Committee Induction

Meeting report

Committees: “The engine rooms of Parliament”

Mr Disang Mocumi, Committee Secretary, gave an overview of the rules applicable to committees in general.

Committees were an extension of the House, the National Assembly. Thus, the committees’ powers were from section 55 - powers of the National Assembly. The Committee may initiate or prepare legislation, except money Bills. It oversees the Department of Public Enterprises (DPE) and its state-owned companies. The DPE was not responsible for legislation -- that was the responsibility of policy departments. For example, the Department of Energy (DoE) was responsible for the policy on Eskom, the Department of Minerals and Energy was responsible for Alexkor, the Department of Agriculture, Forestry, and Fisheries was responsible for South African Forestry Company Limited (SAFCOL) policies, and the Department of Transport was responsible for South African Airways (SAA) policies. Thus, the Department of Public Enterprises was a shareholder management department.

The Committee used different instruments to hold the executive and state-owned companies accountable. These included:

• The budget vote process - budget and strategic plans, where the Committee could scrutinize the strategic plans to see if they were aligned with the strategic plans.
• The Budgetary Review and Recommendations Report (BRRR), which was a midterm report of the Portfolio Committee to review how the Committee had spent its budget for the past six months, and to see what it had implemented in this timeframe. This was achieved by analysing the oversight reports, briefings and budgetary review reports to determine how they had followed recommendations, annual and quarterly performance reports, oversight visits to state-owned companies, legislation and petitions

According to National Assembly Rule 185, the Committee had 11 members. The ANC had six members, and the seventh was an alternate member. The Opposition had five members, and the sixth was an alternate member. Thus, at any point there may be 13 members in the Committee, all of whom could participate, but only 11 members may vote. Alternate members may vote in the absence of a member. Most of the Committee must be present to make decisions -- 50% + one additional member.

Section 59 of the Constitution and National Assembly Rule 170 on public involvement states that committees must ensure public involvement in accordance with the provisions of the Constitution and the rules. Public participation in terms of sub-rule (1) was subject to, and must be exercised in accordance with, the applicable provisions of these Rules. The public has access to all official notices to members and to all documents tabled in the Committee, subject to reasonable measures taken by the Chairperson to regulate such access, in a manner consistent with national laws. Closed meetings were permitted under rules 184, 185, 186, 187, 188 of the National Assembly and National Council of Provinces (NCOP) rules 110, 111, 112 and 113. An example of where the Committee had had to utilize this was during the Eskom Inquiry, where persons had been invited to meetings and to prevent threats on their lives, this information had been withheld from the public.

Guiding legislature would be discussed later, once the Shareholder Management Bill had been passed.

Legacy Report

Mr Mocumi presented the Committee’s legacy report. The Committee focus areas had been to provide oversight to improve governance, financial sustainability performance and ensure that all issues referred to it by the fourth Parliament had been sufficiently met. A strategic plan had been developed, and a mandate formed. Key areas of work and recommendations had been made, but these were not binding on the sixth Parliament. It was intended to inform Members of the challenges faced and audit reports.

The method of work of the Committee was stipulated. This was informed by broader policy imperatives and priorities of government for five years. Instruments were identified to conduct oversight, such as briefings by entities, scrutinising of annual reports, integration with the Auditor General (AG) and robust oversight visits. The Committee developed budget vote reports, and Budgetary Review and Recommendations Reports (BRRR) to outline recommendations for the budget. The Department and Committee do not deal with international agreements, as these were usually dealt with by the policy department.

Discussion

Ms N Mazzone (DA) emphasised that the rules were important to guide the Committee. The legacy report did not include the rules and regulations around non-committee members speaking at Committee meetings. Bluntly, the Committee dealt with matters of great public interest and thus meetings were often filled with lots of media and attracted non-committee members who demanded to speak at meetings for camera time. In the fifth Parliament, they had drafted new rules which had been accepted, that the Chairperson would use his discretion whether to allow non-committee members to speak. It had been found that the amount of speaking time was non-proportional, with smaller parties taking up more time than larger parties. The National Assembly rules 156 and 185 dealt with alternate members and the presence of non-committee members. It was important for the Committee to defend the Chairperson and not allow the Chairperson to be bullied by small parties.

