Department of Public Enterprises on its 2014/15 Annual Report & 1st Quarter 2015/16 performance, with Minister & Deputy Minister & Auditor-General

Meeting report

Opening remarks
The Chairperson welcomed the two political heads of the Department of Public Enterprises and expressed the Committee’s appreciation for their presence at the briefing. She requested the Committee to allow the Minister to address it on pertinent matters regarding the (DPE’s) performance before she left for Cabinet.

Opening address by the Minister of Public Enterprises
Minister Lynne Brown said the mandate of the current DPE administration had been clearly outlined in the Medium Term Strategic Framework (MTSF) of 2014/15. The success of the DPE could only be defined by the impact the Department had on realising the outcomes of creating adequate infrastructure capacity; to support the reindustrialisation of the South African economy and respond to the challenge of unemployment. The mandate of the DPE had clearly focused on reorienting the State Owned Companies (SOCs) to support the achievement of SAs development aspirations. 2015 was the first year that SOCs in the DPE had been trading their own balance sheets, despite what was in the public domain around DENEL.

Of the key highlights in the 2014/15 financial year, a number of factors had had a negative impact on the economy as a whole. That had necessitated that need to ensure that SOCs executed their mandate in a way that would enhance the overall competitiveness of the economy and to create the necessary infrastructure capacity that would enable the economy to grow. In that regard the SOCs in DPE had sustained their investment into the economy of SA.

The following was achieved in 2014/15:
- The combined infrastructure spend by Transnet and Eskom had amounted to R86 billion.
- The investments of SOCs continued to increase in a very depressed economic environment employing around 120 000 people in the country full time.
- The DPE had responded to the sentiment about the differences in working conditions and remuneration of full time staff of SOCs and contracted workers at SOC construction sites by embarking on interactions with COSATU)and Transnet from where the majority complaints were coming. It had to do with how the SOCs projected and managed their work culture onto their contractors as very often the striking work force were contracted labour.
- The localisation of expenditure by SOCs had also gained momentum with significant resourcing from local industry. 1800MW had been sourced from local Independent Power Producers (IPPs) in the 2014/15 FY.
- Cabinet had approved a R23 billion support package to Eskom to support the financial sustainability of the entity which grew. Eskom had been able to raise R49 billion to finance its own operations.
- The improvement in oversight of SOCs had ensured a decline in the number of companies registering losses.
- The value of assets in the DPE portfolio had increased from R720 billion between Eskom and Transnet in 2013/14 to just beyond R812 billion in 2014/15.

In February 2015 the DPE had made representations to the Cabinet Lekgotla on how it could implement Presidential Review Commission (PRC) recommendations to ensure it strengthened the state’s role in the economy.

In 2014 Eskom had had to implement load shedding as a result of supply-demand imbalances, which had impacted SA’s drive to position itself as an investment destination. Tough decisions had to be made after Cabinet had adopted a Five Point Plan in 2015, Eskom had reduced load shedding to just over two hours where the country had gone for 66 days without load shedding. However, the DPE understood that it would take at least two to three years to normalise the electricity supply.

The change in mandate of the DPE and the movement of BroadBand Infraco (BBI) to the Department of Telecommunications and Postal Services (DTPS) and South African Airways (SAA) to National Treasury had had a negative on DPE performance. The Minister noted a need to look at DPE’s adjustment to change.
Importantly, the shift at DPE from managing the office of privatisation to managing SOCs had been a complex period because it was in response to inactivity and reactionary in process, and therefore DPE had to relook at how it could become more proactive in dealing with the challenges out there as it was chiefly responsible for shareholder oversight at SOCs.

Discussion
Ms N Mazzone (DA) said there was a persistent concern in the public space and Parliament as to why Eskom consistently approached NERSA with tariff increase requests when the Minister had just mentioned that the company had made R49 billion in the year under review. Could she explain why the consistent requests were being made?

Mr N Singh (IFP) asked Minister Brown if she was satisfied with her ministry's oversight role in SOCs, especially regarding the challenges at Eskom and Transnet. How far had DPE progressed in legislation on shareholder compacts and ensuring that SOCs could be held to certain legislative prescripts and performances? Had the transfer of BBI and SAA to the other Departments been finalised? There was a perception that the reduction in load shedding was largely due to decrease in demand by industries where the feeling was that industries did not want to expand and would decrease units in their plants; could Minister Brown speak to that? What were the actual challenges that made capital intensive projects like Medupi take so long to complete when comparative countries took shorter periods to do the same?

Ms Mazzone asked how Minister Brown and her Deputy Minister dealt with contractual challenges and disputes between SOCs and their subcontractors in terms of her oversight role. Had she been consulted about DENEL’s decision to put three of its executives on special leave?

Mr K Morapela (EFF) said that it was appreciated that the Minister was taking an interest in the grievances of contracted workers especially engaging them on their conditions of employment and the disparities in matters of remuneration. As Members of Parliament they had been asking for the shareholder compacts at SOCs so that the Committee could understand the agreements between the DPE and SOCs. This would allow the Committee to better oversee compliance and non-compliance by the SOCs in terms of those compacts. Could the Minister clarify that matter?

