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Polity
Published: 05 Jun 2006
Erwin: Public Enterprises Dept Budget Vote 2006/07 (05/06/2006)
Date: 05/06/2006
Source: Department of Public Enterprises
Title: Erwin: Public Enterprises Dept Budget Vote 2006/07


  Address by the Minister of Public Enterprises, Alec Erwin, to the National Assembly for the Departmental Budget Vote 2006/07

Madam speaker, Honourable Members, esteemed guests, ladies and gentlemen

Introduction

I brought along my “girl-child”, Xolelwa Ntozini, a grade 11 student, from Langa High School today, as we have a wide range of activities that will broaden her understanding of the work of the Department and our aligned State-owned enterprises (SOEs). Welcome Xolelwa to our Budget Vote Day. I would also like to welcome:

* Thabiso Msiza and Ntombi Sibanyo joined by their principal Mokamola Selesho from Gauteng Comprehensive High School
* Hanneke van der Walt and Gerhard Hermann Janse van Vuuren joined by their principal Dr Carel Ignatius Scheepers van der Merwe from Menlopark High School
* Nkululeko Sibiya from Pretoria West Pre School joined by her mother Ntombi Sibiya
* Lethabo Lengweng from Sunnyside Primary joined by her guardian Lizette Goosen.

We have invited four students accompanied by two teachers and two children of Department of Public Enterprises (DPE) officials as part of government’s contribution to public education and development. By exposing learners to the processes of Parliament and the mandate of DPE and its strategic intent we hope to contribute to the creation of a more informed and active citizenry.

  I find it hard to believe that this is my third opportunity to present the Budget of the Department of Public Enterprises (DPE) to the National Assembly. This is a salutary thought since in accelerating and sharing growth time is of the essence. However, I believe that we are making progress. This is due to the excellent work that the Boards, Management and Employees of the SOEs are undertaking. It is due to the effort of my young, capable and delightfully impatient Department, under the leadership of Director-General Portia Molefe. It is due to the constructive oversight of the Portfolio Committee and its Chair, the ever questioning and supportive, the Honourable Yunus Carrim.

I strike this positive note at the outset because I believe the positive does indeed far outweigh the negative and provides confidence in dealing with the immense challenges that lie ahead. The year past has not been plain sailing by any stretch of the imagination. I hardly need to tell this House, located in the ‘Fairest but at times Darkest Cape’, what some of our challenges have been. Let me assure this House that I intend no ‘bolts from the blue’ today.

Appended to the written copies of this speech is a summary of progress on all the issues that I raised in the last Budget Speech. We are moving forward since in virtually all cases the projects have expanded and whilst not meeting the time lines envisaged, their implementation will be more beneficial than was originally conceived. There are some exceptions and these are set out. I will not spend too much time on detailing these programmes as I think it is more useful to concentrate on certain key issues that will impact on future progress.

I would like to focus on the following: communication of our plans; capacity in the Department and the SOEs; progress in a refined governance system for the SOEs; key developments in each of the SOEs; and finally the industrial impact of the infrastructure programme. In the process I will welcome into the fold our newest charge – a nuclear one at that – the Pebble Bed Modular Reactor.

Communication

The electricity problems we have and may experience in the Cape have driven home some lessons. A key one is that of communication and reliable information. There are a number of aspects to this matter. The first is a consistent message on growth and the investment required to meet and facilitate that growth. What the last two or three years have shown is that this economy is indeed capable of a higher growth rate and that this is a very robust and competitive economy. It is now time for both the public and private sector to internalise this reality and adjust their decision-making accordingly.

In the public sector, from the local through to the national level, full attention has to be paid to every aspect of infrastructure and efficient and continuous maintenance of that infrastructure. In the private sector the supplier industries, where investment lead times are longer, business leaders must have the confidence and foresight to invest now. Hesitancy and timidity is an obstacle to the growth that we can achieve. This is not an incitement to reckless planning but it is a call to courage. The leaders of both the public and private sectors must now take personal responsibility for training of our talented and capable people. They are the bedrock assets of the economy.

From the side of the DPE and the SOEs we will attempt to improve our communication with the stakeholders so that more information is available for decision-making. As I will deal with later in this address an interaction with potential suppliers into the investment programme is important both to facilitate such a large programme and to open opportunities for the largest and the smallest of enterprises.

Capacity within the DPE and the SOEs

With the change of emphasis in the work of the DPE and the increased level of activity in the SOEs we have had to build new capacities within the Department. During the second half of 2004 and through 2005 the department redesigned its operational areas and embarked on an active staff recruitment programme. More than thirty technically skilled senior management, middle management and professional staff were recruited within the department, and we now exceed employment equity targets for race and gender at all levels.

