14 June 2017

South Africa: Minister Lynne Brown - Public Enterprises Dept Budget Vote Speech in NCOP

press release

Honourable Chairperson,

Honourable Ministers and Deputy Ministers (Deputy Minister Dikobe Ben Martins)

Chairperson of the Select Committee,

Honourable Members,

The Director-General of the Department,

Distinguished guests

Ladies and Gentlemen

Honourable Chairperson

It is a privilege to address you on the eve of the 41st commemoration of Youth Day. We salute the youth who sacrificed their lives for our democracy.

Twenty-three years ago we attained political freedom. Since then we have erased racist and discriminatory legislation from the statute books, built millions of houses, connected tens of millions of South Africans to the electricity, water and sewerage networks, constructed schools, clinics, roads and other infrastructure...

But millions of our compatriots remain mired in poverty and unemployment. Inequality has persisted. We have collectively failed to effect the economic transformation required to create a fair and sustainable society for all.

Well managed and maintained State-Owned Companies are uniquely positioned to contribute to addressing the chasm between rich and poor South Africans. Indeed, they are a critical tool in the hands of the developmental state.

It is imperative that the fog of allegations of corruption that have enveloped some of the State-Owned Companies over the past year are lifted through a definitive investigation followed by appropriate legal processes, if required. We'll return to this subject, shortly...

Chairperson...

As President OR Tambo remarked in 1981: "The objective of our struggle in South Africa, as set out in the Freedom Charter, encompasses economic emancipation. It is inconceivable for liberation to have meaning without a return of the wealth of the country to the people as a whole.

Thirty-six years later, delivering the State of the Nation Address in February, President Zuma defined the need for radical socio-economic transformation.

"We mean fundamental change in the structure, systems, institutions and patterns of ownership, management and control of the economy in favour of all South Africans, especially the poor... "

State-Owned Companies in the DPE portfolio - Eskom, Transnet, Denel, SA Express, Alexkor and SAFCOL - have been given their marching orders to deliver on this mandate.

It is important to note that South Africa is not alone in looking to its State-Owned Companies to lead the advancement of its economy.

Globally, the early-1990s push by multilateral institutions such as the World Bank for a free market system with complete liberalisation is giving way to a more pragmatic approach that acknowledges that market liberalisation policies do not always accord with nations' developmental aspirations.

In 2005, nine percent of Global Fortune 500 companies were state-owned - by 2014, this number had jumped to 23%.

Comrades, colleagues and compatriots...

The larger companies in my Department's stable are among the key economic levers available to the state to give effect to its transformative, developmental agenda.

While many private companies were forced into their shells over the past nearly-10 years of economic sluggishness, State-Owned Companies have undertaken massive infrastructure (and job-creating), projects.

The overwhelming majority of goods and services supplied to Eskom, Transnet and Denel, our Big Three, are not supplied by black-owned or empowered companies.

There is enormous scope to transform the profile of suppliers, bring in new companies, and convince owners of existing suppliers to enter into profit-share arrangements with workers, among other measures.

Chairperson...

We must confront and overcome the allegations and counter-allegations of corruption in state-owned companies, and set about our transformative journey in a climate of the highest ethics and responsibility, thus contributing to the rating agencies reversing their recent decisions in the shortest possible time.

As the Minister of Public Enterprises, it is my task to perform the function of shareholder's representative over the six companies in the Department's portfolio. As a shareholder, one doesn't attend meetings of company boards or executives. One relies on the boards and executives for operational information.

It is the responsibility of the shareholder's representative to formally appoint boards (following complex consultative processes), maintain policy oversight, sign off financial proposals above a particular value (often in conjunction with the Minister of Finance), and participate in annual general meetings.

Boards are responsible for governance, including governance of procurement processes - and executives are responsible for operations.

In 2007 South Africa first experienced load shedding. Since then, there have been at least seven investigations into alleged maladministration and corruption at the utility - several commissioned by Eskom's Board - culminating in the publication of the State of Capture report six months ago.

Eskom's reputation has been torn to shreds. The facts of its financial turnaround, that it has used only R200 billion of its government guarantee, that the build programme is ahead of its revised schedule, that it is making do with a 2.2% tariff hike, and that memories of load shedding are fading, are totally lost to the state capture discourse.

Since January, I have been calling for further investigation to clear the fog...

