Speech by Deputy Minister Phumulo Masualle, MP 2019/20 Budget Vote: Public Enterprises
Honourable House Chairperson
Honourable Minister Pravin Gordhan
Members of the National Assembly
Boards of State Owned Companies
Executives of State Owned Companies
Fellow South Africans
Honourable speaker, as I approached the podium, I made sure to stare quite closely at some of the members present here, you would recall, that recently president Ramaphosa delivered his speech, which was transmitted to other venues, by way of a hologram. Meaning he was there, but not there. As I came up I felt I needed to make sure whether the members around us here, are actually here, or perhaps they themselves have taken to this technology and are abusing it.
Honourable speaker, the president, recently tasked us to buy into a vision of our country. One that looks beyond the perils and challenges of today. Instead it sees an image with solutions. It places South Africa, as a country that has embraced the fourth industrial revolution, and in many instances, is an example to the world.
This image illustrates to us, how working together and actively obtaining consensus from our people can go a long way into building a better South Africa
The vision as I imagine it, sees our SOC’s being agile companies, effective businesses that deliver reliable service to the country. It sees, the like SAA, being the beacon of our national air carriers, self -sufficient and working efficiently in a united Pan African led air travel ecosystem that competes well in the global air travel space.
Honourable speaker, this vision is not a new vision. It is in fact a re- imagination of what we once were, and could be again. Our SOC’s have been plagued by many challenges. These, if left unabated, will surely result in their collapse and failure.
Speaker, corruption and malfeasance has crippled not only our SOC’s but our Country as well.
It has tarnished the good standing that some of our SOC’s held in the world and has brought them to their knees.
However, Speaker, we cannot allow this to render us a failed state.
As a government and department we are determined to root this out at all levels.
We are addressing the structural challenges facing our SOC’s and are taking tangible steps to diversify their service and product offering. They must be market agile and fit for purpose. The interventions we implement must be efficient solutions that safeguard the interests of all our people in providing cheap essential services, whilst becoming a viable and self-sustainable going concern.
We will strive to stop the bleeding, strengthen governance, and address the issues of critical skills shortage, whilst addressing operation issues. These include; seeking manpower efficiencies, the maintenance and development of infrastructure.
Going forward speaker, we must stress that Boards must perform their fiduciary duties, it is not the role of the department to run the enterprises and present a financial stability plan.
Thuma mina / Khawuleza
Madam Speaker, every rock removed, is in itself a great achievement, because it gives an opening for light to come in. The light reflects the hope that lies beyond our plight. The challenges that face our SOC’s require a collective effort to overcome them.
The collective effort that will ensure we overcome the giant before us. The collective effort, is not limited to the efforts of the Department, nor the executives of the SOC’s, it must include the efforts of labour, unions, the private sector and the people of South Africa as a whole.
We must find creative solutions to the challenges we face. The questions that need our urgent attention are;
- How can we save jobs?
- How can we upskill the current workforce to fill in the gaps of the shortage of critical skills?
- How do we stop the flight of management and technical skill?
- How do we rebuild staff morale in our SOC’s?
- How do we ensure, we have the technical expertise to improve our infrastructure, machinery and maintain the technology needed to manage our operations, effectively?
- Most importantly how can we once again make our SOC’s profitable and self -sustainable business’s
- How do we manage turnaround plans, without greatly impacting the jobs and livelihood of people who have families to take care of?
- We need a mind-set that will say; that Private Sector Participation, whilst being a consideration cannot be the only solution for our SOC’s. Especially when we still need to consider, uGogo Dlamini. A pensioner and supports her children, grandchildren and adopted children who are not working and rely solely on her pension grant?
- How do we ensure her cost of living is not so high that she cannot access essential services?
