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Minister Lynne Brown: Public Enterprises Dept Budget Vote 2017/18

25 May 2017

Minister of Public Enterprises, Lynne Brown Budget Vote speech

Honourable Chairperson,
Honourable Ministers and Deputy Ministers (Deputy Minister Dikobe Ben Martins)
Chairperson of the Portfolio Committee,
Honourable Members,
The Director-General of the Department,
Chairpersons and Board Members of State-Owned Companies,
Chief Executives and Senior Managers of State-Owned Companies,
Distinguished guests
Ladies and Gentlemen

It is a privilege to present Budget Vote no 9 on Africa Day.

Among the legacies of colonialism that have most hindered the development of the continent are the infrastructure deficit, and the disconnect between African countries.

It's often easier to send products right across the world than across the river to a neighbour. In 2015, intra-African trade accounted for less than 18% of total continental exports.

Yet, since 2008, Africa has seen an average of 5.3% annual GDP growth. The continent is among the fastest growing economic regions in the world.

Two years ago, my Department challenged state-owned companies in its stable to develop Africa Strategies... To pursue commercial opportunities on the continent, either with other state-owned companies or the private sector.

A few weeks ago, at the World Economic Forum on Africa, Transnet revealed a taste of the opportunities that exist on the continent when they invited representatives of companies they have been dealing with in eight countries to join them for a tour of the Port of Durban. Transnet is currently negotiating to develop port, rail and pipeline infrastructure in Senegal, Liberia, Ghana, Togo, Benin, Nigeria, Democratic Republic of Congo and Kenya.

Africa is on the rise.

Chairperson...

According to the International Monetary Fund, last month, the world's economy is set for a lift-off:

"The global economy is gaining momentum, but further progress hinges on policies to support the recovery, lift productivity growth, and enhance resilience...

"Working within the multilateral framework, countries should strive for strong and more balanced growth and to provide economic opportunities for all.

To this end, they should anticipate the effects of technological progress and economic integration, equip their populations with tools to reap the benefits, and put in place domestic policies to share them more broadly."

This year, the ruling party, which I represent, is holding its policy and elective conferences. It does so in the context of a socio-economic environment characterised by extreme levels of inequality, poverty and unemployment.

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 his 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.

Chairperson...

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 have been forced into their shells over the past nearly-10 years of economic sluggishness, state-owned companies have undertaken massive infrastructure (and job-creating), projects.

Contrary to the popular narrative being sown out there, 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.

Eskom's power stations, for example, still receive about 90% of their coal from white-owned companies, some of which have built giant business empires on the back of the guaranteed cash-flow these contracts have provided.

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.

Our greatest short-term challenge is to confront and overcome the cloud of allegations and counter-allegations relating to corruption in state-owned companies.

And to set about our transformative journey in a climate of the highest ethics and responsibility - quickly - and thus contribute to the rating agencies reversing their recent decisions in the shortest possible time.

Chairperson...

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, and the company has been reduced to a symbol of state-owned malfeasance.

The reputations of companies and individuals named in reports have been placed in infinite limbo, as if they have been convicted of crimes in court.

While the newspapers (and opposition) bay for the public execution of Eskom's "guilty" in the town square, there have as yet been no prosecutions, no convictions - no due legal process.

The facts of Eskom's financial turnaround, that it has used only R200 billion of its government guarantee, that the build programme delay has been recovered and it 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.

I have 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 Department has a Memorandum of Agreement with the Special Investigation Unit. I would like the SIU to review the contents of all reports into alleged wrongdoing at Eskom, conduct further investigations into procurement and governance issues raised, as necessary, and report to a retired judge.

I would like the judge to consider the SIU's report and make recommendations on remedial action to me. I will brief the NPA on the recommendations.

I will announce further details in coming days.

Chairperson...

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

Investors monitor shifts in the political environment of a country and within days of an incident perceived to be negative ratings agencies can decide to downgrade the sovereign.

But they do not only monitor the political environment; they also monitor state-owned companies. They regularly flag as risks low economic growth, a need for structural reform and poor governance of SOCs when assessing their 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 focused on improving the performance of State-Owned Companies.

It is clear that State-Owned Companies' improvement in performance is non-negotiable and that 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. Much of this financial year will be spent on implementation.