The Chairperson wanted clarity on whether there was any Departmental strategy in dealing with the perceived or real high levels of corruption at SOCs, especially DENEL and Eskom.

Minister Brown replied that the perceived high level of corruption, whether real or perceived, was dealt with in the following manner: When DPE was aware that corruption was clearly occurring, that matter was followed up rigorously. However, the issue with shareholder compacts was that they had very clear outlines as to what needed to happen. Unfortunately for example, if say the Minister did not like the owner of Pick 'n Pay and that owner won a contract within a SOC, she could not just assume on that basis that the contract had been awarded fraudulently. When the matter was raised with her though, she could ask the SOC to look into the procedures followed in awarding the contract. She reminded the Committee of the contract that had been awarded at Koeberg (Eskom). The information which SOCs gave her was in terms of how they had arrived at deciding on a particular supplier instead of another. As the SOCs were run independently by their boards and not the DPE, there were predetermined objectives in the shareholders compacts which were also published on DPE’s website and were presented in the DPE’s Annual Performance Plan (APP). It was through those objectives that SOCs were held to account. Therefore when there arose a perception of corruption, perhaps as it was apparent at DENEL recently, which she personally did not think it was. Rather, though the matter was not concluded yet, Minister Brown said it could be a matter of acquisitions that DENEL had made, which the company's balance sheet could not compensate for, which then raised other issues. The way that matter had been presented to her by DENEL was that there certain problems at the SOC and it wanted to put those three executives on leave before actioning that. Together with that presentation, DENEL would tell her why it wanted those officials on leave. She accepted the proposal because had she not and further challenges arose then she would have had to carry the liability as it would then be a matter of her not having probed the matter further. In the case of DENEL, the Auditor-General South Africa (AGSA) would continue investigating how matters had gotten to where they were at the SOC.

In DPE’s interactions with DENEL, it was satisfied that it was an exaggeration to say that the SOC was not paying its suppliers as there were only about 10% of the large suppliers that DENEL still had to pay. However, that would only happen when DENEL itself got paid for the contract so there had to be an alignment concluded between the SOC and its suppliers. That however, raised the issue which Mr Morapela had alluded to about contract workers and their conditions of work. How SOCs managed their contractors and what was built into those contracts though current contracts were concluded before the issues had come about at the SOCs. Going forward these matters would be considered when renewing or taking on new suppliers.

In terms of Medupi and overseeing the commercial sensitive side of the DPE shareholder compact with Eskom, Minister Brown said that that entailed her going to speak to all the suppliers contracted there to find out whether they would have a problem if DPE published their balance sheets or appraised each company in the public domain. At the end of the day, the Companies Act of 2008 regulated how SOCs procured and political heads and politicians were not involved in that process which was a good thing.

In terms of the planning and preparation of capital intensive projects, alluded to by Mr Singh, the Minister referenced similar projects in Poland and India and how long they had taken to go through the planning phase. It had taken around seven years to plan for the construction of a large power station whereas SA had planned and prepared for Medupi in one year. In her short time as Minister and going forward, she wanted to avoid continued cost overruns and delays in bringing Medupi into full capacity operations. By 2020 all units of Medupi, Sere Wind Farm and Kusile would certainly be online.

On the SOC transfers, SAA challenges had been quite substantial in terms of their finances. It had been transferred out of DPE to National Treasury and Broadband Infraco (BBI) had moved to the Department of Telecommunications (DTPS).

The legislation for shareholder management was already in the pipeline and it would be pushed through a discussion paper by the end of 2015. The intention of that legislation was to align the different levels of shareholding and their respective regulatory bodies across all SOCs to decide eventually as to where all 700 SOCs needed to be located. Criteria would then be developed that would determine what an entity’s role was within the economy; welfare; education and the regulatory sectors so that then a decision on how to structure the shareholder management could be finalised going forward.

There was a public perception catastrophising the perceived adverse impact of SOCs in SA’s economy. Of course that was exacerbated by the matter of corruption at SOCs.

She was not satisfied with the amount of oversight DPE was able to do and she certainly wanted to do more oversight in SOCs. However, as DPE they were trying to strengthen their own tools and the fact is that some of the SOCs have met some of their targets - whether it was the balancing of their sheets or stabilising boards and ensuring a positive company image in the public domain. Minister Brown felt that the DPE had grown its own timber in ensuring that some of those targets had been met.

She had been informed about the suspension of the senior officials at DENEL before that had been actioned but not formally which was why she had not made any formal comment on the matter.

Ms Makgola Makololo, Acting Deputy Director-General: Energy, said that a typical example of the continued tariff adjustment was firstly, Eskom was a regulating business. That meant Eskom had to continually go to National Energy Regulator (NERSA) for each fiscal period with their operational requirements so that NERSA could make a determination based on what the economy could afford and what was reasonable for Eskom to possibly spend; and what was reasonable in terms of a benchmark in the various industries. On the multiyear price determination, it was a forward looking process. The current multiyear pricing determination 3 (MYPD 3) had been made in 2012 until 2018 (five year period) where Eskom had received an 8% tariff increase. The determination was a forecast over the five year period where Eskom could project how it would operate its price, the amount of fuels it would burn and the scheduling in terms of its delivery of energy. However, at the end of each year it had to return to NERSA with the actual figures it had used so as to reconcile what it had forecast with what had actually been spent. The adjustment would then be liquidated in the subsequent years through a process called the regulatory clearing account (RCA). For example, in 2015 Eskom was supposed to get a 8% tariff but ended up with 12% because of a 5% increase that had come from the RCA which had then been liquidated into the 2015 determination. With the remaining years of the MYPD 3, Eskom would annually return to NERSA for its annual determination.

