dpe 2011 - 2014 Department of public enterprises strategic plan

CONTENTS

Minister’s Foreword ii Director-General’s Report iii

Part A: Strategic overview 1 Vision 1 Mission Statement 1 Legislative and Other Mandates 5 Constitutional Mandates 5 Situational Analysis 6 Organisational Structure 7 DPE Budget - Appropriation per Programme 8 DPE Budget - Appropriation per Economic Classification 8 DPE Budget Summary of Transfer payments to SOE 8

Part B: Strategic objectives 9 Programme 1 - Administration 9

Programme 2 - Energy and Broadband Enterprises 12

Programme 3 - Legal & Governance 16

Programme 4 - Manufacturing Enterprises 19

Programme 5 - Transport Enterprises 22

Programme 6 - Joint Project Facility 27

State Owned Enterprises 30 Alexkor 30 Broadband Infraco 31 Denel 32 Eskom 33 Pebble Bed Modular Reactor 34 South African Forestry Company 35 South African Airways 36 South African Express Airways 37 Transnet 39

Acronyms 40

I Malusi Gigaba Minister’s foreword

Minister’s foreword

Our department is tasked with the vital responsibility An important component of this process will be of providing shareholder oversight and leadership to establish an enabling policy and regulatory to a number of state owned enterprises (SAA environment. This will include the DPE developing Transnet, Eskom, Safcol, Alexkor, Denel, PBMR, new policies to guide the SOE in the implementation Broadband Infraco, Aventura and SAX). Our of the strategy. In addition, the DPE will be engaging mandate of oversight and leadership is defined with Treasury, sectoral policy Department and their and guided by a range of government policies and regulators to ensure that the regulatory regime strategies including the New Growth Path and the provides both confidence in the future stability of Industrial Policy Action Plan. We, as a shareholder the SOEs and enables special compacts between department, have the mandate to align the strategies the SOEs, their customers and the broader financial and operations of SOE with government’s objectives community. as defined in these policies. In response to the economic and social challenges The two infrastructure SOEs, Transnet and Eskom are facing South Africa, this plan represents a key step in a powerful position to catalyse growth in that they in moving from a balance sheet to a broader growth either place constraints on, or create opportunities perspective in SOE investment planning, funding, for, additional investment in both their customer and procurement and operations. This approach supplier communities. These opportunities can will require active and decisive leadership from be unlocked through creating additional capacity the DPE and I have already started a process of either through SOE investment or through efficiency engaging directly with all SOE Chairs and CEOs. improvements. In addition, given their strategic Such engagements are intended to ensure there position, these infrastructure SOEs can play a is a definitive clarity about government’s strategies leadership role in both the customer and supplier to be reflected by SOEs and also to provide our community in driving programs that catalyse socio- department with a timely grasp of strategic and economic transformation in these sectors. The role operational issues being faced by our SOEs. of the DPE in this context is thus to drive investment, efficiencies and transformation in its portfolio of In summary, we look forward to the challenges SOE, their customers and their suppliers to unlock ahead with enthusiasm and determination, ever growth, create jobs and develop skills. cognisant of the impact our contributions will have on our economy and the continent at large. For the SOEs to unlock growth and transformation, new sources of funding for the infrastructure The deputy minister and I are confident that the programs will need to be found and developmental strategies intended are obtainable if our capable procurement and other business process capabilities efforts are applied through cogitated action for the will need to be developed and implemented. The grander benefits of our South African economy. Our New Growth Path in particular, challenges us to confidence is further reassured by the committed think beyond the existing approach to Shareholder and competent leadership of the department being Management. The policy challenges us to develop spearheaded by our Director General Tshediso compacts with our key stakeholders to enhance Matona. our joint impact on the economy. In order to do this, we need to develop an investment planning approach that goes beyond the constraints of SOE balance sheets with the objective of working with our customers and other key stakeholders to raise the funding to drive investment and employment II creation to qualitatively new levels. Minister Malusi Gigaba Tshediso Matona Director-General’s report

Director-General’s report

We in the Department of Public Enterprises are which is the overriding priority of job creation and actively engaged with the imperatives of forging poverty alleviation. Our two biggest SOE, Eskom a growing and labour-absorbing economy as and Transnet, have embarked on the biggest envisioned in Government’s key policy statements, infrastructure investment by the public sector, in particular, the New Growth Path and the Industrial infrastructure that will be a catalyst for our economy Policy Action Plan. The development of the to grow, and therefore to crowd in the private country’s economic infrastructure is central to this sector for higher levels of employment creation. It vision, and the challenge for the DPE and the state- is therefore important that the SOE are financially owned enterprises (SOE) for which we shareholder viable and able to fund these investments from responsibility is clear. the strength of their balance sheets. In addition to financial viability, the SOE need certainty and clarity The stage has been set for our country’s intentions in terms of policy and regulatory direction, a key to create an economy that factors larger labour factor when investment decisions need to be made. absorption into its growth, through, among The role of the State as shareholder, regulator and other things, the development of our economic policy-maker must be clearly defined, if the SOE are infrastructure. to have certainty to enable them to execute their mandate. The Department of Public Enterprises is responsible for guiding SOE in our portfolio to become more In recognition of the powerful role that an SOE financially sustainable entities which contribute can play in the economy, a Presidential Review positively towards our national growth and Committee has been established to identify ways development objectives. SOE, particularly those of enhancing the impact of SOE on the objectives operating in network infrastructure industries, are and priorities of Government. We look forward to the recommendations to be made by the PRC later in key levers to catalyse growth, and therefore higher 2011, as they will be critical in helping us to further labour absorption. shape and refine Government’s strategic role as a Shareholder. The PRC’s recommendations will Government has clearly prioritised employment- provide greater insight into the role that SOE should creation in the period ahead, during this play in the context of a Developmental State, and Administration and beyond. In his State of the how Government should improve its Shareholder Nation Address President Jacob Zuma has given oversight capabilities to support and strengthen us our marching orders with regard to delivering this role. on this priority, and the DPE, together with the SOE in our portfolio, accept this challenge, and In conclusion, I would like to thank the Minister commit ourselves to the achievement of this for the visionary leadership he is providing to the central objective. This requires an unambiguous Department and the SOE, and the support of the understanding by our SOEs of government’s Deputy Minister in this regard. Lastly, I would like to economic policy and strategy. To this end, with the urge my colleagues in the Department to continue guidance of the Minister and Deputy Minister, we to strive for excellence as we work towards the have undertaken to be more hands-on with regard achievement of our goals as a Department, and as to our oversight and shareholder responsibility over a country. the SOE, to ensure that they are in alignment with Government policy and strategy.

The SOE, together with the private sector, are pivotal in the imperative to reposition the Director-General Tshediso Matona economy to a New Growth Path, central to III IV Part A : Strategic overview

Vision

The aim of the Department of Public Enterprises is to Government Economic Objectives and DPE provide effective shareholder management of state Strategy owned enterprises that report to the department, and support and promote economic efficiency and Three government frameworks provide a context competitiveness for a better life for all South Africans. for the definition of the key objectives that should guide the DPE strategy. These frameworks are the performance evaluation framework, the New Growth Mission Statement Path and the Industrial Policy Action Plan. There are 12 outcomes in the performance evaluation Revised mission statement and 2011–2014 framework. Given the nature of the DPE portfolio of strategic plan SOE, the following outcomes, which are focused on the economic cluster, are of particular significance The state owned enterprises are strategic instruments to the DPE. of industrial policy and core players in the New Growth Path. The department aims to provide Decent employment through inclusive growth: decisive strategic direction to the state owned enterprises so that their businesses are aligned • Increasing GDP with the national growth strategies arising out of • Higher rates of labour absorption, meaning that the New Growth Path. It will do this by ensuring that more of the working-age population has jobs. their planning and performance, and investments and activities, are in line with Government’s medium Efficient, Competitive and Responsive Economic term strategic framework and the Minister’s service Infrastructure Network. delivery agreement. • Globally competitive infrastructure service delivery. In relation to Government’s 12 outcomes, the Department of Public Enterprises is contributing • Provision of additional capacity to provide for directly to creating an efficient, competitive and growth requirements. responsive economic infrastructure network (outcome 6), which forms the basis of the Minister’s service delivery agreement, signed in October 2010. The New Growth Path is a strategy to identify Over the medium term, the department will focus on focus areas for greater competitiveness and labour achieving the outputs and sub-outputs that are linked absorbing growth through the provision of focused to the Outcome and contained in the Agreement. policy and political support for these sectors. The path has the objective of creating five million jobs These are: over ten years. The approach is to fine-tune macro • Improving the delivery and maintenance of and micro policies to support more equitable and infrastructure and monitoring the rollout of the employment-intensive growth through: Transnet and Eskom build programmes. • Measures to make the economy as a whole more • Achieving policy and regulatory clarity in sectors competitive, including the value of the currency, in which the state owned enterprises operate. enhanced infrastructure services and capacity • Improving the operational efficiencies of the and the development of skills. state owned enterprises, particularly in relation • Systematically encouraging more labour- to the reliable delivery of rail and ports services intensive and green activities, including through and the reliable generation, distribution and African regional integration. transmission of electricity. • Developing relatively labour intensive • And developing operational indicators for each manufacturing, particularly through leveraging of the required sub-outputs identified as part of public procurement, in support of the Industrial the delivery agreement and where necessary Policy Action Plan including these shareholder compacts concluded within the state owned enterprises.

1 2 Part A : Strategic overview (cont.)

A core element of the New Growth Path is to promote corporate governance as well as the synchronisation social dialogue and solidarity, through the building of outcomes - based planning and performance of relevant social compacts to achieve targeted reporting. objectives, as central to the change process. The model is being continuously refined. The Industrial Policy Action Plan is extremely complimentary to the New Growth Path and has • Progress on the model to date includes: clarity as its objective development of manufacturing on the strategic intent of each state owned and associated industrial capabilities to facilitate enterprise and performance focused shareholder a diversification of the economic base beyond the compacts. present dependence on resources and non-tradable • The development of a logical planning and services. Core to the Industrial Policy Action Plan monitoring and evaluation framework; the is the provision of competitive infrastructure services development of guidelines on board management and the leveraging of public procurement to promote and founding documents. investment in manufacturing. This includes a special “fleet procurement” process whereby long term • And the tracking of trends in financial and fleet requirements are identified and procurement operational performance through the is structured so as to create a firm foundation for department’s performance measuring investment and learning in the national supplier dashboard, the Isibuko dashboard. The sector. The leveraging of the SOE capital investment dashboard facilitates the quarterly reporting programs, or the Competitive Supplier Development required from the state owned enterprises. Program, is a further core strategy of the IPAP.

