South African Forestry Company Limited (SAFCOL) on its 2012/13 Annual Report

Meeting report

South African Forestry Company Limited SAFCOL Briefing
Ms Nomfanelo Magwentshu, Board Chairperson, SAFCOL, gave highlights of the company’s performance during the past year. She said that in 2010 the company had suffered a huge loss and since then there had been a turnaround, with profits this year of R30.5m. She was ashamed to report that they had received a qualified audit report and SAFCOL had established a detailed plan to prevent a recurrence. The Minister had not been excited about the results and SAFCOL was exploring sales of alternative products to the market. SAFCOL was working with the communities where the company operated in order to conclude the land claims process.

Ms Nomkhita Mona, CEO, SAFCOL, described the structure of SAFCOL, explaining that the Komatiland Forests company was a wholly owned subsidiary, and that SAFCOL had an 80% share in the IFLOMA company in Mozambique. In South Africa, the area of forest under management was 187 000 hectares (ha), of which 121 000ha was planted. In Mozambique 31 000ha was planted, and this area could be increased to 69 000ha.  In the past few years, the market was bad for wood and if SAFCOL was taken out of rural areas it would have an impact, as SAFCOL provided 4 000 jobs and impacted on 20 000 people. The field of green energy was a new, but expensive, space SAFCOL was exploring. SAFCOL moved 24 000 truckloads of logs pre annum. Historically the company had been in decline, with the exception of 2008.

Ms Zoliswa Mashinini, Chief Financial Officer, SAFCOL, presented the financials and said that revenue had shown an upward trend since its low point in 2010, despite a 1% decline last year.  Net profit after tax was R70m in 2013 (R206m in 2012).  Higher profit was achieved in 2012 compared to 2013 because there had been a higher fair value adjustment, the adverse effect of the strikes of July 2012 and land lease rental costs.  The company had received a qualified audit report because its biological asset valuation differed from the physical planted areas, capital profit reserves and retirement fund reserves were classified as non-distributable rather than distributable, and because VAT had not been calculated in terms of the turnover-based method. The company had done a detailed evaluation of its biological assets and corrected a mapping error and updated its register. There were also two emphasis of matter raised by the audit report -- the restatement of corresponding figures and an additional matter related to compliance in the submission of financial statements. The company had taken action to ensure that subsidiaries forward their financial statements on time. The company had not met its targets in three areas -- earnings before tax and depreciation (EBIDTA), cash interest cover and cash ratio.

Ms Mona said SAFCOL had maintained its Level Two status as a Broad-Based Black Economic Empowerment contributor. It had employed 13 out of a targeted 19 disabled black people and 14 out of a targeted 16 black female management executives.  Overall it had attained 63% of its key performance indicators (KPIs). The factors in the partial achievement of the KPIs were the loss in fair value, the strikes, the labour unions, adverse market conditions, and the impact of IFLOMA as a drain on resources.  It had achieved 93.2% of the Transformation Charter objectives. The company had done well to keep to the employment equity target.  SAFCOL had worked with the communities to assist in developing them.  It had established 13 social compacts, embarked on 60 projects, offered bursaries and established five cooperatives.

One key concern for the company was land claims, as 61% of the land SAFCOL operated on were owned by communities.  SAFCOL did not have the jurisdiction to settle land claims and wanted the Portfolio Committee to assist in facilitating action from the Department, the DRDLR and DAFF to ensure that the land claims issue was resolved. The Deputy Minister had accompanied SAFCOL in going to communities where people wanted their land back.

IFLOMA’s factory in Mozambique was operational and being run by SAFCOL. The issue of controls had resulted in a contingent of South African management being sent to Mozambique.   However, some of  this group had been involved in fraud and had been dismissed. SAFCOL was engaging with the Mozambique government, the 20% share partner, on a feasibility study for IFLOMA 2 which would require funding. SAFCOL had to decide whether to stay or cut its losses.
 
The key risks and challenges to SAFCOL were the land claims, and operating from an incorrect business model, where 25% of revenue came from processed products and 75% from raw material. The change in market conditions necessitated a relook at the business model.  Funding was another challenge, as SAFCOL would need big amounts for IFLOMA 2.  Another challenge was the conversion of the pulp industry from pine to eucalyptus.

The future outlook for the company involved community upliftment, the resolution of the land claims, and promoting timber-framed structures as an alternative building method. A decision by the Director General needed to be finalised on the minority shareholding of SAFCOL in some companies.  SAFCOL wanted to negotiate the question of market-related rentals being paid to DAFF, and to leverage government as a strategic partner in the sales of SAFCOL products.

Discussion
Mr E Marais (DA) asked what return on investment was expected from IFLOMA 1.

Dr G Koornhof (ANC) said that he was “shell-shocked” by the presentation. Why did management not take responsibility for the Auditor General’s report?   There were ten qualifications of emphasis on matters in the report that were more serious than those raised in the presentation, most notably the issue of the lack of management  response by leadership, which was noted as a cause for concern. Financial statements had not been submitted on time. There were governance issues of fraud and corruption and fruitless and wasteful expenditure. State-owned companies should be financially sustainable and support the development of communities.  He said there had been three strikes at the company, yet the report talked of the company enjoying good relations with the unions. He asked what the Department was doing about these issues.