Ms Makololo said the rationale with the MYPD was to give a level of certainty about tariffs going forward and the thinking was that the adjustments would not be major. However, with MYPD 3, the Committee would recall that with the 2015 determination, Eskom had applied for 16% and NERSA had given it 8%. The reasons behind that were that some of the assumptions that had gone into MYPD 3 never materialised such as the bill being late. That had forced Eskom to operate other levers like diesel to compensate for the energy shortfall. Those adjustments then would result in major adjustments in the tariff as compared to what was originally anticipated.

Minister Brown said that when Eskom went for the 2014 adjustment application to NERSA, the regulator had refused the power utility its proposed tariff hike and the R49 billion it had raised in the 2014/15 FY went into its other operations as the determination was tightly regulated outside of Eskom. Moreover the assumptions that Eskom made in its application were mostly in contradiction with what NERSA assumed.

Deputy Minister Bulelani Magwanishe said that on performance and attendance of Committee meetings by the Minister and himself as raised by Ms Mazzone, it would be important that the Ministry and the Committee reached an agreement as to which meetings it required the presence of political heads of the DPE. The challenge was that both heads of DPE had been deployed into two cabinet committee that sat on Tuesdays and Wednesdays. Therefore the agreement could include the Committee’s proposed annual programme where it indicated which meetings the DPE executives would be needed.

The Chairperson asked if the structure around the 700 SOCs which the Minister had alluded to and the Shareholder Management Bill were related or was the Bill to clarify how departments would deal with their sector-specific entities, or would there be amalgamation?

The Minister reiterated that the idea was to develop criteria to determine which SOCs would be governed by the proposed structure. For example, DPE oversaw Schedule 2 SOCs which were the economically viable and expandable portfolio. The Shareholder Management Bill had to first work out the criteria which was why the Deputy President chaired it. In essence the DPE was doing the groundwork by producing a concept discussion document by end of 2015. Therefore because many SOCs had their own policies governing them, with others having been established through their own Acts such as SAA, a different model had to be produced for SOCs that would be governed by a Shareholder Management Act.

Mr Singh asked if there was any discussion within Ministerial clusters about semi-commercialising some of the SOCs where Government would not give up more than 50% of state ownership to private companies. What was the current thinking in DPE in terms of renewable energy vis-à-vis Eskom’s coal fuelled plant versus the nuclear energy debate?

Ms Mazzone reiterated that the Committee was quite jealous for DPE executive attention and therefore it would be prudent for the exchange of annual programmes between Ministry and the Committee. The Minister could come to some meetings while the Deputy Minister comes to others as the Committee valued interactions with them directly.

In terms of restructuring SOCs, the Committee understood that SOCs were set-up as a catalyst to privatization. Mr Singh's recent sentiments had been discussed with Minister Brown last time where she had said that though SOCs were supposed to have been catalysts at no stage going forward would privatisation be a possibility. Therefore she was very interested in hearing the Deputy Minister’s views on those public-private partnerships and what progress had been made in that regard.

In realigning the SOCs, and from her experience in the time she had been in the Committee, she found it problematic for DPE as a whole, to not have teeth in how it could approach the SOCs. She referred to the earlier example of whether SOCs were able to say that a matter was too contractually and commercially sensitive for it to discuss with DPE.

The disjuncture occurred where as political leadership of departments, they were blamed by politicians for not having stepped in and taken action when challenges arose; where the concomitant response was that political leadership actually could not step in as SOCs were companies operating under the Companies Act.
This was something that had to be re-evaluated as the DPE was taking the blame for non-performing SOCs which when confronted by DPE could and did say that DPE could not exercise oversight over certain aspects of their operations.

Going forward, Ms Mazzone said that what created panic was the issuing of very broad statements or silence. For example, in the week of 12 October 2015 a vague statement was made by Eskom that the grid had been under extreme pressure and load shedding was a possibility. What was not explained in detail was why that was so, apart from the fact that the hot weather conditions was putting pressure on the grid. The public was not assured that Eskom was aware of the problem and what steps it was taking to ensure that shedding would not occur. Sharing that kind of information with the public would certainly go a long way in quailing fears when challenges arose especially with SOCs like Eskom, DENEL and SAA which were constantly in the spotlight. As DPE, it could ensure that the flow of information from SOCs to the public is better managed so that if rumours are not true then they are rectified immediately through press briefings, as that was the major inflictor of damage on DPE’s reputation.

In the recent past when the Committee was interacting with Minister Brown on challenges with load shedding, she had alluded to the matter of Departmental functioning being in carried out silos, such that DPE was not constantly communicating with the Department of Energy (DoE). Had that situation improved?

