Budgetary Review and Recommendation Report of the Portfolio Committee on Public Enterprises, dated 25 October 2011

 

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). The Act gives Parliament powers to amend money bills and other legislative proposals submitted by the executive whenever they deem it necessary to do so.

 

The Money Bills Amendment Procedure and Related Matters Act therefore makes it obligatory for Parliament to assess the Departmentís budgetary needs and shortfalls vis-ŗ-vis the Departmentís operational efficiency and performance. This is done taking into consideration the fact that the Department has oversight responsibilities over nine state-owned companies, namely Alexkor, Broadband Infraco, Denel, Eskom, Pebble Bed Modular Reactor (PBMR), South African Airways (SAA), South African Express (SAX), Safcol and Transnet.

 

1.1. Mandate of the Committee

 

The Committeeís mandate is to:

         Consider legislation referred to it;

         Exercise oversight over the Department of Public Enterprises and the nine 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;

         Consider all other matters referred to it in terms of legislation and the rules of the National Assembly.

 

1.2. Department of Public Enterprises

 

The vision of the Department of Public Enterprises is to provide effective shareholder management of state-owned companies that report to the Department and support and promote economic efficiency and competitiveness for a better life for all South Africans.

 

The mission of the Department recognises state-owned companies as strategic instruments of the industrial policy and core players in the New Growth Path (NGP). The Department aims to provide decisive strategic direction to all state-owned companies so that their businesses are aligned with the national growth strategies emanating from the NGP, and it will do this by ensuring that their planning and performance, investments and activities are in line with governmentís Medium Term Strategic Framework and the Ministerís service delivery agreement.

 

1.2.1 Oversight responsibilities over state-owned companies

 

The oversight responsibilities encompass the following:

  • Appointment of all directors by the Minister after Cabinet approval;
  • Appointment of executive directors upon recommendation from the Board;
  • Approval of significant and material transactions;
  • Issuing of a statement of strategic intent;
  • Conclusion of binding shareholder compacts;
  • Accessing information to monitor and evaluate performance;
  • Enforcing accountability and taking remedial action;
  • Production of good practice notes.

 

2. Strategic Priorities and Measurable Objectives of the Department

 

2.1 The Strategic Plan of the Department

 

The Department of Public Enterprises is contributing directly to creating an efficient, competitive and responsive economic infrastructure network, a commitment that forms the basis of the Ministerís service delivery agreement signed in October 2010. The focus of the Department has been on achieving the outputs and sub-outputs that are linked to the outcome contained in the agreement, which comprise the following:

 

         Improving the delivery and maintenance of infrastructure and monitoring the rollout of Transnet and Eskom build programmes;

         Achieving policy and regulatory clarity in sectors in which state-owned companies operate;

         Improving the operational efficiencies of state-owned companies, particularly in relation to the reliable delivery of rail and port services and reliable generation, distribution and transmission of electricity;

         Developing operational indicators for each of the required sub-outputs identified as part of the delivery agreement and, where necessary, including shareholder compacts concluded with state-owned companies.

 

Over the financial year, key policy and strategic initiatives of the Department were concretised to give meaning to both the New Growth Path (NGP) and the Industrial Policy Action Plan (IPAP) as well as the outcomes-based cluster delivery plans, and whose focus is on employment creation, industrialisation and infrastructure development.

 

2.2 The measurable objectives of the Department as outlined in its

†††† programmes

 

To fulfil these objectives the Department has six programmes namely, Administration, Energy and Broadband Enterprises, Legal Governance and Transactions, Transport Enterprises, Manufacturing Enterprises, and Joint Project Facility. The objectives of the programmes are as follows:

 

2.2.1 Administration

 

         To provide strategic direction and leadership;

         To provide support services to enable the Department to deliver on its organisational objectives in an environment where the human capital within the Department is both motivated and empowered;

         To improve the quality of corporate governance and performance monitoring systems by ensuring that appropriate policies, processes and procedures are reviewed, updated and implemented within the Department.