In summary, the DPE needs to leverage the SOE to contribute to the following key national objectives: Optimising capital investment and operational efficiencies in state owned enterprises • The provision of competitive infrastructure services and associated capacity to lead growth The provision of adequate and efficient infrastructure and stimulate employment creation. services can stimulate investment and increase the productivity of the customers of state owned • The development of industrial manufacturing enterprises’. In 1976, public investment in capabilities as a whole as well niched areas of infrastructure in South Africa peaked at 16 per cent advanced capabilities. of GDP. By 1994, it had declined to approximately 4 • The development of skills. per cent of GDP where it remained until Eskom and Transnet announced the major build programmes • The development of new technologies, particularly in 2004 and government began a fixed asset those contributing towards employment creation investment programme in 2005. and a green growth trajectory. • The development of social and economics Benchmarking actual public investment in compacts to align stakeholders behind the key infrastructure between 1994 and 2009 against a growth objectives. steady state of investment of at least 10 per cent of GDP per year over the same period suggests a shortfall of approximately R1.5 trillion. This illustrates Strategic focus over the medium term a gap in infrastructure investment which needs to be

addressed and funded. Providing decisive leadership and ensuring that the government shareholder management model A number of state owned enterprises suffer from is implemented operational inefficiencies, which negatively impacts The department provides support to the Minister in on the economy. A key challenge for the department his interactions with the state owned enterprises. is to play a catalytic role in improving efficiencies through positively influencing the Boards’ oversight This involves preparing for structured meetings function and in turn effective management of the between the Minister and the Chairperson of each enterprises. This will require a much higher level of board, as well as research and briefings on issues. analysis, benchmarking, target setting and remedial action than in previous years. The department will The department’s shareholder management also continue to monitor progress on the expansion model measures the state owned enterprises’ of the capacity of state owned enterprises, such as performance against delivery targets. The model the capital programmes of Eskom and Transnet, aims to achieve consistency in compliance with through better funding and risk management. 3 4 Part A : Strategic overview (cont.)

Refining the policy and regulatory environment Knowledge management

The current policy and regulatory environment has It is critical that the department optimise its internal elements that pose key risks to the state owned learning processes. This involves collating and enterprises and their ability to play a developmental recording existing presentations and documents role in the economy. In particular, the regulation of under relevant themes, developing training infrastructure tariffs needs to enable both Eskom programmes in key areas and initiating processes that capture the practical experiential learning and Transnet to recover costs and attract investment around shareholder management. to meet the needs of the economy. In addition, the department needs to monitor closely what additional investments will be required of Eskom in the Integrated Resource Plan for Energy, as this may Legislative and Other Mandates require significant additional funding. Another key DPE exercises shareholder management over nine area relates to the establishment of a Single Buyer SOE. All The SOE are incorporated as companies Office to enable independent power producers’ in accordance with the provisions of the Companies access to the grid. In relation to Transnet, the Act, 1973. Except for Denel, all SOE are established department will be engaging with the establishment in terms of their own enabling legislation which sets of the rail and port Regulator to ensure that the policy out the purpose, mandate and objectives for which and regulatory regime provides an appropriate they were founded. balance between encouraging additional investment DPE is both the founder and the administrator/ and promoting competition. The department will custodian of all legislation relating to the continue to put considerable effort into working establishment of SOE. with policy departments, such as the Departments of Energy and Transport, to create a more enabling Constitutional Mandates environment for the enterprises to better serve the public interest. In addition to the Companies Act and enabling legislation, SOE are also governed by other Integrating key programmes into the broader legislation such as the Public Finance Management industrial policy and economic cluster programme Act of 1999 (PFMA), Competition Act of 1998 and the Insolvency Act of 1936 amongst others. Another area of strategic focus over the short to medium term is the systematic integration of key Within the DPE portfolio, the SOE enabling programmes in state owned enterprises into the New legislations are the following: Growth Path and the Industrial Policy Action Plan 2. For example, both the Industrial Policy Action Plan and • Eskom: Eskom Conversion Act 13 of 2001 the New Growth Path have prioritised the leveraging of public procurement to develop manufacturing. • Transnet: Legal Succession to the South African The department will thus focus on driving the Transport Services Act 9 of 1989 (as amended) implementation of fleet procurement programmes in • Alexkor: Alexkor Limited Act 116 of 1992 locomotives and renewable generation technologies. (as amended) The integration of supplier development policies that will embed procurement leverage into the state • South African Forestry Company (Safcol): owned enterprise procurement policy framework Management of State Forests Act 128 of 1992 will also be closely monitored. The department is considering new governance mechanisms to enable • Aventura: Overvaal Resorts Limited Act 127 of better coordination across government departments 1993 (particularly with respect to the Department of Trade and Industry) and to provide more effective oversight • South African Airways: South African Airways Act of the rollout of these programmes. The South African 5 of 2007, and Forestry Company can play a powerful catalystic • Broadband Infraco: Broadband Infraco Act 33 of role in rural development and work is underway on a strategy in this regard. 2007

5 Part A : Strategic overview (cont.)

Situational Analysis

Organizational Environment

The Department of Public Enterprises requires high The establishment of a Risk Management, Monitoring calibre on specialized skills to carry out its mandate. and Compliance role in Corporate Services, assisted Emphasis has always been placed on ensuring that in ensuring closer alignment between the planning the organizational structure is adequately resourced function and the monitoring of deliverables in to deliver on the organizations key focus areas. Over accordance with the department’s strategic focus the years, this has been a constant challenge. The areas. This dedicated resource has allowed for department is limited in its ability to attract and retain closer evaluation of performance through continuous such expertise when compared to the private sector. assessment and analysis of quarterly reports. However, it continues to strive towards ensuring that Internal risks are also captured on the Isibuko the structure is aptly capacitated. Dashboard, electronic business intelligence system which ensures stronger accountability across the In its endeavour to ensure a feeder channel organization for risk mitigation through a tightly of applicable skills and talent, the department managed process. embarked on a drive to attract and retain young graduates though its internship and graduate With the appointment of the Minister, Deputy Minister development programmes. This has been further and Director-General as well as the launch of the strengthened by a continuous focus on internal skills Presidential Review on State owned enterprises, the development, mentoring and coaching. Department of Public Enterprises is fully cognisant of the possible review of its mandate. A key focus The reorganisation of work streams in the department for the Executive team is to ensure that the internal assisted in ensuring that the sector programmes environment remains stable and conducive for received dedicated support in the legal and sustainable high performance. The department is governance aspects of their work. To support this geared for the work it has to produce and remains initiative, the Legal and Governance unit was divided flexible and agile in its ability to incorporate changes into SOE-specific matters and cross-cutting legal as they become evident, especially regarding support to the department. reorganization of work for improved performance and efficiencies.

6 dpe organisational structure

Special Minister Special Advisor Public Enterprises Advisor

Deputy Minister Public Enterprises

Director-General Public Enterprises

DDG Chief Investment & Portfolio Manager

DDG DDG DDG DDG DDG Energy and Broad- Legal, Governance Manufacturing Transport Joint Project OPSCO Chairperson band Enterprises Enterprises Enterprises Facility

Head Chief Chief Head Corporate Audit Financial Officer Communications Services Executive

7 DPE Budget - Appropriation per Programme

2010/11 2011/12 2012/13 2013/14

Final Medium term estimates Appropriation MTEF Baseline

R'000 R'000 R'000 R'000

1. Administration 106 835 106 734 112 968 118 820

2. Energy and Broadband Enterprises 174 476 58 652 20 246 21 669

3. Legal and Governance 50 023 12 163 13 455 14 321

4. Manufacturing Enterprises 192 782 13 072 13 408 14 275

5. Transport Enterprises 21 257 26 610 25 701 25 465

6. Joint Project Facility 10 176 13 000 13 873 15 862

TOTAL 555 549 230 231 199 651 210 412

DPE Budget - Appropriation per Economic Classification

2010/11 2011/12 2012/13 2013/14

Final Appropriation Medium term estimates

MTEF Baseline R'000 R'000 R'000 R'000

Current payments

Compensation of employees 90 315 96 539 101 017 106 169

Goods and services 87 925 91 539 96 643 102 136

Transfers and subsidies

Public corporations and private enter- 237 296 40 000 - - prises Gifts and donations 610 753 791 835

Payments for capital assets

Machinery and equipment 703 1 400 1 200 1 272

Payment for Financial Assets 138 600 - - -

Total 555 549 230 231 199 651 210 412

DPE Budget Summary of Transfer payments and payment for Financial assets to SOE

2010/11 2011/12 2012/13 2013/14

Final Appropriation Medium term estimates

R'000 R'000 R'000 R'000

Alexkor 36 000 - - -

Denel 181 296 - - -

Broadband Infraco 138 600

Pebble Bed Modular Reactor 20 000 40 000 - -

Total 375 896 40 000 - -

8 Part B : Strategic objectives Programme 1

Administration

Purpose: To achieve the department’s strategic – Performing performance monitoring and share- objectives by providing management, supporting holder risk management to investments in state functions and processes. owned enterprises

The programme is comprised of the following – Developing the department’s capital structure sub-programmes framework for state owned enterprises – Managing the equity interest and contingent • Ministry – Minister and Deputy Minister liability exposure of the department’s investment • Management – Office of the Director-General portfolio and Chief Investment Portfolio Manager – Developing investment policy and identifying • Internal Audit sources for capital funding • Corporate Services – Head: Corporate Services, – Ensuring economic and regulatory cohesion for Human Resources, Secretariat, Administration network infrastructure and Facilities, Knowledge Centre and Internal – Providing specialist transaction input and Risk Management and Performance Monitoring advice DPE Budget - Appropriation per Economic Classification • Office of the Chief Financial Officer – Financial – Implementing the Richtersveld deed of Administration, Supply Chain Management and settlement 2010/11 2011/12 2012/13 2013/14 Information Management – Redirecting Alexkor’s commercial focus and Final • Communications sustainability. Medium term estimates Appropriation • Office Accommodation MTEF Baseline R'000 R'000 R'000 R'000 Resource considerations Current payments Strategic Objectives The spending focus will be on administrative costs Compensation of employees 90 315 96 539 101 017 106 169 • To provide strategic direction and leadership. as no transfers to state owned enterprises over the • To provide support services to enable the Goods and services 87 925 91 539 96 643 102 136 MTEF period are included in this programme. department to deliver on its organisational Transfers and subsidies objectives in an environment where the human Expenditure increased from R68.4 million in 2007/08 capital within DPE is both motivated and Public corporations and private enter- 237 296 40 000 - - to R106.8 million in 2010/11, at an average annual prises empowered. rate of 16.0 per cent. The growth was driven by Gifts and donations 610 753 791 835 • To improve the quality of corporate governance spending in the Corporate Services and Management and performance monitoring systems by Payments for capital assets subprogrammes as the department centralised ensuring that appropriate policies, processes operational expenditure such as IT licences and Machinery and equipment 703 1 400 1 200 1 272 and procedures are reviewed, updated and implemented within the DPE. services, photocopying equipment, and training and Payment for Financial Assets 138 600 - - - communication into this programme. Establishing Total 555 549 230 231 199 651 210 412 the Deputy Minister’s office in 2009/10 and shifting The Office of the Chief Investment and the risk component in the Legal and Governance Portfolio Manager applies a portfolio approach to the management and shareholder investment of all state programme to the Chief Investment Portfolio owned enterprises falling under the purview of the Manager’s office to this programme also contributed department, including conducting comprehensive to the increase. Spending on compensation of DPE Budget Summary of Transfer payments and payment for Financial assets to SOE cross cutting portfolio reviews on a quarterly basis. employees increased from R28.8 million in 2007/08 The office serves to enhance portfolio management to R48.9 million in 2010/11, at an average annual 2010/11 2011/12 2012/13 2013/14 through portfolio analysis to determine overall rate of 19.4 per cent. The increase is attributable Final portfolio structure, highlight shifts in portfolio to annual salary increments and an increase in the Medium term estimates Appropriation composition, determine potential impact to portfolio number of personnel in this programme. Spending performance and identify measures to strengthen on goods and services increased from R35.6 R'000 R'000 R'000 R'000 the portfolio. million in 2007/08 to R56.5 million in 2010/11, at an The office provides analysis of trends and strategic Alexkor 36 000 - - - average annual rate of 16.6 per cent. This increase portfolio recommendations to the Minister of Public in expenditure on goods and services was to provide Denel 181 296 - - - Enterprises to pro-actively manage any exposure support to the larger personnel establishment. Broadband Infraco 138 600 that may arise.

