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Minister Lynne Brown Budget Vote 11 Speech

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Minister Lynne Brown Budget Vote 11 Speech
14/05/2015

Honourable Chairperson,
Honourable Ministers and Deputy Ministers [Deputy Minister Bulelani Magwanishe,
Chairperson of the Portfolio Committee,
Honourable Members,
The Acting Director-General of the Department,
Chairpersons and Board Members of State-Owned Companies,
Chief Executives and Senior Managers of State-Owned Companies,
Distinguished guests, in particular, those beneficiaries of bursaries and training programmes of our State-Owned Companies who are present here today

Ladies and Gentlemen

Chairperson,

The Department of Public Enterprises is somewhat unusual. It does not deliver services directly to citizens or private companies. However, its work, when executed effectively, has a profound positive impact on the quality of life of all citizens, businesses and the Economy as a whole.

Formally, the sole purpose of this Department is to assist the Minister to play certain roles as the designated representative of Government in relation to Eskom, Transnet, Denel, South African Express, SAFCOL, Alexkor and the Pebble Bed Modular Reactor company. For periods in the past fiscal year, this included South African Airways and Broadband Infraco.

In supporting me, the Department plays a great number of strategic and supportive roles in relation to the Companies but also in respect of the development and coordination of national policy and strategy in the economic sectors in which the Companies operate.

Chairperson,

In recent times, it has also fallen to the Department, and myself, to play a leading role in relation to the development of policy and standards for all of the more than 700 State-Owned Entities.

At its February 2015 Lekgotla, the Cabinet took a number of resolutions on implementing key aspects of the report of the Presidential Review Committee on State-Owned Entities.

The Department and I have been tasked with championing the development of an overarching shareholder policy, defining criteria for continued State Ownership in critical and strategic entities.

After a comprehensive process, a report will be presented to the Cabinet Lekgotla in July.

The report will focus on:

  • a Shareholder Policy & appropriate ownership Model,
  • a Framework for Disposal of Non-core Assets supported by National Treasury and the Economic Sector and Infrastructure Cluster,
  • a Private Sector Participation Framework and
  • a Board Appointment Manual, which will be led by the Department of Public Service & Administration.

The process will culminate in the establishment of a conceptual framework which will inform the proposed Government Shareholder Management Bill – a single overarching piece of legislation, particularly for Schedules 2 and 3b entities, which we hope to introduce in the not-too-distant future.

Progress has also been made on the standardisation of governance practices within State-Owned Enterprises. The Department has submitted to Cabinet proposals for Remuneration & Incentive Standards for State-Owned Company Executive Directors, Prescribed Officers and Non-Executive Directors. The Standards aim to introduce good governance, transparency and accountability in the manner in which remuneration and incentives are applied in the entities.

Chairperson,

This budget seeks to finance the initial interventions proposed in the Department's Five-Year Strategic Plan. However, before I elaborate, let me offer some insight into the nature of the terrain within which the Department and I operate.

In Long Walk To Freedom, Madiba says: "After climbing a great hill, one only finds that there are many more hills to climb."

I must tell you that I have come to believe that at the time that he wrote that he must have been thinking about the Public Enterprises portfolio. As, no doubt, you have noticed, there are many hills to climb.

The following metrics define the breadth and depth of the landscape within which we operate:

  • The six active companies have an asset base value of R755-billion, with Eskom and Transnet accounting for some R745-billion.
  • They have annual revenues of over R200-billion.
  • They will also contribute the lion's share of the State's investment in infrastructure of more than R330-million a day every day over the next three years.

In the context of an economy with a GDP of about R4-trillion, this places the SOCs in this portfolio, especially Eskom and Transnet, at the sharp end of driving growth, this Administration's industrial development strategy, transformation of the Economy and, therefore, the assault on poverty, inequality and unemployment.

Chairperson,

The highest priority goals which the Department and I are required to drive over the next five years are set out in the NDP-rooted Medium-Term Strategic Framework of this Fifth Democratic Administration. Foremost among these are critical initiatives to lower the cost of doing business to stimulate job-creating growth and to increase the efficiency of the Economy:

  • First, ramp up the electricity generation reserve margin from its current levels to 19 percent by 2019,
  • Second, increase the tonnage moved on rail from the current 207 million tonnes to 330 million tonnes by 2019,
  • Third, improve the operational performance of sea ports and inland terminals by increasing the average gross crane movements per hour by 25 percent by 2019 and
  • Fourth, use the Eskom and Transnet infrastructure development and replacement investment spend to drive the overall national investment rate to 25 percent in a way that crowds in private sector investment and creates opportunity for new suppliers and sectors

These are the foundations upon which "radical economic transformation" will be built.

