Budget Vote 11 presented by Mr. Malusi Gigaba MP, Minister of Public Enterprises, at the Extended Public Committee (EPC) of the National Assembly in the Old Assembly Chamber, Cape Town

16 May 2012

We are honoured to present to this EPC today our Budget Vote for 2012 / 2013.

We are doing so at a time when the global economic outlook is a major cause for concern resulting in a great deal of uncertainty. 

Our response though in this Budget Vote is that we have good reason to be confident about the future, based in part on the investment programmes of our State-Owned Companies (SOCs), the aim of which is to get South Africa working, growing and moving.

In this presentation, we shall:

• Report back on some of our key achievements for the previous financial year;
• Broadly outline the steps we have taken to bolster our shareholder management function and governance framework; and
• Detail our plans for the infrastructure, aviation and the manufacturing programmes.

As expected, the Deputy Minister will give further details on some of our achievements in the areas delegated to him as well as provincial coordination. 

The investment programmes of our SOCs, are dramatically transforming the South African economic landscape. By 2020:

• An additional 11 719 MW will have been added into the electricity system and 6596 km of transmission network installed to support security of supply;
• Existing logistics corridors will be expanded upon and new corridors will have been established, and 1317 new locomotives and 25 000 new wagons will have been procured, and procured in a manner that puts in place a world-class, export-oriented, rail manufacturing sector;
• 6405 km of rail will have been replaced for the general freight, coal and ore lines, increasing the rail network capacity by 149.7 million tons; and
• 13 125 km of fibre optic cable would have been refurbished and strengthened to ensure carrier grade status and our broadband network would have been expanded to include metros and underserviced areas.

Chairperson,

Last year, I announced a new vision for the Department, the key elements of which included changes in the way SOCs plan, fund and procure their investment programmes.

The Transnet Market Demand Strategy (MDS) is a concrete response to this new vision in that the company has expanded its capital expenditure framework from R110 billion over five years to R300 billion over seven years. 

Critical in this strategy is that 55% of the Capex will be investments in new logistics capacity, which goes beyond the predominant focus on maintenance of the previous Capex plans.

R200 billion of the funding will come from retained earnings while the rest will be raised in the market. Quite clearly, this massive capacity growth should unlock pent up demand for logistics capacity and serve as a much needed stimulus to growth and job creation. Over the next MTEF period, Transnet will spend R107 billion, with R31 billion budgeted for this financial year. Transnet's total contribution to employment is expected to increase by 54.8% from 368 450 in 2011/12 to 570 263 jobs in 2018/19

In the next quarter, Transnet will implement a seven year locomotive fleet procurement of unprecedented scale in South Africa's history, amounting to approximately R35 billion for 1064 locomotives.

The Durban dig-out port, at a cost of over R100 billion, will fundamentally alter the logistics landscape of the region. A project of this scale will only be possible in partnership with the private sector and we have already started developing a relevant implementation plan.

Chairperson, 

Our vision envisages a relationship between our SOCs and their customers that drives investment and enhances our national competitiveness, particularly in sectors identified as important in our industrial policy and the New Growth Path.  In pursuit of this, we are establishing project-based forums between SOCs and key customer sectors.  

For example, we have established an Automotive Forum that will focus on improving operational efficiencies on rail and at the ports and on increasing investment in specialised automotive related rail and port capacity as well as on ensuring security of electricity supply.  

Chairperson,

Eskom continues to invest in building the required infrastructure to ensure adequate electricity supply. The funding plan to 2017 has been finalised, and about 75% of the funding has been secured. Over the MTEF period, Eskom will spend R201.6 billion, R65 billion of which is budgeted for this financial year.

As the Shareholder Representative, we have increased Eskom's domestic borrowing programme (DMTN) from R65 billion to R100 billion to fund the approved build programme.

During the 2011/12 financial year, Eskom was able to secure a total of US$ 615 million funding for its Renewables Energy programmes from the African Development Bank, the Clean Technology Fund (CTF) and the World Bank (CTF).

During this year, we will both commence the construction of the 100MW Sere Wind Farm and conclude the feasibility study for the 100MW Concentrated Solar Power project (CSP).