Pebble Bed Modular Reactor 20 000 40 000 - - Expenditure is expected to grow from R106.8 million Objectives and Measures to R118.8 million over the MTEF period, at an average Total 375 896 40 000 - - • Provide strategic leadership and effective annual rate of 3.6 per cent. The growth is mainly due oversight over the departmental activities by: to inflation related adjustments to the baseline as – Synchronising logical planning, monitoring and adjusted to reflect savings from the centralisation of 9 evaluation processes services. Measurable objectives Programme 1 and medium term Administration output targets

Sub Output Measure/indicator 2011/2012 2012/13 2013/14 Programme Target Milestone Target Milestone Target Milestone CIPM Synchronised logical SOE strategic intent SOE Strategic intent SOE strategic intent SOE strategic intent planning, monitoring statements issued for statements issued by end statement issued by end statement issued by end & evaluation process all SOE of September of September of September

Shareholder compacts SOE Shareholder SOE Shareholder SOE Shareholder Compacts signed annually Compacts signed annually Compacts signed annually

SOE Corporate Plans SOE to submit SOE to submit SOE to submit Corporate Corporate Plans annually Corporate Plans annually Plans annually by end of by end of February by end of February February

SOE performance Quarterly Shareholder Quarterly Shareholder Quarterly Shareholder monitoring & Shareholder reports on SOE reports on SOE reports on SOE Risk Management performance performance performance Assessment, detection, Assessment, detection, Assessment, detection, mitigation and monitoring mitigation and monitoring mitigation and monitoring of cross-cutting of cross-cutting of cross-cutting shareholder risk shareholder risk shareholder risk

Portfolio equity Report on government SOE Quarterly report on SOE Quarterly report on SOE Quarterly report on interest & contingent guarantee and shares government guarantee government guarantee government guarantee liability exposure and shares and shares and shares management Register government Register and safe custody Register and safe custody Register an safe custody guarantee, shares and of government guarantee, of government guarantee, of government guarantee, shareholders’ agreement shares and shareholders’ shares and shareholders’ shares and shareholders’ agreement agreement agreement

Benchmarking Guideline for Industry, Benchmarking Guideline SOE performance indica- SOE performance indica- sector & national economy for SOE performance tor & target setting tor & target setting benchmarking indicator & target setting

Shareholder value Methodological framework Annual portfolio value Annual portfolio value Annual portfolio value enhancement for measuring shareholder assessments assessments assessments value per SOE & aggregation to portfolio

Economic & Research on Report on economic Study on regulatory regulatory economic regulatory cohesion for frameworks employed for cohesion for regulatory models network infrastructure infrastructure investment network study infrastructure

Capital structure Annual portfolio value • Investment policy for SOE capital restructuring framework assessments SOE commercial assessments sustainability • Financing Instruments Framework • SOE capital restructuring assessments

10 Measurable objectives Programme 1 and medium term (cont.) output targets Administration

Sub Output Measure/indicator 2011/2012 2012/13 2013/14 Programme Target Milestone Target Milestone Target Milestone Alexcor Richtersveld Deed • Alexander Bay • Completion of Quarterly monitoring and of Settlement Township Alexander Bay assessment of Pooling implementation infrastructure upgrade township and Sharing Joint Venture • Formal establishment infrastructure upgrade performance of Pooling and • Approval of Sharing Joint Minister of Minerals Venture between & Energy for transfer Alexkor and of Alexkor and mining Richtersveld Mining rights to Richtersveld Company • Mining Company • Monitoring formal establishment of Pooling and Sharing Joint Venture (prospecting plan, work programme, mining plan)

Alexkor Strategy • New business/ • Stakeholder Formulation growthplan for Alexkor consultation to clarify positioning of Alexkor in relation to State Mining Company • Explore synergies between Alexkor and State Mining Company • Alexkor exploring new mining ventures and downstream beneficiations beyond Alexander Bay

Alexkor Monitoring • Annual Reports, • Analysis and • Analysis and • Analysis and and Oversight Corporate Plan, Assessment of the Assessment of the Assessment of the Strategic Intent Annual Report and Annual Report and Annual Report and Statement and Corporate Plan Corporate Plan Corporate Plan Shareholder Compact with Alexkor

• Negotiation and ap- • Negotiation and ap- • Negotiation and ap- proval of shareholder proval of shareholder proval of shareholder compact compact compact

• Shareholder Strategic • Shareholder Strategic • Shareholder Strategic Intent statement at the Intent statement at the Intent statement at the AGM AGM AGM

• Alexkor Board Review • Assessment of SOE • Assessment of SOE • Assessment of SOE Board. Board. Board.

• Quarterly Reports • Assessment of • Assessment of • Assessment of quarterly reports quarterly reports quarterly reports

• Preparation of quarterly • Preparation of quarterly investor briefs investor briefs

• Achievement of MTEF • Assessment of PFMA • Assessment of PFMA • Assessment of PFMA targets by Alexkor Applications Applications Applications

• Assessment of Alexkor • Explore and facilitate • Explore and facilitate • Explore and facilitate funding requirements access to debt and access to debt and access to debt and to support new alternative funding alternative funding alternative funding business plan structures structures structures

11 Part B : Strategic objectives (cont.) Programme 2

Energy and Broadband Enterprises

Purpose: Align the corporate strategies and • Assess shareholder and enterprise risks at performance of Eskom, Pebble Bed Modular Reactor least quarterly, and advise Boards on areas of and Broadband Infraco with Government’s strategic concern. intent and performance targets. • Support the security of electricity supply by: The programme is comprised of the following – Examining Eskom’s maintenance and operational sub-programmes practices, distribution efficiency and the reserve • Management comprises the office of the Deputy margin annually. Director-General. 85.5 percent of the budget is – Receiving regular updates from and ongoing used for compensation of employees. interaction with Eskom, and engaging with • ICT Broadband Sector provides shareholder stakeholders in the energy sector. oversight of Broadband Infraco. This includes • Reduce dependence on the fiscus by monitoring overseeing agreements between parties, cost escalations for the build programme and assessing the business plan, monitoring developing innovative funding mechanisms. the national and international long distance networks, and providing overarching shareholder • Monitor the implementation and evaluate management. quarterly reports of the Competitive Supplier Development Programme to leverage off Eskom’s • Energy Sector provides shareholder oversight capital expenditure in the development of local of Eskom. This entails: generating, transmitting supplier industries. and distributing electricity with a particular emphasis on security of supply and optimising • Maintain state owned assets by monitoring current operations; and carrying out oversight of progress against the implementation of the Care the Pebble Bed Modular Reactor, which includes and Maintenance programme by the Pebble Bed monitoring the progress of the implementation Modular Reactor. of the care and maintenance programme to • Create an enabling policy and regulatory preserve intellectual property and assets as environment for the state owned enterprises by approved by Cabinet. engaging with the Department of Energy and the • Legal and Risk (Energy and Broadband National Energy Regulator of South Africa on new Enterprises) deals with all legal, governance policies and regulations affecting Eskom as and and risk work specifically related to the above- when they arise over the MTEF period. mentioned state owned enterprises. • Ensure that the West Coast submarine cable system is ready for service in 2011 by monitoring Broadband Infraco’s participation in the West Strategic objectives Coast submarine cable system consortium on a • Continuously ensure the alignment of shareholder quarterly basis. strategic intent in relation to state owned • Support increased access to broadband by: enterprises’ role in achieving Government‘s objectives in the energy and communication – monitoring Broadband Infraco’s price reports sectors. annually • Evaluate Corporate Plans annually and advise – increasing the number of access points to Boards about material deviations. broadband in major cities and under serviced areas through rolling out the national long • Monitor and benchmark the implementation of distance infrastructure. Corporate Plans and Shareholder Compacts.

12 Measurable objectives and medium term Programme 2 output targets Energy and Broadband Enterprises

Sub Output Measure/indicator 2011/2012 2012/13 2013/14 Programme Target Milestone Target Milestone Target Milestone

Energy Eskom Monitoring Annual Reports, • Assessment of the • Assessment of the • Assessment of the and Oversight Corporate Plan, Strategic Annual Report and Annual Report and Annual Report and Intent Statement and Corporate Plan Corporate Plan Corporate Plan Shareholder Compact with Eskom • Negotiation and • Negotiation and • Negotiation and approval of approval of approval of Shareholder Compact Shareholder Compact Shareholder Compact

• Shareholder Strategic • Shareholder Strategic • Shareholder Strategic Intent Communique Intent Communique Intent Communique in preparation for the in preparation for the in preparation for the Eskom AGM Eskom AGM Eskom AGM

• Assessment of SOE • Assessment of SOE • Assessment of SOE Board. Board. Board.

Quarterly Reports • Assessment of • Assessment of • Assessment of quarterly reports quarterly reports quarterly reports

• Preparation of quarterly • Preparation of quarterly • Preparation of quarterly investor briefs investor briefs investor briefs

Achievement of MTEF • Assessment of PFMA • Assessment of PFMA • Assessment of PFMA targets by Eskom Applications Applications Applications

• Explore and facilitate • Explore and facilitate • Explore and facilitate access to debt and access to debt and access to debt and alternative funding alternative funding alternative funding structures structures structures

Monitoring Eskom’s Timeous delivery of new • Capacity delivery as • Capacity delivery as • Capacity delivery as capacity expansion generation capacity and per plan (Shareholder per plan (Shareholder per plan (Shareholder programme transmission networks compact and IRP ) compact and IRP ) compact and IRP )

Mitigation strategy for Quarterly reports • Monitoring and • Monitoring and • Monitoring and the declining network analysis of network analysis of network analysis of network performance performance reports performance reports performance reports

Implementation of the Quarterly reports of road • Rehabilitation of coal • Rehabilitation of coal • Rehabilitation of coal Coal Haulage Road to rail migration progress haulage roads haulage roads haulage roads to Rail Migration Plan (tons) and road improve- ments (kms)

• Migrate Eskom coal • Migrate Eskom coal • Migrate Eskom coal from road to rail from road to rail from road to rail

Progress reports on • Report on the imple- • Report on the • Report on the Eskom’s role in MTRMP mentation of Eskom’s implementation of implementation of (DSMEE, ECS implemen- responsibilities with Eskom’s Eskom’s tation, REFIT, etc) respect to the MTRMP responsibilities with responsibilities with respect to the MTRMP respect to the MTRMP

• Report on the System • Report on the System • Report on the System Adequacy Adequacy Adequacy

13 Measurable objectives Programme 2 and medium term Energy and Broadband Enterprises (cont.) output targets

Sub Output Measure/indicator 2011/2012 2012/13 2013/14 Programme Target Milestone Target Milestone Target Milestone

Ring-fenced Ring-fenced purchasing • Ring-fencing directive purchasing function function with approved through Eskom to procure the IPP governance arrangements shareholder compact REFIT allocation as per IRP1

MYPD3 application Approval/support for the • Assessment and and the migration to Eskom application such decision on the Eskom tariff cost reflectivity that Eskom is sustainable application for MYPD3 and the economy is not compromised

Re-negotiation of Support/approve minimiz- • Elimination of risks Special Pricing ing of impact of ASA associated with Special Agreements agreements to Eskom/ Pricing Agreements (Aluminium South economy Africa)

PBMR Care and Main- • Monitor and facilitate • Regular (monthly and • Regular (monthly and tenance Strategy the implementation of quarterly ) progress quarterly ) progress implemented the care and reports reports maintenance strategy

• Quarterly progress report

ICT Infraco monitoring Strategic Intent Statement • Analysis and Assess- • Analysis and Assess- • Analysis and Assess- Broadband and Oversight and Shareholder Compact ment of the Annual ment of the Annual ment of the Annual Sector with Infraco Report and Corporate Report and Corporate Report and Corporate Plan. Plan. Plan.

