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Update on the Performance of State Owned Companies

Update on the Performance of State Owned Companies Presentation to Select Committee: Public Enterprises And Communication. 15 March 2017. Presentation Outline. Purpose of the presentation Context and background (Mandate of the Department) Economic Policy Framework and SOCs

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Update on the Performance of State Owned Companies

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  1. Update on the Performance of State Owned Companies Presentation to Select Committee: Public Enterprises And Communication 15 March 2017

  2. Presentation Outline • Purpose of the presentation • Context and background (Mandate of the Department) • Economic Policy Framework and SOCs • Performance review methodology • Performance report per SOC • Portfolio overview • Conclusion

  3. Purpose of the presentation • The purpose of the presentation is to: • Outline the mandate of DPE and the Governance framework of the oversight function • Detail role of SOCs to support implementation of the National Development Plan (NDP) • Outline the methodology for assessing performance of SOCs • Reflect performance per SOCs • Extent of government exposure on guaranteed loans

  4. Mandate of DPE DPE Portfolio The vision of the Department is to drive investment, productivity and transformation in the Department’s portfolio of SOCs, their customers and suppliers to unlock growth, drive industrialisation, create jobs and develop skills. The vision of the Department is influenced by the current economic policy framework that seeks to completely restructure the economy as well as deracialise it: NDP 9 Point Plan IPAP NGP/sectoral pol

  5. National Development Plan and SOCs • SOCs are required to directly support the implementation of the National Development Plan • Since the adoption of the Plan, SOCs have continued to be at the forefront of implementation of Government Policy • SOCs have been the main driver of investments in the South African economy • Since 2005, SOCs started the implementation of Governments’ CAPEX Programme • This programme became more important post the 2007/08 economic crisis • In 2005 investments by SOCs amounted to around R30bn per annum and in 2015 this amounted to R160bn Source: SARB, 2017

  6. SOCs performance environment & context • The operational environment for the SOCs has significantly changed over the past decade where the global economy was buoyant growing at 5.7 percent in 2007 (2015 growing at just over 3 percent) • This has increased operational risk and also increased the demands for the developmental contribution of the SOCs • The environment requires careful balancing of financial sustainability and economic contribution of SOCs

  7. Performance of the portfolio in 2015/16 Financial Year • SOCs performance continue to improve despite the tough economic environment and fluid policy framework

  8. Governance framework Presidency Performance of Minister of Public Enterprises Parliament Transparency and Accountability Shareholder Executive Authority Shareholder Management Defines powers and responsibilities of shareholder viz a viz the Board and Management Companies Act & PFMA establishes relationship Governance Framework Board Accounting Authority Management Agreement Board cascades delegations and performance expectations down to management Management

  9. SOC Performance Assessment methodology Financial sustainability Operational sustainability Good corporate Governance 1 2 3 • Profitability • Gearing • Working capital requirements • Operational indicators • Investments • Market development • Board stability and alignment • External audit performance • Vacancy rates at Board & Executive level Skills Development BBBEE Industrial Development Enterprise development 4 Developmental Requirements

  10. Financial sustainability: Eskom • Despite the declining volumes and rising costs, Eskom is projected to post a profit for the 2016/17 financial year • However, the balance sheet of the company is significantly stretched with gearing ratio of 74% in quarter 3 • Eskom has implemented interventions e.g. growing exports to boost declining sales

  11. Operational sustainability: Eskom • Eskom’s operational performance has significantly improved over the past 18 months • This has allowed the company to eliminate load shedding • Energy Availability Factor has improved from around 70 percent during the load shedding period to 77 percent at the end of Q3 • Eskom has also increased planned maintenance with the PCLF above 10 percent being maintained over the past 3 quarters

  12. Financial sustainability: Transnet • The relatively weak performance of productive sectors, in particular, mining has had a negative impact on the company’s top line • Transnet had to implement price reductions for its customers that are in distress • However, the company has been able to manage its debt exposure through a number of interventions such as deferment of projects that may not be viable in the short term • The company has remained profitable for the past 3 quarters

  13. Operational sustainability: Transnet • The actual volumes moved by rail has lagged behind target • This has largely been driven by decline in export volumes for both coal and iron ore • The General freight performance has also been impacted by the general performance of the economy and unsupportive legislative framework

  14. Financial sustainability: Denel • Denel experienced liquidity challenges in the first half of 2016/17 which had an impact on the execution of some key programmes • However, between the December 2016 and February 2017, Denel was able to raise R714 million from capital market with the support of the Department . In addition, the entity has put additional focus on debtors’ collection - R500 million was collected in the month of December 2016 • Despite the improving financial position, Denel’s debt to equity (81:19) position remains unsustainably high.