In the current financial year, 260 MW is to be added to the system with a further 894 MW added next year when we include the first unit of Medupi, and 915 km of transmission network will be installed this year.

Owing to severely constrained generation capacity, we are implementing a public awareness campaign, 49m, which is a clarion call to all South Africans to do their part in saving electricity.

Eskom has undertaken a number of interventions to ensure security of supply, which include enhancing reliability from electricity imports, especially from Cahora-Bassa; procuring more than 370 MW from the medium-term power purchase programme; procuring about 400MW additional generation capacity from municipalities; and Accelerated Energy Efficiency (EE) and the Demand Side Management programmes.

I have approved a strategy to keep the lights on which consists of amongst other things the voluntary energy conservation scheme involving Eskom's big customers; the short-term power buy-back programme to secure more than 1000MW of power saving from Eskom's customers; and the Energy Saving Pledge signed with all the SOCs in our portfolio.

In the midst of the constraints we have been experiencing, I am delighted to announce that Eskom will in June this year conduct a pressure testing exercise on the first boiler at Medupi which will be a key milestone of the process to ensure delivery of the unit by 2013.

Chairperson,

Over the last year, the Department has focused on bringing stability to Broadband Infraco's management, Board and business processes.
Key appointments, including that of CEO, have been made, the audit of problem areas has been finalised and remedial actions taken.

I am pleased to announce that the West Africa Cable System (WACS) international connectivity became operational on 11 May 2012, thus increasing bandwith capacity, providing for improved integration of the 10 African countries that are customers of WACS, and enabling the further reduction of the cost to communicate.

Over the MTEF period, Infraco's Capital Expenditure budget is around R3.1 billion, with R780m budgeted for the 2012/13 financial year. Infraco is now well positioned to assume its role as a major player in the ICT sector.  

As a carrier of carriers, Infraco will work aggressively to promote competition in the services sector by making critical infrastructure available to Electronic Communication Services licensees.  

Further, as a wholesaler of ICT infrastructure, Infraco is well positioned to house and administer the scarce radio frequency spectrum currently under discussion.  

For interventions such as Infraco to succeed, it is necessary that government and its agencies be enlisted as major tenants on its network in order to enable the roll-out of the e-governance strategy and extend broadband infrastructure to under-serviced areas.

The Department and Broadband Infraco are working on a detailed funding plan which aims to address the current cash position of the company.

Chairperson,

In furtherance of the infrastructure roll-out plans announced by the President, and in order to ensure that I exercise prudent oversight over the programmes which shall be implemented by the SOCs in our Portfolio, the Department shall establish an Integrated Project Office which will provide enhanced monitoring and reporting of progress and risks relating to the implementation of the programmes and will assist the SOCs in mobilising support from relevant government Departments and agencies for the removal of bottlenecks.

Chairperson,

For us to get South Africa working and growing it is imperative that our SOCs lead in efforts to reduce the cost of doing business without compromising their financial sustainability. 

In response to the President's call for a lower electricity price increase this financial year, the Department and Eskom successfully developed proposals to reduce the increase from 25% to 16%, effectively giving back more R11 billion to South African consumers.

Beyond this, the future price path will be determined in the context of the MYPD 3 process. In addition, the President further announced a R1 billion port tariff rebate for manufactured exports. 

In this regard, I am delighted to announce that the Ports Authority has already processed tariff rebates of R52.9m against qualifying export cargos since 1 April 2012.

Chairperson, 

Aviation is well placed to continue its strong support of South Africa's trade, business and leisure tourism objectives. 

Together with the South African Airways (SAA) and South African Express (SAX), we have drafted an African Aviation Strategy that is to be submitted to Cabinet in June that is aimed at focusing the state-owned airlines on opportunities in the continent and on promoting regional integration. 

The fact is that Africa must constitute the primary market and route for South African airlines.

Given our location on the Southern tip of Africa, and the extremely volatile nature of the airline industry, I believe that it is critical that we sustain a national flag-carrier to ensure security of air-transport to our country.