Four line function branches were established to improve internal operating efficiencies. An Analysis and Risk Management Unit was formed to monitor and manage key risks and vulnerabilities, both at an enterprise level and across the enterprises as they impact on the wider economy. The Corporate Strategy and Structure unit, which oversees the contribution of SOEs to government’s strategic and economic objectives, was augmented. The Legal, Governance and Secretariat Unit, responsible for ensuring SOE policy and regulatory compliance and the Corporate Finance and Transactions Unit, responsible for transactions execution and management were merged to tighten enterprise accountability for transactions. A specialist position to deal with special projects such as the resolution of Aventura and the transformation of Alexkor was established.

With the focusing of the SOEs on their core areas and the increased work load it became evident that there were a number of areas where a joint endeavour by the SOEs and the DPE could give rise to important initiatives that were not within the current core work of the SOEs or fell outside their future work. This realisation resulted in the formation of the Joint Project Facility. Currently the unit is focusing on six projects:

* identifying and finding a coherent strategic approach to investment by SOEs in Africa outside of South Africa
* examining the current use of pipelines within the SOEs and possible future uses to establish synergies with port, rail and energy development
* identifying the skill needs of the SOEs and defining possible areas of cooperation in skill development both for the SOEs and the wider economy. This project fits well with the Joint Initiative on Priority and Skills Acquisition (JIPSA).
* examining the optimal strategic deployment of the ICT infrastructure of the large SOEs and its role in the Second Network Operator and enhanced broadband capacity in our economy. Incorporated in this project is the development of business process outsourcing capacity in populated but poor areas. More information on the latter is set out in the appendix on previous commitments.
* a process to optimise the disposal of non-core properties in order to maximise value, provide Broad-based Black Economic Empowerment (BBBEE) opportunities and to support developmental initiatives.
* to achieve a positive impact on the domestic economy through enhanced local production, revival of dormant capital goods industries and creating opportunities for empowerment in the areas of Small, Medium and Micro Enterprises (SMMEs), BBBEE and women owned enterprises.

The work programme of the DPE is now considerable and the progress that we have made in addressing that workload is positive.

With regard to the SOEs they too have had to pay attention to building new capacity. The investment programme is large. It requires new skills and indeed new management structures and processes to implement it. I believe that the SOEs are making excellent progress in this regard. The work of the Boards and Management has been Herculean. The management teams, especially the newer ones are settling in and I am confident that we will increasingly see the benefits of this process. I am also confident that we are building a professional and dedicated managerial cadre for the economy as a whole. I will continue to provide as much support as possible for this healthy development and along with the Boards find the optimal balance between nurturing new talented management and demanding the highest performance from them.

With regard to the employees as a whole we will continue to find every way we can to improve their skill and efficiency and to make the SOEs employers of preference. This requires a robust but healthy working relationship between management and the unions. I know that all Boards and Managements are striving for this and I am confident that we will achieve this relationship to a measure greater than the present basically good situation. Differences will occur and maybe even future strikes but I believe that there is now a great deal of common ground on what the SOES can and should achieve.

.

Strategic Governance Systems

The strategic and significant roles of SOES in the economy necessitated the institutionalisation and stabilisation of governance systems to balance enterprise, sector and economic developmental imperatives whilst maintaining sound corporate governance practices, and commercial and financial viability.

Key to the developmental role of SOEs is their ability to deliver services in an efficient, reliable and cost-effective manner. Like any other structure that operates in the economy we expect SOEs to raise finances, to cover costs, to maximise efficiency and to maintain healthy, independent balance sheets.  By providing well-priced, effective services, the SOEs enhance national competitiveness and contribute to economic growth and job creation. Capturing the depth and profound macroeconomic impact of SOEs in the form of shareholder compacts is indeed a challenge. We have come a long way in fostering a common understanding between the department and SOEs around key deliverables and the expected rate of return on equity. The process of formulating shareholder compacts has been lengthy, but it is the quality of the end product that is important.

The shareholder compacts will provide clarity to the SOE Boards regarding our expectations in respect of compliance with systems of corporate governance and the developmental objectives of the state. We have exceptionally competent and professional Boards with good management teams that, given clear shareholder management compacts, will be able to drive implementation. Our role is thus primarily to provide support and oversight. We will continue to strengthen the shareholder–board relationship through regular Chairpersons and Chief Executive Officers (CEO) fora; formulating a SOE-wide dividend policy; establishing remuneration guidelines; conducting Board induction programmes and an annual Board evaluation; and revising the transaction management guidelines.