Another issue was the behavior of some of the media. There were serial offenders, and members of other organisations that put microphones in front of Committee Members during discussion, causing one to lose one’s train of thought. Recording devices were also used during breaks and after meetings that recorded private conversations. These issues needed to be condemned.

Lastly, the Committee meeting venues were often too small. The Committee needed meeting rooms that were big enough for their purposes, and should demand to be accommodated in big enough venues.

Ms J Mkhwanazi (ANC) asked what the role of the Committee in the upcoming Shareholders Management Bill was? In terms of Rule 185, point two, on public involvement, what mechanisms did the Committee and Chairperson have to control the influx of non-members?

Mr S Gumede (ANC) asked how the Committee interacted with the formulation of legislature, considering that it had been stated that the Committee was not responsible for creating legislation? Could it be made mandatory that at least once or twice a year the Committee met with sister committees, rather than it being optional?

Department’s response

Mr Mocumi said that any Member of the National Assembly was allowed to speak in committee meetings, but the Chairperson sets time restrictions and allocates according to proportional representation. Interference of the media had been noted, and the media would be addressed on this matter. The issue of the venue size was welcome. The Standing Committee on Public Accounts (SCOPA) and the Finance Committee were prioritized, but this Committee generated great public interest and thus venues were needed to accommodate this.

The Shareholder Management Bill had been coming for about ten years. Under President Zuma, the Presidential Review Committee had stated that overarching legislation that empowered the department to govern, but such legislation had not been created. The hope was that the Bill would be passed this financial year, but it might happen in the next financial year, as per the annual performance plan (APP). It should also come to the Committee, as it deals with shareholder management.

The Committee’s interactions with the formulation of legislature was governed by the National Assembly rules and the Chief Whips forum. However, the Committee was not invited to participate in these decisions. It needed to write to these entities to ensure its involvement.

Department of Public Enterprises (DPE) and State-Owned Entities (SOEs): Overview

Ms Lee Bramwell, Researcher: Parliament presented an overview of the aim, mission and current state of state-owned enterprises/companies, and then presented on each SOE individually.

Alexkor

Land mining was undertaken by the Pooling and Sharing Joint Venture (PSJV), while Alexkor had the marine mining rights. The Richtersveld community had successfully instituted a land claim against Alexkor, which had resulted in the Deed of Settlement (DoS) signed in 2007. The outcome of this land claim settlement had impacted on the company’s mining and non-mining operations, as the settlement agreement stipulated that all land and buildings subject to the land claim would be transferred to the Richtersveld Communal Property Association (CPA). Certain erven and erected buildings within the to-be-established township of Alexander Bay would be transferred to various social institutions and government authorities to normalize the social and government structures, and the land mining rights would be transferred to the Richtersveld Mining Company (RMC) (49%), whilst the company would retain its marine mining rights (51%). Alexkor was required to establish a formal township in Alexander Bay, which included the upgrade of all municipal services to meet municipal standards. Alexander Bay had been formed as a result of the Deed of Settlement of Alexkor.

Alexkor was faced with several challenges. Parties had agreed that Alexkor would lease the properties for a period of 10 years, and further agreed that R45 million would be paid upfront to the Richtersveld Property Holdings company for Alexkor to retain the right of occupation. Community in-fighting posed an issue, as the community disputes the commissions formed by Alexkor.

The rehabilitation of the land to ensure it was the way it used to be before they started mining, had been a challenge. As well as maladministration, the marketing partner sold the diamonds. The community believed this had decreased the revenue, as the market was selling it lower. The marketing company had been linked to the Guptas. About two years ago, a boat had burnt out and they had then been restricted to land mining only, and had lost revenue.

Discussion

Ms Mazzone said the Committee had found that the diamond trading firm, Scarlet Skye Investments (SSI), was linked to two of the Gupta brothers. It was further found that raw alluvial diamonds were sold to SSI by Alexkor at 60 points lower than indexes such as the Bloomberg Diamond Index, which was why Alexkor was running at a loss. The Chairperson of the Alexkor board would be appear at the Zondo Commission. Alexkor had been on the sidelines of state-owned entities (SOEs), but in recent times, a massive haul of pink diamonds had been mined. Now Alexkor had the potential to generate massive revenue for South Africa if diamonds were mined and sold correctly.

