public enterprises 2006-2009 strategic plan and financial overview

PUBLIC ENTERPRISES

2006-2009 STRATEGIC PLAN AND FINANCIAL OVERVIEW

PRESENTATION TO THE PORTFOLIO AND SELECT COMMITTEES

9 & 10 MAY 2006

2

Introduction

• The Committee in its Report on the 2005 Budget Vote requested that the department– Elaborates on the shareholder management model, and

– Outlines the key activities of the different programmes and sub-programmes, including

• Measurable objectives

• Time frames

• Budget allocations

• All these conditions have been met in the current strategy

• The strategy also includes a section highlighting the department’s contribution to the Accelerated and Shared Growth Initiative of South Africa

2

Contents

• Introductory remarks

• Mandate, vision and mission

• Key achievements

• Priority areas and planned activities

3

THE MANDATE, VISION THE MANDATE, VISION and MISSIONand MISSION

4

5

Mandate of the department

The mandate of the DPE is to coordinate with policy and regulatory departments and Ministries and provide oversight and strategic direction for the SOE reporting to the department

The oversight and strategic direction is with the purpose of realising the vision and mission

6

Vision of the department

Our vision is to have SOE that:

• Are efficiently managed, meeting industry operational benchmarks domestically and internationally

• Play a role in their industry that ensures an optimal allocation of responsibility between the public and private sector

• Undertake investment programmes that provide the necessary capacity to accommodate faster economic growth

• Implement their investment programmes in such a manner that national economy is strengthened in a sustainable manner

7

Mission of the department

Our mission as a department is to create a clear operating environment for SOE by ensuring policy coherence and translating policy fundamentals into strategic mandates for each SOE. For DPE this means that we must:

• Work with National policy and regulatory departments to enable a greater understanding of policy objectives and where necessary indicate policy incoherence

• Work with the SOE Boards in particular to enable better understanding of government priorities

• Work with policy departments, especially the Departments of Trade and Industry, Defence, Mineral and Energy Affairs and Water and Forestry to better understand sector strategies to enable the targeting of relevant activities for local content promotion in the SOE investment programmes

8

Performance over the past year• Internal structural adjustments to

– Build a highly skilled and competent department– Establish efficient internal processes, procedures and documentation systems– Ensure effective and efficient governance

• CEO, Chairs, CFO and Risk Managers Forums• EXCO• Projects Meeting

• DPE provided mandate clarity for the SOE– Focus on core operations:

Transnet – rail and freight transport, separation of SAA

Eskom – generation transmission and non-metro distribution

Denel – change strategy focusing on core capability & capitalisation

Alexkor – negotiated settlement– Translating sector policy into clear and unambiguous strategic direction

• Monitor build programme

8

9

Major changes to the structure

9

• Introduction of the Joint Projects Facility (JPF) within the Corporate Strategy and Structure Unit with the objective of :

‘leveraging the SOE to catalyse regional and sectoral economic development opportunities’

• The JPF was created with the following sub-divisions with specialist skills in each area:

Continental InvestmentsEnergy & PipelinesHuman Resources & Capacity BuildingICTsPropertyInvestment Optimisation

10

Major changes to the structure

10

The merging of the Legal, Governance and Secretariat Unit with the Corporate Finance and Transactions Unit. The Unit is now called the Legal, Governance and Transactions Unit Rationale:

Ensure alignment with our focused role in TransactionsTo strengthen the integration of the Transactions and Legal skills To ensure enterprise accountability for transactions To strengthen the capacity to evaluate and recommend applications for Section 54 transactions

Creation of a specialist position to deal with special projects such as the resolution of Aventura and now Alexkor

11

DPE Organisational structure

DPE is comprised of four units, including the Legal, Governance and Transactions (LGT)• Distill and communicate clearly the SOE mandates and ensure alignment of

SOE governance systems, compliance and performance with government policy objectives, oversee and manage significant and material SOE transactions.

Analysis and Risk Management (ARM)• Provide in-depth analysis of the operations and financial performance of

SOE, and systematically manage risks arising from the business of SOE.Corporate Strategy and Structure (CSS)• Identify the most efficient industry structure, within that definition describe the

core business of the SOE, and identify and leverage SOE assets and capabilities to contribute to economic growth and development .

Specialist position especially used for closing outstanding transactions and strategic negotiations (replacing Corporate Finance and Transactions)

Administration• Provide overall operational support and management of the ministry and the

department.

