Financial and governance challenges facing Denel; Developments at Eskom; with Deputy Minister

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Public Enterprises

31 August 2022
Chairperson: Mr K Magaxa (ANC), Mr Z Mkiva (ANC, Eastern Cape), Mr S Luzipo (ANC)
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Meeting Summary

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The Portfolio Committee on Public Enterprises convened on a virtual platform for a joint meeting with the Select Committee on Public Enterprises and Communication, and the Portfolio Committee on Mineral Resources and Energy to receive an update on the financial and governance challenges faced by Denel, and an update on the developments at Eskom.

The Committees heard that Denel accumulated R3.3 billion in legacy debt and could not raise the necessary trading facilities (bank guarantees and performance bonds) needed to conclude new projects. The uncertainty on Denel's future state impacted its current customers concerned about the entity's ability to deliver on contracts. This led to a possible call on prepayments and performance guarantees. A restructuring cost of about R577 million and working capital of approximately R400 million was required to execute the work to return the company to profitability.

There was a 77% reduction in Denel's revenue since the 2016 financial year, and the accumulated revenue in the 2022 financial year was R1.8 billion. The entity's revenue was affected by its inability to execute existing work due to liquidity constraints and inability to secure guarantees for new business. The net revenue of the company was characterised by plummeting revenue levels, margins that were far lower than the industry norm of between 7% and 10%, a high cost structure, including labour under-recoveries, as well as high levels of debt leading to high interest expense. The company had been technically insolvent since 2019 because of its unsustainable high borrowings since 2017, which led to high finance costs.

The Committee wanted to know how the company mitigated against its monthly commitments with its inability to secure guarantees and if there was any willingness to return from the highly skilled personnel who left the company now that the company was restructuring. Mr G Cachalia (DA) said the company was in a dire state because it was insolvent and had a massive exodus of talent. He said in his experience as a former Director of several companies in the private sector, if he had sat on a meeting and received a presentation from a company in a dire state as Denel which was full of word-salad, wish lists, scammed figures, no details and no timelines, he would have thrown it out because it was not what the country needed at this stage.

Hoefyster was another project that Denel failed to deliver on, and its intellectual property belonged to the Department of Defence (DoD). Denel did not have the funds either in reserves or in the medium-term budget to fund expectations and any conditions to secure the sustainability of the project, which was crucial to the company's sustainability.

Denel told the Committee that it would have to raise R800 million in the next few months—over and above the government assistance it had already received—to return to a financially stable position. The company planned to raise R1.8 billion through the sale of non-core assets. The utility had already raised R992 million by July, which it used to pay outstanding salaries. It also accessed just under R1 billion in surplus funds from the Denel Medical Benefits Trust (DMBT). The company still owed R640 million to the South African Revenue Service and still needed to raise R800 million more in the next three months.

Eskom told the Committee that in the financial year-to-date, the energy sent out from dispatchable plants was 1.4% lower than for the same period last year. There were 24 wind generation curtailment events in the financial year. The highest residual demand (demand supplied by dispatchable generation) for 2022 was 33 136 megawatts and the highest contracted peak demand (demand supplied by dispatchable and renewable generation contracted to SBO) for 2022 was 34 666 megawatts.

In the 2022 financial year, there had been a total of 65 days of loadshedding, with 22 days of load curtailment at stages 1 and 2. There had been 91 days of loadshedding, with 18 days of load curtailment at stages 1 and 2, and two days at stage 3 since 1 January 2022. Eskom still expected load shedding in summer with stage 4 being the maximum expected to be implemented.

The Committee was concerned that there was no solution to the loadshedding issue and was worried about the level of illegal connections in communities. Members told Eskom that while people needed to pay for electricity, it was important for the institution to engage with the people because there were also indigent communities. She also wanted to know about the implications of repurposing the coal power stations on power generation and the job security of the workers who work in those stations.  

The CEO of Eskom said indigent users were able to apply to their local municipalities to be supplied with a free basic electricity allowance amounting to 50 kilowatt hours per month, which was funded by the DMRE to ensure that indigent people in the country were able to enjoy access to a minimum amount of electricity.

On job security, Eskom was going to invest in several projects to provide job security by building a 100 megawatt PV solar plant and would install a manufacturing line for modular micro grids on site to create employment at the plant. The company was also going to collaborate with the Cape Peninsula University of Technology to establish a training centre to retrain, re-skill, and up-skill workers in the coal value chain to become Solar and PV Chain Technicians with accredited qualifications.
 

Meeting report

Co-Chairperson Magaxa welcomed the Members of the Portfolio Committee on Public Enterprises and the Select Committee on Public Enterprises and Communication, as well as the delegation from Denel and other stakeholders and media houses, to the meeting. He explained that he and the Chairperson of the Select Committee would co-chair the meeting.

The Committees would receive a financial and governance status update from Denel. The company had struggled to pay the salaries of its workers and there were plans formulated by the Department of Public Enterprises (DPE), the Minister of Public Enterprises, and the Denel Executive to try and turn things around.

He explained that the first phase of the meeting would be chaired by himself, and Co-Chairperson Mkiva would Chair the Discussion phase of the meeting. He also reminded the Members that the session would continue until 11:00am, and from 11:10am, the Portfolio Committee on Mineral Resources & Energy would join the meeting to receive a briefing from Eskom until 13:30. He asked the Members to be business-like in handling the first session of the meeting, acknowledging that there would also be another session.

He asked the Minister of Public Enterprises to give opening remarks and hand over to Denel for their presentation.

The Committee Secretary said the Minister was not in attendance and had relayed an apology, but the Deputy Minister was attending on his behalf. He said Denel thought the meeting would begin at 10:00am and were not logged in on the virtual platform and asked for 5 minutes to locate them and have them log into the meeting.


The Chairperson granted a 5-minute waiting period.

Deputy Minister's Opening Remarks
Mr Phumulo Masualle, Deputy Minister of Public Enterprises, said that over the last two and a half years, Denel faced serious financial challenges and challenges in honouring its obligations. There were unfortunate incidences of the company being unable to pay its employees. Some milestones were achieved in recent times, but needless to say, the company was not where it needed to be in terms of a sustainable set of events to set the entity into a state of full recovery.

