Safcol 2020/21 Annual Report; with Minister

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Public Enterprises

01 December 2021
Chairperson: Mr K Magaxa (ANC)
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Meeting Summary

Annual Reports 2020/21

The Committee met virtually to engage the South African Forestry Company Limited (SAFCOL) on its 2020/21 Annual Report. 

The Minister stated that it had been a considerably tough year. SAFCOL was a small entity. However, it was very well managed.

SAFCOL highlighted some of the highlights of the year under review and some of the lowlights. The CEO took the Committee through the annual report and financial statements for 2020/21.

The company received an unqualified audit opinion from the Auditor-General of South Africa. 

The CEO noted several key points in the report, namely the performance in terms of the Shareholder Compact; Risk Management; Human Capital; Social Capital; and the financial standing of SAFCOL. He outlined the values within which the company operated and indicated the importance of ensuring that all employees were ruled by these values. He also gave an overview of the missions of the company. He spoke about the strategies put in place to ensure that the shortcomings in the previous financial year were not repeated. He indicated the steps the company was taking to ensure that there was sustainable human capital within the company, and highlighted the efforts made to ensure that there was a continuous flow of job creation. The CEO indicated that one of the biggest challenges they had as a company was access to plantable land.

There was a growth in the cash balance of R336 million in the year under review. The company incurred a loss of R45 million for the financial year.

Committee Members raised concerns about R8.7 million in irregular expenditure. They asked for clarity on the strategic plans that the company had put in place to ensure that targets were achieved in the following financial year. Concerns were raised about the creation of employment within the rural areas. The Committee Members asked about SASOL’s response to climate change concerns. They also asked how the company was dealing with the issue of land claims. Concern was raised about the figures for disabling injuries that were reported. 

Meeting report

The Chairperson welcomed all the Committee Members and guests to the meeting; he also noted the presence of the Minister, Mr Pravin Gordhan. He acknowledged the celebration of World AIDS Day, extended solidarity to those who had been diagnosed and applauded the survivors of the disease. The ANC-led government had been in the forefront of providing the best possible support to manage the Covid-19 pandemic and the HIV/Aids pandemic.

There were apologies from Ms J Tshabalala (ANC), Mr N Kwankwa (UDM), Deputy Minister Phumulo Masualle and the Chairperson of the board of South African Forestry Company Limited (SAFCOL).

The Chairperson handed over to the Minister to give an overview.

Minister’s overview

The Minister said that it was safe to say that SAFCOL was a reasonably managed State-Owned Enterprise (SOE). He highlighted that the lockdown during the year under review had an impact on SAFCOL. There had been some improvements that the committee should take note of. He said it was important for the state to start looking at all its forestry assets, whether these were stand-alone or linked to community demands and land claims. There were several fragmented entities operating within this terrain.

The Minister joined the Chairperson in acknowledging World AIDS Day. He acknowledged those whose lives had been extended significantly through the successful treatment programme. He commended the work of South African Scientists who were leading the understanding of viruses and their behaviours, impacts and therapeutics in dealing with the diseases that they caused.

Referring to the identification of the Omicron variant in South Africa, he said that the closing of borders to South African travellers by certain European countries and others was hasty. It was becoming clear that the variant had been around in different parts of the world for some time now. South African scientists were able to identify the structure and the different mutations of the new variant very quickly based on their HIV/Aids training and were able to warn the rest of the world accordingly. He congratulated them for their world leading efforts.

He handed over to the Director-General of the Department and the SAFCOL Board members for a presentation on the Report.

SAFCOL Annual Report 2020/21

Mr Tsepo Monaheng, CEO, Safcol, opened the presentation by highlighting that the first part of the financial year particularly April, May and June had been difficult for business due to the COVID-19 global pandemic. SAFCOL had shown resilience during this period to ensure that most goals were achieved. The presentation would touch on the growth of the company, as a previous presentation had focused on stabilising and structuring the business. SAFCOL had established a solid foundation on which it was able to grow as a business. Growth would be through commercial excellence, the ability to deliver commercial results. The business should be able to achieve excellence through engagement with different stakeholders, creating value for all its stakeholders, employees and customers.