12

Organogram

Chief Operations Officer

Director General

Public Enterprises

Minister

Public EnterprisesOffice of the Minister

(support staff)

DDGCorporate Strategy

and Structure

DDGLegal,Governance &

Transactions

DDGAnalysis & Risk

Management

Director Internal Audit &

Compliance

Chief Financial Officer

(CFO)

Office of the Director-General(support staff)

Special Advisor Filled Posts: 127Vacancies: 30

HeadCommunications

DDGSpecial

Projects

13

DPE Statistics2005/2006

Total Posts 157 • Approved Structure

Filled Posts 127 • Current structure

Vacant Posts 30 • Specialised skills and experience

required• Competitive Market

Turnover Rate 13% • Benchmark is 8%• Influenced by Market forces

Vacancy Rate 19% • The challenge is to decrease the

vacancy rate so as to improve

efficiency in the department

14

DPE Statistics2005/2006

15

Departmental budget

ITEMS BUDGET 05/06 BUDGET 06/07

COMPENSATION OF EMPLOYEES 42 615 283 57 888 000

GOODS AND SERVICES 31 524 970 44 017 000

TRANSFERS 2 017 438 361 581 086 000

CAPITAL 1 061 386 466 000

TOTAL 2 092 653 000 683 457 000

16

Budget vs Expenditure Review

DEPARTMENTAL TOTAL

ITEMS BUDGET 05/06 EXPENDITURE 05/06 VARIANCE %

COMPENSATION OF EMPLOYEES

42 615 283

42 442 407 172 876 99.1

GOODS AND SERVICES 31 524 970 30 839 979 684 991 97.8

TRANSFERS 2 017 438 361 2 013 997 383 3 440 978 99.8

CAPITAL 1 061 386 948 685 112 701 89.3

TOTAL 2 092 653 000 2 088 228 455 4 424 545 99.8

The Department realised an underspend for the year amounting to .2% of its annual budget, this figure was achieved due to the R2 billion adjustment for the recapitalisation of Denel. Had this adjustment not been made the department would not have achieved the required 2% margin, and would have reflected a 4.77% underspending for the year. However, this was as a result of the Department not effecting a transfer payment in the sum of R3 152 000 to the Diabo Share Trust as the audited financial statements for the entity were not available. It was deemed to be in the interests of transparency and good governance to withhold the transfer until the documents are received. The balance of the unspent funds would then have amounted to R1 272 545 of which R287 000 consisted of transfer payments (details of this amount are explained under Programme 5) which left, in real terms, an amount of R985 545 underspent for the year.

17

Five priority areas for the DPE’s activities

• Implement an effective shareholder management system

• Ensure the implementation of the infrastructure investment programme

• Strengthen SOE balance sheets

• Introduce private sector partners/operator where optimal

• Leverage the Capex programme of SOE to catalyse new economic activities and reestablished industries

18

Shareholder Management Model Aim: balance enterprise, sector and national economic development objectives so as to optimise the impact of the SOE whilst maintaining its viability as an enterprise. Informed by the imperative of allowing sufficient scope and space for the Board of Directors and Management of state-owned enterprises to execute their functions without undue interference whilst simultaneously ensuring that the strategic goals of the shareholder are advanced. We are therefore qualitatively shifting the level and content of SOE shareholder management towards addressing the medium to long-range economic and development goals of the country. In addition to the generic function of maximising shareholder value, the key emphasis of the department with respect to shareholder management will be defined around the following outcomes:

•infrastructure investment and delivery •operational and industry efficiency •financial and commercial viability •governance and regulatory compliance

19

Accelerated & Shared Growth Initiative

• The effective and focused utilisation of state assets is core to the success of ASGISA.

• The Department of Public Enterprises, as shareholder manager of seven SOE, therefore forms part of the lead departments responsible for driving the ASGISA programme.

• The DPE’s contribution will be presented in the following categories: • Infrastructure programmes

• Property and Sector Development

• Skills and education initiatives and

• Second economy interventions

20


• Transnet and Eskom are planning to spend R130bn over the next five to seven years on infrastructure and capital goods.

• This program will impact upon: – Demand for inputs– Industrial development of important sectors such as capital goods and

transport equipment– Crowding in of private investment through greater infrastructure capacity

• However, with the twenty five year decline of government expenditure on gross fixed capital investment, supplier industries have been significantly undermined – a consequence of this is that SOE are projecting that over 40% of the capex will be imported.

• Consequently, DPE is developing a local content procurement framework and a number of other supporting initiatives with the objective of optimising the impact of the procurement on the development of local supplier industries without increasing the price.

Infrastructure programmes

21


• The SOE have a significant property portfolio – with a number of assets located in areas that can enable the development of tourism (e.g. waterfront), logistics nodes (e.g. inland terminals and back of sea, rail and air ports) and manufacturing nodes (e.g. supplier parks to Aerospace).