• Negotiation and • Negotiation and • Negotiation and approval of share- approval of share- approval of share- holder compact holder compact holder compact

• Shareholder Strategic • Shareholder Strategic • Shareholder Strategic Intent Communiqué Intent Communiqué Intent Communiqué in preparation for the in preparation for the in preparation for the AGM AGM AGM

• Assessment of SOE • Assessment of SOE • Assessment of SOE Board. Board. Board.

Quarterly and Annual • Assessment of • Assessment of • Assessment of Reports, Corporate Plan quarterly reports quarterly reports quarterly reports

• Preparation of quarterly • Preparation of quarterly • Preparation of quarterly investor briefs investor briefs investor briefs

Achievement of MTEF • Assessment of PFMA • Assessment of PFMA • Assessment of PFMA targets by Infraco Applications Applications Applications

• Explore and facilitate • Explore and facilitate • Explore and facilitate access to debt and access to debt and access to debt and alternative funding alternative funding alternative funding structures structures structures

A drop in wholesale Wholesale price reduction Benchmarking and Benchmarking and Benchmarking and prices to the levels Monitoring of Infraco’s Monitoring of Infraco’s Monitoring of Infraco’s that are affordable pricing in relation to the pricing in relation to the pricing in relation to the and sustainable local and international local and international local and international market prices. market price market price

14 Measurable objectives and medium term Programme 2 output targets Energy and Broadband Enterprises (cont.)

Sub Output Measure/indicator 2011/2012 2012/13 2013/14 Programme Target Milestone Target Milestone Target Milestone Increased national Percentage increase in Monitoring the rollout of Monitoring the rollout of Monitoring the rollout of broadband broadband penetration the national and interna- the national and interna- the national and interna- penetration per annum tional network according tional network according tional network according to the National Broadband to the National Broadband to the National Broadband targets. targets. targets.

Business sustain- Diversification of Revenue Monitoring the contracts Monitoring the contracts Monitoring the contracts ability for Infraco Stream on a quarterly basis on a quarterly basis on a quarterly basis

Sentech JV to enable Formulate a collaboration/ Manage and monitor the Manage and monitor the retail service provision synergy between Infraco relationship on a quarterly relationship on a quarterly access and Sentech in order to basis basis assist Government to achieve its ICT objectives.

Network reliability Quarterly reports Monitor implementation Monitor implementation Monitor implementation and performance indicating progress with plans that are in place plans that are in place plans that are in place reliability and performance to improve reliability and to improve reliability and to improve reliability and improvement performance. performance. performance.

International Commissioning of the Support Infraco during Monitor the performance Monitor the performance connectivity West African Cable the roll-out phase (ends and maintenance of and maintenance of System (WACS) Project in 2011). Infraco’s capacity on Infraco’s capacity on quarterly basis. quarterly basis.

Legal and • To provide Ensuring effective Assisting in assessing Assisting in assessing Assisting in assessing Governance effective and shareholder oversight applications for approval applications for approval applications for approval sound legal advice in Eskom, PBMR and of significant and of significant and of significant and to ensure that Infraco materiality framework materiality framework materiality framework potential legal Legal and risks are Monitoring the Monitoring the Monitoring the litigation highlighted and Department’s legislative Department’s legislative Department’s legislative accounted for. compliance compliance compliance • Monitoring and oversight of Eskom, PBMR and Infraco

Governance Oversight Providing assistance • Developing a • Continuously updating • Continuously updating on developing and methodology on Board database on Board database on Board negotiating shareholder appointments and appointments appointments compacts, corporate reappointment plans, significance and materiality framework, • Continuously updating Board appointments and database on Board shareholder preparations appointments for AGMs • Monitor and oversee • Monitor and oversee • Monitor and oversee SOE remuneration SOE remuneration SOE remuneration

• High level audit of PBMR winding up

Resource considerations Spending in this programme over the medium term will 58.9 per cent. Over the medium term, expenditure is focus on making transfer payments to: the Pebble Bed expected to decrease to R21.7 million, at an average Modular Reactor Company for the decommissioning annual rate of 50.1 per cent. The decrease in both and dismantling costs in 2010/11 and 2011/12, and periods is due to a reduction of transfer payments to Broadband Infraco for the final capitalisation transfer in state owned enterprises, particularly the Pebble Bed 2010/11. Modular Reactor project, as it has been placed into care and maintenance, and Broadband Infraco, as the entity Expenditure decreased from R2.5 billion in 2007/08 to will not be receiving further funding from the fiscus. R174.5 million in 2010/11, at an average annual rate of 15 Part B : Strategic objectives (cont.) Programme 3

Legal & Governance

Purpose: Provide systems that align state owned – providing assistance on developing and enterprises with legal and corporate governance negotiating shareholder compacts, significance best practice and with Government’s strategic intent. and materiality frameworks annually, and as and when necessary, borrowing power delegations. The programme comprises the following sub- programmes – assisting in assessing applications for the approval of significant and material transactions. • Management - Office of the Deputy Director- General. – assisting in board appointments and shareholder preparations for annual general meetings. • Legal provides effective and sound legal advice to the department to ensure that potential legal – continuously updating the database on board risks to the department are highlighted and appointments on the department’s dashboard. accounted for. The subprogramme has a staff – annually reviewing the ownership policy, complement of 4 and 55.3 per cent of the budget governance toolkit and guidelines, as well is used on goods and services, including expert as appointments to, and remuneration and legal advice and normal operational expenditure. performance of the boards of the state owned • Governance develops frameworks to promote enterprises. transparency and good corporate governance within state owned enterprises. The • Ensure that state owned enterprises and the subprogramme has a staff complement of 2 and department comply with legal requirements by: 69.6 per cent of the budget is used on goods – monitoring, quarterly, state owned enterprises’ and services, including expert legal advice and corporate governance indicators through the normal operational expenditure. dashboard. – monitoring and assessing legislative impacts Strategic objectives on state owned enterprises and alerting the enterprises to changes and possible risks. • Ensure effective shareholder oversight of all the state owned enterprises by: – addressing constraints on state owned enterprise contract negotiation and management to improve commercial competence and contribute to economic growth and development.

16 Programme 3 Legal & Governance

Sub Output Measure/indicator 2011/2012 2012/13 2013/14 Programme Target Milestone Target Milestone Target Milestone LEGAL Legal Advice The department’s Monitoring department’s Monitoring department’s Monitoring department’s Legislative Compliance Legislative Compliance Legislative Compliance Legislative Compliance

Presidential Public Respond to queries from Respond to queries from Respond to queries from Respond to queries from Liaison Unit. the Presidential Public the Presidential Public the Presidential Public the Presidential Public Liaison Unit. Liaison Unit. Liaison Unit. Liaison Unit.

Drafting of legal Drafting of SLAs and Drafting SLAs and Legal Drafting SLAs and Legal Drafting SLAs and Legal documents Legal opinions; opinions timeously; opinions timeously; opinions timeously;

Winding down of Implementing and Approval and transfer of n/a n/a Aventura monitoring of the winding the remaining resorts up process Lodge relevant documentation with the Registrar of Companies

Closure of the matter

Winding down of Trace and payout to Monitor the winding up n/a n/a Diabo Trust beneficiaries process and distribution to beneficiaries

Closure of the matter

Finalisation and • Pre – trial proceedings Successful resolution of closure of the Government’s case and litigation : Londoloza/ Court order in favor of the Paharpur • Pre – trial proceedings Department

LEGAL Nabera: Finalisation Conclude litigation Review alternative Approval from Parliament Promulgation and and closure of the measures to conclude the implementation of the Act litigation litigation

Governance Develop the DPE Legislative Mandate Approval from the • Consultation with State Government shareholder Law Advisers Shareholder Management Model Cabinet approval • Enactment and President’s Minute Development of the Green/ White paper

• Shareholder Effective shareholder • Implementing • SOE Performance SOE Performance Management management through Companies Act monitoring and monitoring and evalua- Practices legislative compliance and corporate governance evaluation framework tion framework corporate governance tools (e.g. standard tools Memorandum of incorporation) for all SOE

• Enhance relation- • Provide support to ship between the Inter Ministerial Strategic state Oversight Committee Shareholdings, capital markets • Advise on specific and the private company law and sector corporate governance questions • Develop SOE legislative and regulatory frameworks to provide for the legislative environment within which the SOE operate. 17 Programme 3 Legal & Governance (cont.)

Sub Output Measure/indicator 2011/2012 2012/13 2013/14 Programme Target Milestone Target Milestone Target Milestone

Governance Toolbox Monitor SOE adherence • Develop an Owner’s • Implement manual Monitor SOE adherence and Audit to corporate governance expectation manual to corporate governance principles • Monitor SOE principles adherence to corporate • Finalise manual with governance principles SOEs and obtain Minister’s and Cabinet

SOE Board and Monitor compliance to • Roll out to the SOE Monitor compliance to Monitor compliance to Executive remunera- SOE Remuneration SOE Remuneration SOE Remuneration tion guidelines guidelines guidelines • Implementation by SOE

• Monitor compliance to SOE Remuneration guidelines

SOE Subsidiary Lists Monitor acquisition and Monitor acquisition and Monitor acquisition and Monitor acquisition and disposal of subsidiaries disposal of subsidiaries disposal of subsidiaries disposal of subsidiaries by SOE through the by SOE through the by SOE through the by SOE through the dashboard dashboard dashboard dashboard

Developing a Board Database for potential • Recruit and select Maintain and update Maintain and update Database SOE Board members potential candidates for Board database Board database the SOE Boards

• Develop a Board database

Develop a Board Uniform application by • Approval by DPE • Implementation by Monitoring and evaluation appointment SOE sector teams to Leadership Boards Framework enhance efficiency in board appointment • Monitoring and process. • Roll out to SOE evaluation sector teams.

• Stakeholder Promote effective Formalise and implement Structured engagement Structured engagement Engagements stakeholder relations Forum with key stakeholders with key stakeholders

• Presidential Review Commit- tee on SOE

• Governance Forum

• Structured engagement with Labour

Resource considerations Expenditure decreased from R93.7 million in 2007/08 periods is driven by the reduction in transfers to Alexkor to R50.0 million in 2010/11, at an average annual rate due to the finalisation of the Richtersveld community’s of 18.9 per cent. Over the medium term, expenditure is land claim, which formed part of the court case expected to decrease to R14.3 million, at an average settlement, and the final establishment of the township. annual rate of 34.1 per cent. The decrease in both

18 Programme 4 Manufacturing Enterprises

Manufacturing Enterprises

Purpose: Align the corporate strategies and – setting working capital management targets and performance of Denel and the South African Forestry conducting monthly performance reviews. Company Limited with Government’s strategic intent and performance targets. Develop proposals in terms – providing support to ensure the effective of the state owned enterprises’ role in developing an restructuring of Denel Saab Aerostructures and advanced manufacturing cluster. Denel Dynamics to return to commercial viability.