Mr Monaheng said SAFCOL was fortunate to have huge tracts of land. As a responsible company, looking after the environment should be a priority. Excellence in environmental management would contribute to the country’s broader initiatives. SAFCOL would like to expand access to plantable land. There had been talks with various stakeholders, including the Department of Forestry, Fisheries and the Environment and various municipalities about access to plantable land. Increasing plantable land and beneficiation initiatives translated to more job creation.

He highlighted that although SAFCOL might be seen as the heart of the forestry industry, partnerships were important in ensuring that more people were reached and there was a positive impact on the economy. Partnerships were underway with the private sector to achieve the beneficiation initiative. The company was also looking at partnering with communities in the beneficiation part of the business. The planting of trees was a very risky business, and SAFCOL would focus on planting trees while the processing should be done through partnerships. The success of SAFCOL could only be achieved through transformation, innovation, and partnerships.

To ensure that the business achieved all its mandates, there were assurance providers that assisted in growing the business responsibly. There were internal risk and compliance strategies that looked after the safety of the environment and ensured that the company was not exposed to any risk areas. The internal audit function ensured that all operations of the business were within the accepted controls. The company must drive transformation internally and with entities around it. The Forest Stewardship Council (FSC) certification stated that SAFCOL should manage the forests responsibly on behalf of the state. 

He said that the company had plans to have its Mozambique subsidiary report directly to SAFCOL to improve governance. However, the process had been slower than anticipated.

SAFCOL was established in 1992, and ten years later parts of the company were privatised. He highlighted that the Amathole Forestry Company and Siyaqhubeka Forests managed to maintain the shareholding held by SAFCOL on behalf of communities. He said that when the privatisation began SAFCOL held 16 percent of all the entities on behalf of communities. Singisi Forest Products diluted its shares over the years. SAFCOL had the responsibility to ensure that the shares were transferred to their rightful owners, the communities.

Mr Monaheng highlighted the success of the company. Making sure that commercial, social, and environmental aspects were achieved depended on its employees. The values-based culture should be the guide for employees at all levels to ensure that mandates were achieved. He highlighted the value-centred project that the company had embarked on.

There had not been many changes within the operations of SAFCOL in comparison to the previous report. SAFCOL still managed 189 747 hectares in South Africa and 101 114 hectares in Mozambique. SAFCOL was currently working on improving the plantable land in Mozambique. There had been an increase in the local conservation area.

He noted that although the year had been tough, in terms of the restrictions of the COVID-19 pandemic, the company had had some considerable achievements. There were upgrades of the Timbadola Sawmill, which was the biggest employer in the area. There had been successful cost management initiatives. He outlined the progress achieved by IFLOMA [SAFCOL subsidiary]. Operations did not meet two of the Key Performance Indicators (KPIs) agreed with the shareholder. 

He highlighted that there was an improvement in performance in terms of the Shareholder’s Compact.  There was a 12 percent growth in revenue growth in spite of the tough conditions due to COVID-19. FSC Certification was achieved for the 24th consecutive year. There were challenges that were being attended to, such as the cost structure and profitability at Timbadola.

To achieve its 50:50 strategy SAFCOL had set itself four strategic goals. These included organisational enablement, operational excellence, growth and business development, and stakeholder economic transformation.

The CEO took the committee through the dynamics of the board and highlighted the appointment of the new Chief Financial Officer. He said that the board members have been providing leadership and guidance for the company to implement strategic plans. He also noted that the acting positions had been filled permanently.

Stakeholder engagement was critical for the functioning of the company. SAFCOL must ensure that it took account of all the stakeholder input.

SAFCOL has continued to improve risk management efforts by developing and strengthening the risk intelligence map, risk appetite framework, risk profile, business continuity plans and risk financing arrangements.

There had been zero fatalities. The company had effective responses to the COVID-19 pandemic which included rapid establishment of effective processes and protocols. A culture of safety compliance and safe behaviour was maintained across the organisation.

The company could not grow without the upskilling of its employees. The company had 1 784 employees, with more than 80 percent being black and 25 percent being female. The company had spent R13 million on training employees.

SAFCOL had assisted 84 black-owned emerging and aspiring forestry companies to complete their theoretical pesticide control operator (PCO) training. More than 16 000 community members were impacted by Corporate Social Investments (CSI) projects over the past five years. COVID-19 restrictions affected the execution of a few CSI programmes. The SAFCOL Broad-Based Black Economic Empowerment (B-BBEE) rating dropped from level 3 to level 4.