  15. Operational sustainability: Denel • A sustainable funding solution is critical, as the SOC has been reliant on client advance payments and short term commercial paper to finance its working capital requirements. This has exposed the business to regular cash flow shocks. This has had an impact on the execution of major contracts. A sustainable capital structure plan is required to ensure liquidity and sustainability • Modernisation of some plants is required. The PMP plant is over 40 years old and most of the production assets obsolete. This has resulted in continuous breakdowns and quality concerns resulting loss of sales. PMP faces the risk of permanently losing its competitive edge which it has enjoyed over many years • The long term viability of businesses in the defence and aerospace industry depends on steady investment in research and development (R&D). Over the years, Denel’s own investment in R&D has been below the global benchmark of 5-10% of own revenue, • Denel is a strategic defence products provider to the Department of Defence, whose capital spending has been declining for a long time. This has forced Denel to increasingly relying on foreign business for its sustainability. Over 60% of Denel revenues are derived from exports. The downside of this strategy is that foreign governments expect technology transfers when procuring from external suppliers. This results in Denel cannibalising its own long term future in order to ensure short term cash flows.

  16. Financial Sustainability: Alexkor • Consolidated revenue consists of rental and 51% diamond sales from the PSJV • Total PSJV diamond revenue is R189 million compared to R335 million budget for the quarter. This is due to fewer carats sold by the PSJV and lower average selling price of the IMDSA diamonds. Although diamond revenue is lower than budget for the quarter, the PSJV has exceeded the annual revenue budget of R372 million. • This translates to Alexkor achieving a higher year to date revenue of R255 million compared to annual revenue of R189 million reported in 2015/16 FY. Therefore, the Department should expect a better financial performance for the 2016/17 FY.

  17. Alexkor PSJV Carat Production Actual carat production for the past three quarters has been missed but production improved in the 3rd quarter Causes of poor performance include; Discrepancies in the geological report vs actual mining Lack of mine planning system Mitigating Plans to improve production Employ the service of a experienced geologist to undertake exploratory work on the diamond deposit Establish an integrated mine planning system that will assist management to predict quality of diamond Deep sea mining IMDSA deep sea vessel commenced production in April 2016 One of the two operations in SA Expected to produce over 100 000 carats in FY2017/18 CONFIDENTIAL Alexkor PSJV Carat Production

  18. Financial sustainability: SAFCOL • The Group’s revenue for the quarter under review has been reported below budget and forecast. It points mainly on the stagnant growth being reported on sales volume. • Year-to-date revenue only makes 65% of the full year forecast. This percentage intensify the chances of non-achievement of the year-end forecast . • The opex ratio depicts a steep rise on operational costs, overtaking the revenue line. This suggests that the company is operating on a loss position. • The reported profit of R19m symbolises a year-on-year increase of 123%. This was due to delayed expenditure on key operational activities.

  19. Financial sustainability: SAFCOL • SAFCOL’s balance sheet boasts a strong equity position, valued at R3.2 billion. This makes SAFCOL’s balance sheet to be strong and attractive for investment purposes. • The SOC has low debt (interest-bearing) levels in its books, which equates to 2% of the total equity. • 33% of the cash balance is attributable to interest and dividend. • The company maintains positive working capital requirements.

  20. Financial sustainability: SAX • The financial performance of SAX remains a major challenge • The company’s business model needs overhauling with some support/equity injection from the shareholder • Sustained losses is significantly eroding shareholder value

  21. Guarantee exposure

  22. Governance performance

  23. Developmental contribution: Skills Development • Since the inception of the National Skills Accord in 2011, SOC collectively enrolled 25 484 trainees in various core scarce and critical skills interventions. • These include 8 034 artisan trainees, 2 915 technician trainees, 2 273 engineering trainees, 184 Cadet Pilots, as well as 12 078 trainees in other core sector specific training interventions. • Over 10 500 Graduates and Matriculants befitted through the Eskom Strategic Youth Development Initiative (SYDI) programme. • Table below shows the pipeline of overall SOC contribution to skills development over the five years ending 31 March 2016 :

  24. Developmental contribution: Skills Development • For the 2016/17 Financial Year, SOC have collectively enrolled 8 928 in various scarce and critical skills programmes, including sector specific learning programmes with 10 655 completions reported including placement into fulltime employment of 607 learners.