 

2.2.2 Energy and Broadband Enterprises

 

         To continuously ensure the alignment of shareholder strategic intent in relation to the role of state-owned companies in achieving Governmentís objectives in the energy and communication sectors;

         To monitor and benchmark the implementation of corporate plans and shareholder compacts;

         To support the security of supply by examining Eskomís maintenance and operational practices, distribution efficiency and the reserve margin annually;

         To maintain state-owned assets by monitoring progress against the implementation of the care and maintenance programme by the Pebble Bed Modular Reactor;

         To create an enabling policy and regulatory environment for state-owned companies by engaging with the Department of Energy and the National Energy Regulator of South Africa (NERSA) on new policies and regulations affecting Eskom as and when they arise over the Medium Term Expenditure Framework (MTEF) period.

 

2.2.3 Legal, Governance and Transactions

 

         To address constraints on state-owned companiesí contract negotiations and management to improve commercial competence and contribute to economic growth and development;

         To ensure that state-owned companies and the Department comply with legal requirements through monitoring and assessing legislative impacts on state-owned companies and alerting the companies to changes and possible risks.

 

2.2.4 Manufacturing Enterprises

 

         To ensure alignment with shareholder strategic intent in relation to the role of state-owned companies in achieving objectives in the defence manufacturing and forestry sectors by reviewing enterprise strategies and mandates in the context of political and sectoral policy shifts;

         To facilitate the financial and operational sustainability of Denel by reviewing the Denel Board to bring it to a full complement of members with the requisite skills, experience and expertise, as well as to develop a turnaround plan that clearly indicates how the company will achieve commercial sustainability and reduce its dependence on the fiscus;

         To monitor Denelís turnaround strategy by, among other things, providing support to ensure the effective restructuring of Denel Saab-Aero-structures and Denel Dynamics to return to commercial viability;

         To facilitate the disposal of minority shares within Safcol by engaging with the Department of Rural Development and Land Reform on its position on the optimal institutional vehicle to ensure the transfer of shares and developmental benefits to community beneficiaries.

 

2.2.5 Transport Enterprises

 

         To promote the alignment of corporate strategies of state-owned companies with Governmentís objectives in relation to the transport and aviation sectors by undertaking a comprehensive review of corporate strategies, business plans, and annual and quarterly performance;

         To provide the Boards of Transnet, South African Airways and South African Express Airways with strategic intent statements at their annual general meetings to highlight shareholder priority areas and guide the policy direction of the companies;

         To increase the market share of total freight to rail to an annualised 250mt from the current 177mt by 2014 by undertaking a detailed diagnosis of challenges facing Transnet Freight Rail and developing an integrated Government response to growing rail market share;

         To facilitate the introduction of private sector investment in rail through public-private partnerships to assist with the provision of requisite infrastructure where such investments are unaffordable on the Transnet balance sheet.

 

2.2.6 Joint Project Facility

 

         The Joint Project Facilityís new mandate aims to align the Department and its portfolio of state-owned companies with national economic strategies and associated objectives through focused policy research and the development of catalytic projects.

 

3. Analysis of the Departmentís prevailing strategic and operational plan

At the beginning of the year the President of the Republic gave an outline of Governmentís key focus areas. In addressing the nation, the President said, ďÖ government is committed to addressing the problem of unemployment through practical measures.Ē He concluded his statement by saying, ďÖ 2011 will be the year of job creation through meaningful economic transformation.Ē The President maintained that the introduction of the New Growth Path is a major intervention aimed at achieving many job creation objectives through investment in infrastructure development, manufacturing, tourism, agriculture, beneficiation and the green economy.

 

In response to the Governmentís call for infrastructure investments and job creation initiatives the Department of Public Enterprises set for itself certain key performance indicators that speak directly to Governmentís New Growth Path objectives and those of the Industrial Policy Action Plan. Despite the leadership instability that impacted the Department and two of its state-owned companies namely, Eskom and Transnet, the Department managed to meet most of its service delivery targets. Through its programmes, the Departmentís strategic and operational plans are as follows:

 

3.1 Administration

 

The programme consists of the Ministry of Public Enterprises, the Office of the Director-General which includes the Office of the Chief Investment and Portfolio Manager as well as Corporate Services with its sub-programmes: human resources, information technology, financial management, secretariat, knowledge centre, internal audit and communications, as well as property management. In line with its targets the Department has developed logical planning, monitoring and evaluation framework guidelines and, amongst other targets, the standardisation of financial and risk reporting templates and dashboard with enhanced analytical functionality.

