Addressing governance and financial challenges at SOEs

Meeting report

The Chairperson welcomed the members of the Committee after the period of long constituency work. He hoped that the members impacted on the constituencies that they were supposed to help especially during this challenging time. The country and entire world was still faced with this serious pandemic that was devastating. He hoped that the members were coping. He paid his condolences to all those who had lost family and friends. He wished a speedy recovery to all those who were battling the pandemic.

He welcomed the Department of Public Enterprises that was led by the Director-General, Mr Kgathatso Tlhakudi. The Committee would be receiving a report that would help it be on the same wavelength in terms of understanding the developments at the key entities such as Eskom. There was something that happened at Medupi which was a plant that was just concluded this year. The finishing of the project at Medupi had been celebrated. The Committee had received very disturbing news. The Committee hoped that the Department would be in a position to take the Committee through those developments. The Committee also wanted to receive clarity on some of the developments in Transnet. The Committee wanted to know where it was in relation to Denel. The Committee had received information about disturbing developments in that particular entity as well. The Committee appreciated where this problem came from. The Committee always wanted to be in a position to raise questions. The Committee wanted to have a briefing in relation to SAA. The Committee would be receiving a report from the Director-General.

The Chairperson also welcomed the Ministry. He handed over to the secretary to provide the apologies. He welcomed all the members who had logged in to the meeting. This was a Portfolio Committee which was a public meeting. The meeting was open to the public.

The Committee Secretariat read out the apologies provided for the meeting. The Minister of Public Enterprises also provided an apology as he was in Cabinet.

The Chairperson invited Mr Tlhakudi to make the presentation to the Committee.

Briefing by the Department of Public Enterprises (DPE)

Mr Kgathatso Tlhakudi, DG, DPE, briefed the Committee on progress update on the recent developments at SOEs. The presentation contained no financials as the audit was still unfolding. The presentation detailed efforts to improve governance instruments. The presentation provided more details on the SOE Bill which was intended to address the lack of overarching SOE legislation. The presentation provided updates on SOEs such as Alexkor, Denel, SAA and SA Express.

Alexkor remained financially distressed however it was able to meet its immediate obligations. PSJV restructuring critical to ensure its sustainability, options developed and being evaluated. Long term decision on the SOE was being considered.

At Eskom there were liquidity constraints. The presenter noted the challenges facing the entity which included cable theft, aging power plants, low energy availability which led to load shedding and municipal arrear debt.

Denel was in financial strain and a solution was being formulated. A new operating model and funding options for its implementation were being explored.

Plans to resume with operations were underway at SAA. Date for the resumption will be communicated to the market soon. The interim board and management were leading the organisation. Mango was in business rescue from 28 July 2021. Government was providing funding for the restructuring. The business rescue process would advise on the long-term future of the airline.

 The severe impact on markets both locally and globally had affected overall performance in Transnet. The severe inactivity during the initial stages of lockdown had continuing effects on the economy and demand for transport of freight. TNPA Corporatization was being managed to ensure capital markets understanding of its positive impact on Transnet.

The presentation also provided information on an explosion that happened at the Medupi Power Station. The Medupi Power Station experienced an explosion on the Unit 4 generator at approximately 22h50 on 08 August 2021. The explosion resulted in extensive damage to the generator and other components within close proximity. The full extent of the damage is still to be determined.

(See Presentation)

SOE Bill
Objective:
• Determine an appropriate Shareholder Ownership Model
• Inform institutional arrangements for overseeing SOEs, including the future role of the PSEC;
• Appropriately categorisate SOEs;
• Integrate lessons from the Zondo Commission, Mpai Commission and other public inquiries;
• Ensure the appointment of competent people of integrity in a transparent and robust process to SOE Boards and Executive positions
• Clarify the respective roles and responsibilities of the Executive Authority, Boards and Executives;
• Regularly review and update various guidelines

Discussion
Ms J Mkhwanazi (ANC) noted the progress of the Department led by Mr Tlhakudi. She said that the stability of the Department with regard to the permanent appointments that the Department had been complaining about had started to bear fruit. Permanent appointments would be an advantage in further stabilising the Department going forward. Mr Tlhakudi had spoken about the Department’s internal audit. She wanted Mr Tlhakudi to provide a summary on whether the audit was promising. Was there any potential going forward from the internal audit? She understood that the Committee would receive the report in due course. She wanted him to provide a summary overview of the internal audit. She discussed the issue of governance. The Committee had been raising the issue of vetting of board members and executives. Did this include in the Risk and Integrity Framework? If it was not, why not? The Committee had been raising the issue of vetting of board members and executives.

She then discussed the SOE Bill. She was happy that the DG had said that this was one of the major deliverables of the Department and the Committee. She requested that the Committee receive progress updates on the Bill to ensure that it was finalised by the end of 2021/22 financial year as it stated in the presentation. She discussed the resolution. She could not remember the exact date but there was a resolution of the Committee. The Deputy Minister was in the meeting. The Committee should receive a progress report on the consequence management and a report from the SIU pertaining to the Department. Maybe that report would provide answers to the many questions that the Committee had going forward. It had been a resolution of this Committee.

On Eskom, she said that the Committee would be awaiting the report on consequence management on the Medupi incident. She hoped that it would be soon. She wanted the DG to speak about loadshedding and the load reduction because those two things were really troubling users and communities. What was the plan from Eskom going forward? If the Committee did not receive an answer then the Department needed to ensure that part of the report of Eskom needed to talk about those two issues.

Mr G Cachalia (DA) thanked the Department for the presentation. It dealt with the seven key SOEs that impacted the future of South Africa incorporated in terms of the economy with revenues running into billions of Rands. This matter was terribly important. There were three hours allocated to deal with the plethora of issues after over an hour of presentation which left under two hours of engagement. This did not do justice to the importance of this Committee and its deliberations in terms of how it impacted the country. It impacted the country in no uncertain terms. He implored the Chairperson to consider how the Committee could meet more often and for longer in these trying times to deal with what was necessary for the country.