- Further, what role will our SOC’s play in creating new jobs in our key sectors for the youth, that are tailored to fit in the new world order. This when the analysis reflects that our SOC’s are over burdened with a workforce that is crippling their operations
- Finally, whether the fourth industrial revolution presents an opportunity to create new SOC’s in newly developing strategic sectors
Chairperson, perhaps it is time we elevate the conversation as we look at solving our domestic challenges. The solution may lie in, advancing our strategic partnerships within our Pan- African partners, toward creating a new hub of international trade. Should we not collaborate with them, instead of competing against them on the routes into and out of Africa?
These partnerships for an example, should look into having collaborations as SOC’s, in creating new markets in Africa or consolidating them to unlock value. For example, a collaboration with other African airlines and our national carriers, could be sought to create a new stop off hub for travel into and out of Africa. This whilst establishing new routes. Let’s explore if we along with our Pan African colleagues can influence the direction of global traffic.
This whilst unlocking new value, can also lead to skills transfer and elevation of expertise, establishing new African solutions to our challenges.
Further the value chain will extend to create a new ecosystem to support and grow small businesses and create new jobs
Chairperson the solutions that served us well yesterday, may not meet the challenges we face today.
As part of their performance objectives, boards will be challenged to present and implement viable models of operations that will meet these new challenges.
South African Airways (SAA)
- South African Airways is the South African national airline that provides reliable and extensive air transportation capacity linking SA with the continent and internationally.
- The reality of our domestic aviation environment is that it is effectively deregulated and therefore robustly competitive. International aviation, although somewhat regulated, through a bilateral air agreement system, is also by-and-large free and competitive.
- If our airline assets are to effectively compete and survive in this environment, with a minimal drain on the fiscus, it is imperative that they be turned around and be made fit-for-purpose.
- The Board should work with urgency to address the decline in the airline and its ancillary businesses. This must be founded upon appointment of a world class executive leadership team with credible aviation experience.
- As Government we will not let our SOC’s fail. We are committed to ensure they service and support the national development agenda.
- However, the airline must undergo a rigorous and substantial process of reducing costs, improving efficiencies and strengthening its operations.
- A comprehensive review of its domestic, regional and international routes will be undertaken to minimize losses.
- None core assets which currently distract management from attending to the core business need to be disposed of.
- House Chair, we must stress to all our SOC’s that we are working within limited budget framework. They must use the fiscal injections wisely and efficiently.
- The Board of SAA will be reconstituted. This so to ensure it is better equipped to discharge the strategic, leadership and governance responsibilities.
- While we understand that the state-owned airlines face immediate and urgent liquidity challenges, the real answer to their sustainability lies in stabilizing their current operations and preparing the entity for a strategic equity partner in the near future.
- Chaiperson, we must note that SAA has recently added a new fleet to the New York direct line, this will assist in improving the service offering
- It is imperative to get the alignment between our two state-owned airline companies properly harmonized.
South African Express Airways (SAX)
- South African Express operates secondary airline routes connecting smaller cities with major metros as well as connecting South Africa with some of neighbours: Botswana, the Democratic Republic of Congo and Namibia.
- The current funding arrangements for the airline where Government has had to stand in to meet its funding shortfalls and guarantee borrowings is not sustainable. The consolidation with SAA, as previously stated is a consideration. The Board should work closely and with urgency with their counterparts at SAA to realise this objective.
- The re-fleeting of the airline which has become inevitable if it to be a sustainable business should be effected within the consolidated airline group.
Speaker notwithstanding, we must acknowledge that SAX, has made significant progress since its grounding in May 2018
Chairperson, The Defence Review defines Denel as an integral part of the national security apparatus with the primary purpose of designing, developing, manufacturing and supporting defence matériel. Specifically, Denel maintains critical defence capabilities required for national security. The Minister reiterated this point in his response to the June 2019 State of the National Address when he said ”Denel, our producer of military and aerospace equipment, is a crucial and strategic state entity that was substantially harmed by state capture”.
- The company supports economic growth and industrialisation through the following:
- Securing up to 60% of its revenue from exports.