About two months ago, I instructed my Department to draw up the terms of reference for a broad-scope inquiry into affairs at Eskom since 2007/2008. The constitution of the inquiry has yet to be finalised.

The Director-General of the Department has already met with the Head of the SIU and they are working on a structured process to filter issues which can be dealt in the Department and those that would require independent investigation. This process would culminate in a Presidential proclamation to take the process forward.

Beyond Eskom, State-Owned Companies will take heart from the ANC's support for a judicial commission, and the Hawks' announcement of an investigation, into state capture.

Chairperson...

The debts of large SOCs are linked to the sovereign credit ratings.

The SOC Reform Project and development of a shareholder policy, led by the Department, will implement recommendations of the Report of the Presidential Review Committee on SOEs.

It is clear that State-Owned Companies' improvement in performance is non-negotiable. Structural reforms must be accelerated to improve efficiency and strengthen Government's role as shareholder.

The principles of the shareholder policy were approved by Cabinet in November 2016 for further consultation. The project plan anticipates that the legislative programme for 2017/18 will see the introduction of the draft Shareholder Management Bill.

Cabinet has approved a new SOC Remuneration and Incentives Standards for Non-Executive Directors, Executive Directors and Prescribed Officers. The guiding principles ensure that performance is transparently linked to incentives.

Chairperson...

Before focusing on company performance highlights, a brief word about the Department...

The Department of Public Enterprises' realignment process is gaining momentum; it is being repositioned to become more agile, responsive and efficient in fulfilling its oversight and monitoring roles.

The Department spent R253.8 million of its 2016/17 budget allocation, 94.7% of the total budget. I commend the Department for spending 99.4% of its Goods and Services budget. The under-spending of R14.1 million is primarily due to vacant posts. The Director-General has presented a plan to expedite filling these positions.

The Department has been allocated a budget of R266.7 million in 2017/18, R277.2 million in 2018/19 and R296.5 million in 2019/20.

And now, a quick run through the companies...

Eskom

Two years ago Eskom was on the brink of financial collapse, and load shedding was the norm. Today, we have generation reserves of 3000 MW, and Eskom's managed to keep plant energy availability over 77.34% - up from 60% in 2014.

A total of 153 megawatts (MW) of renewable IPPs went into commercial operation in December 2016, which will bring total contribution of the renewable IPPs to the national grid to 4 180 MW.

Government, led by the Department of Energy is finalising the IRP which will outline the final energy mix for the country. Part of that process will affirm decisions about economic life of Power Stations, and possible closures.

Because Eskom is a strategic role player in the economy, Government continues to support the completion of its build programme. The Government Framework Agreement, due to expire in March 2017, was extended to 2023 to enable Eskom to tap capital markets to fund the programme.

The programme is delivering, and is ahead of revised build programme deadlines.

Ingwa is in full operation, and

Medupi Units 5 and 6, and Kusile Unit 1 are in commercial operation.

When Ingula Pumped Storage reached commercial operation an additional 1 332 MW of peaking power was added to the national grid.

Eskom is expected to record a profit for the 2016/17 financial year, and will continue its cross-border trade programme to boost declining local demand.

Engagements with Municipalities, SALGA and CoGTA to manage municipal debts continue. Solutions must be found to assist municipalities without income generating bases that resort to using funds allocated to the payment of electricity for daily operations.

Eskom's asset base increased to R691.7 billion in the third quarter of 2016 (up from R644.4bn the previous year) mainly due to the addition of Ingula.

Government aims to reach universal electricity access by 2025. In 2016/17, over 200 000 households were connected to the grid.

Transnet

The current negative economic growth both locally and internationally, has necessitated that Transnet revise the targets of their capex investment programme,

The Market Demand Strategy responds to South Africa's industrialisation requirements. Instead of being implemented over 7 years, it will be implemented over 10 years with the intention to advance South Africa's developmental objectives including enterprise development, localisation, and job creation.

The strategy to revitalise branch lines to support its Road to Rail strategy is gaining traction, with Transnet's Board approving three branch line transactions:

Belmont - Douglas

Ceres - Prince Alfred Hamlet - Wolseley

Alicedale - Grahamstown - Port Alfred

The company delivered 37 passenger coaches engineered and manufactured at its centres of excellence in Pretoria and Cape Town to Botswana Railways. The successful delivery confirms the strides the Transnet division has taken as it aggressively advances towards becoming Africa's leading manufacturer of rolling stock.

