the National Assembly for the Departmental Budget Vote 2006/07
5 June 2006
Madam speaker, Honourable Members, esteemed guests, ladies and gentlemen
Introduction
I brought along my âgirl-childâ, 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 governmentâs
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 âFairest but at times Darkest Capeâ, what some of our challenges have been.
Let me assure this House that I intend no âbolts from the blueâ 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 â a nuclear one at that â 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 governmentâs
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 shareholderâboard 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 governmentâs 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 Townâs 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 Eskomâs 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,
Eskomâs 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) Ltdâs (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 âProject Alphaâ, which is expected to
add 2100 MW to the total power available by 2012 and a pump storage project
code named âProject Hotelâ, 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
Africaâs 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 Denelâs 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
Safcolâs 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 countryâs 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 governmentâs 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 Groupâs 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