To tighten our shareholder management function the department also established processes to ensure the systemic review of business, corporate, and investment plans and financial forecasts; and to strengthen our risk management capacity. The HOLT valuation system was introduced to develop financial indicators and the Cash Flow Return on Investment Framework formed part of an initiative to benchmark SOE performance. A Risk Management Questionnaire was developed to measure SOE compliance with the Public Finance Management Act (PFMA) and performance risk analysis reviews are conducted quarterly.

All of this will occur within the context of a robust Shareholder Management Framework. We are working with National Treasury and the Department of Public Service and Administration to amend the PFMA to better align the current performance measures with government’s strategic economic intent.  Greater clarity on the nature and role of SOEs has laid the platform for the formulation of legislation on shareholder management, which we hope to table before this House by next year. We will also be engaged in government-wide consultation to establish co-operative governance protocols to improve co-ordination across the three spheres of government.

Key developments in each SOE

For us the primary focus for the year will thus be to closely monitor the streamlining of SOEs and the implementation of investment plans, to ensure that they take the economy to the leading edge of efficiency in the operations of infrastructure. I will briefly speak to the key developments in each of the SOEs that report to the DPE.

* Transnet

Transnet will continue its process of transforming from a diversified conglomerate into a focused freight transport company. With regard to the reassignment of non-core functions and services, Metrorail was transferred to the department of Transport on 1 May this year and the Shosholoza Meyl is in the process of being transferred. On Monday, 29 May the Group successfully launched a process to sell a majority stake in Cape Town’s Victoria and Alfred Waterfront, which we hope to conclude by September 2006.

It is anticipated that the transfer of South African Airways (SAA) will be completed within the current calendar year. Our primary undertaking following the transfer of SAA will be to stabilise its short-term financial position and to develop a pragmatic airlift strategy. Developments in the airline industry are taking place at a rapid pace. SAA will not be an exception to this and we can expect a number of important and positive announcements in the year to come.

The rate of growth of container traffic has necessitated a rapid expansion of ports. The expansion and redesign of Pier 1 and the widening of the entrance at Durban harbour and the construction of the container terminal at Ngqura are on track. The delays being experienced at Cape Town Container Terminal in respect of environmental impact assessments is a matter of grave concern, which we hope to resolve shortly  A long-term plan for ports that speaks to the strategic industrial requirements of different regions of our country and to ensure greater specialisation between and amongst ports is being developed to optimise the impact of our infrastructural investment programme. * Eskom

The underestimation of economic growth and the consequential underinvestment in infrastructure in the first decade of governance has required us to adjust and accelerate the implementation of Eskom’s build plan. I am happy with the progress to date.

The massive capital expansion requirements will require funding from sources beyond government. In order to address new capacity requirements, as indicated in 2004, Eskom will build 70 percent of future new capacity whilst Independent Power Producers (IPPs) will build the remaining 30 percent. Furthermore, Eskom’s ability to go into the capital markets and raise private capital at very competitive rates is of huge macroeconomic importance.

The first Residential Mortgage Backed Securitisation (RMBS) in the public sector to the value of R1.6 billion was settled on Wednesday, 31 May 2006. The securitisation of Eskom Finance Company  (Pty) Ltd’s (EFC) home loan book is a momentous event, having been 3.5 times oversubscribed and clearing at Jibar + 36 bps. The success of the event highlights the opportunities that the proceeds of restructuring can present to the infrastructural investment programme.

Eskom will invest R97 billion over the next five years: R65 billion will be invested in the generation sector (this amount includes the new build and the return to service of the mothballed plants and will add about 7579 MW to the current 37500 MW available in the system); R10,958 billion will be invested in transmission sector expansion and strengthening; while R15 billion will be invested in the distribution sector. Included in these plans are the provision of a coal-fired power station code named ‘Project Alpha’, which is expected to add 2100 MW to the total power available by 2012 and a pump storage project code named ‘Project Hotel’, which will also be ready in 2012 and which will provide a further 1300 MW.

In terms of additions to current capacity, Eskom will commission 1050 MW of Open Cycle Gas Turbine (OCGT) plants at Atlantis and Mossel Bay by 2007, while IPPs will commission another 1050 MW of OCGT plants in KwaZulu-Natal and Port Elizabeth by 2009.

As indicated by the Minister of Mineral and Energy on 25 May 2006, Cabinet has agreed that we need to establish a National Distributor  that encompasses the municipalities outside of the metropolitan areas and financial modelling is being run by EDI Holdings to look at its viability. Cabinet also acknowledged that Eskom will need to play a critical role in this regard and we are currently consulting with Mineral and Energy, Provincial and Local Government and the National Treasury on how we implement the Cabinet decision.

