public enterprises 2008-2011 strategic plan and financial overview 27-29 february 2008

PUBLIC ENTERPRISES

2008-2011 STRATEGIC PLAN AND

FINANCIAL OVERVIEW

27-29 FEBRUARY 2008

Ms Portia Molefe

Director-General

2Strictly confidential

CONTENTS

Departmental strategy

Mandate, vision and mission

Key achievements & challenges

Priority areas and planned activities


MANDATE OF THE DEPARTMENT

The mandate of the DPE is

to ensure alignment of the SOE business strategies with the Sector

department policies and regulatory authorities whilst ensuring that SOE are

sustainable businesses that provide economic benefit to the country.

SOE reporting to the DPE are

Alexkor, Broadband Infraco, Denel, Eskom, Pebble Bed Modular Reactor,

Safcol, South African Airways, South African Express Airways and Transnet


VISION OF THE DEPARTMENT

Our vision is to have SOE that

are efficiently managed, meeting domestic and international industry operational benchmarks

play a role in the industry in which they operate that ensures an optimal allocation of responsibilities between the public and private sector

undertake investment programmes with a “reserve margin” to accommodate faster economic growth

leverage their investment programmes to the benefit of the South African and African economies on a sustainable basis


MISSION OF THE DEPARTMENT

Our mission is to :-

Provide SOE with clear mandates

Provide consistent and strategic performance management of SOE

Provide simple and unambiguous governance systems


CORE WORK ELEMENTS

The following elements are core to the DPE mandate

Oversight of the SOE against their strategic objectives

Financial and operational

Oversight of the disposal of non-core assets in line with Transaction guidelines

Leverage of all SOE assets for the benefit of the economy

Ensuring that SOE procurement beneficially maximises investment

opportunities for SA manufacturers


SOE PERFORMANCE OVER THE PAST YEAR

SOE Financial Performance

Operational Performance

Comment / Concerns

Alexkor Revenue: R133.7m (2005/06: R154.8m)

Operating loss: R27.3m (2005/06: R209.7m)

Return on assets: -7% (2005/06: -38%)

Return on equity: -69% (2005/06: -93%)

Diamond production: 33,765 cts (2005/06: 43,207 cts)

Fatalities: 0 (2005/06: 1)

Settlement ends uncertainty. PSJV will be formed between Alexkor & the RVC. PSJV to develop long term business plan for a viable mining venture.

Broadband Infraco Invoices yet to be issued to customers.

Expenditure on operationalisation have been incurred.

Infraco has provisioned single route connectivity services at all 20 core backbone and regional expansion sites – SITA live on Infraco network since 18 January 2008.

Concerns on Infraco’s Africa West Coast Cable (AWCC) : Participation by telecommunication companies, funding constraints, timelines and the risk associated with the Nepad / DoC Uhururet Cable.

Denel Revenue: R3,268m (2005/06: R2,773m)

Gross Profit/(loss) : R754m (2005/06: (R131m))

Net Loss: (R549m) (2005/06: (R1,363m))

Order Coverage orders/budgeted sales = 49.4% compared to 69% target.

Operating costs as a percentage of revenue: 115% (2005/06: 146%)

In the 2006/07 financial year, gross profit improved from the previous years and was positively impacted by the increased sales and a decrease in provisions relating to onerous contracts and contract losses.


SOE PERFORMANCE OVER THE PAST YEARSOE Financial

PerformanceOperational Performance Comment /

Concerns

Eskom Eskom’s finances are currently under severe pressure due to increased primary energy costs as well as new build funding requirements

Operating costs increased and Derivative instruments continue to be of concern

All ratios calculated based on the return are under pressure.

Operating efficiency has deteriorated in the third quarter due to the high level of unplanned outrages which have resulted in unprecedented levels of load shedding.

Eskom’s new build programme is on track to deliver some 1 155MW to the system in 2008.

Deteriorating operational performance

Volatility of the derivative instruments

Pebble Bed Modular Reactor

For year ended 31 March 2007:

Contributions received = R1,3 billion

Total funds transferred to PBMR from Govt. = R2,165 bn plus R219 VAT.