The damage both to business and tourism of unreliable air-travel to South Africa will be immeasurable.

The dual challenge of a depressed global economy and high fuel prices means that shareholder support for SAA to procure a modern and fuel-efficient fleet is vital if it is to remain competitive.

The substance of such support is the subject of an on-going discussion between the Department, National Treasury and SAA. However, there is much to celebrate in SAA.

We launched the Johannesburg - Beijing route on 31 January 2012 which will contribute significantly to establishing South Africa as an aviation hub between South America and China, linking three of the five BRICS countries and connecting three continents.

We are delighted to announce that in line with our African Aviation Strategy, we have introduced five new destinations in Africa since October 2011 with Cotonou in Benin commencing operating as of 17 May 2012, tomorrow.

We are working with the SAX Board to address the internal control challenges that the company is currently facing to restore public confidence in the company.

Notwithstanding the above, the airline has launched three new domestic routes and has further established a base at King Shaka International Airport from which the airline will play a catalytic role in continental trade and economic integration, supporting the Dube Trade Port IDZ as well.

Chairperson,

Denel's core defence entities are breaking even and there is projected improvement in financial performance, programme delivery and export market penetration.

During 2011/12, Denel secured over R5bn orders that will be delivered over the next five years and has a substantial pipeline which may require Government support to convert it into bankable orders given the intense competition in the sector.

The Department together with National Treasury are exploring various sustainable funding mechanisms for Denel, cognisant of the fact that a complete turnaround of Denel will not only depend on funding and new revenue streams, but also on improvements in operational efficiency as well as enhanced alignment with the Department of Defence. 

With regard to Denel Aerostructures, the renegotiation of the A400M contract with Airbus is proceeding well, which will put the company on a firmer financial footing. 

The R700 million capitalisation of Denel Aerostructures announced by the Minister of Finance will allow the company to prepare itself for the serial manufacturing phase of the A400M programme starting in 2012/13. 

Furthermore, Denel Aviation will deliver the last six fully certified and combat ready Rooivalk helicopter to the South African Air Force during 2012, which makes this the first helicopter to be designed, built, qualified and fully certified in the African continent.

The Department welcomes the publication of the "Defence Review 2012" draft document. Together with Denel, the Department will make submissions to the Review Committee.

Chairperson,

Our SOCs have a critical role to play in driving regional integration.

Consequently, during the course of this Financial Year, we intend developing and announcing an Integrated Africa Expansion Strategy, which will seek to leverage our SOC capabilities and competitive advantages.

Chairperson,

One of the critical pillars of the Department's vision is to drive transformation.

This entails initiatives relating to procurement, employment equity, skills development and broad-based BEE. In this regard, as an example of the progress being made by our SOCs, in February this year, Transnet appointed Sizwe Ntsaluba Gobodo as the company's external auditors for the next five years, representing the single largest audit appointment of a South African black-owned auditing practice.

However, much remains still remains to be done to develop a more robust transformation programme.

Accordingly, the Department will host an SOC Transformation Summit in July to align the SOC transformation programmes with our vision. Policies, processes and related systems have been revised to ensure that supplier development concerns are integrated into all significant procurements.

Thus far Eskom has leveraged commitments of over R1.2 billion in investment in manufacturing capacity by suppliers, R644 million of which has already been invested. Transnet has entered into contracts valued at R14 billion containing supplier development commitments of R5.4 billion, R2.9 billion have already been delivered to date.  

During the second half of this year, the Department will also be hosting a Supplier Development Summit where comprehensive details of Eskom and Transnet's procurement and supplier development plans for the next five years will be shared with industry. 

Furthermore, our SOCs are playing a leadership role in the production of scarce and critical skills both through internal training and through mobilising our suppliers to play their role.

Our SOCs are committed to producing skills to both meet their needs and the requirements of a growing economy.

In total, more than 15 000 learners were trained in various scarce and critical skills learning programmes within the SOCs in our Portfolio in 2011/12. 

This year, an additional 5500 learners will be enrolled.

In addition, Eskom has leveraged training of 6130 learners as part of supplier contractual obligations and the building of power stations, with some getting on-the-job experience abroad.

