Department & State-Owned Companies Medium term financial & operational performance; State-Owned Companies ecent developments: update

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Public Enterprises

13 November 2019
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Meeting Summary

DPE of Public Enterprises presented its operation and financial performance report for the second quarter of 2019/20. It managed to achieve only 50% of the planned targets for the quarter due to capacity constraints and delays experienced in implementing some of its projects.

DPE raised the dire state of affairs of the State Owned Companies with some reflecting adverse audit outcomes in the form of disclaimers. The majority of the companies were in such a state that they required bailout from government. However, it reported that government has reached a ceiling in issuing bailouts and National Treasury has now issued loans with stringent conditions. DPE will be strengthening its interventions in monitoring the State Owned Entities.

Members discussed DPE's own poor quarterly performance, achieving only 50%. They were concerned that the internal challenges of DPE would limit its ability to monitor the SOCs) and urged DPE to fill urgently all strategic vacant positions.

Members raised that DPE should consider developing legislative provisions to enforce its monitoring and evolution function over the State Owned Companies, preventing the SOCs from resisting this. DPE should consider instituting consequences management for transgression of monitoring and evaluation mechanism such as failure to submit quarterly performance reports, leaving DPE and the Committee in the dark on the progress in their turnaround strategies and audit action plans.

The Eskom Board Chairperson acting as CEO was raised sharply by the Committee as Eskom had failed to honour the submission of its financial and operational performance report for the second quarter. The Committee wanted the matter to be addressed urgently.

DPE reported that it was dealing with its internal capacity challenges and has strengthened its monitoring and evaluation mechanisms for SOCs. These mechanisms include the review of the shareholder compact; inclusion of gatekeepers that will ensure close monitoring of the audit action plans of SOCs; advising the entities to review their business models including the rationalisation of staff to reduce the cost of doing business as well as selling redundant assets to deal with their debt challenges. 

Meeting report

Department of Public Enterprises (DPE) Quarter 2 performance 2018/19
Mr Kgathatso Tlhakudi, DPE Acting Director General, extended an apology for the Minister on official duty abroad and the Deputy Minister who attended a Standing Committee on Public Accounts (SCOPA) meeting.

Mr Tlhakudi reported that DPE achieved 50% of the planned targets set for the second quarter. He acknowledged that the non-achievement of the set targets emanate from the dismal state of the State Owned Enterprises (SOEs) which dealing with rampant corruption, negative performance and adverse audit outcomes. DPE's non-achievement of the set targets was also compounded by the capacity challenges within DPE that are being addressed and it would improve delivery as the financial year progresses.

DPE conducted an analysis to study the reasons for non-performance by SOEs and has introduced policy reforms which would allow DPE to intervene when SOEs are experiencing challenges. The shareholder compact was also reviewed to reflect the policy changes permitting interventions by DPE. A fraud line was introduced for the employees and members of the public to report incidents of corruption and maladministration in the SOEs. As the result, three incidents were reported during the first quarter and are being processed by DPE.

DPE did not managed to develop the Risk Integrity Management Framework as planned for the first quarter. This resulted from the failure to receive reasonable quotations from service providers during the competitive bidding process. DPE has approached GTAC to develop the framework.

DPE noted that 49 Corporate Social Investment (CSI) programmes were undertaken by the SOEs. DPE has developed Term of Reference to appoint a service provider to conduct social impact assessment on these CSI programmes.

DPE is in the process of developing an implementation plan and monitoring and evaluation for its localisation framework. The bidding process to appoint a service provider closed on 1 November 2019 and the bids are in the process of evaluation.

An Environmental Implementation Plan was developed for DPE and the plan submitted to the Department of Environment, Forestry and Fisheries for comments.

Energy and Resources Performance
DPE reported that regular visits to Eskom stations were undertaken. Eskom did not complete a turnaround plan which will include the unbundling of the business units as per the planned target. The plan will be submitted as part of the Eskom special paper in Quarter 3 (Oct-Dec 2019).

An administrator was appointed to assess and determine the status and challenges facing Alexkor. The organisation is a major employer in Namaqualand and the business cannot be allowed to fail. DPE is currently busy with the rationalisation of the business operation model, revisiting its organisational structure and reducing all excesses.

Good progress has been achieved at Medupi and Kusile. Monitoring of the capital expenditure for Medupi and Kusile was undertaken to ensure that projects are completed within the approved budget. Medupi Unit 3 attained commercial operations on 5 July 2019 and was synchronised to the grid on 27 August 2019. There was a delay in the submission of the assessment report on the electricity generation reserve margin.