In order to do this, we need to deal with two main sets of issues – Company-specific matters, like the well documented challenges at Eskom, and just getting the generic basics right like:

  • Financial sustainability,
  • Stability,
  • Funding which requires little or no assistance from the fiscus,
  • The cost of capital,
  • The pace and quality of the delivery of capital projects,
  • The viability of the commercial operations,
  • Cost management,
  • Efficient procurement,
  • Operational efficiency,
  • The quality, effectiveness and stability of boards,
  • The quality, effectiveness and stability of executive management teams,
  • Recruitment and retention of scarce and critical skills,
  • Maximising the impact of the State's industrial development and transformation goals and
  • Eliminating corruption.

Chairperson,

It was pretty easy to rattle off that list. The crisp question, though, is: Does this small department, whose proposed budget we are discussing today, have the cutting-edge resources to address these in an impactful way? Specifically, to:

  • Translate Government's broad socio-economic mandates and very specific industrial development strategies into detailed, precisely targeted annual shareholder's performance compacts for the Companies,
  • Monitor and evaluate the Companies' performance against these compacts to the standard that would be expected by the shareholders of a R750-billion privately owned group of companies,
  • Interpret and understand the Companies' performance within the context of a global business environment, which changes frequently, sometimes dramatically, and needs rapid responses by the Shareholder, and
  • Assist the Companies to respond rapidly to changes in the trading environment in a manner that would be expected by the shareholders of a R750-billion privately owned group of companies.

The Department and I asked ourselves these questions recently.

We concluded that the global environment within which our Companies operate has become so much more competitive and complex that it is becoming unreasonable to expect conventionally structured government departments to meet these challenges with conventional resources and standard methodologies, no matter how gifted and committed the staff may be.

The Department and I are, therefore, currently engaged in an exercise to design and put in place the institutional architecture which will position us to be able to answer "Yes" to each of these four questions by the time I stand here again in a year's time.

Chairperson,

Let me turn to the companies. I will cover Eskom, Transnet, Denel and South African Express Airways while Deputy Minister Magwanishe will focus on SAFCOL, Alexkor and some cross-cutting themes.

Given the frequency with which I report to the nation on day-to-day developments at Eskom and given the frequency with which the Eskom reports to Parliament's committees, I will focus on broader issues.

First, I would like to touch on some important achievements which seemed to have been lost in the avalanche of publicity about other matters.

  • A year ago, I backed Eskom's promise that Medupi Unit 6 would be delivering its full capacity of about 800MW by mid-2015. Today, I am very pleased to announce that the ramp-up towards full output has passed the 700MW milestone. When fully operational by the end of June 2015 as promised, it will deliver the equivalent of more than 40 percent of the output of the Koeberg Nuclear Power Plant. So, Acting CEO, please extend my deep gratitude to everyone in the Medupi team who made this possible.
  • On the subject of Koeberg, the scheduled three-month maintenance of Unit One is well on track and is scheduled to bring more than 900MW back to service by the end of this month.
  • In December 2014, Eskom successfully completed the construction of the 100MW Sere Wind Farm near Koekenaap on the West Coast. What pleased me most was that the project was delivered ahead of schedule and within budget. So, a huge thank you to the Sere Wind Farm team as well.
  • An additional 160 000 households were connected to the grid, improving the lives of about 800 000 citizens and contributing to Government's objective of universal access.
  • Eskom also successfully completed the construction of 315 kilometres of transmission lines, most of this is to serve Medupi and Kusile.
  • The new substations in Vuyani in the Eastern Cape and Gumeni in Mpumalanga will change the lives of those currently without connections in those areas.

In the year ahead, over and above addressing all the administrative basics which I listed earlier, the leadership of Eskom needs to:

  • Accelerate the completion of the build programme, with improved project management and contracting,
  • Increase the generation capacity of the existing fleet,
  • Re-establish an inviolable, responsible maintenance regime,
  • Eliminate the need for load-shedding by all other means as well,
  • Develop a sustainable funding model,
  • Reduce the costs of primary energy, currently at close to 60 percent of revenue,
  • Fill critical vacancies,
  • Bring far greater reliability to the load-shedding schedule to allow consumers to plan effectively,
  • Act timeously to stave off the so-called "Coal Cliff",
  • Address very demanding environmental compliance obligations and
  • Do everything possible to win back the confidence of citizens, Business, financial markets, international and domestic investors and staff.

While I am speaking primarily to the leadership of Eskom, achieving this will require strong Government support and contribution by other departments, agencies and the regulator.

Once again, I would like to thank all citizens and businesses for their patience in dealing with the inconveniences which are part of load shedding. I would also like to thank those who have come forward with proposals to offer new capacity, especially through co-generation.