- Procuring more than 50% of its inputs from suppliers, of which 75% are located in South Africa.
- Absorbing marketing cost, export risk, forex risk, onerous terms and conditions on behalf of local suppliers that would not have been able to assume these liabilities.
- Being the biggest player in the local industry, Denel’s challenges are having a negative impact on the viability of local companies in the defence sector. Numerous companies, in particular SMMEs, are on the verge of collapse as result of unpaid invoices by Denel.
- Denel is implementing a restructuring plan it developed during the 2018/19 financial year to position the business for the future
Chairperson, I submit that the story is not only a doom and gloom and there are in fact positive outcomes these include:
- Prospects for the company are favourable and Denel is pursuing a winnable order pipeline of more than R30bn over the next 24 months. This will provide a solid base for Denel to implement its financial turnaround plan and grow the business.
- The brand remains strong within the global defence sectors despite the local issues caused by the allegations of state capture. There is still broad recognition for the quality of Denel products.
- Denel will soon win further export contracts and strengthen our reputation in the highly competitive global defence arena.
- Denel continues to receive support from local customers in the SA National Defence Force and the SA Police Service.
- Denel is busy with concurrent efforts to restructure the business, restore corporate governance and reduce operating costs.
- Denel has received about 40 expressions of interest from local and international companies who want to enter into partnerships with Denel or acquire parts of the business, this goes without saying that proper governance and PFMA processes will be followed.
- The potential recapitalisation of the business will result in albeit progress returns on investments and grow the company’s cash generation potential.
- The restructuring of the organisation has already led to a reduction of R500m in operating costs and savings of more than R15m at Denel’s Head Office.
- Denel has the potential to generate cash of R1.6bn through the divesting of non-core assets. The results will become visible within the next six months and contribute immensely to resolve the current liquidity problems experienced currently.
- There is a strong potential to reduce an additional R500m in costs from other business activities such as the supply chain processes while cash to the value of R2bn will be generated from the strategic equity partnership activities.
Further to this Speaker we have challenged the executive of Denel to concentrate on the following objectives in the Mid-term period.
- Implementing a restructuring plan it developed during the 2018/19 financial year to position the business for the future.
- Introduce Strategic Equity Partners (SEPs) to maximise business potential of core businesses and exit non-core businesses, to enhance financial sustainability and business focus.
This is not a process foreign to Denel. The following SEPs: Rheinmettal, Turbomeca, SAAB, and Hensoldt have been introduced into Denel subsidiaries with commendable commercial results.
These introduced indigenous products into their international value chains and introduced world class management and manufacturing capabilities into the business.
- The cost base of Denel needs to be addressed to ensure competitive and effective manufacturing and programme management. The support that the customer base, most of which are international , must be serviced with world class delivery.
- The relationship with the funders should be normalised in order to leverage government guarantee support to secure adequate liquidity and strengthen the company’s balance sheet.
- The local industry which has been decimated by Denel liquidity challenges should be resuscitated. A joint effort with DPE, DTI and DOD should be embarked on to restore the sector to the robust health it was in prior to the recent challenges.
Chairperson, it is our view that this Board and management team, supported by a dedicated group of skilled professionals will be able to complete the turnaround of the organisation and restore Denel’s leadership position in the defence and technology sectors
- SAFCOL is government’s forestry company that conducts timber harvesting, timber processing and related activities both domestically and regionally.
- The business is able to sustain itself and has established a strong position in the saw-log market in the regions where it operates. The business, however has been unable to unlock the full value of its unique assets. This has been a product of poor governance, inadequate management and poor customer management. The challenges of land claims and fragmented Government forestry assets management has not assisted.
- We have appointed a new Board in the last financial year composed of capable individuals whom we have confidence in. We expect them to show urgency in addressing these challenges.
- In conclusion Speaker, as the 6th Administration, Sithembeni, nisiphe ithuba kuba injongo zethu kukuba sikhawuleze sisebenza sonke.