 

3.2 Energy and Broadband Enterprises

 

The Department has been instrumental in developing and securing Cabinet approval for financing the support package that will enable Eskom to deliver on the capacity expansion programme on time and within budget. The proposed hybrid funding solution comprises a R20 billion equity injection to Eskom and R174 billion additional guarantees, bringing the total guarantee framework to R350 billion. This was confirmed by Eskom in its annual report for 2010/11 where it said that about 71% of the funding shortfall had been secured with the support of Government.

 

A study commissioned by the Department and conducted by McKinsey & Company on the implications and impact of Broadband Infraco not obtaining an Electronic Communication Services (ECS) licence has been completed. After looking at the options the Department decided to establish a joint venture between Infraco and Sentech at an infrastructure level. A project in KwaZulu-Natal is envisaged that will demonstrate the joint venture collaboration by both entities.

The Pebble Bed Modular Reactor (PBMR) has been granted exemption and is no longer required to submit corporate plans, shareholder compacts and quarterly reports nor annual reports as it has been transferred to ďcare and maintenanceĒ in response to the winding down of the nuclear project.

 

3.3 Legal Governance and Transactions

 

A report on the remuneration guidelines for non-executive and executive directors of state-owned companies has been submitted to Cabinet for consideration. Cabinet has mandated the Minister of Public Enterprises to conduct further consultations before a final remuneration model is approved.

 

Significant progress has also been made in the implementation of the Deed of Settlement with the Richtersveld community. The Pulling and Sharing Joint Venture between the Richtersveld community and Alexkor has also been established, paving the way for optimum mine operations. The upgrade of the townshipís civil and electrical engineering services to municipal standards has commenced and is expected to be completed by the end of the year.

 

3.4 Manufacturing Enterprises

 

The main focus has been on the engagement with Denel and the National Treasury regarding effective implementation of Denelís turnaround strategy with a particular focus on cost cutting and revenue growth as well as the entityís interim financial sustainability, particularly in respect of the development of a framework for the resolution of the Denel Aviation Strategy.

 

The Department has developed a position paper on the available options for the turnaround of Denel Saab-Aerostructures. A roll-over of guarantees amounting to R1.85 billion has been secured as an interim support for Denelís financial sustainability until September 2012.

 

A turnaround strategy for Safcolís future role post land claims has been submitted to the Department by the Board. According to the Fepartment, the implementation of the strategy has commenced. Included in the turnaround strategy is the developmental role that Safcol can play in the rural areas in which it operates. The Department is also working with the Department of Rural Development and Land Reform on the resolution of land claims and on the transfer of minority shares for the benefit of surrounding communities from previously privatised packages.

 

3.5 Transport Enterprises

 

In respect of aviation, major achievements include the final approval of the Airbus transaction, the delivery of the first A330-200 in February 2011, the completion of the South African Airways Technical (SAAT) business plan and the feasibility study on expanding SAAT as a regional maintenance and repair facility. The Department has developed an African Aviation Strategy (Airlift Strategy) for South African Express and South African Airways. This includes a review of SA Expressís joint venture operations in Congo which ended with SA Express eventually pulling out.

 

3.6 Joint Project Facility

 

The South African Power Project (SAPRO) is focused on nuclear and renewable energy as key elements of the countryís energy mix in ensuring security of supply. The South African Renewables Initiative (SARi) forms part of SAPRO and is aimed at identifying the sectorís potential for industrial development and exploring strategic bilateral relationships as a means to subsidise the technology.

 

The Competitive Supplier Development Programme (CSDP) under the Joint Project Facility programme is also responsible for finding innovative ways to leverage state-owned company procurement to build local world-class manufacturing capabilities in South Africa and to supply capital goods for Transnet and Eskomís build programmes. Currently, the CSDP is focused on nuclear and locomotive fleet procurement. A further component of CSDP is aimed at ensuring world-class state-owned company procurement capability by establishing appropriate training and certification.