The programme comprises the following – ensuring optimal alignment between Denel’s sub-programmes restructuring plan and the strategic requirements of the Department of Defence and Military Veterans, • Management – Office of the Deputy Director- particularly the alignment with the Department of General. Defence and Military Veterans’ military strategy, • Defence Sector oversees Denel’s financial and once the Department of Defence has finalised their strategy implementation. revision of the defence strategy.

• Forestry Sector monitors the activities of the South • Facilitate the process of defining Denel’s future African Forestry Company. role in the economy by regular interaction and discussions with various stakeholders. • Legal and Risk (Manufacturing) deals with all legal, governance and risk work specifically related to • Facilitate financial sustainability to ensure above mentioned state owned enterprises. commercial viability by assessing and monitoring the implementation of the South African Forestry Company turnaround plan, measured by improved financial performance on an ongoing basis. Strategic objectives • Provide clarity on the future role of the South African • Ensure alignment in shareholder strategic intent Forestry Company by: in relation to state owned enterprises’ role in achieving objectives in the defence manufacturing – developing an internal position paper for broader and the forestry sectors by reviewing enterprise consultation between the South African Forestry strategies and mandates in the context of political Company Limited and the Departments of and sectoral policy shifts. Agriculture, Forestry and Fisheries and Rural Development and Land Reform • Ensure that the corporate strategies and plans of state owned enterprises are aligned with – ensuring that the mandate of the South African government’s strategic intent by reviewing and Forestry Company is aligned with Government’s evaluating these strategies and plans annually, strategic objectives both domestically and and alerting the boards and enterprises to material internationally by assessing the company’s deviations. quarterly reports.

• Facilitate the financial and operational sustainability • Facilitate the disposal of minority shares of Denel by reviewing the Denel Board to bring it to a by engaging with the Department of Rural full complement of members with the requisite skills, Development and Land Reform on its position experience and expertise, as well as developing on the optimal institutional vehicle to ensure the a turnaround plan that clearly indicates how the transfer of shares and developmental benefits to company will achieve commercial sustainability community beneficiaries. and reduce its dependence on the fiscus. • Monitor progress on resolving land claims over the • Monitor Denel’s turnaround by: 61 per cent of land owned by the South African Forestry Company. – measuring ongoing performance against the turnaround plan

19 Programme 4 Manufacturing Enterprises

Sub Output Measure/indicator 2011/2012 2012/13 2013/14 Programme Target Milestone Target Milestone Target Milestone

DENEL Denel Board Review Appointment of Nine (9) • Nine new Board new Board members members appointed (incl. Chairman) to bring the Board to its full complement

Enabling Denel’s Alignment between Denel • Optimal alignment • Ongoing monitoring • Ongoing monitoring of Strategic Role in strategy and SANDF between Denel’s of alignment alignment provision of Defence requirements (Retention business model and Capabilities of strategic and sovereign the strategic capabilities in areas requirements of the agreed to with DoD) Department of Defence and Military Veterans’ defence strategy

Denel Turnaround New business/growth • Development of • Quarterly monitoring • Quarterly monitoring Plan strategy for Denel turnaround plan that of Implementation of of Implementation of pursues financial turnaround plan turnaround plan recovery and stability through improvements in its operational and financial performance to secure its long term viability and reduces dependence on the fiscus

Resolution of Managed exit from DSA Renegotiation and exit Government’s Airbus A400M contract of DSA Airbus A400M position on the contract future of Denel Saab Aerostructures

Review of Denel’s New group structure Denel’s future role in company and group with optimal governance the economy defined by structure structure that creates regular interaction and value, achieves greater discussions with various business efficiency, stakeholders stronger functionality whilst minimizing cost and duplication

Developmental • Training and skills • Agreement with Denel • Quarterly Report on • Quarterly Report on Contribution development and on increased usage skills development skills development succession planning of Denel’s training strategy and strategy and facilities succession planning succession planning • Improved performance in terms of BBBEE • Quarterly Report on targets skills development strategy and succession planning • Agreement with Denel on BBBEE targets included in the 2011/12 shareholder compact for attainment of Level 4 BEE contribution by March 2012

20 Programme 4 Manufacturing Enterprises (cont.)

Sub Output Measure/indicator 2011/2012 2012/13 2013/14 Programme Target Milestone Target Milestone Target Milestone

SAFCOL Provide shareholder Strategic Intent • Assess the Corporate • Assess the Corporate • Assess the Corporate oversight Statement, Shareholder Plan. Plan. Plan. Compact, Corporate Plan and Annual Report • Negotiate Shareholder • Negotiate Shareholder • Negotiate Shareholder Compact and its Compact and its Compact and its approval approval approval

• Update Strategic Intent • Update Strategic Intent • Update Strategic Intent Statement and Com- Statement and Com- Statement and Com- muniqué in preparation muniqué in preparation muniqué in preparation for the AGM for the AGM for the AGM

• Board assessment. • Board assessment. • Board assessment.

• Assess Turnaround • Monitor Turnaround • Monitor Turnaround Plan Plan. Plan.

• Assess Section 54(2) • Assess Section 54(2) • Assess Section 54(2) PFMA applications as PFMA applications as PFMA applications as required required required

Quarterly • Assess quarterly • Assess quarterly • Assess quarterly reports and provide reports and provide reports and provide investor briefs investor briefs investor briefs

Position paper on • Inter-governmental • Implementation • Implementation SAFCOL’s future role consultation and consensus on SAFCOL’s future role.

• Cabinet memorandum.

Facilitate share transfer • Implementation • Implementation • Implementation to minority shareholders pending inter-departmen- tal resolution on optimal model

Facilitate land claims • Ensure SAFCOL’s • Ensure SAFCOL’s • Ensure SAFCOL’s process participation in land participation in land participation in land claims process claims process claims process

Resource considerations The spending focus of the programme will be primarily Additional transfers of R257.6 million in 2008/09, R191.9 on administrative costs as no transfers will be made to million in 2009/10 and R181.3 million in 2010/11 were state owned enterprises over the MTEF period. made as further payments for indemnity claims.

Expenditure decreased from R1.2 billion in 2007/08 to Expenditure is expected to decrease from R192.8 million R192.8 million in 2010/11, at an average annual rate in 2010/11 to R14.3 million in 2013/14, at an average of 45 per cent. This is primarily due to the decrease annual rate of 58 per cent. The decrease is due to in transfers to Denel. Denel received R1.2 billion in the cessation of transfer payments to the state owned 2007/08, including R221 million to pay a claim for an enterprises indemnity granted to Denel and R933 million as a final capital investment.

21 Part B : Strategic objectives Programme 5

Transport Enterprises

Purpose: Align the corporate strategies and Transnet Freight Rail and developing performance of Transnet, South African Airways and an integrated government response to South African Express Airways with Government’s growing rail market share strategic intent and performance targets. • facilitating the introduction of private The programme comprises of the following sector investment in rail through public sub-programmes private partnerships to assist with the provision of requisite infrastructure where • Management – The Office of the Deputy Director- such investments are unaffordable on the General. Transport Sector provides shareholder Transnet balance sheet oversight of Transnet. Aviation Sector provides shareholder oversight of South African Airways • overseeing the introduction of multiple and South African Express Airways. private operators on the branch line network to revitalise the network as a • Legal and Risk (Transport) deals with all legal, feeder to the core network and to realise governance and risk work specifically related socioeconomic benefits to Transnet, South African Airways and South African Express. • facilitating the introduction of competition for the management of container terminals Strategic objectives through the establishment of the Ngqura container terminal as a transhipment • Promote the alignment of corporate strategies terminal of state owned enterprises with Government’s • pursuing incremental improvements in objectives in relation to the transport and aviation ports productivity and rail operational sectors by undertaking a comprehensive review efficiencies by creating performance of corporate strategies, business plans, and incentives via the Transnet shareholder annual and quarterly performance. compact. • Provide the Boards of Transnet, South African • Ensure the global competitiveness of the South Airways and South African Express Airways with African freight logistics industry by implementing strategic intent statements at their annual general national corridor performance measurement tools meetings to highlight shareholder priority areas and indicators over the MTEF period to quantify and guide the policy direction of the enterprises. the operational efficiency of freight corridors. • Implement a long term strategy for improving the • Improve investment in rail infrastructure by efficiency and performance of investments by monitoring the rollout of Transnet’s capital state owned enterprises by annually monitoring expenditure programme by annually assessing the key performance indicators and concluding its impact for any significant deviations from shareholder compacts with the Boards of corporate plans, including tracking cost overruns Transnet, South African Airways and South and time delays on major capital projects and African Airways Express. taking the necessary action. • Create an enabling environment for transport • Monitor the implementation of the Competitive enterprises and ensure an appropriate balance Supplier Development Programme to leverage between the enterprise interest and the consumer Transnet’s capital expenditure for the interest by: development of local supplier industries by • engaging with the policy Departments and evaluating the quarterly Transnet reports. relevant regulators on a regular basis as and • Provide support to South African Airways to when required achieve sustainable levels of profitability by: • ensuring the compliance of transport – overseeing the implementation of the initiatives enterprises with the Public Finance relating to the R1.6 billion guarantee to South Management Act (1999) and other legislative African Airways prescripts. – encouraging consistent generation of bottom • Ensure the contribution of Transnet to line profits in order to strengthen South African achieving an efficient, competitive and Airways’ balance sheet. responsive infrastructure (output 3 of outcome 6) by: • Monitor the alignment, strategy and mandate of • increasing the market share of total freight South African Airways and South African Express to rail to an annualised 250 mt from the Airways with the African aviation strategy by current 177 mt by 2014 by undertaking a evaluating quarterly, corporate plans and detailed diagnosis of challenges facing performance against targets. 22 Programme 5 Transport Enterprises

Sub Output Measure/indicator 2011/2012 2012/13 2013/14 Programme Target Milestone Target Milestone Target Milestone

Transnet Shareholder Annual reports, Corporate • Assessment of the • Assessment of the • Assessment of the Oversight Plan, Shareholder Annual Report and Annual Report and Annual Report and Compact Corporate Plan Corporate Plan Corporate Plan

• Negotiation and • Negotiation and • Negotiation and approval of Share- approval of Share- approval of Share- holder Compact holder Compact holder Compact

• Preparation of the • Preparation of the • Preparation of the Quarterly Investor Brief Quarterly Investor Brief Quarterly Investor Brief

• Appropriately skilled • Appropriately skilled and representative and representative Boards Boards Achievement of MTEF • Quarterly and annual • Quarterly and annual • Quarterly and annual targets monitoring monitoring monitoring

• Assessment of PFMA • Assessment of PFMA • Assessment of PFMA Applications Applications Applications

Annual General Meetings • AGM agenda and • AGM agenda and • AGM agenda and – Advice to Minister on shareholder response shareholder response shareholder response exercise of shareholder right • Appropriately skilled • Appropriately skilled • Appropriately skilled and representative and representative and representative board board board

SOE five year perfor- • Analysis of 5 year • Analysis of 5 year • Analysis of 5 year mance review performance performance performance • Input to DPE SOE five • Input to DPE SOE five • Input to DPE SOE five year review publication year review publication year review publication

Develop and Increased rail market • Diagnostic workshop • Facilitate implementa- Monitor rail market share implement a rail share to total freight with Transnet and tion of identified in shareholder compact freight improvement report on key initiatives measures to achieve programme to to address modal shift increase in Transnet increase market rail market share share • Facilitate increase (arising from the and improvements to diagnostic workshop Transnet rolling stock report and legislative fleet amendments) • Lead the development • Monitor and ensure of an integrated incremental targets government response for rail market share in to growing market shareholder compact share (by identifying relevant legislation to be amended and approved by Cabinet to support modal shift to rail) • Monitor and ensure incremental targets for rail market share in shareholder compact

Create scope for Multiple private operators • Concession and Rollout of second and Continued rollout and multi-operator on the branch lines rollout of first wave of third wave concessions introduction of new involvement in network concessions operators under-utilized branch lines • Facilitate at least 3 branch lines conces- sions 23 Programme 5 Transport Enterprises (cont.)