He addressed a few issues at high level and then a few specific issues of the entities raised. Mention was made of the ownership model which was either a centralised hybrid or decentralised hybrid. The DG made a comment that the trend was to worldwide centralised models. He wanted the DG to provide the Committee with examples of who was moving to centralised models and under what circumstances? Who had been moving away from centralised models and under what circumstances? This would inform the Committee in South Africa’s particular circumstances. It was clear to him, and should be clear to everybody, that the rationale for SOEs for the State to step in was because of market failure. He was pleased to see that through the presentation there was a recognition of market failure in terms of the State and its attempt to deal with the market failure in the first instance by instituting and operating SOEs. There was a move towards corporatisation and privatisation. The Committee needed a proper detailing and not just generic comment of how this was going to be achieved. How was it going to be funded? Who were going to be the investors? Under what circumstances? What were the rights and terms of reference associated with that? Who was going to finance it? What Government levers would be retained and why? There were very important issues and he hoped that notes would be taken. He hoped that the Committee would be provided with answers. The answers did not need to be provided now but if they were not provided in high level then they needed to be provided in writing.

The Committee also needed an understanding of the Risk and Integrity Framework which was referred to. The Committee also needed sight of the consequence management in terms of that. It was mentioned that there was an integration of the lessons learned from the Zondo Commission and other commissions. He wanted the Committee to receive a tabulation of exactly what the Department learned and what the Department was going to do to obviate that from happening again. Things could not carry on like this. South Africa would end up in a considerable disaster. He raised issues with specific reference to the entities.

He discussed Alexkor. The presentation stated that Alexkor was able to meet its immediate obligations. He thought that was a statement that bended the truth somewhat. Alexkor could not meet its obligations. It was essentially bankrupt and run appallingly.

He wanted to understand the status and standing of the PSJV in terms of how it was governed and not governed under current circumstances by the PFMA. For a State-owned organisation this was absolutely crucial and he wanted answers on it. Secondly, there was the issue of the monies and the obligations owed to the community. This had been going on forever. The Committee was told that the Richtersveld community was under administration. The Committee wanted real timeframes of when this was going to be addressed and when they were going to receive what they were going to receive? What was the community owed? Who was going to get what? He brought up the question of diamond sales. He had sight of a particular list over a number of years going up to the end of 2019 of diamond sales and the prices that were achieved at considerable variants from the norm. This was only indicative of malfeasance. That predated the current CEO but also went into sales under his jurisdiction and aegis. Those needed to be accounted for because that was a very serious issue. He then raised the issue of the non-payment to certain entities for information management systems which was being cited as not having access to. Why had the entities not paid the people to provide the information? That was why the entities lacked the information to come to conclusions about potential governance and malfeasance. The governance of the CEO who currently filled a couple of roles also needed to be dealt with. This flew in the face of governance and needed to be stopped immediately. The Committee needed to understand what was being done right now to fix that governance.

He discussed Eskom and the Medupi Power Station. The Medupi Power Station was met with much fanfare only three days later to have an explosion which put that to bed. The Committee needed to know the timeline to fix, the cost to fix and from where that money would come. Those were the issues that needed to be addressed particularly given the declining volumes and the planned reductions of the coal fleet which had been announced. Then there was the question of maintenance. That needed to be addressed because that was absolutely crucial. The Committee needed to know exactly when that was being done, how it was being done, what it costs and who was going to pay for it? While all of this was happening diesel was being burned at the rate of knots. In the previous year R3.2 billion worth of diesel was burned against a budget of R789 million. What was the ongoing usage? What was the cost going forward? What was the implication of this on tariffs to the ordinary user and business users? These were questions which had to be answered and had to be answered transparently and in detail. The Committee needed to know and the country needed to know. Then there was the question of what happened at Medupi. The Committee would await the report to get complete insight into what happened there and how the reliability maintenance which was touted for a long time resulted in this particular explosion which was going to cost many billions to fix. Mention was made of the OEM involvement. The Committee wanted to know what that involvement was. Who was the OEM and at what cost? Would the insurance cover it? If not, why not?

He discussed Denel. The presentation spoke about certain privatisations and partnerships. This was welcomed. He wanted the details of Rheinmetall’s investment and their previous investment which was mooted and not taken up. There were questions about staff and engineering deficits which needed to be addressed. The loss of contracts needed to be addressed. Funding needed to be addressed. The Committee needed information on this.

When was the date of resumption of SAA going to be? Where was the funding coming from to these investors? The Committee needed transparency about the ultimate sources of the funding whether that would come through various Government agencies or independently? The Committee wanted answers on that. What potential conflicts may there be with regard to where the funding was coming from? There were conflicts that had been raised particularly with elements of the consortium. He then discussed the subsidiaries of SAA. The Committee needed to understand the business rescue and what the plans were. He highlighted SAA Technical and Air Chefs. When Mango went through its business recue process, and hopefully was resuscitated, will they be required to source from Air Chefs and Technical services? Or will they have the freedom in terms of a competitive playing field to source goods and services independently? Otherwise, that would just be another layer of added costs onto a supposedly restructured airline, which relied on margins, which would have no hope of succeeding. The same applied to SAA. When would Parliament debate the issue as had been requested by the unions?

He then discussed Transnet. The corporatisation of Transnet was welcomed. The Committee needed to understand exactly what the terms of these investments would be and what they were envisaged to be. Was it along the lines of the corporatisation and privatisation that happened in Telkom? Or was there another model envisaged? He discussed the investment and retention of certain portions of investment by the shareholder. What degrees of freedom did that give the shareholder to continue with cadre deployment and the layers of cost that affected competitiveness and cost? That was absolutely crucial and would impact the terms of investment and the nature of investment whether people would come onboard. He raised the issue of the cyber attack which happened and the issue of rail security. What was the risk management going forward that had been put in place? The potential investors were a host of international and local investors. What would the investors be getting for their investment? What would they do? What will the shareholder retain? What would the investors get in terms of leases, concessions and in terms of their investment? How would this comply with the Companies Act? These were important questions and he expected answers on each one.