 

3.7 Analytical overview of the departmentís operational plans

 

The Department has managed to achieve most of its strategic objectives as set out in the service delivery agreements signed between the Minister and the President as highlighted in the above section. Challenges, however, remain over some of its oversight responsibilities, especially in the case of Denelís Saab-Aerostructures, and as a result the entityís growing concern remains a matter of great concern. Broadband Infraco on the other hand is still without a Chief Executive Officer since the resignation of the former CEO early this year (2011). The Department has seconded Dr Andrew Shaw to Infraco as acting CEO until the post is filled.

 

Of serious concern also is the lack of quantifiable data on the number of jobs created and skills developed in the six-month period since the beginning of the 2011/12 financial year. The information is crucial in understanding how the Department and the various state-owned companies under its jurisdiction should practically respond to Governmentís New Growth Path and the objectives of a developmental state. Lastly, it would be of great benefit to the Committee if its oversight programme for the next financial year includes a visit to the Department itself to ensure that all the initiatives stated in the Administration programme, such as the dashboard, monitoring and evaluation systems and risk management frameworks are in place and are operational.

 

4. Analysis of annual report and financial statements

 

Government recognises state-owned companies as strategic instruments of industrial policy and core players in the New Growth Path. This recognition compelled state-owned companies to align themselves with the Governmentís broader economic and strategic priorities such as job creation and investment in infrastructure. The provision of adequate and efficient infrastructure services is aimed at stimulating (further) investments in other sectors of the economy and increasing productivity in state-owned companiesí customer base.

 

Consequently, the focus of Government has been to align the planning and performance of state-owned companies with the outcomes defined by the national medium term strategic framework in order to ensure that their investments and activities are aligned with national priorities. The idea is to gain greater recognition for state-owned companies as strategic instruments of industrial policy. This includes the systematic integration of their key programmes into the broader industrial policy and economic cluster programmes of Government.

 

To ensure clarity and transparency of the objectives for state-owned companies and a precise articulation of the trade-offs between policy, regulatory, customer and financial interests, the Department of Public Enterprises consulted with sector departments, namely National Treasury and the Presidency, to determine the strategy of the Government as a shareholder in state-owned companies. Such consultation entailed an assessment of the interaction between the policy and regulatory environment with the financial and operational goals of state-owned companies to ensure the optimisation of shareholder value and achievement of wider socio-economic objectives.

The Department identified the following key areas as strategic in facilitating the countryís growth prospects:

 

         Ensuring the security of supply and the efficient and competitive provision of key infrastructure;

  • Facilitating the development of advanced manufacturing capability through direct investment, procurement programmes and partnerships with global enterprises.

 

Furthermore, the Department of Public Enterprises paid specific attention to the countryís macro-economic challenges, particularly poverty and unemployment. Below is the Departmentís expenditure for the 2010/11 financial year:

 

4.1 Department of Public Enterprisesí Budget 2010/11

 

Table 4.1(a) DPE Budget 2010/11

 

2010/11

2009/10

Programme

Final

Actual

Final

Actual

 

R'000

R'000

R'000

R'000

1. Administration

104 834

101451

90 502

86 999

2. Energy & Broadband

174 476

170 857

1 959 192

1 958 790

3. Legal, Governance &

††† Transaction

50 023

48 797

147379

145793

4. Manufacturing Enterprises

192 782

189 595

199 335

198 068

5. Transport

22 958

19 077

1 568 730

1 568 656

6. Joint Project Facility

10 476

10 134

26 022

24 986

TOTAL

555 549

540 001

3 991 160

3 983 292

 

 

The Departmentís budget for the 2010/11 financial year amounted to R555.5 million and the Department managed to spend about R540 million of this amount. In other words, the Department has underspent by about R15.6 million. In all the programmes, under-spending occurred mainly under compensation of employees as a result of some posts not having been filled due to the scarcity of specialist skills in the market, as well as under-spending under goods and services which arose due to some projects having been delayed until very late in the 2010/11 financial year.

 

Only three transfers were made from the Departmentís 2010/11 budget to state-owned companies: a transfer of R36 million was made to Alexkor for the development of the Alexander Bay township. About R181.2 million was also transferred to Denel for the payment of an indemnity granted to Denel Saab-Aerostructures relating to the Airbus A400M contract. A R20 million transfer was made to the Pebble Bed Modular Reactor in terms of the statutory requirements to decommission and dismantle the Fuel Development Laboratory of the company. Transfers for the 2010/11 financial year totalled R237.2 million.