Achievements for quarter ended at 30/12:

NNR Stop-Work Order lifted on 22 December subject to some conditions

NNR license received for ACF – 17 January

Helium Test Facility achieved 100,000 accident free hours



SOE Financial Performance

Operational Performance

Comment / Concerns

Safcol Revenue: R653m (9 months-2005/06: R326m)

Profit for the year: R800m (9 months-2005/06: R168m)

Gain due to fair value adjustment of plantations: R861m (9 months-2005/06: R171m)

Return on Equity: 53.9% (9 months-2005/06: 19.3%)

Operating Costs as a percentage of revenue: 72% (2005/06: 88%)

In the 2005/06 financial year, SAFCOL changed its financial year end from 30 June to 31 March, hence the 9-month period.

South African Airways

Loss of R 883 million

Compliant with restructuring process

Profitable domestic and regional operations overshadowed by losses on intercontinental routes

Productivity insufficient

Insufficient yield and revenue management

Mango brand launched

Poor financial performance (up until 2007)

Required fundamental restructuring – Seabury restructuring programme agreed by SAA board (May 2007)



SOE Financial Performance Operational Performance

Comment / Concerns

South African Express Airways

Satisfactory

Profit of R102 million

Regional operations well suited to lower demand routes

Continued good performance

Opportunities to expand SAX’s successful business model into region

Transnet EBITDA Margin: target is >35 – Achieved

Cash Interest Cover: target is 5 times - Achieved

Gearing Ratio: target is 40-50% - Achieved

CFROI: target is 6% - Achieved

Infrastructure investment:

Capital Investment: target is 90% of budget R11, 847bn – Achieved

Maintenance: target is 90% of budget R3, 890bn – Achieved

Tariff increases were higher than budgeted for in most Divisions and volume growth was lower than budget in two Divisions.

Improved GFB freight flows (3 mt);

Capacity created on Iron Ore and Coal Line that exceeds current demand from clients;

Increase in monthly port handling capacity at DCT (TEU’s 186 000 vs 158 000) – but general port productivity remains a concern;

Procurement savings of R500 million per annum and reduction in safety incidents (R200 million);

Rail operational, volume growth and financial performance requires substantial improvement.

Financial performance has been good, but more work needs to be done on operational/productivity improvements, particularly in ports and rail;

Safety, particularly in Transnet Freight Rail, needs to be enhanced significantly;

Rail operational, volumes and financial performance requires substantial improvement;

Tariff increases to fund build programme should be within reason


PERFORMANCE OVER THE PAST YEAR

Competitive Supplier Development Programme Steel sourcing project complete Procurement capacity building underway in SOE SOE Supplier Development Programmes being drafted Established benchmarking working group and formalised relationship with UNIDO and

working with Rest of Africa project on benchmarking

The SA Power Project A proposed strategy to leverage the 20-year power build to develop national industry was

accepted by the Advisory Committee

EIA Support Programme Working with DEAT, developed a framework for the identification and treatment of

Strategically Important Developments ( SIDs)



Non-core property disposals

Revised B-BBEE guidelines to align with DTI generic codes

Self-assessment toolkit available on DPE website

Lifted the moratorium on the sale of non-core properties

Property viability study and spatial viability study completed for Rosherville (Eskom)

Skills Initiative

The SOE requirement for artisans was collated and communicated to JIPSA.

Established cross-cutting artisan training initiative.

DPE has applied to DoL for the establishment of a Public Enterprise Employment and Skills Development Agency (ESDA). The ESDA will facilitate SETA funded work-place placements for the FET college graduates with SOE suppliers to enable the graduates to obtain Trade Certificates.



