To: All Media
Date: 8 March 2017
For Immediate Release
MINISTER LYNNE BROWN'S REMARKS ON PERFORMANCES AND CHALLENGES OF SOCs
To provide Minister with briefing notes regarding the performance and challenges facing the State Owned Companies (SOCs) in preparation for the Portfolio Committee.
The performance of SOCs is largely influenced by the performance of the domestic economy and the State of the Global economy. Since 2007, the economy has grown on levels much lower than anticipated in Government's economic policy framework. This context defines the operational environment of SOCs and strongly influences their financial sustainability. Assessing performance of SOCs must take this context into account.
Furthermore, post the global economic crisis, Government issued an instruction that required SOCs to be implementers of Government policy and support the implementation of the countercyclical policy framework. Since 2007, SOCs have driven the investment strategy of the State. Most of the SOCs have undertaken investments at an accelerated rate in a declining economic environment.
The SOCs are also faced with challenges ranging from financial and operational sustainability to policy decisions that have an adverse impact on the viability of the SOC operations.
There are Acting appointments/vacancies of CEOs in SOCs, in Denel the CEO position is awaiting Cabinet process; SAFCOL Board will undertake an open recruitment process; at Alexkor the CEO and CFO recruitment has begun; and Eskom CEO recruitment process has also commenced. SOC specific issues are further highlighted below.
2.1.1 ESKOM Eskom operates in a complex and highly regulated environment and the policy decisions determine whether the SOC will be operationally or financially sustainable or not. The challenges facing Eskom are the uncertainty regarding the role of the company in the future build programme, the adverse impact of IPP programme on the potential impact on its balance sheet, and high environmental compliance costs.
Despite the above, Eskom has continued to maintain a positive financial performance with the company posting a net profit of R4.6bn in the 2015/16 financial year. Furthermore the company is projected to post a profit for the financial year ending in March 2017.
Eskom has also implemented a number of interventions to eliminate the electricity challenge experienced towards the end of 2014. The company has added over 2 000MW of new generating capacity. This has also been accompanied by an aggressive maintenance plan. This has significantly improved the energy availability factor and allowed Eskom to implement merit order within is units which is important for managing costs.
Transnet remains an important company to support the re-industrialisation of the South African economy through improving the performance of strategic corridors. Since 2007, Transnet has implemented an expansion programme that responds to South Africa's industrialization requirements. The company has also started processes to explore new revenue stream to improve the long term sustainability of the company.
However, there are a number of policy decisions that threatens the company's future sustainability and must be urgently addressed. Corporatisation of Transnet National Ports Authority (TNPA): Transnet is faced with the major policy challenge as the National Ports Act requires Corporatisation of TNPA. This poses a serious risk to the strength of Transnet Group's balance sheet; and if implemented, it could jeopardize the implementation the SOC's investment programme as outlined in the Market Demand Strategy. The Comprehensive Maritime Transport Policy is also not specifically addressing this provision, as it remains subject to the amendment of the National Ports Act.
The collapse of demand for commodities and the subsequent decline in export volumes has had a major impact on the sustainability of the company. The funding model explored by the company during the commodity super cycle is no longer feasible as most of its clients cannot commit to long term off-take agreements. Diversification through expanding networks beyond the national borders and pursuing adjacent market such as manufacturing of locos is important for the sustainability of the company.
Despite these challenges, Transnet has continued to expand its networks. The company is committed to spend over R200bn in infrastructure over the next 10 years. This must be applauded as most companies are substantially cutting off their capital budgets. This commitment shows the significance of maintaining State ownership in these companies and their sustainability must be protected.
2.1.3 SA EXPRESS
SAX is the regional aircraft of the State and has played an important role to develop routes that have seen entrance of private players. However, the company is facing some serious challenges, which are largely structural rather than operational. Responding to these challenges will require the reorganization of the State Ownership in the airline industry. However, operational improvements will also be required to set the Airline in a sustainable path.
Denel remains Government Flagship on how to implement a turnaround strategy and hold important lesson for the State in how to optimize partnership with the Private sector. Over the past 3 years, Denel has posted profits and the trend has remained upwards. In 2015/16 financial year, the company posted a profit of R395 million. This is the largest profit that the company has ever posted since the implementation of the turnaround strategy.
However, there are some challenges facing Denel which relates to liquidity and overreliance on foreign markets.
The analysis of the performance of SOCs clearly shows that these companies are contributing positively to the South African economy and they are advancing the developmental obligations of the State. All of the SOCs within my portfolio have continued to operate and meet the mandates that they were established for. Eskom is keeping the light on, Transnet is moving freight that is important for the South African economy.
This does not support the narrative that SOCs are a drain to the State and the South African economy. Furthermore, SOCs in the portfolio have been able to maintain positive external audit outcomes - with the exception of SAX. Improving Governance is at the core of the SOC reform and will remain an important part of SOCs' performance assessment. The Department continues to strive to minimize vacancy rate at the board as well as executive levels. It is important to highlight that there are no Schedule 3 SOCs within the portfolio. The Department has developed a logical planning, monitoring and evaluation framework that outlines the key steps in the exercise of the oversight mandate.
Our SOCs are financially viable and have not defaulted on any loans guaranteed by the Government of South Africa. They continue to raise funding in both domestic and international markets at very favourable and competitive rates. All our SOC within the portfolio of DPE have thus far recorded a profit of R5.4 billion for 2015/16 financial year. Also important to note is that the DPE SOC are creating direct employment of approximately 120 000 (hundred and twenty thousand) people.
For enquiries contact Colin Cruywagen on 082 3779916.
Issued by Ministry of Public Enterprises
8 March 2017