 

 

 

 

 

 

 

 

 

 

 

4.2 Department of Public Enterprisesí Expenditure from 1 April to 30 September 2011

 

Table 4.2(a) First and second quarter expenditure

Departmental total

First Quarter

Second Quarter

Total used %

Available

Expenditure 30 September

R'00

R'00

R'00

R'00

R'00

R'00

353 342 000

69 304 781

50 945 097

38.25%

218 180 618

120 249 878

 

 

Programmes

1st quarter

2nd quarter

Total used %

Available

30-Sep-11

1. Administration

20 077 443

32 119 837

53.48%

51 626 494

52 197 280

2. Energy & Broadband

42 983 349

5 762 116

79.65%

12 453 597

48 745 465

3. Legal & Governance

1 165 141

2 450 871

28.74%

9 606 035

3 616 012

4. Manufacturing

1 254 034

1 818 452

2.40%

125 224 275

3 072 486

5. Transport Enterprises

3 041 601

6 255 768

56.14%

11 515 856

9 297 369

6. Joint Project Facility

783 213

2 538 052

40.96%

7 754 362

3 321 265

 

As a result of adjusted estimates of national expenditure, the Department appropriated R353.3 million instead of the R230.2 million it had initially received from National Treasury at the beginning of the 2011/12 financial year.A total of R7.8 million was requested as roll-over from the previous yearís total unspent budget amount of R15.548 million. National Treasury, however, approved a roll-over amount of R3.378 million which was made up as follows:

 

         Financial modelling support for SAA and SAX (R1.836 million);

         Performance audit pilot project by the Auditor-General (R1.542 million).

 

From April to September 2011 (first two quarters), the Department had spent a total amount of R120.2 million or 38,3% (especially when taking into account commitments made for goods and services). For the first two quarters (April to September) the Department is left with R218.1 million geared for the next six months.

 

Less than 50% of total expenditure in the first two quarters might appear as under-expenditure. However, the Department has attributed this to the compensation of employees due to vacant posts. Compensation of employees is an issue which the Department will need to address as it not only has a negative impact on the organisationís expenditure, but also on job creation objectives as outlined in the New Growth Path.

 

In the first six months of the current 2011/12 financial year, the Department only spend 38.3% or R120.2 million of its total budget. The expenditure trends were reported as follows; capital expenditure spent approximately 74.8% of its budget by 30 September 2011, goods and services spent 49%.1%, compensation of employees spent 47.2% and transfers spent only 25.5%.

 

4.4 Shareholder capital and debt

 

In the past few years, state-owned enterprises have obtained loans from the African Development Bank (Eskom US$2.5 billion), the Japanese Bank for International Cooperation (Transnet Ұ35 billion) and the European Investment Bank (Ä480 million to various state-owned enterprises). The World Bank has granted Eskom US$3.75 billion, along with US$250 million from the World Bankís Clean Technology Fund. Further financing of US$1.25 billion is expected to be available from the World Bank in a subsequent phase. Eskom has recently received a total loan amount of R980 000 from the Agence Fracaise de Development (AFD) for its renewable energy projects.

 

Government has attempted to do its part by providing a R60 billionsubordinated loan to Eskom as well as up to R176 billion in guarantees, making to total framework of guarantees to be R350 billion.

 

To reduce funding of state-owned companies from the fiscus, the Department of Public Enterprises is of the view that state-owned companies must look at other innovative sources of capital and debt funding, including:

 

  • Public-Private Partnerships or direct private investment in infrastructure to provide an option for capital funding not available from public funds, as well as a means of enhancing service delivery by employing private sector entities to operate the facilities.

 

  • Large international suppliers are able to offer funding for their equipment. This often comes in the form of ďExport Credit FinanceĒ and is often relatively cheap (although it is not rand dominated).

 

  • A major source of funding that needs to be explored could come from the state-owned enterprise customer base. It is common practice around the world for large customers to invest in rolling stock (in the case of rail) or in power stations (in the case of electricity).