Ms O Maotwe (EFF) referred to Alexkor and stated that the PSJV restructuring options were being developed but this process had been ongoing for some time now. Could the DG tell the Committee how long it would still take for this process to be concluded? This had been spoken about for a long time. The DG also stated that there was a long-term decision on this particular entity that was being considered. What was that decision? Was the Department also planning on privatising the entity? It seemed to be the new normal that all SOEs were going to be privatised. What should the Committee anticipate with regard to this decision that was pending?

The presentation listed most of the challenges facing Eskom except the challenge of loadshedding which should have been top of the list. Unless the DG believed that loadshedding, or load reduction, was no longer a problem? Could the DG assure the nation that there would be no challenges of load shedding or load reduction anymore? The Committee needed that assurance from the DG because it was not in the presentation. Was it a problem of yesterday? Could South Africa forget about it? Even in the challenges that were highlighted the presentation did not say how the Department was assisting Eskom to overcome all of those challenges. Cable theft, declining sales volumes the Committee knew about those things but what was the Department doing to assist the entity? All of the challenges related to the incompetence of the current leadership led by the CEO of Eskom. The Department was not saying anything about it. What was the Department doing about the incompetence of the leadership of Eskom?

She discussed the Medupi Power Station. She knew that the investigations were still ongoing but when did the Department anticipate that it would have the full report of this explosion? She was sure that in the interim that the Eskom team would have done some analysis of the indicative loss of revenue due to this explosion. How much more would be required to put it back into full operation? There should be preliminary estimates. How long would it take to restore Medupi to full operation?

She discussed Denel. What was the Department doing about the employees that remained unpaid since June? The presentation highlighted that National Treasury was assisting with some resources. What measures did the Department have in place to ensure that this entity honoured its obligations to National Treasury? What revenue-generating projects did the Department, or Denel, have that would assist this entity to generate its own revenue and to be able to sustain itself?

She discussed SAA and its subsidiaries. 51% of SAA was privately owned. What were these private shareholders bringing to the table? How much money had the private shareholders put into this entity? Why was it a surprise that the subsidiaries of SAA were not performing? It should have been known what the impact of privatisation would be on SAA’s subsidiaries. Why had the Department not anticipated that Mango would go into business rescue? Why had the Department not put measures in place to try and address those challenges? This applied to SAAT as well.

She discussed Transnet. It was clear that Transnet was following suit in terms of privatisation. The Department had started with the ports and was coming for TFR. Not very long ago the Department almost sold the assets of TFR. It had become an open secret that Transnet was also on the verge of being privatised. What was the impact of the cyber attacks both operationally and financially on Transnet?

Ms M Clarke (DA) said that she was not going to ask the same questions that were asked by previous members. There were a couple of things that she wanted to factor in. She asked if the Committee could receive the outcome report of the commission that was appointed in terms of SOEs? It would be good to see what their findings were and that that report be shared with the Committee. How did the Department envisage getting competent people on board in terms of the executives, the board and high-level staff? This was needed to ensure that SOEs were functional. It needed to be acknowledged that these entities had been through a band of cadre deployment. In many instances the failures of Government were related to that.

There were a couple of questions she wanted to ask in relation to Alexkor. She was informed that Brigadier Jaap Burger had done an investigation into criminal activities within Alexkor. The Committee would like that report to be presented to it as well as the SCOPA report. The Committee needed to see what the status quo was of Alexkor in terms of the fraud, corruption and maladministration that was going on within the division. She wanted to know whether the likes of Mervyn Carstens, Daniel and Nathan Reagan Phillips the people who were involved previously were being awarded contracts to Alexkor currently. She wanted the Committee to receive answers to that. What was the situation and status quo of the Richtersveld and the commission that was appointed in order to resolve the issues round that? The Committee would like to see an update of that as well.

This was a very long presentation. A lot of deliberation was needed to be done around it in terms of the Committee and its mandate to do proper oversight. She did not think that this meeting added justice to what was expected of the Committee. The Committee would need at least a two-day session to sit down and analyse this presentation. The Departments would have to come and present to the Committee so that it was 100% onboard with what was going to happen going forward.

The Committee needed a full report on the explosion that happened at Eskom. Once the Committee received that report it would be able to analyse and see what had really happened. She was sure that the Committee would find an element of fraud and corruption that went on and that that unit was not to the standard that was required. A report was also needed as to how Eskom was going to deal with loadshedding and load reduction. How was Eskom going to address illegal connections? Nothing much was being done about illegal connections or a very long time. Local authorities were not able to supply the kind of electricity that they should because the grid was so overburdened. That had a huge impact on supply.

She discussed SAFCOL. She asked that the Committee receive a report on the status quo of the land claims at SAFCOL. That would be helpful.

She discussed Denel. Denel was critical for the country. It was in a terrible status quo in terms of finances. Did Denel still have the capability in order to produce missiles and to continue with the very important work that it should do? Denel had a huge exit of skills. Could the Department confirm that PMP was not even tax compliant at the moment? If PMP was not tax compliant then SAPS, SANDF and the like could not even put in any purchases in terms of what they required.

Mango had applied for business rescue. Originally, the court had not accepted that application and said that it had been three months too late. According to reports Mango had been writing to the Department pleading to be placed under business rescue. This was about a year ago. Apparently, if the Department had done that Mango would have been in a much better financial situation at this stage. Why was that request not taken into consideration and taken as an urgent matter? In terms of SAA Technical being in status quo, would SAA truthfully say that it was able to comply with the regulatory and safety compliances? What was the status quo of the pilots? When were the airlines going to start flying again? Will a new fleet be bought or leased? How large would the fleet be? Has agreement been reached on the routes SAA would be flying?