Denel Presentation
William Hlakoane, CEO, Denel, apologised on behalf of the Chairperson of the Board of Denel who could not attend the meeting because of a prior commitment. He handed over to the Chief Financial Officer to provide an overview of the entity's financial status.

Ms Thandeka Sabela, Chief Financial Officer, Denel, said that the entity accumulated R3.3 billion in legacy debt and was unable to raise the necessary trading facilities (bank guarantees and performance bonds) to conclude new projects. In August 2021, Fitch Ratings downgraded Denel's investment status because of the negative equity and absence of a plan by the shareholder to improve the balance sheet.

The uncertainty of Denel's future state impacted its current customers who were concerned about the entity's ability to deliver on contracts. This led to a possible call on prepayments and performance guarantees. A restructuring cost of about R577 million and a working capital of approximately R400 million was required to execute the work to return the company to profitability.

On the positive updates in the entity, she said the Minister of Finance agreed to settle R2.9 billion of Denel's guaranteed debt. However, this would not resolve Denel's immediate liquidity requirements to restart operations and settle legacy obligations impacting viability. Business units and programmes were ring-fenced and, despite the extreme difficulties, continued to deliver key services and products with support from clients and suppliers where feasible.

The embedded institutional knowledge in defence assisted in rebuilding the Denel brand. It continued to attract interest with approaches from the international market and local industry for its products and skills with significant opportunities in the pipeline if the financial position could be resolved.

The company paid all outstanding salaries to employees from the funds it raised from the Denel Medical Benefit Trust (DMBT). There was a large appetite for strategic partnerships in the client environment and private sector that could be leveraged to sustain sovereign and strategic capabilities and return Denel to financial sustainability. The Principals firmly articulated that Denel was a sovereign strategic capability and must be supported in the national interest.

She said there was a 77% reduction in the revenue since the 2016 financial year and the accumulated revenue in the 2022 financial year was R1.8 billion. The entity's revenue was affected by its inability to execute existing work due to liquidity constraints and inability to secure guarantees for new business.

The net revenue of the company was characterised by plummeting revenue levels, margins that were far lower than the industry norm of between 7% and 10%, a high cost structure, including labour under-recoveries, as well as high levels of debt leading to high interest expense. The company has been technically insolvent since 2019 because of its unsustainable high borrowings since 2017, which led to high finance cost.

Mr Hlakoane said a critical success factor to Denel was the existing order pipeline and the additional order pipeline, which underpinned and supported Denel's viable turnaround. Denel could be self-sustaining with a confirmed order book of about R12 billion total over the next business plan cycle.

There were high probability (> 50%) opportunities of about R8 billion on Denel's horizon with the local and other established clients, and the geopolitical instability in Europe and other parts of the world was going to give impetus for significant defence industrial requirements. He said if Denel would be returned to a sound footing, this could be exploited and would yield many opportunities for Denel. If interventions were to be implemented to undo the reputational damage and Denel was on a positive trajectory, an improvement to the probability of the above opportunities would be realised and Denel could expect an order pipeline of at least R30 billion over the next five years.

On governance, he said the Zondo Commission's State Capture report made the following key findings and recommendations on Denel:

• Failure of good corporate governance.
• Abuse of power by the board of directors.
• Improper practice by the chairperson of the board, Mr Mantsha.
• Establishment of a body that focuses on recruitment and selection of right people to be considered for appointment as board members, Chief Executive and Chief Financial Officers.
• Referral of Mr Mantsha to the Law Practices Council for investigation into his fitness to practice as an attorney.
• Board of directors to be subjected to delinquent proceedings in terms of the Companies Act.

Discussion
Mr F Essack (DA) said slide four highlighted a possible call on prepayments and performance guarantees for about R3.4 billion and wanted to know what would transpire if the call would be activated and the R3.4 billion would need to be repaid because of a cancellation or other issues. He wanted to know what the company would do to deal with this possible eventuality in the next few months.

He also wanted to know how the company mitigated its monthly commitments with its inability to secure guarantees. He said the company also mentioned the funding capital expected to run out in October of the current calendar year and wanted to know if Denel had a concrete mitigation plan against this, considering that it is September.

On the projected R400 million expected income from the disposal of non-core assets by the company, he wanted to know how concrete the projected income amount was, considering the rising interest rates and the volatile market. Lastly, he wanted to know how the company intended to mitigate against the R5 billion stolen in Intellectual Property affecting the company going forward.

Ms W Ngwenya (ANC, Gauteng) wanted to know the appointment status of Denel's Chief Restructuring Officer (CRO) and whether he was appointed on a permanent basis or if it was a secondment. In the case that it was a secondment, she wanted to know the duration of the secondment. She asked if there was any willingness to return from the highly skilled personnel who left the company now that the company was restructuring. If there were any, she wanted to know if the company would re-employ them when the recruitment process began. Lastly, she asked if the company had assisted during the July 2021 unrest and the recent floods in KZN through its technical support. If they did, she wanted to know the technical support they offered and the kind of assistance they provided.

Mr A Arnolds (EFF, Western Cape) wanted to know if the company had sufficient staff members to restart operations. He said they all wanted Denel to be fixed, but many procurement processes were not followed in the past, including their own policies. He asked if the company could assure the Committee that everything was in place to sustain the company.

He also asked for feedback on establishing the body that would handle the recruitment of new staff. He also wanted to know what arrangements were made by the company to pay the R640 million owed to SARS and if there was a buy-in from the unions on Denel's corporate plan and asked how their engagements with the unions went in that regard.

Mr G Cachalia (DA) said the company was in a dire state because it was insolvent and had a massive exodus of talent. He said in his experience as a former director of several companies in the private sector, if he had sat in a meeting and received a presentation from a company in a dire state, as Denel, which was full of word-salad, wish lists, scammed figures, no details and no timelines, he would have thrown it out because it was not what the country needed at this stage.

He wanted to know the impact of the medical benefit money on member's benefits and which elements of the company were deemed to be strategic. Denel could not fulfil its order book no matter how big it was and there was no detail of what would come in, what would be addressed, and what could not be addressed.

Hoefyster was another project that Denel failed to deliver on and its intellectual property belonged to the Department of Defence (DoD). Denel did not have the funds either in reserves or in the Medium-term Budget to fund expectations and any conditions to secure the sustainability of the project, which was crucial to the company's sustainability, and part of the plan was to recruit at least 21 people back into the project. He wanted to know who the 21 people were and how they would be funded because the company provided no detail.