 

4.5 Analysis of expenditure trends by the Department of Public Enterprises

 

One of the challenges faced by the Department and some of the state-owned companies in the 2010/11 financial year has been the filling of vacant posts, especially at senior management level. For almost the entire 2010/11 financial year, the Department was without a Director-General. Leadership squabbles at state-owned companies also contributed to the vacancy rate as both the Chairperson of the Board and the Chief Executive Officer of Eskom resigned.

 

The same can be said of Transnet as one of its senior executives appeared before a disciplinary hearing on allegations of mismanagement. In the first two quarters expenditure on goods and services (including commitments) was slightly more than the expenditure on compensation of employees with 38.25% already spent, while only 47.2% was spent on the compensation of employees. A better view of this trend will be clearer at the end of the 2011/12 financial year.

 

The filling of posts both in the 2010 and 2011 financial years has affected the Departmentís expenditure. The Departmentís under-expenditure of R15.6 million in the 2010/11 financial year has been attributed to ďsome posts not having been filled due to scarcity of specialist skills.Ē This contradicts Governmentís commitment to fill posts six months after the positions became vacant. On a broader perspective, the filling of posts in the Department also contradicted the New Growth Pathís objectives of job creation.

 

The Departmentís performance in meeting its objectives as indicated in the previous sections is commendable, in particular the clean audit opinion of its finances. The Department has also done well in achieving its employment equity targets with the exception of targets for people with disabilities. More than 60% of the Departmentís workforce is black (Africans, Coloureds and Indians). Targets for people with disabilities remain a challenge and will hopefully be addressed in the 2011/12 financial year.

 

5. Expenditure trends per programme

 

5.1 Administration

 

In this financial year the programmeís budget allocation has slightly increased from R86.9 million in 2009/10 to R101 million in 2010/11. There was an increase of R4.8 million or 5.2% in real terms. It was the only programme in this financial year whose allocation had been increased. This increase was attributed to, among other things, the establishment of the Deputy Ministerís office as well as the shifting of the risk component in the Legal, Governance and Transactions programme to the chief investment portfolio managerís office. Expenditure is expected to grow moderately over the MTEF period at an average annual rate of 6.7% from R92 million in 2009/10 to R111.8 million in 2012/13. This was generally in line with inflation, but also reflected savings resulting from the centralisation of services.

 

5.2 Energy and Broadband

 

Spending in this programme was mainly on transfer payments to the Pebble Bed Modular Reactor and Broadband Infraco. This year the programme has been allocated about R170.8 million and although this amount is less than the allocation the programme received in the previous financial year by R1.9 billion, it was still the highest compared to other programmes. There was only one transfer for this programme, namely R138.6 million earmarked for Broadband Infraco. Expenditure was expected to decrease from R1.96 billion in 2009/10 to R14.9 million in 2012/13 at an average annual rate of 80.3% when Governmentís contribution to the Pebble Bed Modular Reactor ends.

 

5.3 Legal, Governance and Transactions

 

This programme has been allocated R48.7 million for 2010/11. This yearís programme allocation has decreased by R94.9 million in real terms or by 62,7%. The only projected transfer was that of Alexkor at an estimated value of R36 million as part of the funding of the Richtersveld land claims settlement agreement.In terms of expenditure trends, expenditure was expected to decrease over the MTEF period from R145.9 million to R20.4 million at an average annual rate of 48.1%, due to the finalisation of the Richtersveld communityís land claim.

 

5.4 Manufacturing Enterprises

 

The aim of Manufacturing Enterprises is to align and monitor the corporate strategies of Denel and the South African Forestry Company Limited (Safcol) against Governmentís strategic intent and performance targets. The budget allocation for this programme has decreased from R198 million in 2009/10 to R189.5 million in the 2010/11 financial year. Neither Denel nor Safcol were expected to receive any transfers, as was the case in the previous financial years. The implication is that this allocation for the programme was meant only for the management and oversight functions of the manufacturing enterprises sector. Expenditure was expected to decrease from R199.3 million in 2009/10 to R16.7 million in 2012/13, at an average annual rate of 56.3%.