Deputy Minister Magwanishe said that indeed communications had improved between DPE and the DoE especially with the establishment of the War Room chaired by the Deputy President. There was a structure both at a political and administrative level where the two Departments had met to thrash out the challenges at SOCs.

The issue of commercialisation involved the Presidential Review Commission (PRC) that included looking at all 700 SOCs. The Cabinet Lekgotla had resolved that there could be no movement towards a Bill without having a concept document. That tied in with the differentiation as to what was non-core and in which areas would the state want to be a strategic equity partner and in which SOC would the state want to keep such equity. That was why there was a need for a broader discussion through a concept document which would move to a white paper, which would then culminate in a Bill.

As to whether the DPE had teeth or not; the challenge it had currently was that it was exercising oversight on the basis of many different pieces of legislation: the Companies Act, the Public Finance Management Act (PFMA), the Kings III code of good governance, and the many Acts establishing SOCs. In most cases the Companies Act recognised the board as the accounting authority and the DPE felt that there was a need for legislation that would give a lot of teeth to the shareholders. Such a Bill though would have to encompass a broader conversion involving the Committee itself in its formulation and processing.

The Government position was that there was a need for an energy mix which included renewables and fossil fuels. The issue would be how much of each would be invested in because the Deputy Minister had just been informed that there was a process of reviewing the current Integrated Resource Plan (IRP). The outcome of that would enable the state to determine how much investment was made in each type of fuel source.

Auditor-General South Africa (AGSA) on Public Enterprises portfolio 2014/15 audit outcomes
Mr Sybrand Struwig, AGSA Senior Manager, provided the briefing and some of the key points included:

Quality of annual performance reports
Annual performance reports of which 67% were reliable and useful compared with 33% in the previous year

Financial health of the portfolio
As a going concern, the South African Express Airways (SAX) working capital needed to be monitored and managed closely in order to plan ahead for possible shortfalls in cash.

Irregular expenditure / Fruitless and wasteful expenditure
Irregular expenditure in the entire DPE portfolio amounted to R103 201 813. Fruitless and wasteful expenditure totalled R24 329 000 with SAFCOL and SAX being the biggest contributors to both totals.

Root causes that needed to be addressed
Slow response by management had been one of the top three root causes for audit findings for the portfolio in the past two years. Audit action plans were still being inadequate and their implementation was not monitored. There was also no improvement in assurance provided by management and no improvement in basic internal controls. Senior management did not take immediate consequence action and hold officials accountable for not adhering to the implemented internal controls

Recommendations
The leadership within the entities had to fully enforce the requirements of their Supply Chain Management (SCM) policies and procedures which needed to be continually aligned to all applicable legislation while maintaining the ability of the entities to be profitable businesses. DPE had to monitor on a quarterly basis the status of implementation of action plans by SOCs.

Discussion
Ms Mazzone asked what AGSA meant when it reported that Eskom had an unqualified opinion in financial statements and no findings on predetermined objectives whilst the recorded irregular expenditure for Eskom alone, had gone to R713 million. She enumerated the figures for fruitless and wasteful expenditure for both Eskom and Transnet noting that the numbers were quite large. Was AGSA equally concerned with such large amounts for irregular and fruitless and wasteful expenditure? How was it that Eskom had no findings?

Ms D Rantho (ANC) asked if DPE had presented a turnaround strategy to remedy the challenges identified by AGSA. Could it also clarify what it meant by proper recording as presented in the outcomes? Had AGSA since seen any changes in internal auditing at DPE in terms of quarterly reporting or any other strategy AGSA would have proposed to DPE to use to improve its record keeping?

Mr Morapela agreed with Ms Mazzone's concerns as to the irreconcilability of what the figures were saying about Eskom and Transnet versus the unqualified opinions both SOCs obtained.

Mr N Kwankwa (UDM) asked to what extent can audit committees in SOCs assist in improving the audit outcomes, especially if audit opinions are stagnant and unchanged year-on-year?

Mr Singh supported Mr Kwankwa's comment about the effectiveness of audit committees. For example, the Committee had found in a recent oversight visit to Ekurhuleni municipality that its audit committee was so effective that the adverse findings from AGSA had been addressed through regular contact with AGSA. How did AGSA assess whether oversight responsibility at DPE or its SOCs needed intervention or was adequate? What criteria were used?

Mr Struwig replied that AGSA’s audit process was divided into the three areas as presented in the report and they were audited independently of each other. (1) AGSA reported whether the financial statements were supported by relevant information which was adequate to support the figures reported. An unqualified opinion there meant that AGSA found that the disclosure notes and the reported figures were speaking to each other and there were no material misstatements. (2) The quality of the performance report spoke to the predetermined objectives or the shareholders compact for entities and commitments by the DPE. From the reports on the achievement of those objectives, AGSA would then audit whether the commitments had been useful and measurable. It would also audit whether commitments were credible, accurate and complete. No findings in that regard meant that AGSA was satisfied with the quality of the performance report. (3) Compliance with legislation was where AGSA audited whether the key laws were complied with by DPE and its entities. The PFMA had stipulations that SOCs had to prevent irregular and wasteful expenditure. If such expenditure was incurred, then AGSA had to report it as non-compliance finding.