The Chairperson asked if the issue with the pricing of the diamonds still occurs.

Ms Mazzone said that the Minister in the fifth Parliament had instructed that an investigation should take place into the pricing of Alexkor’s raw diamonds, but the situation at present was probably still unchanged, as the investigation results were still pending. The lengthy time taken to conduct investigations was anti-progressive. The previous Minister had overseen the investigation, as the Committee did not have direct oversight over Alexkor.

Denel

Denel, like Alexkor, had been linked to the Gupta family and corruption scandals -- more specifically the Denel Asia saga -- which had since damaged the company’s reputation. Due to the nature of the defence industry, Denel needed upfront capital to begin manufacturing, with payment flowing only once targets had been met. Without this capital, Denel could not meet its obligations. There were liquidity challenges, suppliers withholding deliveries due to delayed payments, and Denel entering into loss-making contracts. Denel had the option of strategic equity partners.

Revenue had amounted to R5 billion in 2017/18, with a loss of R1.8 billion in 2017/18 (unaudited), and the 2017/18 annual financial statement (AFS) had not been submitted to Parliament. It had received an unqualified opinion in 2016/17, with a finding on its irregular expenditure.
 

Discussion

Ms Mazzone expanded on how Denel Asia had been founded and its connection to the Gupta family.

Ms Mkhwanazi asked why the Department was not reporting on the matter of SOE’s raw and uncut diamonds, to which the Chairperson responded that Ms Bramwell was restricted by not being partial.

Ms J Tshabalala (ANC) requested that the Committee echo Ms Mkhwanazi’s point -- that the issues needed to be reported on in detail so that the Committee could understand how SOEs have been led into “state capture.”

Ms Mazzone asked the department to make available the “bible”’ of state capture compiled by a group of university experts.

Eskom

Eskom’s sales volumes had decreased by 1.8%. There was a staff complement of 46 665 (March 2019) comprised of both permanent and fixed-term contracts. Total assets amounted to R758 billion, and debt and borrowings stood at R440 billion. Municipal debt, with interest, totaled R19.9 billion, of which Soweto accounted for R13.6 billion. In 2018/19 it had received a qualified audit opinion with findings and emphasis of matter.

Eskom had an ageing fleet, inadequate maintenance and breakdowns, deterioration of plant performance and under-investment in mines and plants. There was a reduction in sales, low tariff increases, a reduction in revenue, and the utility could not cover increasing costs of primary energy, mainly coal. Eskom’s business structure was in question due to changes in the sector and the economy. Debt servicing costs and operating expenditure had been increasing while revenue had been declining. There had been a lack of clarity in the energy sector -- the Integrated Resource Plan had not been finalised, and there was no clarity on the energy mix for South Africa going forward.

Discussion

Ms Mazzone pointed out that Eskom had about 46 000 employees, and the most similar enterprise in Africa would be the Kenyan electricity facility, which had about 13 000 employees. The staff complement at Eskom was inflated, which contributed to the Eskom dilemma. It was eight years behind the Medupi build, which was R18 billion over budget. There was a disparity between the rates at which Eskom provided electricity. An example of this was where big businesses such BHP Billiton were charged a tariff of 18c per megawatt hour, while the public was charged 82c per megawatt hour. This was why the National Energy Regulator of South Africa (NERSA) would not grant tariff increases. Another issue was its coal quality, and the ability of power stations to burn the coal. Eskom was the single biggest risk to the South African economy.

Ms Tshabalala said the Committee should adhere to the structure of the meeting and allow the Department to present.

SAFCOL

The South African Forestry Company Limited (SAFCOL) manages 10.5% of forests in South Africa, operating in Mpumalanga, Limpopo and KwaZulu-Natal with 189 760 hectares of plantations, as well as in Mozambique with Industrias Florestais De Manica (IFLOMA), where it manages 82 574 hectares. Business offerings include commercial management of forest plantations, logs and lumber, and ecotourism. Revenue was R926 million, with an operating loss of R136 million, a net loss of R80 million and a 2017/18 qualified audit opinion with findings.