Chairperson...

Allow me, now, to brief you on progress in the year under review and plans for the year ahead.

The Departmental realignment process led by the Director-General is gaining momentum. The Department 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 (R267.9 million), 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. The Department's focus over the medium term will be largely on enhancing the capabilities of the Department in performing its mandate.

Chairperson...

Before focusing, separately, on the companies in the department's portfolio, some feedback on two important initiatives I mentioned in my Budget Vote a year ago.

Firstly, the Design Initiative:

  • Transnet has partnered with the Design Institute of the South African Bureau of Standards (SABS) to establish the Transnet Innovation and Design Research Centre.
  • This partnership promotes a culture of innovation and entrepreneurship.
  • Through its 'Moving Ideas' concept, more than 1 200 young entrepreneurs were invited to submit life-changing innovative ideas that would provide solutions to challenges in their communities and some of Transnet's operational challenges.

Secondly, the Skills Development initiative:

Between them, the six State-Owned Companies in the portfolio have enrolled 8 931 trainees (as at 31 December 2016) in various scarce job and critical skill programmes.

A total of 10 655 trainees in various disciplines graduated from a variety of programmes over the past year, 607 of whom have been employed.

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

Let me take this opportunity to welcome in the gallery some of our State-Owned Companies' beneficiaries and trainees.

Chairperson...

If we may now briefly focus on company performance highlights, beginning with:

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 will finalise the IRP which will outline the final energy mix for the Country.

Part of that process will be to affirm decisions about economic life of Power Station. In that regard concrete decisions on closure of Power Stations will be finalized then.

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

The new build programme is delivering.

  • Ingwa is in full operation,
  • and Medupi Units 5 and 6,
  • and Kusile Unit 1 are in commercial operation.

Eskom is ahead of its revised build programme deadlines and its focus is on delivering the remaining Medupi units.

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 at the end of the 2016/17 financial year, and will continue to enhance its financial sustainability by unlocking cross-border trade to boost declining local demand.

Engagements with Municipalities, SALGA and CoGTA are continuing to ensure that the municipal debt is managed and payments are made to sustain Eskom financial sustainability.

A solution must be found by Government on how to assist municipalities where there is virtually no income generating base and those municipalities resort to using funds allocated to the payment of electricity for their daily operations.

Eskom's asset base increased to R691.7 billion in the third quarter of 2016 (2015: Q3 R644.4bn) mainly due to addition of Ingula Pumped Storage Scheme.

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

The successful implementation and operational sustainability of the distribution network of the future will require Government, consumers and business to work with the regulator to determine measures that will achieve accurate billing systems and time-of-use tariffs that will promote efficient use of electricity and incentivise household and industrial generators.

It is appropriate, on Africa Day, to mention regional integration. Eskom remains committed to ongoing participation in the Southern African Development Community (SADC) region through an integrated grid.

Eskom recently concluded supply agreements with Botswana and Namibia.

Eskom is in the process of updating its Africa strategy which will take lessons learnt from past projects and cater for emerging paradigms in the region such as climate change and energy efficiency. Eskom has also embarked on feasibility studies to develop and strengthen the regional transmission networks.

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 EXPRESS

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

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.

South African Express, the State's regional airline, has played an important role in developing routes that have seen the entrance of private players.

The company is currently re-negotiating loans with Rand Merchant Bank and Nedbank, this includes the revised payment profile of the loans as well as the reinstatement of the R121m guarantee.

The company has also revised its flight schedule to address aircraft shortages and continues to work at mitigating the negative impact of the fleet issues.

Chairperson...

I will leave reporting on Denel, Alexkor and SAFCOL to the Honourable Deputy Minister Dikobe Ben Martins, besides saying that all three are expected to report positive financial results this financial year.

With regard to Denel Asia, I have requested Denel to mothball the company until the Minister of Finance has decided on Denel's section 51 (g) application as prescribed in the Public Finance Management Act. I have requested a meeting with the Finance Minister to discuss the 17 month delay.

To conclude...

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. His support over the past six weeks has been of enormous help.

I also wish to thank Director-General Seleke for his steady hand at the helm, and sterling work behind the scenes; 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.

     
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