Transport and Defence Performance
Regular monitoring of these SOEs was undertaken. These entities were still experiencing challenges in meeting their set targets. DPE is beefing up its own capacity through filling strategic positions to increase effectiveness of the monitoring programmes.

Four out of seven SOEs (Denel, SAA, SA Express and Alexkor) were able to submit their quarterly reports on time. The other three failed to submit their quarterly report.

Denel was reported to be struggling and was not able to pay its suppliers. The Denel business has a lot of potential for growth, its products still have a worldwide appeal. Eskom runs a 70% tied system of electricity supply. The big challenge is the carbon emissions that pollute the air and causing respiratory diseases for the affected local communities.

DPE is continuing to assist Alexkor in addressing the challenges facing the company. SAFCOL is not doing well. SAFCOL had initiated new investments; however, they have not yet yielded good results. Based on the socio-economic assessment done in the areas where the company is operating, the recommendation was that the company should work with land claimants.

Financial Performance
Ms Jacky Moluane, DPE Deputy Director General, Finance, reported that DPE managed to spend 83% of its budget at the end of September 2019 which is R21.2 billion of the DPE total budget allocation of R25.5 billion. This is an improvement from the spending in the same period in 2018/2019 which was 37.2%.

The spending includes R13.5 billion transferred to Eskom, R5.5 billion transferred to SAA, R1.8 billion transferred to Denel and R300 million transferred to South African Express (SAX). These transfers were made to these companies for the purpose of securing a working capital and as a settlement of government guaranteed debts.

The spending on Compensation of Employees and Goods and Services was 19.9% and 37.1% respectively. The spending on these budget items is lower than projected. This is due to unfilled posts and delays in implementation of projects.

State Owned Companies Operational and Financial Performance
Mr Tlhakudi asserted that the audit outcomes of the SOCs are reminiscent of the negative past which was characterised by rampant corruption and maladministration among state owned companies. Transnet, Eskom and SAFCOL received qualified audit outcomes. While Alexkor, Denel and SAX received disclaimers. The audit of SAA had not yet been finalised by due date.

Ms Moluane reiterated that the audit outcomes reflects the damage done over the years. DPE is making some progress in dealing with the damage. SAA was reported to be still finding itself with a funding shortfall. DPE's stance is that the company must deal with its financial problems without the expectation of government bailout. The SAA board and executives should consider negotiating with suppliers and deal with the excesses in pilot salaries.

Mr Tlhakudi emphasised that government has reached a ceiling in being able to give out guarantees to SOCs. That is the position DPE is relaying to the SOCs under its stewardship.

Discussion
Mr S Gumede (ANC) said that the stories reported by DPE were not good. He had envisaged that DPE would report on retrenchments at SAA and the DPE staff challenges, especially the appointment of a permanent Director-General. The Committee has been receiving skewed reports and he had hoped that the evaluations undertaken by DPE would reflect the true state of affairs in the SOCs. He emphasised the monitoring of the SOC audit action plans to ensure there were better results. The bailout must be preceded by a concrete improvement programme which can be monitored – this would be similar to what the new Denel CFO presented to the Committee. Would the bailouts/loans assist in ensuring the SOEs are sustainable? Regarding corruption, the Member was of the view that a person who steals from government is tantamount to someone committing treason – perhaps these people should be charged on high-treason. The situation of “working and stealing” cannot continue.

Mr G Cachalia (DA) found that the first slide and the last slide were the most pertinent parts of the presentation. It is imperative that DPE send the presentations well in advance to give Committee members enough time to engage with it so as to be able to discharge their oversight mandate effectively. This is especially in light of the matters under discussion.

Ms D Dlamini (ANC) highlighted that Alexkor was of the SOEs which could stand alone because of foreign money. Every day the SOEs were declining and not gaining any value – would the Department look to other markets and countries? Why was Eskom delaying submission? Often problems accompanied these delays e.g. loadshedding. There is a problem at Eskom and lack of planning. One individual could not play the role of Board Chairperson and CEO.

Ms O Maotwe (EFF) was not happy with the reasons for deviation provided in the presentation – they were too vague. Clarity on SAA is required as this is a burning issue in the country. How were the DEP and SOEs promoting the fraud lines among SOE employees? This cannot only be online as some employees did not have laptops. She was concerned that there were too many lines of accountability in the SOEs. All the SOCs were in the red – what was the Department doing to get out of this situation? What was being done to ensure performance was not the same this time next year? She was concerned about the increase of acting positions across government – did this mean there were no competent people in the country to take on the permanent positions?