Mr Struwig explained that in the case of Eskom, AGSA was satisfied that the financial statements were supported by relevant information which was adequate to support the figures reported and that the indicators for the predetermined objectives had been useful and measurable, credible, accurate and complete. Therefore the fact that Eskom had incurred irregular expenditure was a compliance matter which it had reported. Thus, Eskom received an unqualified audit opinion with a compliance finding.

On DPE as shareholder and whether it could lead by example, in guiding its entire portfolio to a clean administration, Mr Struwig referred to the commitments made by the Minister to address the issues raised by AGSA in the previous audit. The commitments were important for DPE so that it could be a role model for its SOCs. AGSA tracked them on a quarterly basis. DPE had developed an action plan to address those issues.

On what ‘proper recording’ referred to, Mr Struwig said that it meant that if one was recording figures in the financial statements, or the achievement of one’s performance objectives, or whether one had complied with regulations and laws that had to be supported by evidence to substantiate what one was reporting. Therefore if AGSA had said it had a concern with proper record keeping that meant AGSA had difficulty in getting the evidence to substantiate certain reported items such as an invoice as evidence.

As to what assistance AGSA offered to improve audit outcomes, the quarterly follow-ups were very useful where AGSA visited DPE quarterly. Previously it used to do a dashboard report where it would assess internal controls at SOCs to check what had moved from quarter-to-quarter and that was ongoing. In the case of SAFCOL and SA Express (SAX) AGSA had had workshops with the directors and executives to work through the findings from previous audits. Looking at the past three years, the Committee could discern a gradual improvement with SA Express although the opinion was still a qualified audit opinion.

On effectiveness of SOC Audit Committees, first of all AGSA assessed their effectiveness through its combined assurance model which had been reported on. AGSA expected Audit Committee to be operational at SOCs. It sometimes found that an Audit Committee was not appointed and that would be AGSA’s first concern when coming into audit. Secondly AGSA would assess that Audit Committee’s plan and constitution as its make-up was related to a very specific mandate as per Treasury regulations and as given by their boards and executive authority. AGSA would assess the mandates as given to the Audit Committee when it was auditing to determine if the Audit Committee could provide assurance.

Mr Struwig said that the oversight responsibility within the key internal controls assessment was for the SOCs themselves and not the DPE portfolio. If a concern was reflected; it would mean that there was not always adequate oversight especially on compliance matters. On the overall assessment of oversight, that was in relation to the assurance-providing model as presented.

Ms Rantho said she was concerned with the auditing process because if there were concerns about fruitless and irregular expenditure; it simply was not logical for the SOC to have an unqualified opinion.

Mr Kwankwa said that the way the pie charts were presented had the potential to mislead without the attendant explanation that Mr Struwig had given.

Mr Struwig replied that a briefing note was supplied with the presentation which elaborated on the matters presented.

Department of Public Enterprises (DPE) on its 2014/15 Annual Report
Mr Kgathatso Tlhakudi, DPE Acting Director-General, said that the Deputy Directors General would present on their units. He asked if DPE may respond about Audit Committees and the status one of the key commitments which was that portfolio managers were to attend Audit Committee and board meetings to pick up and identify issues earlier to avoid surprises.

Ms Matsietsi Mokholo, DDG: Legal, Governance and Risk, said that the commitment that portfolio managers attend Audit Committee and board meetings to pick up and identify issues earlier had actually been a proposal by the Minister. The reason it had not been carried out was because it still needed to be debated in order to deal with the legality of DPE attendance of board meetings of SOCs where DPE was a shareholder. That scenario presented a potential conflict. If for example, Ms Mokholo sat on behalf of DPE at a SAX board or committee meeting and at some point it had to consider the application of the PFMA from the executives and it had to approve it for submission to the Minister, she would then be conflicted as she still had to advise the Minister on the other side in terms of approval of that transaction. That scenario also raised issues for the King Report on Corporate Governance and the Companies Act in terms of the indemnity and insurance of directors’ liability for board directors. That matter was an issue under consideration but it needed careful management by DPE as a shareholder. DPE was working on the harmonisation of the role of the state as shareholder in the concept paper as alluded to earlier by Minister Brown as to what extent as a shareholder, a department could have its officials sitting in those meetings. Amongst the proposals was that it could not be a DPE official but Minister Brown consider an official from an alternative department so as to manage that risk.

DPE Strategic direction framework for 2014/15
Mr Tlhakudi said that 2014/15 was the first year where DPE was implementing its new strategy. The strategy had been developed to address the challenges DPE’s SOCs were encountering and to move DPE away from being only compliance driven to start ensuring that its SOCs had an impact on the economy in their various industries.

Programme 1: Administration
Non-achievements
Mr Tlhakudi said that the work of identification of organisational capabilities to inform the development of the DPE competency model had not been completed though implementation had been initiated, and that was linked to DPE’s ability to be able to develop retention programmes to retain key skills. That work would be finalised in the following two financial years.

Programme 2: Energy Enterprises
Ms Makololo said that BBI had reported to DPE until 30 September 2014 with its employees moving to the DTPS only at the beginning of 2015/16. As a result BBI was included in the DPE APP. DPE had achieved 10 out of its 11 targets. However, this had added two items to the non-achievements that originally were in the Department’s Operational Performance Plan (OPP).