Mr S Gumede (ANC) wanted to give a summary. Issues and matters raised by all the members that had spoken were issues and matters that all of the members had an interest in. He thanked the Department and the DG for the presentation. No one said that the report did not give what was expected of the Department. That report had won the interest of members. This was his observation and what he had seen. It was true that the report was long. It was true that the Committee did not give itself enough time to discuss matters. However, there was only one thing that the Department needed to do. The Committee needed a proper timeframe. When were some of these things happening? Even if it was not the accurate date but it helped the Committee to make sure what was expected on a certain date. The Department would also be on its toes trying to meet the deadlines. What would be left for the Committee would be a very structured oversight. All of the members would know that these were the things that were coming. He recommended to the Department that the Committee be given a progress report on this report. In many instances the Department would come and present. The Committee would ask questions. Then in the following meeting the Committee would have forgotten about some of the matters and issues that were raised.

He discussed the issue of Denel. This meeting was critical. The DG had spoken about a joint ministerial meeting. This meeting had no date. Everyone could see that Denel was going down. All entities were important but Denel was so important because it involved the security of the country. There were a few things that needed to be confirmed. All of the members were asking questions but there was no answer that was coming up.

Where was the money going to come from? Very soon SAA would be taking off. How would SAA be sustained and managed? The Department was looking for an equity partner with Denel. It was kind of the same thing. It needed to be gauged what exactly Treasury could offer the Department in order to maintain and sustain these SOEs. The country could not live without them.

He said some of these questions were very open-ended. Everyone needed to agree that the SOEs were weak. It needed to be asked what was causing all of these SOEs to be weak. If the Committee had enough time then those were the things that needed to be talked about. There needed to be a very good exchange. Could the Committee and Department convince themselves that the SOEs would ever come back? The weaknesses needed to be identified so that those mistakes were not repeated. If the Committee and Department were not honest with themselves then they might end up saying things that were farfetched. He did not think that the SOEs were privatising. When looking for money there were two options. The first option was Government and that was Treasury. The second option was the equity partner. It was a semi-privatisation, but it was not complete privatisation. Once the entity gained muscle then it might have the right to come back and do all of those things. It was unfortunate that Denel was trying things that might not be accurate or that could be really implemented. It was not the first time that the sale of non-core assets was being talked about. Some of these assets were obsolete. There was not much interest from the market to buy some of these things. Currently, it was aimed that within five years the Department may get R1.5 billion in terms of dispatching of those non-core assets. That little bit of amount may help Denel catch up with the situation. He was not expecting the DG to fully answer these questions because these were packed questions. What needed to be done to save all of these entities? These entities were critical in the economy of South Africa. What kind of support did the Department require from the Committee? For him, doing only oversight was not enough. There was something more that the members needed to do in order for them to be hands-on and be convinced that they were assisting the Department. Many of the members had been talking about restructuring and the restructuring of boards. He noted an example of how board members, in either China or India, were hired three months before they took office. That was done to ensure that these board members were trained and had skills. People may have a qualification but the practical experience of the individuals was also needed. Those were the things that the members agreed and accepted needed to be seen. All board members needed to be equipped and trained so that they knew that if the management was not the right management in terms of the administration. The decisions taken needed to be implemented. If the decisions were not implemented then SOEs would always be languishing in a situation like this. This time around the Department could not discuss finances because the audit reports had been delayed. These things were serious. He hoped that the Department would come back to the Committee. The Committee would need a progress report on this report after a month or two months. The Committee could not deviate from the things that were raised and talk about other things that were not in line with the matters and issues that were raised. Today was a little bit of a milestone. The Department had raised the interest of the Committee. Members were asking the Department for more and were asking for more time. The Committee needed to strengthen its oversight and be sure that it left a mark so that when the other members came in the new term that they had something to look at.
The Chairperson said that he would be giving over to the DG and his team to respond. He wanted to ask one question. He was covered by the questions that had been reflected by the members. South Africa was a developmental state and there was cooperative government. There was something that disturbed him particularly in relation to the airport entity which was not necessarily under this Department, but it was a SOE. There was a decision to ground a State-owned airline for reasons that were not very strong. Both Mango and the airport entity were both State-owned. He did not understand why it was difficult to engage between the two entities before such a drastic decision was taken. He listened to the explanation as to why Mango was grounded. It did not warrant, specifically from a SOE, a grounding of the airline. The circumstances were still being confronted by Mango airline. It was not only applicable to Mango but to all the aviation industry currently due to the contribution of Covid-19 problems. How did the SOEs engage with each other? He cautioned the members. There had been a complaint that arose when members were making their contributions.

Members were consistently raising the issue of time while he was giving each member enough time to speak for as long as they wanted. Members were allowed to speak on all the issues that were in their minds to the Department. The purpose of this meeting was to engage the Department at a policy level. The Committee was still going to meet all of the affected SOEs on their performance and operation. Operations of SOEs will be answered by them directly. For example, next week the Committee would be having a similar session but directly with Denel. Some of the issues that were raised today would be discussed next week. He was not saying that those issues should not have been raised in this meeting. Some of the questions would be more relevant when the SOEs were present to engage with. The Department was responsible to account to all of these entities. That was why the Committee gave the Department this opportunity to present and cover all of these entities. Some of the issues that were more operational would be much more relevant when the entity itself accounted to this Committee directly. All those kinds of questions could be asked to the entities directly. He thanked the members for their contributions. The Chairperson noted that some of the questions that were asked would be more relevant when they were answered by those entities. He handed over to the Department to answer those questions that it was able to answer. He cautioned the members. The Committee still had sessions with the entities as it usually did.

Mr Tlhakudi thanked the Chairperson for his comments. He agreed with the Chairperson. Some of these questions could be part of the discussions that would be held with the SOEs when they presented to the Committee. The entities would be presenting their annual reports when they appeared before the Committee. Some of these issues could be incorporated into their presentations so that they gave the Committee insight from within the organisation.