He wanted to know what components of the Hoefyster and Badger project were already in the possession of Denel and their values and what non-revenue raising needed to be reintegrated with ARMSCOR while the sustaining parts needed to be privatised. He said the country had highly sustainable private sector arms and ammunition sector players who could easily supply all the South African National Defence Force's (SANDF) needs, but that Denel was not buying any from them.

He said the ongoing SIU investigations would not solve the problem in either the short or the medium-term and added that the Restructuring Officer of Denel should have been in the meeting to answer questions on what the restructuring plan was and what he was doing to fix the situation in the company. He wanted to know how the company was planning to bring back the intellectual property that left the company.

Mr M Nhanha (DA, Eastern Cape) said the entire presentation by Denel was a pipe dream because the company was trying to "pull the wool over the Committees' eyes". He said the company presented things that they were hoping to achieve instead of what was reflected in their books and there were no plans of the steps they would take to achieve their targets: "It is good to live in hope, but hope must come with a plan," he said.

He said the CFO or CEO admitted that Denel was unable to raise capital in the open market. That admission suggested that the company would continuously look for handouts from the National Treasury to survive to at least pay salaries. He said the company had a tarnished image in the open market and was downgraded by credit rating agencies and asked how the company hoped to raise money and survive other than closing shop, accepting its losses and moving on. He also wanted to know how the company hoped to retain its remaining few customers and how it would attract new customers with such a terrible reputation.

Lastly, he said highly qualified engineers left in droves to the private sector and others started their own businesses. He asked what factors drove them away from the company and what the contribution of affirmative action was in that regard.

Mr N Kwankwa (UDM) said when the Portfolio Committee went on an oversight visit to Denel, they indicated the R30 billion as pipeline business. The problem with the pipeline business was that there was no indication of how much of it was converted into sales for Denel because if there was a correlation between what the company had in its pipeline business book and their sales book, there would not be a massive drop in turnover.


He said selling non-core assets was the right thing to do, but there was no money being made from it, and the company was not bringing new business and the problem remained. There was only little much that the sale of non-core assets could do in the medium to long-term in trying to improve the cashflow situation in the company, but it was never going to help them turn around the business. This needed to be scrutinised so that there would be no over-reliance on the sale of non-core assets.

There needed to be a contingency plan in place in the case of call on guarantees, but that was not evident in the presentation. In a previous meeting, the Committee had raised the issue that Denel was not selling ammunition to the South African Police Services (SAPS). The new developments and progress in that regard should have been part of the presentation points from Denel, but that was not the case.

Ms J Tshabalala (ANC) said the "vultures of doom" kept using words like "closing-shop" and asking Denel to invite private partners without quantifying what the private partners would do to change the situation and their commitment to the sovereignty of the country. She said Denel would remain a strategic and sovereign asset and should be prioritised to ensure and safeguard the country's defence capabilities.

She asked the Deputy Minister why it took long for the DPE, the DoD and National Treasury to agree on the future of Denel. The company was able to access R992 million at the Denel Medical Benefit Trust (DMBT) and should be able to account for how the money was utilised and how the balance would be used in the future. She wanted to know what would become of the country's defence mechanisms if there were to be a war or any threat to the defence of the country.

She said the DMBT and the disposal of non-core assets were instrumental in raising money to meet operational requirements including the payment of salaries and suppliers and wanted to know how the company would meet the funding of operational requirements when the money raised from the DMBT and the sale of the non-core assets ran out.

National Treasury's commitment to reducing the stock of public debt to attract capital inflows crowded out public investment in the State-Owned Enterprises (SOEs), which made SOEs susceptible to reliance on international financial markets for access to cheap credit and foreign exchange needed for operational purposes. Sadly, the United States-denominated debt exposed SOEs to two types of vulnerabilities, a currency mismatch between the income generation activities and debt servicing costs aggravated by exchange rate volatility, as well as policy risks as the sustainability of the US-denominated debt position was at the mercy of a foreign central bank, the US Federal Reserve Bank which set policy rates with no regard for the fate of the South African SOEs. She wanted to know how much investment was required by Denel to stabilise its financial operational sustainability.

Contracts and export permits related issues with the National Conventional Arms Control Committee (NCACC) were partly responsible for the company's low levels of revenue. Failure to address such issues effectively meant that government was undermining the efforts to return the company to its financial sustainability. She wanted to know how the inefficiencies, ineffectiveness, and unpredictability in the NCACC were being addressed.

She said there was an exodus of employees with critical skills in engineering, production, technicians in design and development technicians at Denel, and the company intended to reduce its headcount to achieve the restructuring cost required for the implementation of its new business model. She wanted to know how the company would be able to implement its new business model with limited capacity for employees with critical skills.

Mr S Gumede (ANC) said the Committee must remain close to Denel when it is struggling so they could understand the extent of their challenges. It was unfortunate that they met the company with limited time because they would have liked to have more time with the company to have them answer questions to their satisfaction.


He was concerned about the situation at Denel and wondered what would happen if the company did not achieve its goals to sustain itself in terms of the order book and the application forwarded to Treasury by the DPE, as well as the sale of the non-core assets. He wanted to know if the company had a plan B if all of their current plans did not work out. He also wanted to know how much Denel's new strategic plan would cost to implement and whether the Treasury completed the assessment of the plan and the outcomes of the assessment.

He said a lot of workers in the company were unpaid and the R1 billion that was procured would be exhausted soon and wanted to know if the staff was receiving salaries and what would happen when the R1 billion was depleted. He also wanted to know the number of people who left the company during the court engagements and protest actions. He also wanted to know if the company had enough personnel to begin operations, as the Committee had learnt from Alexkor, who tried to implement cost-cutting measures by retrenching 150 workers. When it was time to start operation, it was unable to do so because of understaffing. He also wanted to know whether the assets that were auctioned could be recovered.

He said it seemed that government was undermining the capabilities of Denel as the company could do more than just depend on the DoD and urged the government to try by all possible means to use the capabilities possessed by the company. He requested that the Committee organise another meeting with the company to engage further.