Legislative Transnet Pension Fund Amendment Act promulgated

South African Airways, Broadband Infraco and South African Express Bills processed and promulgated

Collaborated with DOC re: amendments to the Electronic Communications Act

Collaborated with DME, DPLG and NT re the EDI and RED Bill

Richtersveld settlement concluded

Other key achievements Collaborated with DoD, DTI and DST on sector strategy for the defence industry

Submitted to cabinet a revised build programme for Eskom

Ports and rail master plan drafted

Monitoring capacity of investment dashboard expanded Procurement training in Competitive Supplier Development Programme rolled out



Risks/challenges

Delays with the finalisation of the Nuclear Policy could delay the implementation of

this element of Eskom’s Build Programme

Review of Maintenance practice across all SOE

Balancing the risk of weakened balance sheet against the very large investment

programmes

Cost reflective tariffs which are economically more efficient against the inflationary

effects and impact on the poor

Skills scarcity and supplies could delay SOE capital/build plans


ORGANISATIONAL STRUCTURE

Director-General

Public Enterprises

Minister

Public Enterprises

DDGLegal, Governance, Risk & Transactions

DDGEnergy & Broadband

Enterprises

DDGTransportEnterprise

DDG Joint Project

Facility

DDGManufacturing

Enterprise

DDGChief Investment &Portfolio Manager

OPSCOChairperson

Special Advisor


DPE BUDGET

Over the MTEF, expenditure decreases at a rate of 59.1 percent, from R4.6 bn in 2007/08 to R315 m in 2010/11. Transfers to SOE remain high in the first two years of the MTEF with a combined amount of R4.9 bn, of which R3.5 bn is allocated to the PBMR. The Joint Project Facility is subject to an increase in expenditure over the MTEF rising from R14.4 m in 2007/08 to R27 m in 2010/11.


DPE BUDGET continued


DPE STATISTICSTOTAL POSTS FILLED POSTS VACANCIES

162 143 19

Level 1 - 10 68 3

Level 11 - 12 27 4

Level 13 - 15 48 12

Appointments made April to date 20

Interviews in progress 3

Advertised Posts 11

Work in Progress (new vacancies/posts//to be re-advertised) 5

Terminations April to date 21

Resignations 11

Contract Expiry 1

Transfers 9


Breakdown of Vacant Posts : Levels 13-15

Vacant Posts Level Vacancy period Why?

Financial Analyst 14 - Chief Director 90 days Position became vacant in December 2007.Position advertised. Closing date was 08/02/08

Aviation & Rail Sector Specialist

13 – Director : Rail 540 Days Post advertised 3 times without any success. One offer declined. Head hunting in progress.

Business Analyst 13 - Director 240 Days Post on hold

DDG : Energy & Broadband Enterprises

15 - Deputy-Director General

38 Days Acting appointment. Post to be advertised.

D: Risk Management 13 - Director 480 Days Post advertised 3 times without any success. One offer declined. Head hunting in progress.

DDG: Legal, Governance, Risk & Transactions

15 - Deputy-Director General

120 Post advertised on 7/10/2007 and interviews held on 21/1/2008. Memo to Cabinet finalized.


Breakdown of vacant posts : Levels 13-15

Vacant Posts Level Vacancy period Why?

Industry Strategy 14 - Chief Director 100 Days Advertised on 17/12/2007. Applications in process of short listing.

Industry Development 14 - Chief Director 120 Days Advertised on 17/12/2007. Applications in process of short listing.

Special Projects 13 - Director 190 Days Advertised on 17/12/2007. Applications in process of short listing.

Human Resources 13 - Director 74 Days Post advertised 28/01/2008. Interviews to be held.

Economist 13 - Director 390 Days Post advertised. Offer declined. Post re-advertised in 04/02/2008.