He responded to the Chairperson’s questions around ACSA and the role that it played in relation to Mango. The reality of the entities was that they were governed by a very strict framework in the PFMA. Each one of these entities was expected to collect revenues that were due to them. Entities were required to put in place recovery mechanisms including taking appropriate action to recover those monies. If they were not able to do so then they were found wanting. Then they would appear before the Committee with very negative audit outcomes. That largely compelled the entities to do what they needed to do. Regimes were put in place to ensure that there were sustainable entities. They would be able to collect the revenues and were able to account for their cost base. That was why the SOE Bill became so important. There needed to be a regime that was much more relevant to SOEs. There needed to be some sort of complementarity in all these State-owned businesses. In the aviation space, actions that were taken could not be violating the objectives that were set as a country. South Africa was a developmental state. He agreed that the Chairperson had raised fair points. At some point it could be a discussion in itself. How much did each SOE owe to the other? How did the Department deal with situations of distressed SOEs? Within the SAA group there were distressed entities. How was that dealt with? SAA Technical had received payments from SAA to ensure that its aircrafts were maintained. How was that situation dealt with as SAA entered business rescue? Those were the dynamics in relation to Mango. The biggest contributors were other SOEs. That was a topic that needed to be discussed at some point within the framework of the kind of state that was desired. Some of the questions that were asked required an entire presentation. It was a whole discussion in itself. In some instances those questions required input from other parts of Government.

He responded to the question of Mr Gumede on how the Committee could help the Department. He raised the issue of land claims that was raised by Ms Clarke. That was a process that was unfolding in another Government Department. He wanted to think that the Portfolio Committee that was overseeing agriculture, land reform and land restitution was also interested in ensuring that these land claims were settled. There were communities that had been were waiting for these issues to be addressed since 1998. Almost 20 years down the line there were people that were hoping that before they passed on that the land of their ancestors would have been restored to them. How could this Committee engage with that Portfolio Committee to get a better sense of what was unfolding in those Departments? There needed to be engagements at both Departmental and Ministerial level.

An inquiry from the Committee’s side could help in giving clarity on timelines. He agreed with Mr Gumede that there needed to be regular reporting to report back on those timelines.

With regard to Medupi a report needed to be done and actions needed to be taken where negligence had been identified. Systems and procedures also needed to be improved. The report needed to state the cost of that exercise and how that incident would not happen again in the future. The Department agreed fully with providing a progress report. He said that through the questions that were asked the entire agenda of the Department was covered. He said that the agenda needed to be packaged so that the Department could answer some of the questions that arose. That was something that the Department would also have a close look at.

The Department appreciated the positive comments from Ms Mkhwanazi. He said that the appointments continued to unfold in the Department. There were two iterations of publication of advertisements in the process that was unfolding. Some sense of stability was coming into the Department. There were areas where the Department ensured that it made new appointments as well as resources that had been seconded from various stakeholders.

He responded to the questions related to the audit outcome. The Department would get an unqualified audit this year. There still remained some areas of reporting in terms of the annual financial statements that the Department needed to improve on. Some of the capabilities among the middle and senior management oversight capabilities had been sighted for improvement. The Department had moved sideways from the previous financial year. The Department had not declined nor had it improved. There was still a lot of work that needed to be done in the Department in improving the procedures that informed its business. The Department needed a session on forensic reports and to give feedback on that. The Committee might also want to invite the SIU to hear the work it was doing in the SOEs in terms of the proclamation. The Committee would get a sense of how far the SIU had gone and what had been handed over to law enforcement agencies. The Committee would also be able to hear what had been prepared in terms of accountability, the criminal justice system and the civil actions that were taken. It would be good for the Committee to have that presentation. If the Committee set aside time the Department would be able to present on that. It would also be useful to get a sense from the criminal justice components and the Portfolio Committees concerned to produce a report. There was a watching brief on the Zondo Commission to say what actions had been taken with regard to what had been raised there. The Department stood in line with everyone to get feedback but if the Committee got involved then the Department might be able to jump the queue.

He responded to the questions about the Medupi report and when it would be available. He said that time needed to be given to the engineers and the Department of Labour to do their work. Timelines could not be put to this work because as one investigates there were various tests that needed to be done. The process needed to be allowed to run its course. When there was any indication of what had happened with case management then action would be taken as required. There had been suspensions that had been done. The Department could unfortunately not give firm answers at present. There were also questions asked around costs of repair. There had been some early indications and speculation about what the costs of repair might be. Once the recovery manager had completed his work then the Department would have a sense of what would be the impact on electricity availability. These units delivered about 800 megawatts so it was a huge portion of capacity that had been lost. He hoped that the recovery would happen fairly soon.

He responded to Ms Mkhwanazi’s question about loadshedding and load reduction. Load shedding happened when the capacity that was available on the grid was less than the demand. What then happened was that some of that demand needed to be taken out to ensure that there was a stable system. Load reduction happened at a distribution level. He provided the example of illegal connections where the capacity that was put in place in terms of the wires to deliver the electricity was less than what was being connected. It was a symptom of the State of municipalities to plan for new settlements, both formal and informal, and being able to provide services on time. This included improvement on the infrastructure to deliver that additional supply. That was the distinction and how the Department described it. On the part of the user there was no difference. All that the user knew was that they were not receiving any service. This meant that the particular interventions from Eskom or the municipality were required. Eskom did what it could but in most instances it found its hand tied because some municipalities were not paying for services. If services were not paid for then supply could not be sustained. Those were the issues that required assistance from the Committee. There needed to be a mechanism that oversaw local government to ask what had been put in place? What instruments were available to ensure that municipalities were run properly? What was the Committee doing with the reports released by the AG on the state of municipalities? In the same way that this Committee interrogated the audit reports on the SOEs that were in the portfolio of Public Enterprises; that same expectation should be there that the municipalities were also being addressed as the SOEs were addressed by COGTA. Were municipalities appointing right the people into positions of financial management? Those bulk service providers, whether electricity or water, needed to be paid so that they continued to provide services. Were municipalities ensuring that reticulation businesses were being properly taken care of such that there was no load reduction? Those were some of the tough discussions that needed to happen across the legs of Government to ensure that good services were provided to the people. This would ensure that the trust in leadership was also restored.