Eskom has continued to exceed its electrification targets. For the year ending in March 2006, Eskom electrified 135 868 additional homes, surpassing its 85 000 target and has now electrified 3 346 425 homes since the inception of the electrification programme.  * PBMR

This brings me to the newest acquisition of the department, the Pebble Bed Modular Reactor (PBMR), which was transferred from the Department of Trade and Industry to the DPE in March 2006. The increasing demand for energy and the need to combat global warming has resulted in nuclear energy re-emerging as an attractive alternative. Currently 30 nuclear plants are being built in 12 countries and over 50 are in the pipeline.

Given the urgent demand for large-scale, clean, affordable energy and South Africa’s lack of primary fuel sources at its coastal regions, providing coastal towns and cities with electricity requires either the construction of very long and expensive transmission systems, or the setting up of the logistics capability to supply coastal power stations with either natural gas or coal. Both of these solutions are expensive.

The PBMR provides a plausible and cost-competitive alternative solution. PBMRs can be situated close to the point of use so that there is no need to upgrade either transmission or rail infrastructure. The PBMR modules use uranium in small quantities with the resulting advantages in waste management. In addition South Africa has an abundance of uranium, negating security of supply concerns. Having innovated significantly from its original German-based technology, the PBMR design can be regarded as the most efficient High Temperature Reactor in the world at present.

The department will assist in the establishment of this entity by introducing a PMFA compliant governance system; supporting the construction of a demonstration power plant and pilot fuel plant; and facilitating the timely processing of the environmental impact assessment.

* Denel

Last year we reported that Denel was facing a funding crisis and that it was not viable under its current model. The recent R2 billion cash injection and a strategic refocus based on establishing Denel as a systems integrator rather than a system developer is bearing positive fruits despite the challenges.

Denel has identified four key measures to improve its profitability and long-term viability. * Firstly, Denel will consolidate its business units in order to reduce duplication and to focus on supplying niche capabilities. This process includes the assessment of the viability of each business unit and a decision to either fix or exit the particular business. The assessment of the businesses has largely been completed. Denel will consolidate and reduce the number of its product lines. In addition, Denel is in the process of disposing of its non-core business units and assets.

* The second central measure of the strategy is the identification of global alliance partners and the conclusion of business partnerships at business unit level. Selective equity partnerships and alliances with global prime contractors will be established. These partnerships will result in Denel achieving greater market access, global supply chain integration and world-class capabilities and productivity. Our first partnership deal in the aerospace sector with SAAB is currently underway. We are also actively seeking new partnerships in the emerging world. My recent visit to Turkey was to advance this objective.

* Domestic demand is the nucleus for success in the defence market. As its third measure Denel is seeking to secure at least 70 percent of local defence spend. Inter-departmental task teams involving the departments of Defence (DoD) and Trade and Industry have been established to ensure further alignment of defence acquisition policy with the objective of further developing the local industry. This may require changes to the current Armscor Act and the alignment of DoD requirements with the strategic capabilities of Denel as indicated by the Minister of Defence during his Budget Vote.

* Lastly, Denel will raise its capabilities and productivity to world standards. It will identify, initiate, coordinate and manage interventions to ensure capability and productivity gains. Where required, the alliance partners will inject new technology, processes and skills into Denel; resulting in a leading technological edge and improved efficiencies.

The department will closely monitor the implementation of Denel’s business strategy and its performance with respect to joint venture partnerships. We are also working closely with the National Treasury to monitor the balance sheet requirements of Denel, especially after the R2 billion injection. Furthermore we will work with the departments of Trade and Industry and Science and Technology to develop a defence sector strategy and to ensure policy alignment. In order to streamline the activities of national organisations to support the Department of Defence, Denel, Armscor and industry with research and testing services the DPE will also play a key role in establishing the Defence Evaluation and Research Institute (DERI) which will fall under the DoD.

* Alexkor

The significance of community participation in decision-making on matters pertaining to their economic well-being cannot be understated. We have therefore dedicated significant time and resources to engage the Richtersveld community on developing a comprehensive and beneficial resolution to their concerns.

A memorandum of agreement was signed on 10 February 2006, but a few outstanding concerns are still being negotiated. It is expected that a settlement will be concluded with the Richtersveld community shortly. This will allow for the recapitalisation of Alexkor to be expedited and Alexkor will then be in a position to implement its short-term turnaround plan and drive its exploration and expansion programme.

The department however is proceeding with the transfer of community services such as the hospital, the school, the airport and other non-core services currently managed by Alexkor, to the relevant authorities. A consultant has been appointed to support the establishment of a municipality and the Northern Cape Provincial government is in the process of taking over the functions, which should reside with them.