ESDA 13 - Director 90 Days Post had to be evaluated (JE) created. Advertised on 19/2/2008 and applications will closed on 29/2/2008


Internship ProgrammeBRANCH GROUP 1

1 APRIL 2007 – 31 MARCH 2008

GROUP 2

2 JAN 2008 – 31 DEC 2008

Office of the Minister 1 2

Office of the DG 1 2

LGR&T 6 3

E & B Enterprises 3 3

Transport 2 2

Manufacturing 2

CIPM 1

Human Resources 1 1

Communications 3 2

Internal Audit 1 1

Admin & Facilities 1 1

Finance & SCM 1 1

Information Management 3

Secretariat 1

Knowledge Centre 1 2

TOTAL 26

(12 Interns have secured alternative employment to date)

22


PROGRAMMESPROGRAMMES

PRIORITY AREAS AND PLANNED ACTIVITIESPRIORITY AREAS AND PLANNED ACTIVITIES


PROGRAMME 1 ADMINISTRATION

Purpose Responsible for the overall direction and management of the Ministry and the department

and the provision of administrative support services to the department

Priorities for 2008/09 Process automation Training and Development Performance management of staff Annual risk assessment and audits of DPE Energy Efficiency Campaign throughout DPE offices

DG’s Office – Chief Investment & Portfolio Management SOE Investment Dashboard (Integrated infrastructure planning; Financial; Operations;

Capital investment programme; Capitalisation; Social Economic ;Risk) Capitalisation & Dividend policy Annual rolling (5 year) review Assessment of SOE restructuring Significant shareholder transactions


PROGRAMME 1 ADMINISTRATION continued

ITEMS

R thousand

BUDGET 07/08 BUDGET 08/09

COMPENSATION OF EMPLOYEES 29 014 33 979

GOODS AND SERVICES 31 629 30 982

TRANSFERS 620 650

OTHER - -

CAPITAL 1 432 375

TOTAL 62 695 65 986

There is very little change to this programme other than an inflationary increase for compensation of employees which includes the remuneration of all 48 interns (26 in 07/08 and 22 in 08/09). Equipment contracts, telephones, stationery, training, recruitment advertising and software licences are centralised to this programme.


PROGRAMME 2ENERGY & BROADBAND ENTERPRISES

Purpose To align the corporate strategies of Eskom, PBMR and Broadband Infraco with

government’s strategic intent and monitor their performance in respect of financial and operational performance

Priorities for 2008/09 Portfolio Management Implementation of the National Electricity Emergency Response Plan Fastrack Geyser Replacement Programme Capacity Expansion Programme implementation (Generation & Transmission) Generation Adequacy monitoring Implementation of Single Buyer Model – monitor Co-gen and IPP implementation Generation, Transmission & Distribution Infrastructure Maintenance & Refurbishment Monitoring of Eskom Nuclear Build Programme Monitoring of progress of International Submarine Cable rollout


PROGRAMME 2ENERGY & BROADBAND ENTERPRISES continued

ITEMS

R thousand




TRANSFERS 2 502 273 2 127 000

OTHER - -

CAPITAL - -

TOTAL 2 511 880 2 137 580

The transfer payment to PBMR decreases from R 2.5 billion in 2007/08 to R1.75 billion in 2008/09. Furthermore a transfer payment of R377 million is allocated to Broadband Infraco in 2008/09.

The functions and funds in the Mining sub-programme (Alexkor) which previously resided in this programme, has been moved to Programme 3 : Legal, Governance, Risk and Transactions.


PROGRAMME 4MANUFACTURING

Purpose To analyse SOE strategies (Denel, Safcol) against government’s strategic intent, develop

proposals around how SOE can play a catalytic role in the development of the manufacturing cluster and monitor and advise on SOE financial and operational performance.

Priorities for 2008/09 Portfolio Management

Develop Denel end-state in partnership with DoD, National Treasury and Denel

Review of acquisition policy in 2008/09. Facilitating the achievement of the 60% - 70% local defence procurement target over the next 3 years

Establishing DoD/Industry supplier fora by the end of July 2008 to enhance communication and alignment between industry, Armscor and the DoD in defence acquisitions

Assist with the establishment of the Defence Evaluation & Research Institute (DERI) in 2008/09

Development of a missiles export strategy in 2008/09 to leverage technology and increase access to markets

Establishment of a defence export council by the end of September 2008 to facilitate export marketing support

Provide sector support in KLF disposal


PROGRAMME 4MANUFACTURING continued

ITEMS

R thousand




TRANSFERS 1 155 000 -

OTHER - -

CAPITAL 16 -

TOTAL 1 165 373 11 641

There is no significant increase in the operational budget for this Programme. The substantial decrease reflected over the period is due to Denel having received a transfer payment amounting to R 1.155 billion in 2007/08, with no further transfer in 2008/09.