Eskom's training budget has increased from R998 million in 2011/12 to R1.2 billion in 2012/13, while Transnet's has increased from R670m to R870m.

In terms of Transnet's MDS, about R7.7 billion is budgeted for training, which translates to about R1.1 billion per year for seven years.

All SOC training facilities are being optimised to often to produce highly specialised skills for the industries in which they operate. In collaboration with the Department of Higher and Training, and as part of strengthening the FET Colleges, SAA signed a Memorandum of Understanding with the Ekurhuleni West College to train youth in aviation skills.

The Department also launched the Youth Economic Participation Programme in June 2011 to systematically mainstream participation of youth in the economy within SOC business.  

A Forum will be established between the Department, the SOCs and development finance institutions to provide systematic support to young entrepreneurs, to enable them to access available opportunities.

Chairperson,

The Companies Act 2008 came into effect over the past year and the DPE has made great strides in strengthening the governance of our SOCs in this context. 

However, since SOCs are not ordinary commercial enterprises in that they also have a mandate to achieve longer-term strategic economic objectives, a key responsibility of the Department's annual activity is focused on the identification and design of improvements in the SOC oversight and governance with the objective of both securing SOC financial integrity and stimulating improved national economic performance.

This includes making inputs on a range of governance processes for SOCs and implementing initiatives that leverage the assets, activities and capacities of SOCs for the benefit of the economy as a whole. 

Thus far, we have developed innovative approaches and comprehensive guidelines to codify and harmonise shareholder management practices across the SOCs within our portfolio.

In view of the expanding oversight role of the Department and the increased need strategically to guide the SOCs investment programmes, we have conducted a review of the organisational structure and capacity of the Department.

This was to close the gap between the Department's expanded oversight responsibilities and the resources available to it to execute its mandate.

Arising from this review, we have reconfigured certain branches and created new divisions, which are currently being staffed within existing resource constraints.

Chairperson,

Quite clearly, in many countries, as well as in both public and private sector companies, the issue of the remuneration of both executive and non-executive directors has assumed prominence.

The benefit of this review has encompassed not only the individual needs of the SOCs, but also the policies of national government as well as the Department's shareholder expectations. We are creating a new remuneration model that is fair and transparent and can be consistently applied by all the SOCs within the Department's portfolio.

Aware of the constraints to the SOCs and the potential risks that the decision may have on the Boards and their CEOs, we shall strive to finalise the framework as speedily as possible.

Chairperson,

Working with the SOCs, the Department in 2011 developed a strategic framework to guide the SOCs in their responses to the challenge of climate change.  

Some of our SOCs will soon be announcing their carbon footprints and certain management incentives have already been aligned with energy efficiency and reduced carbon emissions. 

WWF has been appointed as our partner in developing the SOC positions and strategies relating to the framework.  

Chairperson,

What is clear is that the SOCs in our portfolio are in the process of transforming the economic landscape of our country and, through their investment process and the resultant additional capacity, they are producing a myriad of new business opportunities for SOC suppliers, customers and other stakeholders.  

We can already see the private sector begin to engage with these opportunities, a process that I believe will gather considerable momentum resulting in increased growth and employment.   

In conclusion, I would like to thank Deputy Minister Ben Martins, the Director General, Tshediso Matona and all the DDGs and staff of the Department for their relentless support and tireless-work, particularly as we worked hard to change the vision of the Department.

I would like to thank the interns in the Ministry: Ms Tebatso Nelane, Ms Koketso Modjaji and Kagiso Segage and wish them well during their tenure.

I thank the Chairpersons, CEOs and all staff of our SOCs for their commitment to fulfilling the difficult goals and targets we set them, particularly during this difficult economic climate.

I thank the Chairperson of the Portfolio Committee, the Honourable Peter Maluleke, the Honourable Members of the Portfolio Committee and my Cabinet Colleagues for their support and regular wise counsel.

I am humbled to request the EPC to support this budget of R1 249 072 billion.

I thank you.

Issued by the Department of Public Enterprises, May 16 2012

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