Sub Output Measure/indicator 2011/2012 2012/13 2013/14 Programme Target Milestone Target Milestone Target Milestone

Introduction of private Public Private Partner- • Facilitate approval of • Monitor frameworks/ Achievement of ten PPPs sector investment ships (PPPs) in rail the Transnet private agreements negotiated in rail in rail infrastructure sector participation and entered into with framework by Cabinet private sector • Oversee market • Facilitate four PPPs in testing of private sector rail by Transnet appetite to invest

Oversee private Licensed operator for • Framework for private • Request for proposal • Operator in place sector participation Ngqura container terminal sector involvement (RFP) for advertised by in Ngqura container in Ngqura container Transnet • Monitor performance of terminal terminal developed Ngqura as a transship- and approved • Agreement signed with ment terminal new operator • Oversee appointment of transaction advisor • Ngqura container by Transnet operator licensed by Ports Regulator

Develop National • IT system in place • Gauteng – Durban • Full NCPM system in Monitoring of corridor Corridor Performance (Natcor) place performance via NCPM Measurement • Agreed indicators system (NCPM) tools and • Gauteng – Cape Town • Feedback of NCPM • Population and (Capecor) indicators monitoring of system inputs to policy in DoT, data • Gauteng – Port DTI and Transnet Elizabeth shareholder compact • Business intelligence outputs • Gauteng – Maputo • IT system operational

Monitor roll out of • Monitor compliance to • Quarterly and Annual • Quarterly and Annual Quarterly and Annual Transnet’s capex budget assessment assessment assessment programme • Assess impact of • Monitor delivery of the • Monitor delivery of changes in plan Transnet NMPP main coastal terminal and trunk line completion of Transnet NMPP

Complete a long • National Freight • Initiate study on • Completed study, term National Freight Network Design National Freight including funding op- Network Plan (Rail Network Design (rail tions for infrastructure and ports) • Inputs to Transnet NIP and ports) development. • Input to DOT’s NATMAP process

Implementation of Leverage of Transnet • Oversee development • Monitor implementation • Monitor implementation Competitive capex in the development of Transnet supplier Supplier Develop- of local supplier industries development plan • Monitor delivery of • Monitor delivery of ment Programme new jobs in supplier new jobs in supplier • Monitor delivery of industries industries new jobs in supplier industries

Consideration of Defined role for in a Develop corporate Transnet corporate developmental economy structure options for structure options Transnet

Aviation Oversight SAA and • Annual reports, • Assessment of the • Assessment of the • Assessment of the SAX Corporate Plan, Annual Report and Annual Report and Annual Report and Shareholder Compact Corporate Plan Corporate Plan Corporate Plan • Negotiation and • Negotiation and • Negotiation and approval of Share- approval of Share- approval of Share- holder Compact holder Compact holder Compact

24 Programme 5 Transport Enterprises (cont.)

Sub Output Measure/indicator 2011/2012 2012/13 2013/14 Programme Target Milestone Target Milestone Target Milestone

• Preparation of the • Preparation of the • Preparation of the Quarterly Investor Brief Quarterly Investor Brief Quarterly Investor Brief

• Shareholder Strategic • Shareholder Strategic • Shareholder Strategic Intent Communique Intent Communique Intent Communique in in preparation for the in preparation for the preparation for the SAA SAA and SAX AGM SAA and SAX AGM and SAX AGM

• Assessment of SOE • Assessment of SOE • Assessment of SOE Board Board Board

• Achievement of MTEF • Quarterly and annual • Quarterly and annual • Quarterly and annual targets monitoring monitoring monitoring

• Assessment of PFMA • Assessment of PFMA • Assessment of PFMA Applications Applications Applications

• Annual General • AGM agenda and • AGM agenda and • AGM agenda and Meetings – Advice to shareholder response shareholder response shareholder response Minister on exercise of shareholder rights

• SOE five year • Analysis of 5 year • Analysis of 5 year • Analysis of 5 year performance review performance performance performance

• Input to DPE SOE 5 • Input to DPE SOE 5 • Input to DPE SOE 5 year review publication year review publication year review publication

Develop a strategic • Assessment of • Financial model devel- • Scenario planning and • Scenario planning and scenario planning strategic options oped and scenarios forecasting forecasting model for SAA assessed

• Scenario planning and forecasting

Ring-fencing of se- • Development of an • Review and implement • Implement business • Monitoring of lected SAA business independent business business plans plans implementation of units and strategic focus and new business plan equity investments strategic alignment (Voyager, Air Chefs, Galileo and Cargo)

Assess options for • Feasibility study • Proposal to Cabinet • Implement decisions • Monitoring of establishing South and draft enabling Act implementation of African Airways business plan Technical as a multi-airline focused African maintenance hub

Resource considerations The spending focus of the programme will be primarily transfers to state owned enterprises. Over the medium on administrative costs as no transfers will be made to term, expenditure is expected to increase to R25.5 state owned enterprises over the MTEF period. million, at an average annual rate of 6.2 per cent, mainly to provide adequate support to the entities managed in Expenditure decreased from R752.1 million in 2007/08 this programme. to R21.3 million in 2010/11, at an average annual rate of 69.5 per cent. The decrease was due to the cessation of

25 26 Part B : Strategic objectives Programme 6 Joint Project Facility

Purpose: Align the department and its portfolio of state stakeholders is being contemplated to improve the owned enterprises to national economic strategies, performance of state owned enterprises. such as the New Growth Path and associated • The framework for Africa programme aims at defining objectives, through focused policy research and the focus areas with acceptable risk parameters and development of catalytic projects. clear developmental impacts for the involvement of South Africa’s state owned enterprises in Africa and The programme comprises the following sub- will also develop implementation policy for state programmes owned enterprises.

• Management- The Office of the Deputy Director- • The human resource, capacity building General. and transformation programme has several subprogrammes: • Joint Project Facility provides programme management support for a number of catalytic – The skills development programme leverages projects that align the department and its portfolio the skills development capacity of state owned of state owned enterprises to national economic enterprises and their core suppliers to ensure strategies. 79.1 per cent of the subprogramme’s the optimum provision of scarce and critical skills budget over the MTEF period will be used for (artisans, technicians and engineers) in support goods and services. of the build programme. This includes: overseeing skills planning and implementation in state Strategic objectives owned enterprises and their suppliers; facilitating partnerships between state owned enterprises, The Joint Project Facility’s (JPF) new mandate aims further education and training institutions and to align the DPE and its portfolio of SOE to national industry, in support of artisan development; economic strategies and associated objectives ensuring that state owned enterprises support through focused policy research and the development the national skills agenda; and monitoring scarce and critical skills in state owned enterprises and of catalytic projects. ensuring skills performance indicators are included Achievements of Joint Project Facility projects in Shareholder Compacts. – The management learning programme develops • The procurement leverage/competitive supplier a cadre of management leadership capability in development programme leverages off state owned state owned enterprises, agencies and regulators enterprises’ capital and operational procurements in South Africa and Africa. The University of Cape associated with Eskom and Transnet’s build Town’s Graduate School of Business launched this programmes to promote investments in plant, programme in May 2010. technologies and skills in state owned enterprises’ suppliers. This supports the Industrial Policy – The parliamentary learning programme (Autumn Action Plan 2 and the New Growth Path. It includes School) is an annual event to provide the both Transactional and Programmatic (fleet Parliamentary Portfolio Committee on Public procurement) The South African Renewables Enterprises and National Council of Provinces Initiative aims to reduce the cost of capital for Select Committees on Labour and public renewables and provide additional funding for enterprises with an opportunity to engage in the renewable energy feed-in tariff. In future, dialogue with industry experts around key issues facing government and the state owned the procurement leverage programme aims to enterprises. establish a Centre of Excellence. The Infrastructure Supplier Benchmarking Programme, which builds • The environmental issues project balances the competitiveness of the local supplier base and environmental conservation with the need to develop is focused on supplier profiling, benchmarking, infrastructure rapidly. The environmental impact capacity building and matchmaking, will be assessment process for strategically important relocated to the Department of Trade and Industry. developments has been streamlined for the state owned enterprises’ build programmes and a fund • Policy programmes aim at establishing the role has been established to assist the process. The of state owned enterprises and the shareholder environmental impact assessments for strategically executive in the Developmental State. They will important developments are monitored, and also focus on the role of state owned enterprises where necessary ministerial intervention can be in Government’s New Growth Path and develop a sought. The project also participates in broader departmental position on macroeconomic policy. engagements around air quality, water provision and climate change. • The innovative infrastructure investment dialogue programme aims at interrogating existing • The property project leverages off the non-core investment plans’ assumptions around unlocking property portfolios of state owned enterprises to growth and developing policies and funding contribute to state priorities, such as land release for human settlement, property sector transformation, strategies to increase the rate of investment in urban renewal and socioeconomic development. Eskom and Transnet. Better dialogue with key 27 Programme 6 Joint Project Facility

Sub Output Measure/indicator 2011/2012 Target 2012/13 2013/14 Programme Milestone Target Milestone Target Milestone HR, Capacity Provision of scarce • Establish partnerships Implementation and Implementation and Implementation and Building and and critical skills in between SOE, FET Monitoring Monitoring Monitoring Transfor- SOE and industry in support mation of artisan development Programme: • Monitor skills dashboard. SOE and Supplier Skills • Skills development Development KPIs to be included in Compacts

SOE Implementation of Monitor B-BBEE, Dashboard to include Implementation and Implementation and Transforma- SOE transformation employment equity and transformation indicators Monitoring Monitoring tion Oversight agenda management transforma- tion (including succession planning).

Specialised Management MLP review Annual Review of Annual Review of Annual Review of Skills Learning Programme Programme Programme Programme Development at UCT GSB to Programmes facilitate improved SOE performance and management

Parliamentary Hosting of annual PLP for Annual PLP Annual PLP Annual PLP Learning Programme Portfolio Committee on (PLP) Public Enterprises and National Council of Provinces Select Committee for Labour and Public Enterprises

Procurement Leverage SOE capi- • Ensure SOE demand Implementation and Implementation and Implementation and Leverage tal and operational planning and procure- monitoring monitoring monitoring Programme procurements to ment implementation promote investments process to enable in plant, technologies supplier development and skills in SOE supplier communities • Institutionalise govern- Establish governance and Monitoring Monitoring ance and accountability accounting mechanism

Transactional based • Ensure SOE design Oversight of implementa- Oversight of implementa- Oversight of implementa- leverage to ensure and implement next tion and monitoring tion and monitoring tion and monitoring procurements have generation supplier optimal development development plans. impact • Integration of supplier DPE procurement policy Monitoring Monitoring development with SOE for supplier development procurement policy.

Programmatic/fleet • Design and facilitate Monitor industrial Monitoring Monitoring based leverage the implementation of capabilities long term procurements.