Chairperson Mkiva wanted to know the methods used by Denel to dispose of the non-core assets and to whom they prioritised selling the assets. He also wanted to know if all the non-core assets were in the country and if some were elsewhere in the world. He said Denel started as a company established as a shelter employment organisation premised on the country's defence mechanisms and wanted to understand the extent to which it may have transformed and modernised over the years since its inception. He asked how far the company had gone in embracing technological advances and the fourth industrial revolution (4IR) in its operations.

Chairperson Magaxa said when the Committee visited Denel on its oversight work on 28 August 2021, it discovered that some of the challenges facing the company were more to do with the failure of South Africa to advance public-to-public investment. He wanted to know the extent to which Denel was addressing the issue. He was concerned about the DoD having to procure products available at Denel from other stakeholders. That was the reason the Committee called for the shareholders and Treasury to deal with the matter and find a solution so that the entity would not be sabotaged by the state's own systems.

The Committee also called for diversification to be considered in Denel appreciating the skills that the country invested in building within the entity for many years. He said there were a lot of unused skills within Denel and they could be used to help the entity to grow and asked what the entity did to harness those skills. The Committee had also called for the National Treasury to save the entity as a matter of national interest because it was important for the security of the country.

He said as much as the Committee was aware of the extent of the damage caused by State Capture on the entity, they wanted to see the people who were implicated being arrested and hoped the justice system would fast-track the process. State Capture should not be used as an excuse for selling the company to capitalist vultures.

Response by Deputy Minister
Deputy Minister Masualle appreciated the comments from the Members and noted that they understood the anxiety and frustration and where it came from.

He said over the last two financial years, the Department was focused on getting Denel to a state of health by using every avenue at their disposal, including requesting funding from Treasury. Initially, they felt that Treasury was not responding to the plight they presented to them, but recently with the understanding of the heavy burden carried by the fiscus, there was a clear commitment demonstrated by Treasury to the requests made by the Department. However, it was not near enough to get the Department to a position where it could see all the wheels turning in the entity.

The R2.9 billion injection provided by Treasury relieved some of the plights in the entity as some of the outstanding interests were paid, but that was still not enough considering the operational requirements to get the entity into the path of complete recovery and sustainability. He said they would not try to "pull the wool over the face of the Committee" because the entity was a strategic and national asset that was important to the sovereignty of the country.

He said they placed high premium on inter-departmental and inter-sectoral engagement because Denel would thrive much better if it were aligned with the DoD and procurement avenues such as ARMSCOR as a first step. However, the DoD was also facing serious budgetary constraints and some of its programmes and projects were either delayed or suspended. The DoD was also considering reducing its staff numbers and the number of soldiers because of the overall financial challenges faced by the country. The DPE decided to work on restructuring to try and customise what it does in respect of the programmes that could be funded fully and build the capacity of the entity through those programmes.

Response by Denel
Ms Gloria Serobe, Chairperson, Denel, said the CRO of the entity was in the Eastern Cape and was struggling to connect to the meeting and apologised on his behalf.

She said the appointment of the CRO was a secondment from South African Airways Technical (SAAT) which ended on the day of the meeting (31 August 2022). The CRO would be at Denel for a further 12-month period as a contractor, and she thanked SAAT for helping them with the secondment in the last three months as they also helped Denel with carrying the cost of the secondment.

She said if the board did not believe in the recovery of Denel, they would not have acquired the services of a CRO. The CRO's job, with the backup from the board was to ensure that the company had credible turnaround plans before Treasury: "Treasury does not work with pipe dreams because they need to see a plan backed by credible support programmes," she said.

The board was comfortable with the turnaround plan because the steering committee between ARMSCOR and Denel was meant to unlock all the opportunities between them. The steering committee consisted of both members from ARMSCOR and Denel. It was chaired by both chairpersons of the entities to ensure that whatever needed to be unlocked between the two entities would be unlocked. The board put its hopes on this because the bulk of what Denel wanted to achieve rested with ARMSCOR, including how to rearrange and ensure that the Hoefyster project and others were given the credibility they needed. She said she was comfortable that it was not a pipe dream and that it was a turnaround plan backed by credible pipelines and partners.

She said Denel was being downgraded because they were mindful that the ceiling for SOEs was the credit rating of the country, so while the country was in "junk status," one could imagine what that ceiling looked like. The company would do its part to ensure that its downgrade was handled properly.

She said the programme on the medical aid took over two years because it was a sensitive programme as the company had to work with the members and their representatives and ensure that everyone was protected. Members had their own actuary, and so did Denel, and so did the Fund. The emphasis on the actuary was based on the medical aid being based on liabilities which needed to be appropriately calculated.

She assured the Committee that none of the medical aid members were negatively affected and the main issue was that while Denel was in trouble over the years, the medical aid was building up surplus. It was not usual that an entity could build surplus outside of itself, especially while it was in trouble. The board had to deal with the matter appropriately and ensure that Denel received its portion of the surplus in the medical aid.

Mr Hlakoane said some of the DMBT money was put aside for investment back into the project to get the business running so the money was not only used to pay salaries. On the non-core assets, he said the market was volatile, but the company had enough interest during their disposal of the assets. In two or three of the transactions they were in the process of procuring, they were close to signing sale agreements with the bidders. He said they were comfortable that if everything went according to their plan, they would be able to mitigate against the shortfall of salaries within the next three months.

On where certain of their none-core assets were, he said Denel was a shareholder at Hensodlt, and the sale of shares of the company did not affect Denel in any way unlike Rheinmetall, which was embedded in the DoD, so part of the non-core assets was in the selling of Denel shares at Hensoldt. The company was also looking at property optimisation wherein some of the properties rented out by the company to its customers end up being bought by the customers. He said they wanted to consolidate their property portfolio with other SOEs and DPE would run with that initiative to ensure that the company did not lose all of its assets.

Regarding the stolen Intellectual Property (IP), he said IP comes in two forms, one is intrinsic, and the other is based on hardware and infrastructure. The company still had the hardware and infrastructure IP as some data packs owned by Denel and registered as such, while some were registered under ARMSCOR and the DoD and the relationship would continue in terms of management of the IP.

He said the company was being audited by ARMSCOR for the IP that was in their possession, and the company put measures in place to update their own business processes for the approval of the disposal of IP. Denel was also updating its ICT systems and moving into a consolidated ARP system to mitigate against people stealing IP. 

