Economic Regulation of Transport Bill: Department response to public submissions; PRASA 2019/20 audit outcomes

Meeting report

The Chairperson accepted apologies from the Minister of Transport and the Deputy Minister of Transport, who were on study leave. Apologies were also received from Committee Members. He invited the Department of Transport (DoT) to deliver the presentation.

Department of Transport (DoT): Economic Regulation of Transport Bill
Mr Moeketsi Sikhudo, Chief Director: Economic Regulation, DoT, said that out of the 20 submissions received, 16 were in favour of the Economic Regulation of Transport (ERT) Bill. He gave a brief summary of the views that had been expressed by stakeholders. He grouped the Department’s responses to the public submissions under eight headings: definitions, jurisdiction concurrency with the Competition Commission (CC), the constitutionality of the Bill, the consultation period, the applicability of the Bill to local authorities, access to and processing of personal information, the review of price controls, and the discretionary powers of the Minister of Transport or the Regulator.

On definitions, the Department agreed that the definition of “market” should be expanded to include electronic markets. The Department accepted a few other suggested minor amendments, and noted and responded to the comments on a large number of other definitions in the Bill.

The Department had consulted extensively with the CC to clarify the role of the Regulator with respect to the CC. The ERT Bill borrowed several clauses from the legislation governing the relationship to the CC of existing regulators such as the Independent Communications Authority of South Africa (ICASA) and the National Energy Regulator of South Africa (NERSA). At the highest level, the Department’s view was that whereas the CC’s role was to address competition issues post facto (after the event); the Regulator would operate ex ante (before the event).

The intention of the Bill was not to infringe on the right to freedom of trade but to protect end users from the abuse of power by monopolies. The State Law Advisor was of the opinion that the Bill was in line with the Constitution.

The Department’s view was that numerous stakeholders had been engaged in the process of shaping the Bill.

The Bill was not currently intended to regulate local authorities, but it was within the power of the Minister to extend its application.

The Department noted the comments on the Bill’s relation to the Promotion of Access to Information Act and the Protection of Personal Information Act.

The unprecedented economic effect of the COVID-19 pandemic provided a good example of why the Bill needed to provide for an extraordinary review of price controls. Consultation with regulated entities on price determinations was embedded in the Bill. Anyone aggrieved by the determination of the Regulator could appeal to the Transport Economic Council. The reason for capping the penalty for prohibited conduct at 10% of a company’s turnover was to prevent undue harm to the company.

The Department said that if any entity was aggrieved by a discretionary decision of the Regulator they could appeal to the Transport Economic Council.

Discussion
Mr C Hunsinger (DA) supported the Bill in principle but said that there was one remaining over-arching question: given the ongoing challenges in the transport sector, was this Bill the best thing to be spending money on now. ‘Would it really bring the greatest public benefit’? The Minister already had the authority to make interventions. There were already boards and tribunals in the sector to which complaints about tariffs and fees could be directed. ‘Was the Bill not premature’? He asked what it meant for the Regulator to be the “core” regulator in the sector. ‘Would it supersede the other regulators’? He appreciated the clarity offered on the relative responsibilities of the Regulator and the CC, but noted that if the Regulator was conceived as handling matters ex ante only, it was unclear how it would deal with complaints about its tariff determinations.  He was also uneasy about capping the penalty for prohibited conduct at 10% of a company’s revenue.

Mr T Mabhena (DA) recalled that most of the public submissions had raised concerns about price controls. Many agreed that the state should not be intimately involved in setting prices. The fact that it was possible to appeal to the Transport Economic Council was neither here nor there. The transport sector should be self-sustaining. In 2018 the President had identified as much as R1 trillion held by domestic private companies that could be used to revive the economy, but the private sector needed confidence. The state was going to have to bear the entire cost of repairing vandalised rail infrastructure for example, but had the sector been a little bit more open, this cost would have been shared with private companies.