In addition, the development of the Trans-Africa Locomotive, the first diesel locomotive designed and built in Africa, for African conditions, aligns perfectly with Transnet's Africa Strategy and the company's vision to become the leading provider of logistics services in sub-Saharan Africa.

The company should announce a profit for the 2016/17 financial year.

SA Expres

The global airline industry is experiencing radical economic turbulence, and SA Express has not been unaffected.

SA Express improved its financial performance in the 2015/16 financial year from a R69.4 million net loss in the previous year to a profit of R16.9 million. This was mainly due to cost savings of R330 million, partially offset by the decrease in revenue of R203 million year-on-year.

The revenue decrease is attributable to the 7% decrease in passenger numbers from 1.4 million to 1.3 million. Although this decline is partly due to a reduction in capacity as a consequence of austerity measures, the airline should explore other initiatives that will ensure sustainable revenue growth.

The continued decline in revenue does not ensure that the airline will be able to meet its operating costs. In 2015/2016 the entity remained solvent, with equity of R131 million. However, the risk of insolvency remains high should SA Express be unable to generate profits from 2016/17.

There is light at the end of the tunnel. I expect the task team appointed by National Treasury to submit proposals on the end-state for Government's airline assets, namely; South African Airways, Mango and SA Express.

Alexkor:

Alexkor is a diamond mining company operating primarily in Alexander Bay and the greater Namaqualand region. Its operations include both marine and land mining.

During the current financial year, the Department completed a desktop study on the Richtersveld Diamond Deposit. This study confirmed it is possible to extend the life of the Alexkor Pooling and Sharing Joint Venture beyond its current estimated ten year life span.

Alexkor experienced operational challenges during the 2016/17 financial year. It did not meet its carat production target set for the year under review. However, its diamond revenue increased from R386.5 million in 2015/16 to R758 million in 2016/17.

Additional economic opportunities for the community of Richtersveld and its environs are expected, as mining operations expand in the next two to three years.

Denel

With regard to Denel the Portfolio Committee at its meeting of 24 May 2017 resolved to hold a meeting at the earliest opportunity with the Board of Denel and officials of National Treasury to resolve issues pertaining to Denel Asia.

Pursuant to the resignation of the former Group Chief Executive Officer and Chief Financial Officer in 2015, the Denel Board has finalised the recruitment process for both positions and made recommendations to the Minister.

Denel continues to grow its revenue. Its acquisition of Land Systems South Africa will enhance its capability to design and manufacture multi-purpose armoured vehicles that will enable it to compete in lucrative international markets. Furthermore, the development of the Small African Regional Aircraft (SARA) is proceeding according to plan.

Denel's Aerostructures' delivery on the Airbus A400M contract continues with on-time and on-specification deliveries.

The South African Forestry Company LTD

The Southern African Forestry Company Limited manages and develops commercial forests. Its activities include timber harvesting and processing.

During the 2015/16 financial year the Department conducted a review of SAFCOL's financial position. The company has a sound balance sheet that can support its capital expenditure programme over the medium term.

Changes to the company's executive committee have had a negative impact, and the Board has been reminded by the Ministry to speed up the recruitment of a Chief Executive Officer.

With regard to Denel Asia, I requested Denel to mothball the company until the Minister of Finance decided on its section 51 (g) application as prescribed in the Public Finance Management Act. I have requested a meeting with the Finance Minister to discuss Denel's proposal.

Chairperson...

Before wrapping up, a quick word about State-Owned Companies' Corporate Social Investment programmes.

Between them, the six companies in the portfolio enrolled 8 931 trainees, in 2016, in various scarce job and critical skill programmes.

A total of 10 655 trainees in various disciplines graduated over the past year, 607 of whom were employed.

And 1 779 learners have received bursaries for the current financial year.

In conclusion, I would like to thank the honourable former Deputy Minister, Bulelani Magwanishe, for his excellent support over the years, and warmly welcome Honourable Deputy Minister Dikobe Ben Martins, who is no stranger to the Department.

I also wish to thank Director-General Seleke for his steady hand at the helm; the Boards and Executives of the State-Owned Companies; and my Department's senior management and staff.

I hereby table Budget Vote number nine of the Department of Public Enterprises.

I thank you.

Issued by: Department of Public Enterprises

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