He said some of the highly skilled personnel that left the company were willing to return; some of them were very experienced and aged 50-56. They had left because they wanted to cash in on their pensions and had nowhere else to go. Some of them were still in the market and the company still had access to them, while some were working in companies outside of Denel. The company was also able to reach out to them to help with the execution of some of the projects they were willing to assist. The stabilisation of Denel would play a major role in bringing those people back to the company because even though some of them worked for other companies, they were still willing to assist the company in their personal capacity.

On the support provided by Denel during the KZN floods, he said the C130 from the South African Air Force and the Oryx Helicopter that helped people during the floods were maintained by Denel. They also sent engineers to KZN during the floods to assist the Air Force and Army. They supported the SANDF even though they were manufacturers and were not always at the forefront. They also assisted the Army in Mozambique with the C130 and the Rooivalk and also assisted in the Central African Republic.

He said they updated their procurement policies and continued to update them whenever they saw gaps in governance. They also updated their Delegation of Authorities (DOA) to mitigate against some of the shortfalls they faced. He said they had payment arrangements made with SARS on the R640 million they owed them and they had some buy-in from the unions led by the CRO and were continuing with the engagements. There were engagements that they held recently in the last three months and the unions had shown their support to the entity.

He said Hoefyster was done in two phases, the first one dealt with the design of the vehicles and five variants were created, and then phase two dealt with the actual manufacturing of the vehicles. He said the design phase still needed to be completed and a plan was put in place alongside ARMSCOR, which would run until June next year and was still waiting for approval. There were funds available to fund the completion of phase one and the resources were available to enable the ring-fencing and completion of phase one of the Hoefyster project. The second phase had not been decided upon and once that is done, the next step would be to see how the phase would be rolled out.

The exodus of skilled staff in the company dented its image and impacted its ability to raise funds, but because of the company's robust products, there was great demand for the products and with the war in Europe, there were a lot of questions regarding some of the products from Denel in the market. He said as much as their reputation was tarnished, they were still an important role player in the Defence industry and there was a need for their products.

He said the R30 billion project was not a pipe dream but a project that the company was working on. They had a five year plan for the project and knew what they needed to do to secure it. He said some projects were in the Middle East and Europe. The project that they had already secured was the R12 billion project and contracts had been signed. It was true that they could sell all their assets, but they would not be able to sustain the company if they did not get extra revenue.

He said they tried as hard as possible to diversify the company by looking at non-defence sectors. For example, they had a corporation that worked with SARS to maintain some of the helicopters, working with other SOEs such as Eskom and Transnet. He said they had done the work before, but at a small scale and would have to be more aggressive to capture the market. They were trying to move into the corporate market to ensure they did not depend only on the defence sector.

Although there were highly skilled personnel that left the company, they were confident that they would be able to work with what they had. The main divisions affected were where the company lost a lot of IP and critical resources. Denel is the country's strategic asset and without the company, the country would see the demise of its sovereign capability of self-defence so it was important to ensure that Denel is taken care of.

He said the industry commission dealt with the contracts and export permits because the entire defence industry was affected, not only Denel. The company had Committees that sat with the NCACC to ensure that some of their plights were heard, but because of geopolitics, the permits were only approved based on security measurement and analysis in different countries.

Denel had enough capacity in some aspects of the business, but the restructuring was mainly on the support functions of the company such as finance, procurement, human resources, and the supply chain. All these parts of support services of the company would be streamlined within the Shared Services Model to support different divisions. The technical capacity would not be affected by the restructuring.

The company was moving towards technological advances of the 4IR but their infrastructure was old in most parts of the business and would need a considerable amount of capital investments to be modernised. The company was far behind compared to its competitors in the US and France in terms of technological advancement and their work was highly labour-intensive. 

Ms Sabela said the highest risk contributor to the call guarantees the company had were around the Hoefyster project based on the prepayments and performance guarantees they received on the contract. They would have to relook at the contract from a South African perspective on issuing guarantees between sister companies. The company was considering approaching National Treasury to find an alternative way to ensure that whilst it provided support to the issuing entity, it did not drain the fiscus in issuing commercial guarantees.

In looking forward to new contacts and how the company dealt with new contracts and their demand guarantees, the board took a clear view that for any prepayments received from customers, the funds would be ring-fenced to negate the requirements for issuing a prepayment guarantee and the client would have sight of the funds and the utilisation thereof to mitigate and reduce the requirement prepayment guarantees in future contracts.

She said they tabled a payment plan to SARS that dealt with legacy debt on Value Added Tax (VAT) and Pay as you Earn (PAYE) for up to May next year, and they accepted it and the company actioned the payment plan. On the utilisation of the DMBT funds, the board was clear about how the money needed to be used in that the company needed to secure the strategic assets (Denel) and any pending legal actions that would hinder that were dealt with. This also included ensuring that employees were taken care of because they formed part of the strategic assets. The DMBT funds also dealt with working capital for the future whilst awaiting a final decision from a Shareholder for funding to secure the investment.

Mr Hlakoane said non-core assets included the Shares that the company owned as well as the property owned by the company, which was non-core because the company was not in the property industry. The company employed a transaction advisor to assist them with selling their non-core assets and none of the executive members were involved in the procurement or bidding processes.

Chairperson Magaxa said they had passed their intended time for the end of the discussion and would not be able to allow for a follow-up discussion. He thanked the delegation from Denel for their presentation and participation and allowed them to exit the meeting.

Mr Chachalia requested some of the questions that could not be answered in the meeting be responded to in writing.

Chairperson Magaxa said the next session would be alongside the Portfolio Committee on Mineral Resources and Energy and allowed the Members of the Select Committee on Public Enterprises and Communication to exit the meeting if they wished.

He allowed a four-minute break while the Portfolio Committee on Mineral Resources and Energy logged into the meeting.

Meeting with Eskom
Chairperson Magaxa welcomed the Portfolio Committee on Mineral Resources and Energy and the delegation from Eskom to the meeting.

He said the meeting was long overdue because the issue of the Koeberg oversight visit should have been dealt with long ago. The Committee had been informed that members of the National Union of Mineworkers (NUM) who were working on the SGR project were suspended but the presentation by Eskom did not address the serious allegations of maladministration raised by the NUM, which was one of the main objectives for the Joint Committee visit to the Koeberg Power Station.