• It is critical that the portfolio is reviewed and, where appropriate, properties are made available to stimulate increased economic activity and to realise value that can be added to the SOE’s balance sheets.

• The property project is in the process of performing this review and their presentation will provide a sense of the many opportunities that have been identified thus far.

Property and sector development

22


• It has been widely publicised that skills shortages are a major constraint to economic growth.

• In recognition of the positive multipliers associated with skills development, historically, the SOE trained artisans over and beyond their immediate needs. This practice is to recommence and we are encouraging major SOE suppliers to add to the process.

• The SOE have also developed significant training infrastructure – much of which is sub-optimally utilised. The DPE, through the JPF, is in the process of launching a project to audit these facilities and develop a strategy to ensure that they are utilised to meet high priority skill requirements.

Skills

23


Integrating the second economy

•Without interventions directly aimed at reducing South Africa’s historical inequalities, growth is unsustainable

•DPE in collaboration with DoE will be providing specific sector support in the area of business process outsourcing, especially focused on rural call centers

•The property project has specific initiatives aimed at integrating the first and second economies

•SOE are developing programmes to enable greater participation of local communities in capex projects to ensure geographic spread of economic opportunities

PRIORITY AREAS AND PRIORITY AREAS AND PLANNED ACTIVITIESPLANNED ACTIVITIES

PROGRAMMESPROGRAMMES

24

25

Programme 1: Administration

Measurable Objectives, Medium Term Outputs and Expenditure Estimates: Management and Administration Purpose: Responsible for the overall direction and management of the Ministry and the department and provision of administrative support services to the department. Measurable objective: •To provide strategic direction and leadership•To provide support services to enable the department to deliver on its organisational objectives in an environment where the human capital within DPE is both motivated and empowered•To improve the quality of corporate governance and performance monitoring systems by ensuring that appropriate policies, processes and procedures are developed and implemented within DPE Management and Administration includes the Ministry, the Office of the Director-General and Corporate Services. The programme includes policy formulation by the Minister and senior management. Support services are provided by the ministerial support staff, strategy and business planning, human capital, information technology, communications, finance, security services, legal counsel and internal audit.

26


27





TRANSFERS 171 344 619 000

CAPITAL 822 386 139 000

TOTAL 43 241 235 44 329 000

Subprogramme• Minister• Management• Corporate Services• Property Management

28

Programme 2: ARM Measurable Objectives, Medium Term Outputs and Expenditure Estimates: Analysis

and Risk Management Purpose: The main purpose of Analysis and Risk Management (ARM) programme is to analyse and monitor the financial, operational and socioeconomic performance of SOE to ensure compliance with the Corporate Plans, and Shareholder Compacts and actively mitigate keys risks flowing from the SOE activities. Apart from the Management component of the programme, there are two sub-programmes:

Analysis sub-programme continuously analyses and monitors the performance of SOE, focusing on their operations, financial performance and their role in socioeconomic development. The sub-programme plays a vital role in the shareholder compact and oversight process as it identifies the key performance indicators and targets for inclusion in the compacts and is responsible for a comparative benchmarking programme of SOE. This activity will be informed by a financial analysis framework. Risk Management is responsible for formulating risk management framework related to SOE, analyse and monitors risks associated with SOE activities, advise on the section 54 PFMA applications and materiality frameworks, identify key risks to be monitored by the shareholder, assess their impact and likelihood, setting up an early warning and reporting systems. The sub-programme regularly reports on systemic risks, vulnerabilities and potential shocks in and across the SOE and advises on mitigations plans. These key risks include the following, amongst others: Safety, Occupational Health and HIV/AIDS, Environment, Security of key infrastructure- pipelines, ports, railways, and airline, Security of supply against demand in the growing economy, Industrial action, Skills, Solvency of SOE and their contribution to national financial stability, Governance and Litigation. This activity will be informed by a risk management framework.

29

Programme 2: ARM

Output Indicator Target

-Review the pension & medical aid funds of SOEs

-Due diligence of SOE pension and medical aid funds

-Identify risks in the pension and medical aid funds

-Propose Pension fund reform

October 2006

-Development of the financial analysis manual

-Approved financial analysis manual May 2006

-Standardization of SOEs annual reports, Corporate plans and quarterly reports for presentation to the Portfolio Committee

-Create the database of KPIs & benchmarks for all SOEs

-Revised Five year review on SOE performance

-Standardized annual reports

-Approved KPIs & benchmarks

-Publishing the five year review

Dec 2006

Nov 2006

June 2006

Analysis

30

Programme 2: ARM

Risk ManagementOutput Indicator Target

-Risk assessment of each SOE -Risk register for SOE September 2006

-Development of the Risk Management Framework

- Approved Risk Management Framework

August 2006

--Procurement of the Risk Management System

Implementation of the Risk Management System

November 2006

-Crisis Management System Submission of the proposed Crisis Management system to the CEO forum