Mr K Dikobo (AZAPO) asked if the qualifications could not have been foreseen -- for example, the matters regarding the VAT and capital profits being indicated as non-distributable.  How long-lasting were timber framed structures?  Why was Government assistance required for the sales of products -- could they not promote the sales themselves, or were there laws which prevented this?  Were the new initiatives on green energy under the mandate of SAFCOL?

Ms G Borman asked why jobs were not being created in rural areas.  Why did it take so long to discover the 75/25 split was not the correct business model?  SAFCOL needed to be more focused. Why were targets not fully attained?

Mr C Gololo (ANC) commended SAFCOL on their work in rural areas. Why were the disabled leaving SAFCOL, and how was SAFCOL managing the issue?  Did SAFCOL own shares in the land or the trees? What was the total value of IFLOMA assets?  He said the mindset on timber-framed homes needed to be changed.

Mr A Mokoena (ANC) said most problems raised by fellow committee members were legacy issues -- for example, the land claim. He said SAFCOL should discuss its timber requirements with Transnet.

Ms Magwentshu said that this was her second term on the Board and that most of the issues were legacy issues, because SAFCOL was supposed to have been privatised.  In her term, the Board had focused initially on stabilising the company financially and in terms of its leadership.  SAFCOL had made a concerted effort to get closer to communities. There had been challenges, such as delayed decisions by the Competition Commission and its rulings. The focus on growth had started only now that the company was financially stable and had a stable leadership. In the case of IFLOMA, fraud had been uncovered and the CFO had capacitated the finance department to ensure that it would not happen again.

Mr Kgathatso Tlhakudi, Deputy Director General, Department of Public Enterprises, said a task team had been established to finalise the land claims. The Department of Rural Development and Land Reform (DRDLR) was the lead department.

Regarding the R1bn sawmill, he said that SAFCOL would have to prove that there was a market for the products of the sawmill.  SAFCOL would also have to take into account the viability of smaller sawmills.  He acknowledged that the ratio of 25% processing might not be sustainable, but SAFCOL should increase the ratio slowly. SAFCOL was good at managing forests and that was the core area that should be developed.  Mozambique could be used as a gateway into Africa for SAFCOL to manage forests in other countries. Regarding IFLOMA, he said that SAFCOL had been handed this problem, but he believed that SAFCOL could overcome the problem.

Ms Mona said the problem with reporting on the annual report was that many things had happened since the report had been compiled.  She said the AG had a different approach to auditing than their previous auditing service provider. She acknowledged that the wasteful and fruitless expenditure items should have been in the presentation. IFLOMA was not expected to make a profit and contribute to SAFCOL’s revenues before 2020, and would breakeven only in 2018.  There were management offices in Maputo and Messica, Mozambique. The SAFCOL employees involved in corruption there had been recalled to South Africa. She said that at the time of the strikes, relations with the unions had not been good.

Ms Julia Mphafudi, Human Resources Executive, said SAFCOL’s relationship with unions had been turned around since then.

Ms Mona said it was not SAFCOL’s intention to produce timber-frame structures only to encourage and facilitate that business.  There was an issue around legislation where SAFCOL, for example, did not tick all the boxes when it came to filling in tenders for the supply of school desks to the Department of Education. Yet SAFCOL wanted to focus on job creation in rural areas. It had introduced EPWP projects. Regarding not attaining 100% in its KPIs, it had discussed the targets with the Department.  The change to the business model had taken so long because the focus had been on other matters, and there had not been a strong management-level capacity. Regarding the national energy regulator (NERSA), she said that a state-owned entity could not sell energy to the grid.   There had been three resignations of disabled persons, which was not an exodus, and SAFCOL had employed more disabled people than they had been required to. She said that in IFLOMA, SAFCOL owned the rights to the plantations, not the land. SAFCOL had met with the institute of timber-framed structures to partner and promote them as an alternative building method.  SAFCOL would follow up on Transnet as a possible buyer of its products. A study was being done on log exports, and log chip exports would also be investigated.

Ms Mashinini said it had made sure that the finance department was well capacitated. The exclusion of the emphasis of matters mentioned by Dr Koornhof, was an oversight, but internally SAFCOL was going through the findings and implementing corrective measures. The misalignment of figures between the SAFCOL figures and that of the AG was because of a mapping error and the registers had been brought up to date. It was focusing on its procurement policies and taking disciplinary action where necessary. Regarding the reported R14m fruitless and wasteful expenditure, she said that this reflected penalties and interest incurred by IFLOMA.  SAFCOL had reviewed the management fee structure and was engaged in talks with Mozambique authorities on how these penalties could be reversed.

Dr Koornhof said the Committee needed to deliberate on the land issue, as requested by SAFCOL.

The Chairperson requested that it be put in writing by SAFCOL.

Mr Mokoena asked if there had been progress on the matter of baboons debarking trees and impacting on the plantations.  

Mr Francois de Villiers, Chief Operations Officer, SAFCOL, said baboons were an ongoing problem, but it had developed a protocol to deal with the animals. The problem had not been solved, but was being addressed by an industry body.

Dr Koornhof said the land issue had existed for three years already, and needed to be resolved or at least placed in the legacy report for the next parliament.

The meeting was adjourned.