 

5.5 Transport Enterprises

 

The Transport Enterprises intended to align and monitor the corporate strategies and the performance of Transnet, South African Airways (SAA) and South African Express Airways (SAX) against Governmentís strategic intent and performance targets. This programme has been allocated R22 million (2010/11) compared to the R1.5 billion it received in for 2009/10. This yearís allocation has been slashed by 98% with no transfers to any of the state-owned companies that fall under this programme. Most of the transfers have been going the way of South African Airways, but since the airline reported a profit in the last financial year this seems to have come to an end.Expenditure is expected to decrease significantly to R23.4 million over the MTEF period, at an average annual rate of 75.4%.

 

5.6 Joint Project Facility

 

The budget allocation for this programme for 2010/11 is R10.4 million and like all the other programmes, this programme has been allocated less compared to the previous financial year where it was given R24 million. The budget is used for expenses related to support functions such as remuneration, and goods and services. The Joint Project Facility was established in 2005/06 and was funded by all the state-owned companies.

 

In 2006/07, the unit was included as a sub-programme under the Manufacturing Enterprises programme, but through the realignment of the functions within the Department a new programme (Joint Project Facility) was created in 2007/08 and historical expenditure was adjusted accordingly. Expenditure was expected to decrease from R26 million in 2009/10 to R9.1 million in 2012/13, at an average annual rate of 29.5%. This is mainly due to the completion of some of the projects and programmes and the shift of the oversight and implementation of these projects to the relevant state-owned companiesí teams.

 

5.7 An analytical overview of the Departmentís expenditure trends

 

In terms of allocation, the Department of Public Enterprises was allocated approximately R555.5 million for the 2010/11 financial year. This confirms National Treasuryís statement that much of the infrastructure funding undertaken by Eskom and Transnet would not come from the fiscus. This is a huge decrease from the R3.9 billion that the Department was allocated in 2009/10. The general perception is that this allocation for the Department was mainly for administration and shareholder management of the various state-owned companies. Consequently, there are no major transfers to state-owned companies and only two of them were funded from this budget namely, Broadband Infraco (R138 million) and Alexkor (R36 million); the latterís transfer was mandatory in terms of the Deeds of Settlement with the Richtersveld community.

 

The Departmentís budget allocation has decreased by R3.6 billion in monetary terms or by 91% compared to R3.9 billion for 2009/10. In other words, the overall budget allocation for each of the Departmentís programmes decreased significantly except for the Administration programme for 2010/11. This, however, does not mean that state-owned companies were, in general, not in need of further capital. On the contrary, over the next few years state-owned companies were estimated to spend more than R700 billion on capital investments. According to the Minister of Finance, this capital expenditure had to come from internally generated resources and a mixture of long-term and short-term borrowings in the domestic and foreign markets.

 

Expenditure trends for 2011/12 continue to decrease with the Departmentís overall budget allocation of R353.3 million and was slightly less than the R555.5 million the department received in the previous financial year. This is due to a reduction in transfer payments to state-owned companies. Between 2007/08 and 2010/11, transfer payments to state-owned companies totalled R11 billion. The reduction, therefore, came as a relief to the fiscus and in particular to those who have been calling for a stop on the fiscus funding state-owned companies.

 

A close look at economic classifications, especially on the compensation of employees, showed a steady increase of the Departmentís overall expenditure. This was mainly due to the establishment of the Deputy Ministerís office in 2009. However, spending on consultants and professional services increased from R27.2 million in 2007/08 to R37.7 million in 2013/14, at an average annual rate of 12.1%. Over the MTEF period, spending on consultants and professional services increased at an average annual rate of 0.2% due to the need to support critical skills and provide specialist technical expertise in the priority sectors in the Department.

 

Overall, the reduction of transfer payments to state-owned companies in the 2011/12 budget meant that struggling companies like Denel would have to find solutions based on their balance sheets, rather than being funded from the fiscus. Safcol on the other hand was dealing with land claimed by communities around its plants. Whether this would have any financial implications or not on their balance sheets would depend on the negotiations between the Department of Public Enterprises and the Department of Rural Development and Land Reform. From the Governmentís side, Safcol still had a strategic role to play in the South African forestry industry.