The COVID-19 pandemic had brought a new appreciation for the pivotal role that the South African agricultural sector played in the provision of healthy, sufficient, and affordable food for local communities. SAFCOL supported 11 small-scale farmers by supplying seedlings, fertilisers, garden tools, farming equipment and mentorship. The agroforestry project had indeed had a positive impact on the livelihoods of the communities involved.

There was a growth in cash balance in the operations, from R242 million in the previous financial year to R336 million. Revenue grew by 12 percent from the previous financial year. The total operating costs were 25 percent below budget. The company received an unqualified audit outcome from the Auditor General of South Africa. There was an irregular expenditure of R8.7 million due to unavoidable operational requirements. ICT was a problem area, but SAFCOL was currently investing in this section of the business. 

Mr Monaheng outlined the 50:50 strategy implemented by SAFCOL. He said the company should not be dependent on the sale of raw material, but should be able to participate where the money was being made. The money was in the beneficiation, in the processing. Fifty percent of future revenue should come from raw material, while the other 50 percent came from beneficiation. He was confident that in the current financial year the company would continue to grow, and debts and liabilities would  continue to decrease. SAFCOL had already started paying the Department of Environment, Forestry and Fisheries.

The Chairperson invited input from board members.

Ms Zimkhitha Zatu, SAFCOL board member, apologised on behalf of the chairperson of the board who was unable to attend the meeting due to other commitments. She noted that there had been improvement on a lot of targets despite the restrictions of the pandemic. Performance in terms of the Shareholder Compact went from 56 percent to 67 percent. Financial operations had improved considerably. She highlighted that SAFCOL had stepped up in supporting many of the communities in which it operated. The board had a renewed focus on pursuing growth both locally and abroad. It was currently finalising the export strategy, which should be completed in the next month. This strategy would ensure that the revenue base was deepened in a more sustainable way. She closed by thanking management, as they were the ones driving the ship. She also thanked the board for their consistent insight and the committee for welcoming the report.

The Chairperson opened the floor for engagement from the committee.

Discussion

Mr S Gumede (ANC) said that the presentation was a “song-well-sung“, as there was a target of zero irregular expenditure but it came in at R8.7 million. He made use of a “daka-boy” analogy, stating that it was impossible to work without dirtying your hands. 

He asked how long it would take to finalise the issue of land claims and what kind of obstacles had prevented this issue from being finalised. The committee was happy to see an entity that had delivered on its targets. He asked about the values and principles that enabled the company to achieve its mandates and goals.

He asked for clarity on other initiatives apart from looking for plantable land. What were the  strategies put in place to overcome some of the challenges raised in the report and reach a clean audit? How did the company plan to manage its debt?

Mr G Cachalia (DA) thanked SAFCOL for the presentation and reiterated the sentiments that it had been a tough year. He said that the continued irregular expenditure raised concerns, as did the debt currently within the Mozambican entity. SAFCOL was an important player within the industry, and it had potential impact on employment, land usage and the environment. He asked if SAFCOL had identified any other projected profits. The Committee would indeed hold it accountable for the proposed plans. The Committee would like to see more details on these.

He asked why the chairperson was not able to honour the meeting, considering that it was announced in advance and everyone else was able to make it to the meeting.

Ms O Maotwe (EFF) highlighted the mandates of SAFCOL on job creation. She said it was unclear how SAFCOL was supporting communities through job creation. She asked how SAFCOL was supporting small emerging businesses in particular. 

She noted that the CEO had said the company had 21 KPI’s and only 14 were achieved. She asked for clarity on the 7 that were not achieved, in relation to the growth and sustainability of SAFCOL as a company.

She asked how old the presentation being presented was and noted that the company should have foreseen that it needed to update it based on the positions that had recently been filled.

She said that although it was good that there had been a zero fatality rate, the numbers for disabling injuries (DIs) were quite concerning. She asked what the company was doing to achieve a zero target for DIs. It was painful having a family member going to work and coming back disabled. Plans should be put in place to ensure this did not happen.

She asked for clarity on what contributed to the loss of R45 million. She said that the unavoidable expenses resulting in irregular expenditure of R8.7 million could not be correct. She asked what maintenance plans had been put in place to rectify this.

She asked for the market share of the company in comparison to other industry players. What was the overall performance of SAFCOL?

Ms J Mkhwanazi (ANC) joined in the commemoration of World AIDS Day, pleading with members to encourage those around them to continue putting lives first.

