ensure that emphasis is placed on monitoring that the SOCs’ implementation of Government’s policy objectives is realised, especially their outcomes as they have an impact on peoples’ lives;

8.9        consider introducing the Shareholder Management Bill which will empower the department to carry out its oversight responsibilities over state-owned companies more effectively, especially in providing guidance on how to align SOCs’ strategic priorities with government policies;

8.10      consider providing the Committee with shareholder compacts signed with state-owned companies in order to enhance the oversight role of the Committee;

8.11      consider institutionalisation of the recommendations of the Presidential Review Committee on SOCs;

8.12      ensure that there are improvements in integration, harmonisation and alignment of planning and implementation across all three spheres of government and state-owned companies;

8.13      ensure that the guiding frameworks for SOCs are completed timeously and implemented so as to provide a stable working environment. The Department should ensure that the SOCs comply with these frameworks;

8.14      ensure that there are punitive measures in place for under performance against targets for board members, executives and contractors of SOCs.

 

8.         Appreciation

 

The Committee would like to express its gratitude to the Minister and management of the Department of Public Enterprises, the Office of the Auditor-General, state-owned companies reporting to the Department of Public Enterprises and the parliamentary officials supporting the Committee for their hard work and co-operation during this process.

 

 

Report to be considered.