Mr Cachalia had put 22 issues before the Department. Some of these issues required a whole session in themselves. The Department sought to share as much as it could and that explained the length of the presentation. A number of questions had been put to the Department and the Department needed to do justice to that. He apologised for the length of the presentation. In the same way answering these questions would take some time because quite a lot had been put before the Department. As the Chairperson had said some of these questions would be answered by the SOEs as they presented to the Committee.

He discussed the examples of centralised and decentralised models. The Department had a whole presentation that it could make to the Committee so that it could show what was happening around the world with regard to Government shareholder management. There were various entities and institutions that would also be interested in sharing what they were thinking from what they had observed. The Committee would be getting third-party views on what the Department would be saying. For example, the OECD was an associate member so the Department and Committee would be able to access the research that it did.

The solutions to the challenges that was plaguing SOEs was not an issue of private sector or public sector. Public entities could be well-run and some of the biggest corporations and businesses in the world were publicly owned in that they were owned through government. Government should be looking for the best solution available. The former leader of China said that the colour of the cat did not matter. It did not matter if the cat was black or white. What the cat must do is catch mice. In the same way whether it was the public sector or the private sector, alone or in partnership, as long as services were delivered in a cost-effective way. As long as there were services that business could rely on; that was what Government should be aiming for. He noted that around the world when certain countries turned around their SOEs they brought in more discipline including on governance and privately listing some of those entities. The Department benefited from the knowhow that was in that particular space. Government needed to enter into joint venture partnerships with the private sector to deliver public goods while ensuring that the control of strategic assets was not lost to the State. South Africa needed to craft its own model in that regard and the SOE Bill development process should help the Department a great deal towards that.

He said that lessons from the commissions needed to be brought to the Committee. If the Department needed to summarise those then it would be happy to do so. The Department would be guided by the Committee in terms of how it wanted to deal with that.

He discussed Alexkor and PSJV. The Department had concluded in the report that the businesses were not sustainable yet. For sustainability there needed to be a defendable balance sheet to start with. It needed to run with a good balance sheet with a positive net profit. On the cash flow front things were looking better than they had been in the past. That was the message that the Department sought to bring across. More still needed to be done. The issues around the communities were very important. There were details and timeframes that had been requested. That was where the Committee could liaise on the issue of land reform and help out with administration which was not overseen by the Department. He discussed diamond sales. There was a report which was tabled at the Zondo Commission. There were consequences that flew from that including some of the managers that were kicked out from the business. They continued to put up a fight including at the CCMA. The Department was still dealing with that matter accordingly.

He responded to the question about IT systems not being available in reference to Transnet and the cost thereof. At an appropriate time that would be dealt with. Transnet could present to the Committee and some of those issues could be dealt with. Transnet could be requested to provide more information. The cost of mitigation had been shared. It ranged anywhere from R180/190 billion to R300 billion in terms of complying with Departmental environmental minimum emission standards. The source of funding had to come from the tariff. That was where the cost reflectivity issue became relevant. To pay for that if it was loaded onto the tariff then it meant the users would experience a higher cost. Retiring some of the power stations earlier would help in mitigating that cost and maybe some of the money could be used towards bringing in newer technology which would produce less emissions. Those were some of the issues the academy of engineers would help with in making the Committee aware of some of the challenges and the balancing that needed to be made in addressing some of these complex issues. That could be a whole presentation that could be made to the Committee. The Department did not have the information on the diesel costs. The Department could provide that information after the meeting. He would ask the head of the energy team to put together some information. The Department would get to the information about which OEM was brought in. A power station was quite a complex assembly of various components, some of them with their own OEMs.

The RDM was referred to. It had been a good investment. It had brought in quite a lot of extra business to the country. Denel had gotten some dividends in the past from that particular shareholding. Going forward what was going to be important for Denel and RDM was the markets that were served. There were some challenges with regard to the control regime in terms of how it served. That was an issue that the Department needed to be able to address.

He discussed the sources of funding for the Strategic Equity Partner (SEPs). There would be a time when that information would be shared. The Department had a referred SEP. The Department had not signed the agreement yet. Ordinarily the shareholder would be using money that was internally derived cashflow or went to the bank to provide the funding. In due course the SEP would be able to share with South Africans the source of funding. They were also a private entity. If there were any suspicions that the funds were coming from a government entity then questions could be put to that Government entity and the process that they would have followed in the confines of their own policies and the law. The Department did not have the information of the funding of the SEPs at present or what the form the funding would come through as.

He responded to the question whether Mango would continue to be a burden on other parts of SAA in terms of provision of services. If Mango was part of an integrated group then it was only fair that maintenance was provided from SAA Technical. Asking if the SAA was getting value for service from Mango was a fair question. Government would want to get signages from its various holdings and SOEs. He added the SAA issue about was more directed towards the Committee than the Department.

There were various questions that Mr Cachalia asked in relation to Transnet. What was the Department offering the private sector in terms of partnerships? There was a request for information process that Transnet would be undertaking to test the market in terms of whether what Transnet had to offer was what the market was looking for. What kind of solutions both financial and technical would be appropriate for what the Department was seeking to do? Those questions were a bit premature at present. The processes within Transnet needed to run their proper course. He said the cadre deployment input was more of a comment than a question. That question was above his pay grade and he would leave it to those above him to deal with that at an appropriate time.