She noted the improvement in eliminating acting positions.

The company had indicated that it would seek to realign fixed and variable costs to ensure the sustainability of the business. She asked how it planned to do so, given the ageing infrastructure and high cost of maintenance.

She asked what plans the board had to ensure that the findings of the Auditor General in this financial year were not repeated in the following year.

She noted that during an oversight visit, she had appreciated the corporate investment and social programmes of SAFCOL. Given the current financial climate of the company, would the company continue to invest in these social programmes? They contributed positively to the wellbeing of these communities.

Ms M Clark (DA) noted that during the oversight visit, it was mentioned that there would be a focus on tourism in terms of boosting financial viability. What plans had been put in place to ensure that this focus became a revenue generator?

She asked how the company planned to mitigate the R8.7 million irregular expenditure. What was the exact cause of the closure of York Timbers? And what mitigation strategies had been put in place? She asked for clarity on the retention strategy for keeping skilled staff on board.

She said it was also the responsibility of the committee to collaborate with other departments, such as the Department of Land Affairs and Rural Development to ensure that the issue of land claims was speedily resolved.

She said that she would keenly watch the progress of the profit projections in reports that would need to come before the committee for it to do proper oversight.

Mr N Dlamini (ANC) welcomed the report and said it flowed well from what the committee had observed during their oversight visit. He said the issue of limiting Greenhouse Gas Emissions (GGE) was gaining momentum in the country. SAFCOL was primarily in the business of planting trees. He asked if there were any plans to increase forestry.

He said that the committee should not only play an oversight role, but should assist in unlocking challenges where they arose, especially in terms of land claims. He was not quite sure to what extent land claims contributed to the financial losses suffered by SAFCOL. He noted that some of the questions being asked had already been discussed during the oversight visit. The information from oversight visits should be shared amongst the Committee Members to avoid addressing the same issues repeatedly.

Ms V Malinga (ANC) welcomed the report from SAFCOL, and she applauded the audit outcome. She asked about mitigation strategies by SAFCOL in response to a decision at the COP 26 climate change summit that there should be less cutting down of trees. 

The Chairperson said that the Committee would like to see SAFCOL grow as a company. He suggested that SAFCOL should diversify and create a company that made furniture not only for offices but also desks for schools. He asked if SAFCOL had any plans to embark on this expansion.

Responses

The CEO, Mr Monaheng, said that the issue of land claims had been discussed with the Department of Forestry, Fisheries and the Environment (DFFE) and the Department of Agriculture, Rural Development and Land Reform (DARDLR) through the land commissions. The longer it took to resolve the issue of land claims, the riskier it was to do business. It was in the interests of SAFCOL to resolve the matter promptly. The future was uncertain, and communities needed these processes to be fast tracked.

Under the guidance of the board, SAFCOL had a sound strategy. However, implementation often became a problem. SAFCOL was tracking the progress of these plans. Success could only be achieved through successful implementation of strategies. He highlighted that limited resources were often the cause of slow implementation. There was a focus on being able to deliver commercially.

SAFCOL was monitoring the positive impact it had on communities, including those who showed an interest in doing business with SAFCOL. Success was also measured through the impact on the environment. Controls were in place to ensure that progress was being made. There were weekly and monthly reports to the board to ensure that there was successful implementation of strategies.

The company had plans to acquire land internationally. However, it had been a difficult process. Unutilised commercial land had been identified locally. If the identified land was utilised well it would assist with job creation in communities, as there would be an opportunity for business.

SAFCOL had tried going into Zimbabwe, but it had been difficult due to certain financial requests. SAFCOL had wanted to take over the management of plantations. There were plans to grow the business in Mozambique on the land that was available. Locally, there were engagements with the Gert Sibande and the Msunduzi municipalities to take over their plantations. Good progress was being made. There were also discussions with the DEFF to take over the plantations in Mpumalanga, as they were currently ill-managed and bordering SAFCOL owned plantations. SAFCOL planned to partner with communities to bring these plantations to commercial standards.

Mr Monaheng said the elimination of challenges was a work in progress. Good progress was being made to ensure that targets were met. SAFCOL was working on paying the DEFF for leasing of land and there were hopes to conclude the debt soon. With the profitability of IFLOMA, there were plans for the subsidiary to pay back its debt to SAFCOL. The company had budgeted for positive earnings before interest, taxes, depreciation, and amortisation (EBITDA), but the margin target was missed by 10 percent. Relative to prior years, there had been improvements.