Mismanagement, weak governance processes and internal controls, and leadership instability pose challenges to SAFCOL. There were depressed log and lumber market conditions due to agriculture restrictions and regulations. SAFCOL needed to diversify its export-based market.
SAA

South African Airways (SAA) had four wholly-owned subsidiaries -- Mango, SAA Technical, Air Chefs and South African Travel Centre -- as well as SAA Cargo and SAA Voyager, although these were non-corporate businesses. In 2016/17 it had received a qualified audit opinion, while the 2017/18 AFS had still not been submitted. Revenue for 2017 had been R30.7 billion, with operating costs of R33.5 billion and an operating loss R2.8 billion. The total loss for the year had amounted to R5.6 billion, and it had incurred losses for the past 12 years. It had a staff complement at 31 March 2017 of 5 275 employees. An unsustainable cost structure, high indebtedness and an inappropriate fleet configuration were challenges for SAA. High levels of competition, high fuel costs and the exchange rate impacted on the costs of the airline.
SAX

One of the primary functions of SA Express (SAX) was to convey passengers from the smaller airports in the country to the larger airports, and strengthen the network. It offered flights to most destinations within South Africa and services between Botswana, Namibia, and the Democratic Republic of Congo. The
2016/17 and 2017/18 AFSs were outstanding due to going concern uncertainty. An ageing fleet, high maintenance costs, breakdowns and cash flow constraints due to the inability to raise cash owing to a weak balance sheet, were challenges for SAX. Like SAA, SAX had high operational costs such as fuel costs, maintenance and exchange rate differentials.

Transnet

Transnet’s revenue as of September 30, 2018, stood at R37.6 billion, with a profit for the period of R2.8 billion, total assets of R365 billion and borrowings of R130 billion. The staff complement in March 2018 was 55 666 employees. Transnet had received a qualified audit opinion in 2017/18 due to irregular expenditure.

Transnet was burdened by mismanagement, ineffective governance processes and internal controls. Low economic growth had impacted on its business and revenue, and resulted in delays in its capital programme, procurement, and an escalation of costs. It had the dual role of oversight over the National Ports Authority (NPA) as well as being a player in the marketing of port terminals. There were high port charges and uncertainty in the energy sector, which would affect its gas and pipelines business
Discussion

Ms D Dlamini (ANC) asked who had taken the decision to move from the original company selling the Alexkor diamonds to SSI. What had been the Minister’s findings?

The Chairperson said the management had been responsible for the decision, and the Minister’s findings on the investigation had not yet been made available.

Mr Gumede asked why the Minister could not appoint specialists to assess the pricing of diamonds prior to them being sold, who could determine the right price at which they were sold? This would avoid the fluctuating prices that were causing community unrest. Who determined the 10-year lease period for Alexkor’s lease of land? He asked if diamonds were being polished outside of South Africa, as doing this in South Africa would create jobs. The delay in submitting the AFS was also a huge issue.

Ms Tshabalala acknowledged the work of the content advisors. She suggested the Committee should schedule a meeting with the Department to provide timelines for the Shareholder Management Bill. She supported the extension of invitations to stakeholders to meet with the Committee, as well as interdepartmental policy departments. AFS submissions were essential, as the Committee needed to start getting into the details of them. The Committee should intervene in the community unrest in Alexkor as part of its oversight.

Ms Mkhwanazi stressed that the Shareholder Managers Bill would assist with most of the issues faced. She asked for more information on Denel’s strategic partners as well as Eskom’s integrated resource plan. What had been the effect of the introduction of more airlines on SAA?

Department’s response

Ms Bramwell said that at Alexkor, the 10-year lease period for land was part of an exit strategy from their 51% of deed settlement, and had been determined between the community and Alexkor.

Alexkor had a branch that polished diamonds, but it was very small and they polished only Alexkor diamonds.

The community unrest was because they were unhappy with the creation of a commission that investigated community issues, on the grounds that they had not been involved in the process, and were demanding a new commission. The departments dealing with SOEs and land development had tried to step in and resolve this matter.