 

5.8 Analysis of Auditor-Generalís report

 

For the financial year under review the Department had received an unqualified audit report with no emphasis on any accounting matter. For the past three years the Department has consistently been receiving clean audits. This was a great achievement for the Department and was not only an indication of good managerial skills on the part of management but also a reflection of strong financial management systems and internal controls that were effective and efficient.

 

6. Oversight Reports

 

The Committee undertook an oversight visit to Denel on 24 June 2011 in order to familiarise itself with the challenges that were reported at Denel Saab-Aerostructures (DSA), which is one of the business units at the Denel group. DSA had been recording financial losses for the past number of years, which had adversely affected the overall performance of the Denel group. DSA implemented measures to cut operating costs and to ensure the financial sustainability of the unit. The Department was working closely with Denelís management on a business plan for DSA division in order to turn the division to profitability. The Denel group has recorded a profit for the 2010/11 financial year.

 

The Committee also had the opportunity to attend a one-day workshop organised and facilitated by PriceWaterhouseCoopers in 29 June 2011 on corporate governance principles. The focus of the workshop was the King III Report on Corporate Governance Principles for South Africa, with specific reference to state-owned companies.

 

The Committee also undertook an international study tour to Venezuela and Brazil in July 2011 with a focus on the developmental role of state-owned companies (especially on job creation, skills development, infrastructure, etc). This included a focus on corporate governance principles, executive oversight by the legislature and the alignment of governmentís objectives with the mandates of state-owned companies.

 

Lastly, the Committee also had the opportunity to attend a three-day Winter School programme on 7 Ė 9 September 2011 organised and facilitated by the Department of Public Enterprises on the role of state-owned companies in the context of a developmental state.

 

 

7. Committeeís Observations

 

7.1 The Committee welcomed the unqualified report of the Auditor-General and the clean audit that the Department received and urged the Department to ensure that this practice was sustained and for such performance to be shared with other stakeholders in the relevant forums, such as the Directors-General forum.

 

7.2 The Committee noted with great concern the irregular expenditure of R8.5 billion reported at Transnet. The Committee failed to understand how such an amount escaped the attention of Transnetís audit committee as well as the monitoring and evaluation systems of the Department itself.

 

7.3 The Departmentís budget reflected an increasing use of consultants. In the first two quarters, expenditure on consultants amounting to 49.1% was second to capital expenditure. The Committee would monitor this trend closely and hoped that the Department would in the near future be able to recruit the required skilled personnel to reduce the use of consultants.

 

7.4 The Committee also noted with concern the state-owned companies that were working in silos rather than in a co-ordinated manner to maximise their potential output in the economy and the country in general. A good example of co-ordination among state-owned companies was Transnetís rail project which was intended to transport Eskomís coal supplies to power stations. This should be emulated by other state-owned companies where projects of common interest were meant to yield economic benefits to each state-owned company and the country.

 

8. Conclusions

 

The Committee took note of the improvements and achievements made by the Department on its performance and the financial management of its budget for both 2010/11 and the six-month period since the beginning of the 2011/12 financial year. The Committee also took note of the decreasing budget allocations and expenditure trends of the Department and the implication this has on struggling state-owned companies like Denel. The filling of vacant posts was a matter of concern as it had been affecting the Departmentís expenditure negatively (under-expenditure).

 

9. Recommendations

 

For 2010/11, the Department has been allocated R230.2 million and based on the Departmentís projections for the MTEF period there will be less funding for 2012/13. This must come as a relief to the fiscus as no more recapitalisation for state-owned companies is envisaged. Based on the analysis of the Departmentís budget for the year under review, the following recommendations are made:††

 

9.1††††††† The Standing Committee on Public Accounts should investigate cases of fruitless and wasteful expenditure reported in annual reports of state-owned companies, especially the wasteful expenditure of R8.5 billion at Transnet.

 

9.2 †††††† The Department should finalise the executive remuneration review recommendations with urgency to address the discrepancies among the salaries of executives of state-owned companies.

9.3††††††† The Department should provide the Committee with the shareholder compacts of state-owned companies to enhance the oversight work of the Committee.

 

Report to be considered.††††††††††††††††††††††††††††††††††††††††††††††††