Mr M Chabangu (EFF) asked for clarity on whether the Regulator would earn profits. ‘Was it not going to be funded from the budget’? ‘How could the Department convince the stakeholders who were not in support of the Bill to support it’? The community, who would be directly affected by prices, had not been properly consulted on the matter of the CC. ‘Why had they not been consulted’?

Responses
Mr Sikhudo said that consolidating the fragmented regulatory landscape would in fact bring cost savings in the long term. This would also allow the regulators of the various modes of transport to co-ordinate their decisions. The design of the penalty system should follow a ‘carrot-and-stick approach’, otherwise it would be abused. The thinking was that the penalty should not be so high that it prevented a company that received it from continuing to do business, he said. Some form of intervention from a government intervention was the only way to correct a market failure. The rail transport space for example, was beset by unfair pricing and access, which was why a regulator was required. The Bill did not want to stifle the transport sector. Price controls would be focussed on areas where there was a monopoly. It was right for the Minister, guided by a market enquiry and the terms and conditions built into the system, to have discretion over whether a specific market or entity should be regulated. He explained that the profit referred to was the profit generated by companies. The Department would be guided by the Portfolio Committee on how to convince all stakeholders to support the Bill. While end-users would be affected by price controls, the focus of the consultation on the Bill had been the entities that would be regulated. The second phase would give everyone a chance to make a comment.

Mr Alec Moemi, Director-General, DoT, said that the Bill would not only consolidate transport regulation, making it easier to do business, but also extend it to areas that were currently not regulated such as minibus taxis and toll gate tariffs. He observed that in South Africa transport was relatively expensive. Reducing transport costs would stimulate the economy. For these reasons, the Bill was timely. He also noted that the determination of tariffs should take into account the inequality in the country.

Passenger Rail Agency of South Africa (Prasa) on its 2019/20 audit outcomes
Mr Leonard Ramatlakane, Chairperson of the Board, Prasa, acknowledged that there was a lot of work to be done at the Prasa. The newly appointed board of directors would have to hit the ground running. The most important thing was to make sure the trains were running safely and reliably, to stabilise management and to address capital expenditure issues.

Ms Thandeka Mabija, Acting Group Chief Executive (CEO), Prasa, said that the Auditor-General of South Africa (AGSA) had given Prasa a disclaimed audit opinion with material findings for 2019/2020. Some of the reasons given were inadequate governance records, instability in key positions, poor financial management and record-keeping, lack of compliance monitoring and enforcement and lack of consequence management. Some progress had been made to address the audit outcomes. This included the establishment of several board committees, filling key vacancies, seconding investigative resources from the Special Investigations Unit (SIU) to investigate 17 material irregularities, training and awareness on supply chain management (SCM) compliance, and dismissing officials involved in malfeasance. She acknowledged that consequence management was still not sufficient. She gave a summary of Prasa’s 2019/20 performance in terms of 14 objectives, none of which had been fully achieved, and 144 key performance indicators (KPIs), of which just 20 had been achieved. Some of the reasons for non-achievement were the need to establish long-term contracts, the security of assets, the financial distress of Autopax, and general funding challenges. Prasa’s key priority going forward was to recover rail corridors lost to theft and vandalism.

Mr Krishna Govender, Acting Chief Financial Officer (CFO), Prasa, said that the revenue of the Prasa group had increased from R14 billion in 2018/19 to R16.2 billion in 2019/20, primarily due to additional subsidies from government but also through interest on unspent capital, and despite declining fare revenue. Expenditure had decreased from R16.1 billion to R14 billion but if the debt write-off of receivables from Swifambo in 2018/19 was excluded expenditure had not changed much. Staff costs accounted for 52% of cash outflow against a target benchmark of 46%. The group’s 2019/20 surplus was R2.3 billion of which non-cash items amounted to R1.5 billion. The bulk of the remaining R0.8 billion had already been allocated to servicing debts. In order to address some of AGSA’s findings, Prasa was reviewing the structure of its asset register to ensure that whoever was managing and benefiting from an asset was responsible for it in the register. It was also working to improve consequence management and appointing appropriately qualified and experienced personnel.

Ms Mabija summarised a few more actions that Prasa was planning to address the audit findings.