The AFS reports were on hold with the auditors. They would not sign them off as the enterprises were unable to generate enough revenue to run themselves. This would mean that SAFCOL, Eskom, Alexkor and other enterprises would have to close down, and the government could not allow that to happen. The AFS reports would not be signed off until the entities were in a position where they had enough money to make the auditors comfortable enough that they were ongoing concerns. Unaudited AFSs may be submitted in the meantime.

Mr Mocumi said that the legislative impediments to SOEs must be considered. SAA had mentioned that they used to get a bigger share of passengers within the domestic market, but the Competition Commission had directed that government departments must also use other airlines if they were more cost effective. Eskom had complained that the independent power producers (IPPs) sell electricity to it at R2,22c per kilowatt hour, and they have to sell it back to the consumer at 89c per kilowatt hour. Eskom did not decide on the IPPs’ prices, or which/how many houses were electrified -- this was determined by the Department of Energy.

Ms Bramwell said that Denel’s strategic partners had shares in companies, but they were not majority shareholders. They would have access to all information as a shareholder of that company. For example, if they wanted information on optical solutions for night vision but they did not have the expertise themselves, they would get the intellectual property and send employees to that company so they could get those skills and then return to Denel to apply them.

With regard to energy, Eskom did the generation, distribution and transmission of energy, but wanted to separate the three services. This would make the generation more competitive, as it would not be the only enterprise building power plants, and this would free up the IPPs.

Competition to SAA was the low cost carriers. People had moved away from business-class traveling that had value-added services such as AirChefs, to more low-cost airlines that just get them to where they need to go. As a result, SAA was carrying fewer passengers and cannot cover their costs.

Governance in State-owned Companies

Mr Rodney Mnisi, Committee Content Advisor, presented on an overview of the South African economy, as well as the national practices for the board of directors of state-owned companies (SOCs), and reported on the performance to Parliament.

He said growth in incomes and labour productivity had stagnated. The gross domestic product (GDP) per capita remains around 75% below the average of the upper half of Organisation for Economic Cooperation and Development (OECD) countries due to weak labour utilization and total factor productivity. The economy and state-owned companies would benefit from removing barriers to competition and lifting regulatory restrictions in many sectors. In particular, more competition in network industries would bring down prices, increase the accessibility of services, stimulate downstream firms’ competitiveness and raise productivity growth.

The national practices for boards play a central function in SOC governance and should act as an intermediary between the ownership function and the SOC’s executive management. The role of the board should be clearly defined and founded in legislation, preferably according to general company law. The state should inform the board of its objectives and priorities through proper channels to ensure the board maximum autonomy and independence. A robust nomination framework was one that clearly specified that the nominating power was transparent and was consistent in its application. Ministerial or executive powers normally had the ultimate responsibility for nominations. This brought legitimacy to the process, but it should not undermine the role of the ownership function. Mechanisms should exist to facilitate non-government shareholders’ participation in the board nomination process.

Persons directly linked with the executive powers should not sit on SOC boards. Other state representatives should be nominated based on qualifications, subject to specific vetting mechanisms. Independent directors should be independent from management, government and business relationships. Specific safeguards should be established to verify that nominees comply with requirements. The appointment of board members should ensure that such persons were qualified, as well as representative of the SOC’s staff.

The remuneration of Board members should reflect the market conditions to the extent that this is necessary to attract and retain highly qualified directors. Remuneration policies of civil servants serving on SOC boards should be carefully considered to ensure the right incentives.

The department should clarify the process for reporting to Parliament and provide guidance to all relevant entities for doing so. These guidelines should encourage SOC officials to be open and direct in dealings with Parliamentarians, to familiarise themselves with Parliamentary functioning and even to take specific training in this regard if necessary. Audited annual financial statements of individual SOEs should be sent to, or collected by, the ministries and/or department. Annual financial statements were often used to generate budget supplements as background to budget acts, and may be aggregated into a combined or summary report on the SOC sector by an ownership entity.