He discussed risk management and the cyber attacks Transnet faced. It was one of the capable entities that had secure systems in place. Transnet was able to mobilise internal resources and private sector resources to help it out in addressing the attack. This showed the capability that was there. As the Minister indicated on Monday in his press conference to the country there was some colleagues at Transnet who had spent days without sleeping to ensure that the damage from the attack had been mitigated against. That was something that the Department commended. Transnet’s reaction and the strategy that was utilised was commended from around the world including shutting down the system and bringing it back as they cleaned up various portions of it. South Africa needed to be proud of the organisation in that regard.

In response to Ms Maotwe, he said that the Department had presented six options in the past to the Committee. The Department indicated that it was having engagements at the time on one of those options. That process did not bear any fruit. The Department was looking at alternatives to that solution. The Department hoped that it would make some headway before the end of the financial year. He hoped that satisfied the question with regard to timelines.

He said that loadshedding was as a result of maintenance. The Department was saying that the generation capacity needed to be improved upon if this particular issue was going to be addressed in the future.

He discussed the Department assistance to SOEs. The Department’s job was to ensure that the right policies were in place to support the work of the entities. Government support and financial support was provided to SOEs. The Department ensured that the promises that the SOEs made to the public, though the corporate plans that were developed, were implemented. Where intervention was required from the Minister, as the shareholder representative, the Department had to ensure that that was raised accordingly. The reality of the entities was that they came from a bad place. They came from an era where they were repurposed to serve narrow interests where capital was diverted away and they were hollowed out in the process. The Department was slowly pulling them out of that hole as was seen with SAA. SAA went into business rescue and has emerged out of business rescue. It was being prepared for the private sector to play a leading role in the entity and that should be commended.

The Department had not said much about SAFCOL but it had found itself in a bad place. The Department had put a very strong board in place. A very strong executive was appointed by that board. The Portfolio Committee visited operations and the Department got some very good feedback in terms of where the business was at. There were some positives in the portfolio that needed to be recognised.

The salary payments at Denel was dependent upon securing funding. The Department had bid for cash within the system and had not been successful. The Department was trying again this year to try and find funds to restructure the business. It was important that the Department got these entities to a point where they were able to meet their obligations from internally generated funds. It was not sustainable for equity injections to be paying for operational expenses. It was not a good state at all. That needed to be addressed. It was a difficult topic but a business had to be able to take care of itself. There had to be a return on investment. There needed to be a return on equity for the investor which in this case was the South African public through Government shareholding. That was what the businesses needed to be built towards. That was a discussion that also needed to be had at some point. It needed to be discussed what had been pumped into the entities over the years and what it had realised for the South African public. The colleagues in these entities needed to hold management and boards accountable. When these businesses were mismanaged then they were sowing the seeds for the difficulties that had been found at Denel in recent times which SAA and Mango also found themselves in. There needed to be those kinds of discussions with broader stakeholder engagement on these issues. The due diligence decided how much the SEPs would be bringing in. There was also a valuation exercise that took place. There was a business plan that had a particular figure in terms of what it would take. The pandemic meant that there was going to be a much smaller airline than before so that figure had come down quite a bit. The valuation would tell the Department how much had to be brought it. It needed to be acknowledged that the shares were being sold during a very bad period in the aviation market. The pandemic had left a lot of damage to airlines across the world.

He was not sure what Ms Maotwe meant when she said that it was a surprise that Mango was in trouble. The Department knew that Mango had been in trouble for quite some time. There had been various interventions to address that particular problem. It had been critical to get funding to fund PCF. If the Department did not provide for PCF it would have ended up with an SA Express situation. If there were no funds to finance a business rescue then that business would end up being liquidated where everyone lost out. That was the case with SA Express. There was a supplier that put the business into business rescue and everyone knew what happened there. The Department made the appeal to the courts that it needed the funds to fund the business rescue. That was why it took as long as it did. Government raised funds at specific periods. The funding needed for the restructuring of the subsidiaries could not come through with the adjustment budget last year. The Department had to wait for the 2021/2022 budget for the funds to be available. Those were the constraints that the Department had to work within in addressing the challenges within the entities.

He responded to the comments made about Transnet being privatised. Government needed partnerships and needed to mobilise the capital that was available within the country if the cycle of low economic growth was going to be broken. This would ensure that jobs would be great for the people of South Africa. Government could not allow ideology to restrain it from reacting. There were examples from other countries. There were many countries that South Africa could learn from including some of the countries in the east that had unshackled themselves from ideology in order to find the best solutions for their people. The Department would get guidance from the Committee with regard to the sharing of reports from commissions. There was a framework from DPSA that had been developed that informed how boards and management were appointed. The SOE Bill to a large extent needed to deal with that particular issue of ensuring that that was properly coded in law. When these businesses were turned around and were successful then they would attract good people. When businesses got into trouble then they repelled good people. That was the current situation and that needed to be changed. When the entities sought to fill board positions the good people that in the past filled those positions were no longer available. That is what the Department had seen and that needed to be changed because Government needed skills across its businesses to ensure that they were successfully turned around.

Ms Clarke referred to Brigadier Burger. He hoped Brigadier Burger presented that docket to the NPA so that action could be taken against those implicated at Alexkor. If the Committee could provide the Department with his details the Department would get in touch with him to ensure that the Department could also put pressure from its side.

He was not sure about the Richtersveld Commission that Ms Clarke referred to. He asked her to clarify that matter for the Department. A full report on the explosion would be shared with the Committee. A full investigation would enlighten the Committee on what had occurred.

He said that organisations also had the knowhow and the corporate knowledge. There was design data, procedures and processes that had been encoded into an organisation. There was a supplier base that was known. There were test and evaluation processes that were known. That made it possible for a new cadre of engineers, as they came in, to be able to continue the work that was done by those who had departed. The good thing with the situation at Denel was that those who had previously left the organisation had said that they were prepared to come back once Denel’s troubles were sorted out. They understood the unique role that Denel played in enabling South Africa’s security forces. The Department was comfortable that Denel would be able to continue the good work that they do once it was restructured and recapitalised. Denel needed to be led properly and that was what the Department would ensure happened. He discussed the issue of Denel and tax compliance. Denel had been unable to emit certain statutory payments and there were entities that found themselves in financial challenges. The Department was helping Denel where it could in that regard.