As matters stand now, I believe that it will require at least three more years of dedicated work by a number of players to restore electricity supply security. The good news is that it is possible to turn around this super tanker and set it on a long-term positive trajectory.

Chairperson,

I would like to touch briefly on the forecasts of Transnet's performance over the 2014/2015 fiscal year.

  • On the freight rail side, Transnet is expected to have moved approximately 225 million tonnes, a 7 percent year-on-year volume growth.
  • Container volumes for the 2014/15 financial year are likely to be slightly below target at approximately 4.6 million Twenty-foot Equivalent Units.
  • Transnet Pipelines is expected to achieve the 2014/15 volume target of 16.7 billion litres.

Among the major achievements in the last fiscal year were:

  • The successful completion of the expansion of the City Deep inland terminal from 400 000 Twenty-foot Equivalent Units capacity to 800 000 a year. Further work is underway to upgrade the Kascon terminal to create additional capacity of 300 000 Twenty-foot Equivalent Units. There has been even more impressive expansion at Ngqura Container Terminal.
  • Transnet took delivery of the last 85 locomotives which were assembled at its facilities in Koedoespoort, providing a huge boost to local manufacturing companies and increasing the engineering manufacturing capacity of the economy. Most of these locomotives have been deployed in the current manganese export line from the Northern Cape to Port Elizabeth and this has resulted in a 28 percent improvement in train cycle times.
  • The Company received approval to procure 100 locomotives to be deployed on the coal export line which will allow it to cascade an additional 125 locomotives from the current coal line fleet to the General Freight Business.
  • It also received approval for a project to increase manganese export capacity from 7 million tonnes a year to 16 million tonnes.

During this fiscal year the Department and I expect the General Freight Business volumes to increase by 18 percent given that about half of Transnet's Market-Driven Strategy capital investments has been allocated to this area.

The Department and Transnet will also be working closely to ensure that the key Operation Phakisa projects, for which the Department and the Company are responsible, materialise on time. These are:

  • The Saldanha Bay rig repair facility,
  • The Mossgas quay and
  • The Richards Bay floating dock installation. 

Chairperson,

Denel continues to show a pleasing improvement in financial performance.

  • Over 50 percent of revenues were derived from its international business.
  • The order book stands at over R33-billion.
  • Revenue is expected to exceed R5.5-billion.
  • Preliminary numbers suggest more than R200-million in net profit after tax.

Denel Aero-structures is on course to achieve breakeven in the next fiscal year.

Denel's cash facilities improved on a scale which allows the company to mitigate against any liquidity risk. In addition, banks have also granted Denel R10-billion in facilities on the strength of the company's balance sheet. Thank you, Denel. That is music to my ears. Maybe we should second your CEO to Eskom as well.

The Department and I have the following matters clearly in our sights in the next five years.

  • Developing more partnerships with other global Original Equipment Manufacturers, like its joint venture with the UAE's Tawuzan.
  • Addressing the linked issues of the aging workforce and the pace of transformation.
  • Investing in plant and equipment to replace some aging facilities, in the light of the order book.

Chairperson,

While the South African Express Airline still requires high care, it has put the support provided by the Department and the National Treasury over the past year to good use and we are seeing the first green shoots.

Using two aviation industry measures, the airline looks likely to exceed the revenue target significantly and is performing above expectations in respect of cost containment.

And in the past few months, there has been cautious talk of humble profits.

It is pleasing to see that the airline continues to champion transformation in the aviation industry.

During the current year, the Department and I will focus on the implementation of the 20:20 Vision strategy and performance against prescribed austerity measures which will lay the foundation for a return to financial sustainability.

In addition, the Department, the National Treasury and an aviation expert will examine the imminent commercial agreement between the airline and South African Airways very closely. I am looking for equitability and a feeder model which works well for all players. This is an excellent example of the kind of cooperation between State-Owned Companies across portfolios which Cabinet is seeking to encourage.

Strengthening leadership and performance at State-Owned Companies is important and I am pleased to report that the airline appointed a CFO with aviation experience in January 2015. I am confident that this will lead very soon to the restoration of excellent financial management and the finalisation of a realistic business model.

Chairperson,

In conclusion, let me touch on the issue of migration and the appalling recent violence against foreigners from the perspective of the State-Owned Companies.

There is universal agreement that economic migrants bring fresh perspectives and innovative thinking which enriches the countries which host them. What is not commonly understood is that private and publically owned companies in almost every country are trying to recruit skilled individuals from other countries.

I consider South Africa to be very fortunate to have those migrants from other countries who are engaged in building and managing our State-owned Companies and assure them that they will always be welcome.

Thank you.


Page last modified:20/05/2015 18:53