Inkosi E Buthelezi (IFP) questioned the plans to mitigate pollution by some of the SOEs in that they did not seem aggressive enough.

Ms C Phiri (ANC) asked how the achievements of the Department could be extended to the SOEs. While the Department’s achievement was 50%, it is clear the entities are not doing well. How could the skills and performance of the Department be transferred to the entities? Could assurance be provided that the permanent DG would be aligned with what is required? Does the Department have a plan in place for any individual to follow? The concern was that people could just do what they wanted. The Committee is very concerned about acting posts. When would the position of DG, and other vacant posts, being filled permanently? She then asked if the three entities who have not submitted were still within the 45-day limit. What consequence management was done to ensure the entities performed accordingly? The SOEs were constantly submitting reports late. What was the Department’s oversight role in this regard? How often did DPE officials physically monitor the SOEs?

Ms Phiri said the main objectives of the SOEs are to assist the country’s economic growth. Even with all the turnaround strategies, one is not seeing the fruit. Action and implementation needs to be seen. What role is being played by Eskom on the matter of the CEO? This individual cannot be a player, supporter and referee at the same time. She asked the team to share the frustrations experienced in this regard.

The presentation made mention of financial constraints yet it was found some of the entities were renting their offices at great expense. At the same time, there was land owned yet the entities were based in the cities in rented buildings – what caused this? She recommended the entities be based where they are operational to save money and reduce costs.

She further added that Eskom should consider better ways of communicating about load-shedding times. Is there any hope that Eskom would find more funds, apart from government, such as promising investors?

Mr Cachalia suggested that to make the presentations more user-friendly, there be a standard way of reporting. Perhaps there could be separate reports for operational, strategic and financial matters. Standard items could include the status quo, challenges, progress made and implications. This would also make it easier for the Committee to interact with the documents.

The Chairperson reflected that many of the concerns raised by Committee Members had been raised in the previous meeting and the Committee was satisfied with the responses provided by DPE. He advised DPE to prioritise the new issues raised during this meeting in its response. The question on the progress made on appointing a CFO was paramount.

Response
Adv Melanchthon Makobe, DPE Acting DDG: Corporate Services, responded that to the question on the audit outcomes, DPE makes use of gatekeepers who ensure that bonuses are not paid where audit outcomes are not achieved. The responsibility fell on the executive when the audit outcomes were not achieved. There was therefore consequence management if the desired audit outcome was not achieved.

On the matter of treason, the most important aspect is to ensure stolen government money is recovered. 

An independent anti-fraud and corruption line number was established within the SOCs and it is being marketed to the staff.

The Board is dealing with the matter of the appointment of an administrator.

DPE is dealing with the high vacancy rate. There are detailed explanations for why particular targets were not met.

Ms Moluane added that regarding sustainability and bail-outs, it is important for the SOCs to review their business models because currently it was not sustainable for their operation as business entities. Improvement plans are followed for the audit outcomes – DPE monitors cases of non-adherence to these plans and there is follow up whether there are challenges or lags to ensure the audit picture actually does change.

Mr Tlhakudi said the issue of people losing jobs is not something to be taken lightly as it also pains DPE. The Department wants to get to a point where SOCs are making great contributions to the country’s economy and coffers and employ more people. Most black engineers have been trained at SOEs – this included Mr Tlhakudi himself. If the SOEs continue on the current trajectory, they will end up in business rescue under administration and facing liquidation. The SOEs are subject to the same laws as private entities i.e. the Companies Act. The reckless trading must come to an end. Internal stakeholders in the SOEs must get around the table and speak.

On the matter of loans, the SOCs need to be weaned off debt.

Mr Tlhakudi apologised for the last submission of the presentation – there were some challenges but the Department is committed to ensuring presentations are delivered to the Committee in good time. He was happy to consider the suggestions made by Mr Cachalia regarding structuring of the presentations.

On Alexkor, luckily the marine resources have not been depleted. Going forward, there will be an appropriate plan in place. There were some concerns around the contractors being appointed from outside the Richtersveld community.

Tipoff’s have been received via the fraud hotlines.

Mr Tlhakudi addressed the matter of retrofitting power stations noting the problem of funding and debt Eskom currently faced. Commitments have been made at COP to reduce emissions but this is to be done within funding means.

Mr Tlhakudi replied that government, through the Presidency, has made public pronouncements about the Eskom CEO and he would urge the Committee to await further pronouncement on the matter.

The meeting was adjourned 

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