SAFCOL was looking at growth on two levels, the first being land. There was a need for more plantations. The second was vertical integration. When 25 years was spent growing a tree there should be 95 percent value from that tree. The company was only realising 50 percent currently. It needed to ensure that it monetised the other 50 percent that went to waste. SAFCOL was currently working on an energy project in Limpopo.

Eco-tourism during the time of COVID-19 had proven to be challenging. SAFCOL was looking into strategic partnerships in this area. The company was looking into partnerships for the production of transmission poles. Work was being done to set up a pallet plant in Sabi, and this should create quite a few jobs. This project needed more log material input, and this could be achieved through access to more plantable land. There was a partnership with York on a biomass plant to generate energy.

Mr Monaheng addressed the concerns around the closure of the York sawmill. It was closed as it was no longer profitable for York as an entity. In the past weeks, SAFCOL had been working closely with York to turn the sawmill into a cross laminated timber (CLT) plant. It hoped to create a new product and in turn re-employ the staff from York.

There was a broad initiative covering communities and enterprises. Without support from SAFCOL, communities would not be able to succeed. SAFCOL had entered into civic culture contracts for the maintenance of plantations. Broadly, these companies were black-owned or women-owned. They were supported from the incubation phase. There were only a few unsuccessful stories. SAFCOL was currently supporting new entrants in the sawmilling sector to ensure equitable participation within the processing, as this was where most of the money was.

The company had planned to achieve more than 80 percent of the Shareholder Compact target, but the beginning of the financial year was tough, and these targets were difficult to meet. Plans were in place to ensure that these targets were achieved. SAFCOL had a responsibility to bring along the communities in the journey of success.

Furniture manufacturing was one of the areas that the company had identified. SAFCOL had the raw materials and unemployed people could be skilled to carry this project to fruition. It was being carried out on a smaller scale, but there were hopes that it could be done on a much larger scale.

Mr D’Shorne Human, CFO Safcol, said it was important to note that although there was a loss of R45 million in the financial year 2021, there was an operating profit of R40 million. It was not as high as expected, due to some of the reasons outlined before. The reality was that the fixed variable cost ratio made the company less agile in response to situations such as lockdowns. SAFCOL was looking at decentralising elements of the cost-based operations. At the onset of any procurement initiation, consideration was given to whether it could be linked to a specific revenue generating unit. He said the biggest thing that threw the company into a loss was an accounting entry on long term land leases.

After a root cause analysis, the company realised that there were inadequacies in some procedures and policy documents, and it caused them to trip over a few irregularities. The board approved a streamlined SCM policy that was in line with the treasury regulations, and a procedure document had been executed by the company to ensure a streamlined flow of operations. He said that the company would continue to investigate these irregularities. It had already closed 95 percent of the audit findings raised by the auditor general, but some of these would only come into effect at financial year end. The forecast net profit was already R100 million.

Mr Vishal Harichund, Executive: Strategy and Commercial, SAFCOL, gave an update on the Shareholder Compact target profits which were not met in the previous year. Revenue targets were missed due to the COVID 19 lockdown. There were unfavourable weather conditions that affected planting. He said that B-Certificates expired during the year under review, and it resulted in the company not achieving set targets. The target for the Timbadola project was not met. In quarter two the company had already seen the fruits of achieving shareholder targets.

Mr Kgathatso Tlhakudi, Director-General, Department of Public Enterprises, supported the presentation from SAFCOL. He said this was a performance that the committee should be pleased with, given the conditions of the current financial year. SAFCOL was greatly exposed to the economy and therefore much pressure had been placed on its top line of operations. There was a need to look into the way in which entities could be leveraged to increase economic activity and create jobs in the areas in which they operated. SAFCOL had put forward quite an ambitious projection going forward, where it sought to diversify its revenues. He noted the efforts of the board in ensuring that there were continuously jobs in the communities. SAFCOL should be the preferred forestry partner as soon as land claims got settled. It was important to keep the land within forestry. Initiatives such as agroforestry were crucial in ensuring that revenue was created in the process of waiting for a tree to grow.

The Committee adopted minutes from previous meetings.

The meeting was adjourned.

 

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