"Any person or organisation is protected by the Constitution to write to Parliament, and suspending employees for whistleblowing is tantamount to victimisation and is a sign of poor understanding of the role of unions in the workplace," he said. The presentation was incomplete and the Committee needed clarity; because of this, the Committee would not be able to finalise its oversight report.

Deputy Minister's opening remarks
Deputy Minister Masualle said the meeting resulted from an oversight visit that the Committee undertook to the Koeberg Power Station in which certain observations were made and feedback on the progress status since the visit was expected from Eskom.

Eskom Chairperson's opening remarks
Prof Malegapuru Makgoba, chairperson of the Eskom board, said the team from Eskom had prepared a presentation even though the Chairperson of the Committee had already noted that it did not address the expected issues, but one of the lessons learnt from the oversight visit from the Joint Committees was the robustness and insightfulness of the questions that were raised that needed equally and satisfactory responses. He said he joined the meeting out of respect for the Joint Committee and noted that he would depart early for a prior engagement.

Chairperson Magaxa said it was disappointing that the presentation from the entity was incomplete and that it was disappointing to hear that the NUM members working on the SGR project were suspended for whistleblowing because that interfered with the work of Parliament.

Prof Makgoba said he would follow up on the matter and respond in writing to the Committee.


Update on developments at Eskom
Mr Andre de Ruyter, CEO, Eskom, said they were verbally informed of the meeting on Friday and received the agenda on Saturday. That did not give them enough time to prepare on the matter related to the oversight visit and the suspension of some of the senior members. He apologised to the Committee.

He said the presentation would deal with two matters: the system status and outlook and then the Koeberg matters could be addressed after that.

Ms Isabel Fick, Systems Operator, Eskom, presented the systems status and outlook of Eskom.

On the summary of the system status, she said in the financial year-to-date, the energy sent out from dispatchable plant was 1.4% lower than for the same period last year and there were 24 wind generation curtailment events in the financial year. The highest residual demand (demand supplied by dispatchable generation) for 2022 was 33 136 megawatts and the highest contracted peak demand (demand supplied by dispatchable and renewable generation contracted to SBO) for 2022 was 34 666 megawatts.

On the loadshedding and load curtailment summary, she noted that in the 2022 financial year, there had been a total of 65 days of loadshedding, with 22 days of load curtailment at stages 1 and 2. There had been 91 days of loadshedding, with 18 days of load curtailment at stages 1 and 2, and two days at stage 3 since 1 January 2022.

In general, some of the following conditions led to the above load reductions:

• Shortage of generation;
• Increased unplanned unavailability;
• Limited fuel availability at peaking stations;
• The need to conserve and replenish depleted emergency resources; and
• Poor coal and compromised emissions performance.

Regarding the power systems outlook and the summer plan for 2022/23, she said the maintenance outage optimisation was done in the Capacity Plan using an unplanned unavailability provision of 10 000 Megawatts. Anything higher than this would not make sense because there would be no room to schedule maintenance. The difference between the Capacity Plan and the System Outlook (Summer Plan) was that the Capacity Plan contained risks in the assumptions while the System Outlook Plan showed the consequences should those risks materialise.

All reliability maintenance required in the 12-month planning period was accommodated in the plan. This resulted in a "full" plan with little room to move, extend or add outages. For the most part, the system operator would need to source operating reserves from Demand Response (DR) products as well as from emergency reserve sources such as Interruptible Load Shedding (ILS) and Open Cycle Gas Turbines (OCGTs). The plan requires OCGT usage over weekdays, and low diesel usage on some weekends. The failure of Medupi 4 increased the dependency on diesel generation to manage the power system.

She said the plan was "tight" and any significant outage slips would have a knock-on effect that would influence the plan from that point forward. However, the plan did not cater for difficulties that could arise at power stations due to industrial action or other employee protests.

Discussion
Ms Tshabalala said the matter of whistle-blowers needed to be understood because they needed protection from intimidation. She asked why the Eskom Board Chairperson was not informed about the suspension of the NUM members. She asked Eskom to tell the Committee about the issues that led to the suspension of the members.

She said the matter of Soweto residents and the meter box installations needed to be scrutinised, especially in Ward 121 in Moletsane, Tladi, among others and there were many areas in the Gauteng province that were hit hard with power cuts on the basis that Eskom wanted to deal with maintenance and the installing of meter boxes. She said the people blamed their ward Councillors for the power cuts because they understood them to be the responsible party, when Eskom was the one who failed to communicate with its customers.

While she understood the need for people to pay for electricity, she felt it was important for Eskom to engage with the people because there were indigent communities and asked Eskom not to be arrogant when dealing with such communities.

She asked Mr de Ruyter to give them access to his personal contact details because it was hard to gain access to them when communities needed electricity. She implored him to personally follow up on the matter and not act like the issue was below him.

She asked the Deputy Minister if the DPE was happy with the performance of the Eskom management and wanted to know the specific areas where the Department saw improvements in the entity thus far.

She said when Mr de Ruyter was appointed, they were told the issue of load shedding would be resolved, yet it seemed to be a constant in recent times.

She said the President did not mention where Eskom would receive funds to procure additional capacity as well as the budget to undertake more maintenance.

The Eskom tariffs were set by the National Energy Regulator (NERSA), which dictated Eskom revenue and additional expenditure would have to be recovered through the tariffs paid by the consumers who were already struggling with the rising electricity prices. She wanted to know if this would provide confidence for investment by the Private Sector in returns of the investments.

She said Eskom had been requesting additional capacity between 4 000 to 6 000 megawatts for the past four years, and the additional capacity had not materialised. The Department of Mineral Resources and Energy needed to account for the lack of additional capacity.

National Treasury's commitment to reducing the stock of public debt to attract capital inflows crowded out public investment in SOEs, making SOEs susceptible to reliance on international markets. She asked how Eskom was attracting investment and whether the entity was comfortable with the status quo.

She said in addressing the gap between installed capacity and reliable supply, Eskom installed capacity of 46 000 megawatts and reliable supply of 28 000 megawatts. This meant that Eskom had power stations not functioning optimally to supply electricity to the grid.

She wanted to know if it would hurt Eskom to deal with skill and capacity that needed to be sought from the Council for Scientific and Industrial Research (CSIR) and other government entities with engineering capacity to facilitate the maintenance.