• Locomotive fleet Establish formal oversight Monitoring Monitoring procurement for committee and task team Transnet.

• Facilitate renewable Leverage international Implementation Monitoring procurements for climate financing com- the South African mitments and align with Renewables Initiative DOE. (SARi). 28 Programme 6 Joint Project Facility (cont.)

Sub Output Measure/indicator 2011/2012 Target 2012/13 2013/14 Programme Milestone Target Milestone Target Milestone • Nuclear fleet Align roles and Implementation Realignment with IRP3 procurement based on responsibilities with DOE. and implementation IRP2 allocations.

Establish SOE Institutional design Implementation Implementation Implementation Centre of Excellence for Complex Capital Develop Buyer Implementation Implementation Implementation Projects requirement database.

SOE procurement Implementation Implementation Implementation capability certification project

Complex procurement Implementation Implementation and Implementation and skills development. monitoring monitoring

Policy Role of SOE and Further development of Implementation Monitoring Monitoring Programmes Shareholder in the shareholder management developmental State model.

Role of SOE in the Analysis of New Implementation and Implementation and Implementation and New Growth Path. Growth Path and SOE monitoring monitoring monitoring contribution

Develop a DPE Analysis of macro- Research alternative Implementation Implementation position on Macro- economic policy and its policies. Economic Policy. impact on SOE viability.

Strategic Innovative Infra- Develop funding Develop relevant policies. Implementation Implementation Programmes structure Investment strategies. Dialogue

Framework for Africa. Develop policy and focus Develop implementation Implementation Implementation areas in Africa for SOE policy. involvement.

Property SOE non-core Property disposals and Facilitation and monitoring Facilitation and monitoring Facilitation and monitoring Project property portfolios facilitation of Key contribute to state Integrated Developments. priorities, property sector transforma- tion, urban renewal and socio-economic development.

Environmental Government policy Monitor Environmental Analysis and Monitoring Analysis and Monitoring Analysis and Monitoring Issues balances environ- Impact Assessments for mental conservation Strategically Important with the need Developments to develop SOE infrastructure rapidly Implement DPE-DEA- Implementation Implementation Implementation Eskom MOU.

Resource considerations

As a result of the realignment of the department’s projects increased from four to five as a result of the South functions, the Joint Project Facility subprogramme African Renewables Initiative project being launched. was moved to this programme from the Manufacturing Over the MTEF period, expenditure is expected to Enterprises programme in 2007/08. Historical increase from R10.2 million to R15.9 million, at an expenditure has been adjusted accordingly. average annual rate of 15.9 per cent. This is mainly due Expenditure decreased from R15.5 million in 2007/08 to to the expansion over the MTEF period of some of the R10.2 million in 2010/11, at an average annual rate of projects and programmes, and two new projects to be 13.1 per cent. This was due to the completion of some launched from 2011/12. of the research projects. In 2010/11, the programme’s 29 State Owned Enterprises

Alexkor Since November 1992, Alexkor has been run as a except for the township erven. The subdivision and public company with the State as sole shareholder. zoning of the township has been conducted and Alexkor mines diamonds in the Alexander Bay area, the general plan has been approved. Transfer of including marine mining and land mining. the township will be made soon. The upgrade of the township civil and electrical engineering services In 2003, the Constitutional Court ruled that the to municipal standards has begun and is expected Richtersveld community had a legitimate claim to be completed in July 2011. Alexkor’s agricultural to its ancestral land from which it was forcibly and maricultural assets have been transferred to the removed after diamonds were discovered there in community. Transfer of the land mining rights to the the early 1920s. The court found that the community community is also imminent, and this paves the way had been evicted under discriminatory apartheid for the development of a more viable mining venture laws and was entitled to have both the land and and a redirection of Alexkor’s strategy. mineral rights returned. Alexkor has been subject to a number of business constraints, including the land This will entail, among other things, seeking claim. These constraints have resulted in decreasing opportunities to procure new mining ventures to diamond recoveries over the years. The deed of secure new revenue streams and ensure its future settlement for the land claim was signed in April growth. It will also involve exploring opportunities for 2007, and the Department of Public Enterprises has downstream beneficiation to contribute to the creation mandated Alexkor to explore options to reposition of new jobs, the development of the requisite skills, the company as a state owned mining and minerals investment in research and development, economic company. This new strategy will enable Alexkor to growth, sustainable development and cost effective respond to new mining and mineral opportunities support for the broader policies of government. and ensure the company’s long term viability, The company showed some improvements in enabling it to effectively address its environmental its financial performance in 2009/10, driven by rehabilitation and other liabilities while contributing improvements in carat production and the carat price, to the socioeconomic development of the region. coupled with reductions in expenses and provisions While continuing with mining activities in the current for the post-retirement medical aid. Alexkor achieved constrained economic context, Alexkor is focused on revenue of R163.9 million in 2009/10, a 28.5 per cent implementing the Richtersveld land restitution order increase from the R127.5 million achieved in the imposed on it by the land claims court. The court previous year. It recorded a net operating profit of order obliges it to transfer land and mineral rights R27 million (2008/09: R77.6 million loss) and R36.1 to the Richtersveld community, establish Alexander million profit for the year (2008/09: R65.7 million Bay as a formal township, undertake environmental loss). Comprehensive income for the year was R48.8 rehabilitation, and establish a pool and share joint million, after taking into account the revaluation venture with the Richtersveld Mining Company for reserve of R12.7 million. As a result of the profit of future mining activities. R36.1 million coupled with the revaluation of R12.7 Significant progress has been made in the million, Alexkor’s capital and reserves improved, implementation of the settlement signed with the albeit remaining in a net negative R67.3 million Richtersveld community. All Alexkor, State and equity position (2008/09: negative R103.4 million Northern Cape provincial land has been transferred, equity position).

30 State Owned Enterprises (cont.)

Broadband Infraco South Africa lags behind its international its inception, Broadband Infraco’s strategy has counterparts in terms of ICT penetration and the rate focused on reducing the cost of this key element. at which new technology is adopted. Broadband The construction and maintenance agreement was services in South Africa are more expensive and signed in April 2009. Once completed and fully the penetration is much lower than international commissioned, the system will reduce broadband benchmarks. Broadband Infraco was established in costs and increase bandwidth capacity for all South 2007 in terms of the Broadband Infraco Act (2007) Africans. as a State led intervention to introduce competition in The West Coast Submarine Cable System is the telecommunications market and to contribute to expected to be ready for service by the last quarter increasing access to broadband services including of 2011/12. All targets set in the previous MTEF underserviced areas. It has invested in a national long cycle such as the marine environmental survey, the distance fibre optic network based on the fibre optic manufacturing of the marine cable, the deployment assets deployed by Eskom on power transmission of the optical line terminal equipment have been lines and Transtel on railway lines, which will form completed. It is anticipated that the marine cable the backbone of the second national operator. By installation will be completed in March 2011. March 2010, Broadband Infraco had deployed and commissioned 12 250 km of the network. Broadband Since 2006/07, Broadband Infraco was capitalised Infraco launched its services to the market in October with R1.3 billion for establishment and operational 2010 after obtaining an electronic communications costs, which comprised: R627 million in 2006/07, networks services licence in October 2009. R377 million in 2008/09, R208.5 million in 2009/10, and a final transfer of R138.6 million in 2010/11. In addition to national connectivity, international connectivity is also a major cost component. Since

31 State Owned Enterprises (cont.)

Denel Denel was incorporated as a private company in The business has largely been relying on debt April 1992, when it separated from the Armaments financing with the help of government guarantees, Corporation of South Africa. At the time, the industrial but this is not sustainable. More sustainable support and manufacturing activities of the corporation were mechanisms are currently being assessed, and they integrated into Denel. Denel’s mandate is to supply will be developed, based on a robust turnaround South Africa’s armed forces with strategic and plan. The plan is aiming for financial recovery and sovereign capabilities. Denel also plays a major role stability through improvements in its operational and in contributing to the development of South Africa’s financial performance to secure its long term viability. advanced manufacturing capability. The Denel A key focus is the restructuring of Denel Saab group of companies currently delivers products Aerostructures and ensuring optimal alignment ranging from ammunition to missiles, and also between Denel’s business with the strategic carries out systems design and integration for land requirements of the Department of Defence and and air capabilities for the Department of Defence Military Veterans, particularly in relation to its military and Military Veterans. strategy. Coupled with this will be the need to define Denel’s future role in the economy to ensure In 2005, a turnaround strategy for Denel was the strengthening of advanced manufacturing initiated, which provided for a shift from major technologies in support of government’s industrial systems development towards the manufacture of policy objectives. sub-systems and components for local and global Denel recorded a net loss of R246 million, which is markets. The strategy was driven by the need for an improvement of R287 million compared to the Denel to be commercially viable and reduce its net loss of R533 million incurred in 2008/09. This dependence on the fiscus. A key part of the strategy improvement is due to lower operating costs, the was for Denel to enter into equity partnerships that closing of certain legacy contracts, cost cutting could provide it with access to international markets, and better financial performance by associated technical expertise and capital. Equity partnerships companies. have thus far been secured in four of Denel’s businesses: engine manufacturing, munitions, The net loss for the year is mainly ascribed to: optronics and aero structures. Denel Saab Aerostructures (which posted a net loss of R328 million before interest and taxes); Denel Although Denel has made some progress since Dynamics Missiles (which posted a net loss of R51 2005, its solvency position continues to pose serious million after impairment charges, before interest and challenges. While the trading losses in all the trading taxes); and interest expenses of R139 million on entities (apart from the aerostructures business) have external loans. Revenue has also been negatively been brought down and net equity is in the black, impacted by the delays in the A400M programme. Denel is overloaded with debt and is not generating Revenue decreased by 8 per cent from R3.9 billion enough gross profit to secure its survival. to R3.6 billion in 2009/10.

32 State Owned Enterprises (cont.)

Eskom Eskom generates 95 per cent of the electricity used Completed projects between 2005/06 and 2008/09 in South Africa and 45 per cent of the electricity used include the return to service and construction of in Africa. Eskom’s reserve margin has been steadily three power stations. As a result, Eskom delivered declining since 1999 as a result of increasing 4 9064MW of additional generating capacity into the demand and not enough additional capacity being system between 2005/06 and 2009/10. The focus commissioned. This was particularly acute in for 2010/11 includes finalising the funding model January 2008, when the reserve margin dropped to ensure the completion of the capital expansion to alarmingly low levels (3.6 per cent commercially programme and improving operational performance available), resulting in extensive load shedding. to ensure security of supply. Low coal stockpile levels (12 days compared to the Over the five-year period from 2008/09 to 2012/13, 20 days which is acceptable in the industry) also Eskom’s revised build programme is estimated at contributed to the low reserve margin in 2007/08. R385 billion. Major projects still to be completed Eskom has since introduced a recovery plan, which include the construction of three new power stations. has seen the average stockpile level increase to 37 Other major projects include the return to service of days as at the end of March 2010. However, this is two power stations and the construction of three new still less than the company target of 42 days. power stations and transmission projects. Eskom Since 2004, Eskom has been undertaking a capacity plans to deliver another 625MW of capacity into expansion (build) programme to increase capacity the system in 2010/11, and additional generating and ensure the secure supply of electricity. capacity of 2 025MW between 2010/11 and 2012/13.