Non-achievements included finalisation of the shareholder compact with Eskom which was supposed to have been concluded by 30 September 2014. However, due to Cabinet’s approval of the R23 billion support package to Eskom, DPE could not conclude that compact seeing that it felt that it needed to give Eskom time to internalise the package as it affected some of Eskom’s targets and proposed focus areas in its plan.

On the delays in initiating the assessment of the Eskom generation fleet, she reminded the Committee that in terms of the IRP there were certain plants which possibly needed an extension from a 50 to a 60 year lifespan in terms of DPE’s OPP. The DPE then had to do studies to understand the required trade-offs in extending the lifespan of a power station versus environmental compliance and what other possibilities there were.

Programme 3: Manufacturing Enterprises
Achievements
Ms Vuyo Tlale, Acting DDG: Manufacturing, said that Denel’s dependency on the state guarantees had been significantly reduced so that, of the current guarantee of R1.85 billion, the SOC had managed to not use about R300 million of that guarantee. Investment into Alexkor had yielded increased production results to about 74 000 carats which had to do with DPE’s support to the SOC.

Non-achievements
The reason DPE had not achieved on SAFCOLs new strategy was that the SOC had submitted the strategy two weeks before the close of the financial year, thereby not allowing DPE enough time to assess the strategy.

Programme 4: Transport Enterprises
Non-achievements
Ms Kgomotso Modise, DDG: Transport, said that Strategic Intent Statements (SISs) for SAA and SAX were not signed off as guarantee applications to National Treasury had still been pending. DPE wanted to ensure that as a shareholding department that when it issued Strategic Intent Statements to them that those would be focused on what was reasonable for a shareholder to expect and to ensure that the statements were aligned to Treasury requirements. Due to this, the SAX Shareholder Compact could not be finalised.

SAA’s long term turnaround strategy had called for a Whole of State Policy approach in creating an enabling policy environment for both SAA and SAX as done by other countries to ensure coordination and alignment of policies. Unfortunately that was currently not the case in South Africa.

Programme 5: Economic Impact & Policy Alignment (EIPA)
Non-achievements
Ms Ntsiki Mbono, DDG: Economic Impact and Policy Alignment (EIPA) Unit said that filling of critical positions remained a challenge in the Unit including the posts for a chief director and director for economic policy alignment and chief director for environmental alignment. Moreover, DPE was still struggling to fill positions for the skills required for oversight for the disposal of non-core properties of SOCs. However, there was some progress in that regard as some of those positions had started being filled in the first quarter of the 2015/16 FY.

Programme 6: Strategic Partnerships
Ms Jacky Molisane, DDG: Strategic Partnerships, said that in terms of implementation of the Africa Strategy, the document had been developed such that work had commenced in that regard. However, the DPE currently had to profile the projects and identify where they were in terms of progress.

Annual Financial Statements Analysis
Ms Tintswalo Mofokeng, Acting Chief Financial Officer, took the Committee through the finance section of DPE’s report. In comparison to its 96.6% 2013/14 expenditure, DPE had regressed by spending 92.4% in 2014/15.

Response to audited outcomes
DPE had instituted an investigation to find out how it had incurred irregular expenditure and who the relevant officials were in the flouting of procurement and supply chain management (SCM) practices so that at the conclusion of the investigation the other findings of inadequate implementation of consequence management, could be put to the test.

On Human Resources (HR) awarding performance bonuses to senior management staff (SMS) who were not entitled would be addressed by the correct capturing of leave on time and implementation of the leave policy.

Conclusion
Ms Mokholo elaborated that in terms of the resolution of the 20% state shareholding in Namaqualand Mines; the transaction was a legacy transaction that DPE had acquired when the Mineral and Petroleum Resources Development Act (MPRDA) was introduced. The 20% was part of the concession that De Beers had made in entering into a settlement agreement with government for the mining of alluvial diamonds. It had been agreed then that that equity could not be held by the Department of Mineral Resources (DMR) as it was conflicted because it was a policy regulator in the mining sector. That was how DPE had received that equity and in 2010 De Beers wanted to exit Namaqualand and entered into a share sale agreement with Trans Hex however, there were three conditions. One was the approval of the Competition Commission, Government had to give approval for its equity stake and that was how that transaction had come onto DPE’s table. The transaction had been concluded but the sticking point was the warehousing agreements because DPE had to have consulted the Minister of Mineral Resources for the transfer. However, the former Minister Ngoako Ramatlhodi proposed that the 20% needed to be used for empowerment towards emerging black miners which was to be linked to the Eskom emerging miner’s strategy. His support of the latter had the caveat that there had to be value for the 20% so that BEE emerging miners could pay for that themselves without receiving the stake for free from the state. Whilst DPE was engaging DMR there had been a change of administration and the timelines were subsequently not met between the two departments. Therefore Trans Hex and De Beers had concluded their part in that transaction so the hold-up was whether Government would continue with the partnership or it would give it to Alexkor or another state mining company.

Mr Tlhakudi said that indeed the DPE had to be creative in the area of filling vacant posts as it sat in a country with graduates that were unemployed. Therefore he was making the undertaking that as SMS in the DPE, they would be looking into that matter very closely so that DPE could achieve its predetermined objectives.