She said the updates from Eskom always said "the remaining units at Medupi and Kusile will be brought online as soon as possible, additional units at Lethabo and Koeberg are returning to service" and added that the Democratic Alliance (DA) in Cape Town was taking people off the grid of Eskom and were inviting Independent Power Producers (IPPs). She wanted to know if Eskom had engaged with them on the matter.

She said the power stations largely responsible for load shedding because their parts were no longer manufactured around the world were very costly to taxpayers and asked if it would not be a good idea to repurpose the coal power stations.

She also wanted to know about the implications of repurposing the coal power stations on power generation and the job security of the workers who worked in those stations.  

Mr Cachalia wanted to know the progress made on rehabilitating the 17 000 megawatts that were broken and whether they were included in the plan mentioned in the presentation. He also wanted to know when the maintenance was expected to be concluded and the costs and financial burden brought by the issue. He also wanted to know the amount of capacity that was provided by wind and solar in the past year versus the amount paid for the portion that was not used due to curtailment.

He asked when the Koeberg Power Station was expected to be online, why the delay was not highlighted when the oversight visit was conducted, and what the implications of NUM's concerns were.

He asked how much diesel Eskom would be earmarking in a worst-case scenario and at what cost over the next year, September to March.

Lastly, he appreciated being taken through the presentation. He said it was reasonably technical and asked for a layman's summary in the future, especially because the presentation was submitted on the morning of the meeting.

Mr N Dlamini (ANC) said the oversight visit was partly influenced by a letter written by members of the NUM on issues relating to Eskom and the meeting was a product of the oversight visit so it was not fair that Eskom did not respond to the NUM issues. Eskom needed to respond to the issues because it did not make sense for them to be in the meeting if they were unwilling to do so.

He said South Africa had a growing population and the electricity supply was not matching that growth and recalled an Integrated Resource Plan (IRP) that was led by an Energy Regulator of the country in 2010 to look into the issues of energy. During that time, the "nuclear idea" was being sold to government, but there was some opposition to nuclear power and the interesting bit was that all that opposition and the reasons that were brought forward never affected the Koeberg Power Station which was working perfectly in the last 40 years, and only encountered problems recently.

Renewable energy must be used in a way that will benefit the entire country and not only businesses. He said over a million people in Gauteng alone lived in squatter camps and were not able to buy electricity due to indigence. This meant that those people would have to steal electricity at some point, which would cause power supply problems due to overload. He wanted to know why solar panels were not installed at the squatter camps to ease pressure on the power grids and save pressure on Eskom infrastructure.

He asked if Eskom's work responded to the challenges faced by the country or if it was mainly focused on managing the situation that is unmanageable.

Mr K Mileham (DA) found it interesting that Mr Dlamini said Koeberg Power Station was working perfectly for the past 40 years and said the power plant had a lifetime energy availability factor of just 72% and, to a large extent, load shedding this year was driven by Unit 2 of Koeberg being offline for an extended period, in a time where numerous life extension operations were supposed to take place.

He said when the business case was made for life extension at Koeberg in 2010, a figure of R20 billion was put forward as the cost of the extension operations and at the time, the Rand/Dollar exchange rate was in the region of R7.50 to the Dollar. He asked what the revised estimate for the life extension at Koeberg based on the 2022 Rand/Dollar exchange rate was. He also wanted to know if a revised programme of work was developed for the life extension programme given the delays experienced in replacing the steam generators and what the timeframe looked like.

He said Koeberg's operating license would expire in 2024 and wanted to know the impact on license renewal, given the delays in the life extension operations. He asked if it was likely to get a license renewal because it was not meeting the safety and operational standards required for a new license.

Lastly, he wanted to know what Eskom did to upgrade the transmission infrastructure, especially because most of the country's renewable resource potential was in the areas where Eskom had limited ability to evacuate power.

Mr M Mahlaule (ANC) said the Committees visited Koeberg jointly and received a presentation from Eskom and a letter of concern from the NUM which they expected the Eskom management would respond to in the meeting. The Committee would then go back to finish the oversight on Koeberg and compile a joint report to be tabled to the National Assembly for adoption.

Mr Kwankwa wrote to the Speaker on 29 June 2022 requesting an urgent debate on a matter of national importance, load shedding, for discussion by the House. The Speaker responded that his letter did not meet the requirements and subsequently wrote to the National Assembly House Chairperson, Mr Frolick, requesting that the two Portfolio Committees on Public Enterprises and Mineral Resources and Energy should prioritise and deal with the matter. The Committees were also urged to develop a specific programme of intervention within the context of their mandate and powers and report to the House where applicable.

The meeting was meant to help the joint Committee to develop a specific programme and report to the National Assembly, but the presentation that was received from Eskom was on load shedding, which presented nothing new. He proposed that the Co-Chairpersons of the Joint Committee, with their researchers and content advisors, should prepare a specific programme that they think would help Eskom in dealing with load shedding and bring it to a joint meeting to discuss where the Committees agree and disagree. Once an agreement is reached, they would then adopt it and present it to the National Assembly for adoption so that oversight could be done according to the newly adopted programme.

Chairperson Luzipo said what he got from the presentation was that the country should brace itself for more load shedding and he found that there was a certain degree of contradiction in the presentation because, on one side, it said even if renewable energy was considered, it would not match what could be provided. Secondly, the presentation was silent on recent developments and did not even acknowledge the announcements made by the President and nothing in the presentation related to the President's plan.

He was worried about the presentation because it did not provide concrete plans on what would be done to address the challenges such as maintenance. He did not understand how the systems in place were unable to detect the possibilities and potentials for maintenance challenges. He said it would have been a good idea to have contractual obligations for those responsible for maintenance at Eskom and certain standards of achievement so that failure to meet those standards could be punishable.

He was surprised that the NUM letter needed a lot of time for Eskom to respond to it because, during the oversight visit, they dealt with the issues raised by the NUM but decided to put them on hold because of time constraints and would finish the discussion in the meeting. He said Eskom needed to explain what was so difficult for them to respond to since they had already responded and had to adjourn to proceed at a different time.

He said that during the oversight visit, the Joint Committee only went to the site, then received the presentation, and subsequently suggested reintroducing the presentations as they had been occupied with the oversight visit to ascertain how things had changed. "Any person that is relevant to the work of a Portfolio Committee of Parliament cannot be subjected to conditions imposed by an institution, including an institution of the state," he said.