33 State Owned Enterprises (cont.)

Pebble Bed Modular Reactor The Pebble Bed Modular Reactor was initially set programme in which the Pebble Bed Modular up as a nuclear architect engineering company Reactor Company was part of a consortium, not that was focused on the design and licensing of materialising, Cabinet approved that the company a standardised nuclear heat supply system and be placed into care and maintenance to protect pebble fuel. It was established in 1999 to develop its intellectual property and assets while ensuring and market small scale, high temperature reactors that no additional funding will be required from locally and internationally. The company has not been Government. The Department of Public Enterprises able to acquire additional investment for the Pebble will therefore be monitoring the implementation of Bed Modular Reactor project, nor has it been able this transition. to acquire a customer despite revising its business No further funds have been committed by model in 2008/9, since Government’s last funding Government, except for R20 million, which was allocation in 2007, of which the last transfer was provided in the adjustments budget and which will effected in 2009/10. The company’s business model be disbursed in 2010/11, and a further R40 million has subsequently been revised in May 2009 and the for disbursement in 2011/12. These funds have been company’s main focus will be the preservation and allocated to ensure that the necessary provision for maintenance of intellectual property and assets. the statutory requirement for decommissioning and In light of the participation in the United States dismantling the fuel development laboratory is met Department of Energy’s next generation nuclear by the company.

34 State Owned Enterprises (cont.)

South African Forestry Company The South African Forestry Company manages Public Enterprises is carrying out its own review, the and develops commercial forests. The company’s Presidency is conducting a broader review of state activities include forestry management and timber owned enterprises across all spheres of government. harvesting and processing. The company’s The department will be engaging closely with the main subsidiary, Komatiland Forests, operates Presidential Review Committee on the implications in Mpumalanga, Limpopo, KwaZulu-Natal and for the company as well as other key stakeholders Mozambique. Softwood saw timber is sold in South such as the Department of Agriculture, Forestry and Africa and soft and hardwood saw timber and pulp Fisheries and the Department of Rural Development wood in Mozambique. Komatiland Forests has an 80 and Land Reform. Thereafter, a joint proposal will be per cent shareholding in the Mozambican forestry submitted to Cabinet for consideration. company, Indùstrias Florestais de Manica, while the In 2007, the Minister of Public Enterprises extended remaining 20 per cent is held by the Mozambican the disposal of the company by five years to 2011/12 government through its Instituto de Gestão das to allow for the resolution of the land claims lodged Participações do Estado. The company plays an with the department of Rural Development and important role in rural development and various Land Reform since 61 percent of the South African enterprise development projects have been initiated Forestry Company Limited land under operation is in order to contribute to poverty alleviation in the rural subject to land claims, with the understanding that areas in which it operates. shareholder value would be preserved in the interim. Government is currently re-examining the privatisation However, the economic downturn has had a severe of Komatiland Forests and the future role of the impact on the company’s operations and revenue. South African Forestry Company, in the context of The company reported a net loss of R468.9 million the developmental State. While the Department of in 2009/10.

35 State Owned Enterprises (cont.)

South African Airways

South African Airways is South Africa’s national air rescheduling the delivery dates of the aircraft from carrier. Owned by government, it is a full service 2010 to 2013 and reducing unit pricing by increasing network operating international, regional and the number of aircraft contractually committed from domestic scheduled services, from its head office 15 to 20. This provided South African Airways with at OR Tambo International Airport. Its main business a temporary reprieve to allow it to strengthen its units include passenger and mail air services, cargo, balance sheet. South African Airways Technical and a Voyager loyalty programme. The stringent focus on operational efficiency following the successful restructuring programme The airline’s governance structure has recently been strengthened with the appointment of a new Board has enabled the airline to record profits over the past of Directors and a new Chief Executive Officer, three years. These include a profit of R123 million which continue to build on the successes achieved. before restructuring costs in 2007/08, a bottom line Chief among these is the continued rollout of the profit of R11 million in 2008/09, and a bottom line cost saving measures that were implemented as profit of R323 million in 2009/10. The major drawback part of the restructuring plan that was implemented in the past has been huge hedging losses, of which in 2007. These measures achieved savings of R1.6 billion was recorded in 2008/09 but reduced to R2.5 billion over an 18-month period until March R601 million in 2009/10. The reduction in hedging 2009. The department and National Treasury are losses was achieved through the implementation of jointly monitoring what the airline is doing to meet a new financial risk management policy. the conditions for approval of a R1.6 billion going concern guarantee provided in 2008. The company The focus over the MTEF period will be to ensure did not make use of this guarantee in 2009/10, the implementation of the initiatives relating to the although R615 million was used to provide for R1.6 billion guarantee and to encourage consistent consumer protection guarantees to the domestic generation of bottom line profits to strengthen the and international licensing councils in 2010/11. airline’s balance sheet. This is necessary for ensuring In 2009/10, the legacy agreement for the purchase that the airline is able to fund the aircraft replacement of Airbus A320 aircraft was satisfactorily resolved by transaction without government support.

36 State Owned Enterprises (cont.)

South African Express Airways South African Express Airways operates regional and below the previous year’s passenger numbers of domestic flights from OR Tambo International Airport 1.61 million, as well as the target of 1.65 million for in Johannesburg, serving secondary routes in South 2009/10.. Africa and Africa. The airline was established in 1994. Daily flight hours increased from 6 hours per day The airline’s African operation includes services to in 2008/09 to 7 hours per day in 2009/10, but were Botswana, Namibia, the Democratic Republic of the below the target of 8 hours per day. It is anticipated Congo and Mozambique. It also provides a feeder that conditions for most regions’ air travel will air service that connects with the South African improve in 2010/11. The slowdown in domestic and Airways network. The company was transferred from regional air travel experienced during the 2010 FIFA Transnet to the Department of Public Enterprises in World Cup is expected to reverse. In addition, the 2008/09. recent appointment of a new Chief Executive Officer is expected to bring stability to the airline. The airline’s joint venture with a local partner in the Democratic Republic of Congo, Congo The airline continues to generate profits, a trend which has been maintained over the last six years. Express, began in February 2010 as part of the The net profit for 2009/10 was R251 million, a 6 per implementation of the African hub strategy. However, cent growth compared to 2008/09. This was slightly these operations have not performed as anticipated, above the corporate plan target for the year. Net although the board and management are addressing profit increased by 10 per cent from R228 million the financial and operational aspects to improve the to R251 million compared to last year. The revenue joint venture’s prospects. declined by 10 per cent to R1.7 million compared to The load factors of the airline reduced from 71 per the previous year, and was 21 per cent below target. cent in 2008/09 to 63 per cent in 2009/10 due to This was due to falling passenger numbers as a the slowdown in both the domestic economy and result of the global economic downturn. regional markets. This affected other key performance Total capital and reserves in 2009/10 amounted to indicators, which were mostly below the target. R1.2 billion, 27 per cent above the equity of R943 Passenger numbers at 1.56 million in 2009/10 were million in 2008/09.

37 38 State Owned Enterprises (cont.)

Transnet Transnet has been transformed into a focused In terms of the revised schedule, the 24-inch new freight transport company whose mission is to lower multi-product pipeline trunk line is to be completed the cost of doing business through providing port, by December 2011. However, the remaining rail, and pipeline infrastructure and cost effective, construction activities to supporting infrastructure efficient operations within acceptable benchmark are now scheduled to be complete and ready for standards. Transnet’s key role is to assist in lowering operation by December 2013. Some delays were the cost of doing business in South Africa and to experienced following the decision to relocate the enable economic growth. construction of the coastal terminal from the old The company made good progress in significant Durban International Airport to Island View in the port areas of the business for the first six months of of Durban, as well as delays in obtaining the required 2010/11. The key drivers of the business that statutory approvals. The move to Island View reflected improvement were volume growth and resulted in an 11km increase in the length of the productivity, which, together with cost reduction pipeline affecting the hydraulics and the need initiatives, contributed to improved profitability. The capital expenditure programme continued despite for a change of design. These changes and other the global economic downturn, resulting in the matters will have an impact on the new multi- creation of capacity ahead of demand. product pipeline’s total costs. Transnet will make an announcement once the cost review exercise is Capacity on the iron export line increased from 47Mt completed. to 61Mt. Specific interventions to create capacity on the coal line through improved operational Net profit from continuing operations for the period procedures and efficiencies are currently in place. ending 30 September 2010 was R1.7 billion an This will support the planned R15.4 billion investment increase of 34.7 per cent compared to R1.3 billion on the coal line to create the targeted capacity of 81Mt by 2014, subject to the coal industry entering up to 30 September 2009. Revenue increased by 76 into long term take or pay contracts which are still per cent to R18.7 billion (30 September 2009: R17.3 being negotiated. Transnet Freight Rail’s quantum billion) despite the impact of the organised labour leap focuses on customer service delivery and strike that negatively impacted on operations for 17 operational efficiencies. In the first six months of days. The growth in revenue reflects the increase in 2010/11, containers on rail increased by 9 per cent volumes of all commodities transported compared to in line with quantum leap targets. Other interventions the previous period, except for iron ore, which was include investment in rolling stock to address ageing negatively impacted by derailments. infrastructure, and branch line revitalisation, aimed at contributing to modal shift. Cash generated from operations increased by 13.5 Gross crane moves per hour at the Durban container per cent to R8.7 billion, which shows the company’s terminal and pier 1 continue to be below benchmark ability to generate stable and strong cash flows. levels, reported at 21 and 22 gross crane moves The cash interest cover ratio has decreased to 3.7 per hour for the first half of 2010/11. But substantial times from 4.2 times compared to the same period improvements were realised in the first few weeks in 2008/09, due to an increase in net finance costs, of September 2010, where 24 gross crane hours at which is a consequence of the capital expenditure the Durban container terminal and 30 in pier 1 were programme. This ratio, however, remains significantly reported. Iron ore loading rates for the same period above the target of a minimum of three times. were above the set target despite the derailments on the line, assisted by dual and staggered loading at Transnet is planning to borrow approximately R35 the Saldanha bulk terminal. billion over the next three years to partly fund the The new multi-product pipeline is a strategic execution of the capital expenditure programme. investment to secure the supply of petroleum Funding raised by the 30 September 2010 was R7.6 products to the inland market over the long term. billion, with an estimated funding requirement for the This line will replace the old Durban-Johannesburg remainder of the year of approximately R9.6 billion. pipeline, which is running at full capacity and nearing Despite the recent economic downturn, Transnet’s the end of its design life. Some of the benefits of investment in infrastructure is still on track. The the new multi-product pipeline include (when fully capital expenditure for the six months ended 30 operational) the reduction in the number of tankers September 2010 (excluding capitalised borrowing on the road by at least 60 per cent, a reduction in costs) was R10.2 billion, compared to R8.7 billion congestion on the roads and a reduction in carbon spent in the previous six-month period. emissions from road transportation of petroleum products. 39 Acronyms

GDP Gross Domestic Product MTEF Medium-Term Expenditure Framework PFMA Public Finance Management Act IRP Integrated Resources Plan MTRMP Medium-Term Expenditure Framework DSMEE Demand Side Management and Energy Efficiency ECS Energy Conservation Scheme REFIT Renewable Energy Feed in Tariff IPP Independent Power producers MYPD Multi-Year price Determination SLA Service Level Agreement NCPM National Corridor Performance Management NMPP National Multi Product Pipeline NATMAP National Transport Master Plan NIP National Infrastructure Plan FET Further Education and Trainng UCT GSB University of Cape Town Graduate School of Business DPE-DEA-Eskom MOU Department of Public Enterprises-Department of Environmental Affairs-Eskom Memorandum of Understanding

40