Discussion
Ms Rantho said she was concerned about the vacancy rate at DPE. Moreover the DPE had long ago undertaken to focus on training inexperienced graduates to fill the skills shortage in specific units of the Department. That undertaking had been preceded by the Committee’s proposal that DPE approach the Department of Higher Education and Training (DHET) and consult them on how the two departments could mutually benefit each other in that regard. She had seen nothing in the report on whether that had happened or any alternative strategy that DPE had implemented to bridge that gap. In terms of employment equity (EE), how far was DPE in implementing the EE policy objectives on employment of people with disabilities?

Ms Mazzone said as MPs she was the first one to complain about the salaries of SMS personnel in government administration however, when the state was to employ people who were experts in their fields; they had to be paid accordingly. That was why she had always put a caveat to her statements in that regard; that experts in their respective fields had to be retained at all costs. Government certainly had to look at whether it was commercially and financially competitive since it wanted the best personnel in its SOCs. She also suggested that the DPE possibly needed to retrospectively look at what it had prioritised to do in the past three years and what challenges there had been in the non-achievement of those objectives. It should then compile a to-do list of how to clear out those repetitive challenges so that the new to-do list for 2015/16 hopefully would be shorter and a lot easier to work through.

In terms of the irregular expenditure incurred especially at the SOCs, she asked who were the responsible oversight personnel there and what action could the DPE take to remedy the situation without infringing on the legislation making SOCs independent authorities.

Mr Morapela said that it was known that flouting of SCM procedures was the main reason fomenting corruption year-on-year; it was frustrating therefore to have that talk shop. Going forward, action would have to be taken.

It was also important for DPE to simplify the language it used in reporting on the contributions of SOCs into the economy in its Annual Report so that the layman could understand what was being said.

Mr Kwankwa said that the regression in DPE performance audit outcomes could be based on the issue of uncertain leadership at the Department, especially the acting senior personnel.

Mr Singh asked if the Management of State Forests Act of 1992 was still appropriate for managing state forests in 2015. What were the reasons behind the withdrawal of SAX flights between Durban and Cape Town? What was the nature of the whistle blowing matter as reported in the Annual Report and had it been finalised? He also noted that the concerns raised by the DPE Audit Committee on the effectiveness of internal controls at DPE and that DPE had an alternative system instead of a unit on internal controls – was that system effective? Had the DPE applied for roll-overs where it had underspent on its budget? Was the R63 million to Denel the last amount that DPE was paying to the SOC? Was the pro bono work done by individuals for DPE really for free or was there an exchange of services?

The Chairperson asked whether SCM flouting was resulting from the skill incapacity of staff or pure negligence. Moreover in terms of the AGSA findings in that regard, there was no undertaking by DPE in its action plan that in the following financial year remedial action in terms of consequence management would be taken to prevent repeat findings.

Mr Morapela said that in a previous SAX presentation on its performance the Committee had applauded the strides made in improving its outlook. Yet, the current concerns raised by AGSA and DPE versus what SAX had presented shows disjuncture between SAX’s performance and the AGSA concerns.

The Chairperson said an additional concern for her was in the reporting on Programme 3: Transport Enterprises because assessment without stated outcomes could not be captured as a performance measure. She said DPE should table its First Quarter 2015/16 report so as to combine their replies to the questions posed, with whatever questions arise from the First Quarter report

DPE Quarter 1 2015/16 Performance Report
Mr Tlhakudi said that although DPE had achieved 71% of its quarterly targets for 2015/16 that was still below the 80% threshold it had set itself.

Expenditure Trend Analysis: Spending On Major Budget Items
Ms Mofokeng said that the underspending in goods and services spoke to its Business Process Management where DPE had decided a year ago that it needed to define processes inside itself. Mainly, it had to define what processes were in internal controls and what procedures needed to be followed. It had to understand where the bottlenecks where so that all of that would have been accounted for when developing processes going forward.
On the implementation of the SOC remuneration standards, the revision of the 2015/16 APP had made the target obsolete though DPE was still working on it in its OPP.

Deputy Minister Magwanishe said that he appreciated Ms Mazzone’s suggestion on a to-do list and certainly DPE would be following that up. In the previous week DPE had interviewed for the post of DG and DPE was anticipating that the new DG would be starting work in early 2016. The other challenge with the vacancy rate was at what level the vacancies were in the structure of DPE because the graduate programme would not assist with the current challenge. However, DPE would need to have a programme in place to deal with some of the vacancies. Some posts also needed a review of whether they were actually needed. He said that the remuneration standards were not entirely under DPE’s control. With the new administration, Cabinet felt that DPE had to make presentations on the standards afresh and Cabinet had made further input on that work. He said that the Minister had been quite strong about corruption and raised the matter even in the Annual General Meeting (AGM). The DPE wanted to even include it in its shareholder compacts.

In terms of expertise retention, he said that he had become unpopular in the executive because of the interesting discussions in that regard. The DPE had observed that people from the private sector were applying for vacant posts in government, even at the current salary levels. It would be useful as government prepared for SOC reports that SMS issues be addressed to strengthen oversight.