Discussion
Mr Hunsinger welcomed the new management at Prasa but asked why the group CEO and CFO had only been appointed in acting capacity despite their competence and vast experience. He had heard numerous turnaround plans from Prasa over the last few years but was confident in the new board of directors. It simply had to succeed. The condition of the country’s rail system was embarrassing. He asked what working committees were being considered and what their objectives would be. He asked about Prasa’s relationship to the Rail Safety Regulator (RSR), which was generating a large income but not improving rail safety and had been described as having a “traffic cop mentality.” He observed that Prasa did not have any short-term insurance. Was this issue being addressed? Many tenders had been advertised in the last few months but most of them had then been withdrawn. ‘What was the reason for the withdrawals’? Rail depots did not even have spare parts. He had witnessed technicians taking spares from waste bins. Prasa had also suffered the embarrassment of having its electricity cut off by Eskom for non-payment, while 174 stations did not have electricity. ‘Would the new board follow the impressive strategic plan designed by the business administrator’? There was a persistent misalignment between KPI achievement and the experience of people on the ground. ‘How would this be fixed’? ‘What was the board’s view on performance bonuses for managers’? ‘Would the board consider expanding the mandate of the regional managers to enable them to sign off on tenders’? Prasa’s relationship with the South African Police Service (SAPS) could be improved. Burnt trains often stood in Cape Town station for weeks because the forensic unit was based in Port Elizabeth. ‘How accurate was Prasa’s asset register, and could it estimate the cost of the infrastructure that had been lost to vandalism’?

Mr Mabhena said that a good job had been done in identifying the problems at Prasa. The question was what was to be done. The presentation confirmed the complete erosion of corporate governance at Prasa. No-one seemed to be adhering to management best practices. He asked for clarity on the progress made by the SIU investigators into material irregularities. ‘Had progress only been made on one matter, what about the remaining 16’? He asked for clarity on the increased operating subsidy. The decrease in Autopax passenger numbers was a serious concern, as was the rolling stock maintenance and modernisation backlog. He recalled that the Minister of Transport had recently announced that 3000 security guards would be insourced, but the presentation indicated that the insourcing of security personnel had not been implemented. ‘Why were senior managers continuing to earn millions while nothing was done’? Prasa was planning to do SCM training, yet 39% of senior management were not qualified.  Perhaps remuneration of managers should be linked to the performance of the organisation and duties such as record-keeping should be integrated into their contracts. He had grown sceptical of turnaround plans from Prasa, as so many had been presented and then failed. The Committee would hold the board to account.

Mr L McDonald (ANC) was concerned about the low revenue from property rental. ‘Approximately how much of this was due to unpaid rent’? He noted that since 2006, the number of passengers using Prasa’s main services had declined from 4 million to around 400 000. ‘What was going to be done to get passengers back on the trains’? He was very concerned that SAP was involved in Prasa’s information and communication technology (ICT) systems, given the numerous accounts of the company’s involvement in corruption and state capture. Prasa should engage a local company for ICT services. He was astonished that only 10% of Prasa’s budget was allocated to maintenance. The world average for rail operators such as the London and New York metros was around 27%. ‘Of the small businesses from which Prasa had made purchases, how many were owned by previously disadvantaged groups’? ‘Could Prasa break down the R20m it had spent on personal protective equipment (PPE)’?

Mr L Mangcu (ANC) doubted the value for the Committee of expressing its anger or asking questions, as Prasa did not usually answer them. He asked what the material misstatements in Prasa’s financial statements were. Many of the rail lines such as Mabopane had already not been working before COVID-19.  Prasa seemed to have no intention of addressing this. He dismissed Prasa’s intention to develop a policy for fruitless and wasteful expenditure. The provisions of the Public Finance Management Act (PFMA) were clear. ‘How many officials had been charged with violating the fruitless and wasteful expenditure provisions of the PFMA’? He expected that the answer would be that implicated officials had resigned before they could be charged, and asked how many charges had been laid with SAPS. He asked why locomotives were being leased, and from whom, and how much was it costing? ‘Given that security insourcing had not been achieved, who was guarding Prasa’s infrastructure now? He had not seen any security guards. ‘How was it possible that Prasa could not have standards of engineering’? ‘What standards had been used until now’? He asked for confirmation and details about the agreement with the Western Cape Provincial Government to re-open the Cape Town Central Line. There was nothing new in Prasa’s plans and he was pessimistic about their success.