PROGRAMME 5TRANSPORT

Purpose Oversee the activities of Transnet, SA Airways, SA Express in terms of corporate strategy

& structure, operational performance, industry structure, corporate governance and policy, financial and risk management, corporate transactions and benchmarking. Develop proposals on how the SOE can play a catalytic role in the development of the associated manufacturing cluster through leveraging their capital and investment programmes via the Competitive Supplier Development Programme.

Priorities for 2008/09 Portfolio Management Port of Ngqura (Coega) PSP Branchlines position paper Ports and Rail masterplans approval & implementation Railway supplier study Monitor Transnet Build Programme Monitor New Multi Product Pipeline (NMPP) implementation Implementation of SAA turnaround Strategic repositioning of SAA Technical Optimal commercial relationship between SAA and SAX


PROGRAMME 5TRANSPORT continued

ITEMS

R thousand




TRANSFERS 744 400 585 000

OTHER - -

CAPITAL 16 -

TOTAL 753 995 605 669

The slight decrease in the budget for this Programme is attributed to a reduction in the amount allocated for transfer payments. In 2007/08 an amount of R 744.4 million was allocated to South African Airways (SAA), whereas an amount of R585 million is allocated for South African Express Airways (SAX) in 2008/09. However operational expenditure increases substantially as the department will be sourcing specialist technical expertise to assist with various priority projects in the sector which will be undertaken in the coming year.


PROGRAMME 3LEGAL, GOVERNANCE, RISK AND TRANSACTIONS

Purpose

To provide effective legal services, corporate governance and risk management systems and implementation of legal aspects of strategically important transactions.

Priorities for 2008/09

South African Government Shareholder Management Legislation

Alexkor Deed of Settlement implementation

Aventura closure

KLF disposal

SOE and Shareholder Risk Assessments

General legal counsel for the Department

Provision of legal support for Shareholder transactions


PROGRAMME 3LEGAL, GOVERNANCE, RISK AND TRANSACTIONS continued

ITEMS

R thousand




TRANSFERS 72 700 130 000

OTHER - -

CAPITAL 16 -

TOTAL 96 778 158 163

Operational expenditure in this programme increases as a result of additional funding for the legal costs for the Alexkor and Safcol transactions. The sub-programme Transactions was created specifically for this purpose. At the same time the transfer payment to Alexkor was shifted from Programme 2 to Programme 3 for oversight of the implementation of the Richtersveld settlement. The historical figures between the Programmes were adjusted accordingly.


PROGRAMME 6JOINT PROJECT FACILITY

Purpose Identify synergies and co-ordinate and develop cross-cutting projects that leverage the

assets, activities and capabilities of the SOE to the benefit of the SOE and the economy as a whole.

Priorities Aerospace: Strategy formulation Rest of Africa

Implement supplier benchmarking Joint infrastructure development programme with 2 countries

Autumn School 2008 roll-out CSDP: finalise Eskom, Transnet, PBMR supplier development plans Environmental Issues: Finalise guidelines for Strategic Important Developments (SIDs) Advanced Learning Programme: Module development Human Resources & Capacity Building: Establishment of the Employment & Skills

Development Agency (ESDA) Property: guide non-core property disposals SA Power Project: strategy for a globally competitive power cluster to support the build

programme


PROGRAMME 6JOINT PROJECT FACILITY continued

ITEMS

R thousand




TRANSFERS - -

OTHER - -

CAPITAL - -

TOTAL 14 368 28 823

The overall increase in this Programme is mainly due to additional capacity to meet the objectives of the unit, which includes the commencement of the SA Power Project and the implementation of the Competitive Supplier Development Programme in 2008/09.

THANK YOU

public enterprises 2008-2011 strategic plan and financial overview 27-29 february 2008

Documents

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soe requirement

soe thatare

soe business strategies

south african airways

investment programmes

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