In terms of simplified language at Imbizos, the DPE had recently been in Mpumalanga were it had ensured that its SOCs accompanied it to present what opportunities they offered in beneficiating citizens at both national and the provincial level as it was observed sometimes that people wanted to access province specific opportunities.

Mr Tlhakudi said that DPE would certainly improve its reporting on EE on opportunities for people with disabilities as it was performing in that aspect.

On irregular expenditure at DPE and consequence management, officials were indeed found to have not followed SCM procedures. As more officials were identified further action would be taken in terms of the whistle blowing matter raised by Mr Singh. However, as the process was ongoing DPE could not comment much on it.

Ms Mokholo said that the principle was that DPE did not condone irregular and wasteful expenditure. What SOCs were battling with in that regard was the human element of compliance as sometimes it was apparent that SCM flouting was deliberate. Minister Brown had introduced consequence management in certain cases but it varied from top to bottom. It could also be followed from the recent AGM cycle, where the Minister had refused to consider both the boards and executives increases and in not approving long term incentives. The idea there then was that would have to cascade down to the general workforce. Additionally there were thresholds and executives were currently being evaluated on what actions they had taken in punitive measures when cases of maladministration had been identified. Together with the strengthening of SCM procedures, SOCs were being encouraged to comply with the provisions of the Promotion of Access to Information Act (PAIA). That compliance was envisaged to take away the perception that there was corruption at SOCs.

Ms Mofokeng said that some of the findings reported on by AGSA had been identified by the internal audit committee at DPE. The Department had both internal audit and risk management units. Both worked on a similar combined assurance model as AGSA and had systems that needed to be improved and better synchronized to avoid repeat findings of non-compliance. The DPE had not applied for a roll-over in 2015/16 as it projected that its current allocation was sufficient to cover all its projects.

Ms Modise said past lessons about withdrawing airlines from non-profitable routes without a consultative process was something that had been remedied in 2015/16 so that consultation with the relevant stakeholders would be done before any decisions were taken. The Ministers and Treasury had established an interdepartmental task team in 2014/15 to look at the turnaround of SAA and SAX before SAA moved to Treasury. The task team had been tasked to look at a possible nationalisation of the route network to ensure the long term sustainability of both airlines in terms of the turnaround and to avoid duplication of services between them; and to take advantage of the economies of scale. One decision that had emanated from that concept document on possible nationalisation of route networks was the consideration of operations by SAA, Mango and SAX where it had been identified that SAX had been making huge losses on the Durban-Cape Town route where Mango was found to be profitable. That was how the decision had been made to withdraw the airline from that route. However, SAX would not summarily withdraw from the route and Minister Brown had requested meetings with both Members of the Executive Councils (MECs) for Transport from KwaZulu Natal and the Western Cape to inform them of the thinking behind the nationalisation of route networks.

On the performance of SAX and what it had reported previously to the Committee, SAX had been reporting on its 2014/15 annual performance which included progress including corrective actions it had put in place to improve its performance in 2015/16. Therefore what DPE had reported was a repeat of what the SOC had reported to the Committee as well.

Ms Tlale said that SAFCOL’s mandate in terms of the Management of State Forests Act, No. 128 of 1992, was premised on the development in the long term of the SA forestry industry and optimizing on assets according to commercial management practices and consideration principles which still applied in terms of that Act.

On the indemnity claim by Denel, the total facility allocated was for R1.6 billion and to date only R1.2 billion had been spent. DPE had observed in recent years that the amount claimed had been gradually decreasing. She could not say whether Denel would be claiming for the last time in 2015/16.

Ms Mbono said that the pro bono work by Dr Sadesh Sookraj was actually research he had done in assisting the Department; and there was no money paid for that. However, more technical work which he and the DPE had no capacity for had been paid for. The motivation for the work stemmed from DPE’s forward outlook of meeting the 2020 target requirements of producing 500 billion litres of biofuels for the aviation industry which had however since been postponed. The trade-off there was that seeing as he was a citizen of SA based in the United States he had become an expert in the field of aviation biofuels and his contribution would then enable him in the future to leverage his input against opportunities in the industry focusing mainly on private sector players.

Mr Tlhakudi replied on Programme 3: Transport Enterprise that indeed the DPE assessed SOC reports and what was critical there was that afterwards DPE was mainly interested in what lessons had been learned previously and that the projects that were conceived would have the economic impact envisaged in the various industries. That related to his earlier remark that the DPE’s current strategy was to move away from those compliance based exercises to projects that were impact focused, so that it ensured transformation and nationalisation. Therefore, going forward, the Committee would see less reporting on assessments and more reporting on how the conceived projects were being taken forward.

He added that the 1992 Forests Act was not DPE legislation but actually that of the Department of Agriculture, Forestry and Fisheries (DAFF) - that review was ongoing where DPE had had interactions with DAFF. Currently there were amendments being made to the National Forests Act, Act No. 84 of 1998.

The Chairperson thanked AGSA and the DPE for the briefing and encouraged DPE to continue setting its standard very high and to try and speed up the Shareholder Management bill as it was a key piece of legislation in enabling SOCs to respond to government imperatives.

The meeting was adjourned.