  25. Localisation and SMME ESKOM • As part of the promotion of SMMEs, Eskom has through its New Build Project spent a total of R88.56 bnon the designated suppliers as follows: • R59bn on Large Black Suppliers (LBS) • R13bn on Black Women Owned (BWO) companies • R10bn on Small and Medium Enterprises (SME) / Small Black Enterprises (SBE) • R6bn on companies Located close to the projects, i.e. Local To Site (L2S) ALEXKOR • Alexkor has to date in the 2016/17 Financial Year, incurred a procurement spend of R94.04mn; with 95% (R89,5 mn) spent on local companies in the Northern Cape Province, 26% representing R23,2 mnspent on women owned companies. • In their support to SMMEs, Alexkor awarded 43 (i.e. 60.5%) of the 71 Mining contracts awarded; to historically disadvantaged individuals. • Furthermore, contract revenue paid out to BEE compliant companies amounted to R195 mn for the current FY, which include R51mn paid to 100% Black Owned companies for 12 months that ended on March 2016.

  26. Localisation and SMME • SAFCOL • SAFCOL is currently running three projects in its Enterprise Development Programme in which R7.9mn was spent over a three year period to support: • Furniture manufacturing: 31 young people trained; assisted with the registration of own business entity; and supplied with raw materials, equipment and hand tools. This project indirectly benefitted 5 146 school learners for whom the furniture was made; • Charcoal manufacturing: Support including supply of raw material provided to 18 Black Owned Companies, of which 13 are male owned with 5 women owned; • Fruit trees and vegetables nursery initiatives: Support provided through supply of seedlings, development of hydroponic tunnels and installation of irrigation pipes benefiting 8 Black Owned companies of which 4 are male owned with 4 women owned. • Co-operative Support Initiative: (1) 3 Cooperatives comprising 16 Youth in Manual Hand rolling; (2) 10 Women Emerging Contractors in Silviculture (the growing and cultivation of trees); and (3) 16 men in Emerging Contractors in Silviculture supported.

  27. Localisation and SMME DENEL • Denel has to date in the 2016/17 Financial Year, incurred a local spend of R4.2bn to support local companies with R927.8mn spent on Black Owned companies; R312.1mnon Black Women Owned companies, R60.2mn on Black Youth Owned companies, and R161 000 spend was incurred on Businesses Owned by People with Disabilities. • R15.7mnspent was also incurred to support Enterprise and Supplier Development Initiatives. SAX • SAX has identified 15 Small Enterprises to participate in their Enterprise Support and Development programme to benefit from opportunities such as aircraft painting, simulators, inflight catering, tugs, shuttle service and car leasing. • Of the total procurement spent of R409.48mn million incurred to date; total BBBEE spend was R336.66mn with R64.61mn spent on Emerging Medium Enterprises(EME) and Qualifying Small Enterprises (QSE).

  28. Localisation and SMME TRANSNET • Transnet has a well-established strategy, plan and approach towards Enterprise and Supplier Development which helped the entity achieve 102% of the DTI codes in January 2017. • By leveraging on its procurement spend, Transnet has made significant contribution to economic growth as well as to economic transformation specific initiatives. • On Localisation, Transnet has embarked on the following initiatives: • Through their programmatic locomotive procurement, suppliers are required to localise 50% of Diesel locomotives and 60% Electric locomotives; • The locomotive OEM’s have developed 13 Black Owned Suppliers into their supply chains • Further support for localisation is provided through rolling stock components utilised for locomotive and wagon maintenance programs. This will include local content on components such as: • Wheels; Axels; Bogies; Springs; Bearings; Draw Gear and Coupling systems. • These are procured locally from more than 30 suppliers, 6 of which are Black Owned suppliers

  29. Conclusion • The performance of SOCs has remained relatively strong despite the tough operational environment • Over the past 3 quarters, 5 of the 6 SOCs posted profits, which affirms the strength of the SOCs business models and strategies being implemented • However, the continued constrained economic environment pose a major risk to SOCs and if no improvement is seen in the next 12 months, this will have major impact on the financial sustainability of SOCs • The Department has continued to closely monitor the Governance performance of SOCs and ensuring alignment at Executive and Non-Executive Levels • Establishing supportive policy framework is essential for the long term sustainability of SOCs

  30. THANK YOU

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