There had been a settlement reached with the pilots at SAA. The Department was quite pleased to see that the interests of the organisation were put ahead of individual interests. The pilots would be the first ones to admit that SAA had done well by them over a number of years. There were new employment terms that informed the employment of pilots going forward. That was a good thing. That ensured the sustainability of that business. There was a small fleet that had been brought in to enable the start of operations. Going forward the business plan would detail the route network that would be operated. That was commercially sensitive information which needed to be handled sensitively and the meeting was being held on a public channel. The Department would not want to compromise SAA’s re-emergence.

He thanked Mr Gumede for the positive comments that were received. He noted Mr Gumede’s comments about timeframes and report backs being needed. He assured Mr Gumede that there were processes across all levels to help the Denel situation. The Department had made good traction and that was why it could report that the Government guaranteed obligations the Department was able to get funding for those. The Department had gotten National Treasury to help out and that was a positive thing. That showed that those interventions were working.

He discussed the funding of SOEs in terms of the various projects that were undertaken in their own restructuring. It had to come from a combination of partnerships and also from Government coffers. The reality was that bids were being made while there were other demands on the State. The Department had to show that what it was doing would result in a positive outcome for the State and that there would be new cash flows that would result. Where there were operational holes that had been created there had to be innovative solutions and there had to be some sacrifice from all stakeholders to fill those as what had happened at SAA. Employees to their credit settled for three months of salaries even though they were owed eight months of salaries. This was done so that the business was given a chance to fly again. That decision was made by employees who were also in a difficult position themselves. The employees understood that there were public funds that were being utilised. The employees also understood that for the business to disappear it would have a wider impact on the local economy. That was a commendable concession on their part. After the transaction the majority shareholder would be responsible for the airline going forward. They would need to ensure that there was effective leadership in place, proper funding and structure in place to support the airline. The minority shareholder would also ensure that the business went well and was managed well going forward. It would not be in a position to provide more capital to the airline. That was a very clear message that the Department had provided. This was because the shareholding was diluted. This was how businesses were run. That was what shareholders were expected to do.

There were some SOEs that were doing very well. ACSA had been acknowledged as one of the well-run entities that had been able to pay dividends to Government. That was where the Department wanted the entities to get to.

He responded to Mr Gumede’s question about whether SOEs would come back. SOEs had to come back. SOEs needed to be stronger again. Expectations of SOEs needed to be increased in terms of adding to the fiscus as well as through dividends. When the Department engaged with other countries they were able to say that 5% of the national revenue came from SOEs. That was the figure that South African SOEs were able to give. That was the vision that was needed for SOEs going forward.

He discussed the selling of non-core assets. The market would inform the Department about the response levels in relation to Denel. He agreed that it was not only qualifications that mattered. It was also the skills and the experience that was needed. That was why people who had managed projects in the past, and made mistakes, were also valuable because they knew what not to do. The Department also wanted to give young people an opportunity to learn from those who had walked the path before. There was a need for people with vocational skills and vocational qualifications who had learned while doing. He thanked the Chairperson for the opportunity to present to the Committee.
Adv. Melanchton Makobe, Acting Deputy Director-General: Legal, Governance and Risk, DPE, responded to the issue of vetting with regard to Risk and Integrity Management Framework as raised by Ms Mkhwanazi. The Department was conducting vetting of executive and non-executive directors of SOEs before their appointment. The Risk and Integrity Management Framework would enhance this process and it would cover all of the employees. It would also introduce stringent background checks for all of the employees of the SOEs. It would also prohibit SOE officials from doing business with the SOE that they worked for.

He discussed the SOE Bill. The Department would first develop the SOE policy out of which it would then develop the legislation. The Department would ensure that it complied with the timelines that had been presented by the DG.

The Chairperson thanked the DG and his team. He appreciated the manner in which he went through all of the questions. He did not receive a response on the question of Denel and the workers. What was the Department doing in terms of making it a point that the workers were remunerated? Was there any process that the Department was embarking on like for Treasury to intervene? These employees were people with families. Was there any engagement that was taking place with Treasury or anyone else to rescue that situation? He did not hear the DG’s response to that question.

Mr Tlhakudi said that there was a process that was unfolding. There was the NTEC process that was unfolding. There was a budget bid that could be put in for the entities. The Department was doing that. There was a joint team that was in place to develop a solution to support the new business model of Denel. That required funding. National Treasury was also part of that effort. The Department was doing that in a very difficult space. The requirements for funds for SOEs had to also be balanced with the effort that Government was putting in to deal with the pandemic. The South African economy had been relatively flat in terms of growth. The revenues were not what they should be. It was not an easy space. The Department needed to be sensitive to the difficult situation that National Treasury found itself in.

The Chairperson said he thought that there would have been enough time for a second round of questions since there was not a large number of members. Unfortunately, this was not possible because of the comprehensive nature of the input including the questions that were asked and members had been very long in asking questions. Even the response had to take another long period. The Committee would be meeting with the SOEs next week starting with Denel. The Committee would discuss some of the specifics that the members would need. The Committee would be continuing having these sorts of sessions. The Committee would always stick to its programme. The Committee would continue engaging on those issues. He thanked the Department led by Mr Tlhakudi for making the presentation and for the responses. The Committee would go further with its questions especially those that had to do with specific issues of operation and performance to those specific entities.

Committee Programme

The Committee Secretariat said that the members needed to look at the Committee programme.

The Chairperson asked for the third term programme to be displayed. The Chairperson read through the programme and put it before the Committee for adoption.

Ms Mkhwanazi moved for adoption of the third term programme.

Mr Gumede seconded the adoption of the third term programme.

The third term programme was adopted.

The meeting was adjourned.