Response by Deputy Minister
Deputy Minister Masualle said he heard Mr de Ruyter say they were notified verbally about the meeting on Friday and received a confirmation letter on Saturday morning. He said there seemed to be confusion on what was understood to be the objective of the meeting, which was supposed to be an update on the oversight visit to the Koeberg power plant.

He would have preferred that the joint Ministers from the Department of Mineral Resources and Energy (DMRE) and DPE would meet with the Joint Committee to speak to the elements of the programme announced by the President because the President had suggested the steps that would be taken. An Inter-Ministerial Committee was established on the matter. He felt that the Joint Committee was owed a progress report on the Inter-Ministerial Committee which could be compared to what was happening at Eskom.

He said some of the issues relating to the expected response to the NUM letter should have been dealt with in Eskom's presentation and asked that the Joint Committee allow Eskom to provide a comprehensive report on the matter later.

Response by Eskom
Mr de Ruyter reaffirmed Eskom's respect for the institution of Parliament and for every citizen of the country to approach Parliament with any matter and said that Parliament had a right to investigate and consider all complaints submitted.

Chairperson Luzipo asked Mr de Ruyter to respond to questions about the presentation made in the meeting because they did not have a written report on the matters of the oversight visit. He said they would deal with the issues of the oversight visit at another time when Eskom submitted a written response.

Mr de Ruyter said the three people suspended were all senior managers at Eskom and not lower level employees. The relevant legislation that guided the disciplinary processes was the Protected Disclosures Act. There were no Protected Disclosure actions that met the requirements of the Act.

On the load reduction in Soweto, he said Eskom was rolling out the installation of prepaid meter boxes in all the areas where they were experiencing illegal connections and this was an endeavour to secure revenue that was due to Eskom and to prevent electricity theft which was still rife in many parts of the country.

Eskom's distribution business ran the campaigns and information was communicated in advance and shared with residents. In some instances, the installation teams were not welcomed by residents because the meter boxes would impose the obligation for them to pay for electricity. The installation teams would sometimes be met with violence and they would not have a choice but to withdraw from the communities and resume load reduction measures to protect the infrastructure from the overloading which caused transformers to overload.

He said indigent users were able to apply to their local municipalities to be supplied with a free basic electricity allowance amounting to 50 kilowatt hours per month, which the DMRE funded to ensure that indigent people in the country are able to enjoy access to a minimum amount of electricity. The free basic electricity programme uptake was not as positive as expected because people were either unaware of the programme or found the application process too onerous, which meant that Eskom still had to deal with illegal connections and theft.

He said Ms Tshabalala was correct in saying there was a disconnect between political accountability attributable to local councillors and the supply of electricity. Over the past two years, Eskom entered into discussions with the City Council of Johannesburg to transfer Soweto to the municipality. The idea behind that was to ensure that they coincided with the delivery of electricity with political accountability. There were some challenges with fluctuations and turbulence at the Mayoral level, but Eskom hoped there would be some progress with the transaction which they believed could have resolved many of the frustrations experienced by the residents of Soweto as well as the Councillors and would have also benefitted Eskom in enhancing their revenue security.

The NERSA tariffs were not discretionary and were not imposed by Eskom in a vacuum. Eskom imposed the tariffs in strict compliance with the directive they received from NERSA and did not have the discretion to deviate from the regulations. Eskom was not able to procure additional generation capacity on its own and was not in a position to be able to build a new plant without a section 34 approval provided by the Minister of Mineral Resources and Energy in terms of the Electricity Regulation Act. The company would not be able to make new investments and buy new electricity without the consent of the DMRE and the structure that was established to procure new capacity. This would be done through the IPP office located in the DMRE, which ran the bid windows responsible for bringing more capacity onto the grid.

Eskom noticed several municipalities exploring and entering into Power Purchase Agreements with IPPs; some were in the Western Cape and others in Gauteng. Eskom saw this as a positive development for them because they were producing electricity from their OCGTs using diesel at significantly higher costs than they were able to recover from consumers. The burden on the grid would be alleviated by more electricity being generated by IPPs and bought directly by municipalities. Eskom would be able to reduce diesel consumption, which would be a significant cost-saving process for Eskom and, ultimately, for the consumers.

Eskom was in the process of pursuing projects to repurpose and re-power power stations that had reached the end of their lives.

For example, the Komati Power Station which had been operating since 1961 and was now past its useful operating life and had only one unit left operating out of nine units, and the unit was scheduled to be shut down before the end of the current year.

Eskom was going to invest in several projects to provide job security by building a 100 megawatt PV solar plant and would install a manufacturing line for modular micro grids on site to create employment at the plant. Eskom was also exploring opportunities with the local community to develop agri-voltaic projects where farming communities and electricity generation would be developed and were looking into developing a 40-70 megawatt wind farm.

He said Eskom was going to collaborate with the Cape Peninsula University of Technology (CPUT) to establish a training centre to retrain, re-skill, and up-skill workers in the coal value chain to become solar and PV chain technicians with accredited qualifications. He said they issued statements to relevant media about areas where load reduction would be implemented and communicated extensively regarding load shedding.

Concluding Remarks
Chairperson Luzipo asked Mr de Ruyter to respond to the questions in writing and forward the responses to the Committee Secretariat, including the questions he was yet to answer in the meeting because the time had run out. He asked the Co-Chairpersons of the Joint Committee to be allowed to work out a plan to deal with the issue of the letter that was written by the Speaker and was received by the Committees through the National Assembly House Chairperson.

The Co-Chairpersons would communicate what would happen next, considering the written response from Eskom and the Presidential intervention, and then meet in another Joint Committee meeting and suggest what they think should be the way forward with the urgency it deserves.

He said they may invite Eskom again on the same matters raised in the meeting and where they think there were gaps, but they would be specific on what would need to be done to address those gaps. The Co-Chairpersons and the Committee Secretariat would also discuss how to attend to the outstanding matter of the oversight visit to the Koeberg power station, including the letter of concern from the NUM and the maintenance challenges faced by the Koeberg power station.

He asked if the Members and the Deputy Minister were comfortable with the suggestion.

They all agreed.

The meeting was adjourned.

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