Mr Chabangu asked what measures Prasa intended to put in place to improve its performance. In particular, how was Prasa going to improve security so that passengers could be sure that they were safe? ‘From who had Prasa procured buses for Autopax and at what cost’? ‘Was a middleman involved, and if so, were correct procedures followed’?

Mr K Sithole (IFP) asked if those responsible for Prasa’s troubles, such as Popo Molefe, had faced any consequences for their actions. ‘How long was the turnaround strategy expected to take’? Vandalism was ongoing at Katlehong and there was no security. ‘What was happening’? ‘How many security guards would be employed’? ‘Had there been any consequences for officials who had resigned because of the SIU investigation’? ‘What was the reason that tenders had been withdrawn’?

Mr P Mey (FF+) said that theft and vandalism was one of Prasa’s main problems, and the reason was the lack of security. Had the reported 3000 security guards had any affect or was this fake news? He welcomed the news that railway stations would be upgraded but said that some stations had deteriorated to a point where they would need to be rebuilt. He acknowledged that the board had inherited a bankrupt organisation and wished them well.

Ms M Ramadwa (ANC) noted the management instability at Prasa. There had been more than 10 CEOs since 2015, and many had been appointed in an acting capacity, which meant that they did not hold full responsibility. ‘When would a permanent CEO be appointed’? ‘Given the SCM problems at Prasa, were there systems in place to enable it to work properly’? ‘What plans had been made to ensure that security was in place for Autopax buses’?

Responses
Mr Ramatlakane took note of the criticisms of past board conduct. Whatever had been left undone was now the responsibility of the current board. He explained that the board had decided to appoint a permanent CEO within three months. He acknowledged that the relationships with the RSR, SAPS and Transnet would have to be repaired. The withdrawal of tenders and the lack of spares was a long-standing problem related to the absence of a maintenance contract. It was linked to the insufficient authority and power of the regional offices. It would take time to correct. He said that the Committee Members had raised critical issues, but as the board was newly appointed, he asked the Committee to have some patience and judge them on the basis of their actions. He explained that the SCM policy that would be implemented was that which was built into the PFMA. There were thousands of problems at Prasa, but the most important thing was for commuters to be able to trust that at least the trains would arrive on time.

Ms Mabija said that Prasa had short-term insurance until July 2021. Prasa was working on a policy dashboard which had already yielded quite significant improvement in policy stability. There was no bonus scheme for managers at Prasa. The SCM problems were deep and historical, so the plan was to capacitate the key supply chain function. The training referred to included refresher training and training for all new employees. She was reluctant to comment on consequences faced by previous managers such as Popo Molefe and Lucky Montana as the SIU had not completed its investigations. The SIU team had been impeded by the lockdown which had made it difficult to conduct in-person interviews. The board was tracking the progress of these investigations and would ensure that they were concluded before the end of 2020/21.

Mr Govender explained that due to the systemic security issues and resulting vandalism across the rail network, there was an inherent lag in recording assets in the register. The fact that the register was maintained at a national level was incongruent with the inherently local nature of the assets.

The Chairperson noted that this was the first meeting of the new Prasa board with the Portfolio Committee. He wished the new board success and said that the Committee would support it.

Consideration and adoption of draft minutes of proceedings
The Committee adopted the minutes of the meeting on 10 November 2020 and discussed its oversight programme.

Mr Mangcu asked when the Committee would implement its decision and resolution tracking register.

Ms Valerie Carelse, Committee Secretary, replied that the Committee Support Staff would discuss it and report back. She did not foresee any problems in drafting a resolution register.

The meeting was adjourned.