Discussion

Ms Tshabalala wondered how issues around shareholder rights had not been foreseen earlier. Legislation that governed this matter needed to be dealt with. The challenges cited addressed the role of the boards, which were governed by general company law, but they directed government companies, which involved Parliament and Parliamentary accountability. This was problematic. Regarding the nomination of people to serve on the board, where was the law governing these appointments? Contradictions were apparent where it states the board should oversee the appointment of the board. It was stated that persons linked to the executive should not sit on the board of any SOE -- which executive powers did this refer to, and what legislation permits this? The remuneration of civil servants seemed not to be coherent -- were they being remunerated by government or inflation? Financial statements not being submitted seemed to be a problem, as they were tabled in Parliament, and this was usually done within a specific timeframe. It went back to the Shareholder Management Bill. Public funds were injected into SOEs and APPs were developed by the Department, but what was the point of this if the Department did not have a full oversight role? Another issue was the limited information SOEs made available to Parliament.

Mr S Swart (ACDP) said the reason SAA had not given financial reports was because they would be found to be bankrupt, and they were awaiting bailouts from Treasury. As an oversight body, it was important to understand why they were in that situation in the first place. Regarding Eskom oversight, the Announcements, Tablings and Committees (ATC) document of 28 November 2018 was useful for the Committee, as it gave a number of recommendations to improve its oversight. The Zondo Commission might require the Committee to account for their lack of oversight, so the Committee needed to up its game. There had been evidence at the Zondo Commission that the appointment process of board members had to be transparent. Every time a new Minister was elected, a new board was formed. The role of the department was to advertise board vacancies, but it had not been mentioned that a list had been drawn up within the department, and this process needed to be looked at. How were board members appointed, and were they the best possible people for the job? The Shareholder Management Bill would help the Committee understand what they were dealing with.

Ms C Phiri (ANC) asked if the Department was unable to attract highly qualified board members due to a low remuneration rate? Was there a gazette that stipulated how much SOE board members were remunerated?

The Chairperson asked why board members needed to be highly qualified, as they did not run the institution. They govern the institution and ensure it follows requirements.

Department’s response

Mr Mocumi responded to Ms Tshabalala’s questions, stating that the Public Finance Management Act (PFMA) governs the submission of financial reports. All SOEs had submitted their financial reports except for the airlines due to their ongoing costs, and they had written to the Speaker and been given approval for the years they had not submitted reports. The Companies Act stipulates the judicial duties of the board, the chief executive officer (CEO) and the shareholder/Minister. The Code of Conduct (King IV) gives the principles of good operate governance which were globally accepted.

Mr Mnisi, stated that appointment by consensus of the boards of SOEs ran through the ministry, but the ultimate decision was made by Cabinet and the President. Appointment by consensus needed to be vetted through all the stages and consultations. Board members could not be connected to the Executive, as a relationship of conformance emerges. They needed to understand both the commercial basis and the political relationship, but they may not be governing the company and representing shareholders at the same time. Board members needed to be highly qualified as they had a judicial duty to provide strategy, leadership and ensure that the enterprise was successful. They therefore need financial and analytical skills, as SOE budgets were in the trillions. They had to understand the business structure and industry, as well as the global context. Furthermore, to asses someone's performance one needed to understand their job better than they did.

Remuneration practices were benchmarked by meeting attendance. Remuneration could range from R3 500 per meeting, or from whatever level the board member had been attracted by. Eskom had been in crisis, so the board had been meeting daily. There was a limit on remuneration, but these figures had not been disclosed.

The nomination of board members had not been transparent over the years. It had merely been stated that a new board had been appointed, but no advertisement had been seen or people invited. It was not apparent how lists were drawn up or meetings were being processed. It had been found that most board members were politically exposed persons and should not be on the boards. However, they were because they had close relationships with the Executive. The board should have no political interference and could not be controversial, and must maintain its autonomy. There was a need for the Department to provide guidelines for the board nomination process.

Some directors were found to be incompetent in their roles. If there were criminal proceedings, for example, recommendations on these matters must be brought forward by the Committee.

Ms Tshabalala stressed that the Department could not be expected to make determinations of board members being delinquent and politically exposed, yet not know how they were being nominated and appointed.

Mr Mnisi apologised for making these suggestions on behalf of the Committee.

The meeting was adjourned.