As you know, a new Act that seeks to encourage the local beneficiation of key strategic mineral resources mined in the country has been promulgated, namely the Diamond Amendment Act of 2005. This Act envisages the establishment of the State Diamond Trade (SDT), which will facilitate the redistribution of unpolished (rough) diamonds to local emerging diamond manufacturers.  It will buy the diamonds at market-related prices from local producers, including Alexkor. Discussions are being held with the Department of Minerals and Energy and Alexkor to ensure that Alexkor becomes the first producer to sell its entire production to the SDT as soon as the Trader and the Regulator are in place.

* Safcol

Safcol’s Komatiland Forests (Pty) Ltd (KLF) is the last remaining forestry package that was to be disposed of under the forestry-restructuring programme. The Bonheur consortium has withdrawn from the competition tribunal process and the KLF transaction, providing the department with an opportunity to review the transaction. A study of high-level international best practice in forestry revealed opportunities within the wider Forest, Timber, Pulp and Paper industry (FTPP) for greater contributions to the AsgiSA objectives of skills development, the cost of intermediate inputs for industry, expansion and development of SMMEs and maintaining the competitiveness of SA industry. A new strategy is currently being developed, which should be finalised within the current financial year.

The industrial impact of the infrastructure programme

Expanding and modernising the country’s logistical infrastructure will improve the quality and efficiency of services, thereby contributing to overall economic growth. In addition to the shareholder compacts, a project to model infrastructure impact on the economy, social equity and the natural environment is being developed to align capex planning with macro-economic and industrial policy targets. This will ensure that the infrastructure spend does indeed result in the desired outcomes.  Furthermore, an investment dashboard is being introduced to track the outputs of capex related projects, thereby increasing transparency, accountability and effective implementation.

The capex programmes will also provide opportunities for the development of domestic industries and for job creation. The total government infrastructural spend over the next five to seven years is estimated at R360 billion, of which a third will be driven by Eskom and Transnet. The capex programmes spend by Transnet and Eskom, which translates to 1.5 percent of 2004 GDP per annum over the next five years, will have a significant positive impact on the economy. It will result in an increased demand for outputs, focused industrial development of important sectors such as capital goods and transport equipment, and the crowding in of private sector investment.

These opportunities can however easily be lost if domestic industries fail to rapidly improve their productive capacity. One such example is the poor quality of production of train wheels by a local supplier, which is forcing Transnet to procure from overseas manufacturers. In order to optimise the impact of the procurement on the development of local supplier industries, the department is developing a local content procurement framework, with a number of other supporting initiatives. Procurement mechanisms that are being explored are developmental instruments such as set asides, preferential premium, industrial participation programmes, enforced minimum local content standards and labour intensive construction methodologies. A cost/ benefit analysis of each of these instruments are being undertaken to ensure that the framework offers maximum support to local industries without jeopardising expeditious delivery.  This framework will be supported by comprehensive sectors strategies for supplier industries, which are being developed by the dti The development of the PBMR will give rise to a new industrial sector in the form of the supply and maintenance of these reactors. It is also foreseeable that new engineering techniques to deal with the heat by-product of the PBMR will open many new industrial and chemical opportunities.

I have earlier mentioned that the department will improve its communication with potential suppliers to facilitate the participation of small and large enterprises in the programme. A brochure outlining the local procurement framework within Eskom will be distributed today. I will encourage Members to obtain additional copies from my office for distribution during the Constituency period.

Conclusion

Madam Speaker, we table before you a Budget Vote request of R683.4 million. In the current financial year the department will oversee the continued shedding of non-core activities of SOEs and the accelerated implementation of build-plans through the stringent application of shareholder management and governance frameworks. I would like to impress on the House the enormity of the responsibility that rests with the department and its reporting SOEs.

Madam Speaker, we embrace the challenge because we know that we have a competent team within the department and within each SOEs and its Board, which is committed to the expeditious realisation of government’s developmental objectives.

Allow me to once again thank the Chief Executive Officers and Board chairpersons and members; the Director-General, Portia Molefe and all the energetic young people in my department; and the Portfolio Committee Chairperson, Yunus Carrim, and all the members of the Portfolio Committee for their contributions to the remarkable progress made by the Department. Congratulations also to Ms Maria Ramos on the extension of her term as the Transnet Group’s Chief Executive Officer.

And finally to my special guests who we announced at the outset, I hope that you have been able to learn something and that the information may have opened exciting opportunities for you to consider in your career to come.

Issued by: Department of Public Enterprises
5 June 2006