May 2006

31

Programme 2: ARM




TRANSFERS 17 520 10 000

CAPITAL 30 000 -

TOTAL 7 093 682 16 723 000

Subprogramme• Management• Analysis• Risk Management

32

Programme 3: LGTMeasurable Objectives, Medium Term Outputs and Expenditure Estimates: Legal, Governance and Transactions (LGT) Purpose: Provide clear SOE mandates and ensure alignment of SOE governance systems, compliance and performance with government policy objectives. Measurable objective: Develop effective governance, transactions and policy frameworks that ensure that all SOE activities are performed with integrity, honesty and in compliance with appropriate legislation. Legal, Governance and Transactions (LGT) is comprised of three functional areas: Legal Office, Corporate Governance, including the Secretariat and Transactions. All three deliver internal services. Corporate Governance has a distinct role in the interface with SOEs, National Treasury and other Government Departments. A substantial portion of the Secretariat’s workload relates to the Economic Cluster. Transactions includes corporate finance and structuring expertise and largely serve as interface with SOE in relation to Pubic Finance Management Act (PFMA) section 54(2) approvals and execute DPE led transactions. The programme has a distinctly legal focus, as it interprets, develops and records factual frameworks in relation to powers, functions and duties, corporate structure and obligations, and formal decisions, hence all legal activities were centralised in one programme this year. LGT has a four-pronged delivery focus, namely:•interpretation of current law, monitoring of statutory/contractual compliance and induction of good governance protocol •optimal corporate financial and legal structuring•repository and disseminator of factual records and information supporting the functions of LGS, DPE, the Minister and the Economic Cluster•inter-governmental co-ordinator and conduit for communication between other Government Departments and SOE in respect of issues which are SOE-specific.

33

Programme 3: LGT

OUTPUT INDICATOR 2006/07 2007/08 2008/09

Effective management of litigation risk

Reduction in outstanding litigation

Review and resolution of outstanding litigation with reduction target of 25%-50%

Continued reduction & swift resolution of litigation

Continued reduction & swift resolution of litigation

In-house Counsel •Swift to the point and succinct legal advice

•Legal Panel (service providers)•Regular reports on impact of draft legislation on DPE & SOE

Continued activities Continued activities

Effective Management of administrative justice & disclosure obligations

Compliance with statutory obligations

•Internal DPE procurement guidelines •DPE access to information manual (guidelines and procedures)

Continued activities Continued activities

LEGAL

34

Programme 3: LGT


Shareholder Management Legislative Framework

SOE Act Conceptual Framework & Draft Legislation

(Classification of SOE, key areas of shareholder oversight, principles, criteria and procedure for strategic intervention,Shareholder Communication & Monitoring Principles, matters to be regulated by regulation (compulsory), matters to be regulated by practice note (recommended), Matters to be published (public domain)

Legislation enacted Implementation

Aligned SOE Founding Documents

Harmonised SOE founding documents

Harmonisation of board remuneration

Minimum requirements for Memoranda and Articles of Association

Implementation Implementation

GOVERNANCE

35

Programme 3: LGT

36

Programme 3: LGT


Transaction Good Practice Framework

Harmonised SOE & DPE transaction approaches

Transaction Management Guidelines Guidelines

ESOP & MBO Guidelines

BBBEE & PP Guidelines

Corporate structure guidelines (special emphasis on “golden shareholding”)

Model Shareholders Agreements


Transaction Execution Successful transaction completion

EFC securitization

PBMR

SAA transaction

Property Project

InfraCo

SAFCOL – ESOP, NEF shareholding

To be determined To be determined

Transaction Approval Swift & credible PFMA sec 54(2) approvals

Application, processing & approval guideline


TRANSACTIONS

37

Programme 3: LGT




TRANSFERS 17 129 9 000

CAPITAL 164 000 231 000

TOTAL 12 407 094 15 204 000

Subprogramme• Management• Legal and Litigation• Governance and Secretariat• Legal Transactions

CFT: ITEMS BUDGET 05-06 BUDGET 06-07



TRANSFERS 2 017 217 163 441 000

CAPITAL 6 000 -

TOTAL 2 021 015 946 6 437 000

38

Programme 4: CSSMeasurable Objectives, Medium Term Outputs and Expenditure Estimates : Corporate Strategy and Structure Purpose: Define and implement industry structures, public/private service delivery and SOE strategies that will optimise overall industry efficiency, service provision, pricing of services and economic development Measurable Objectives: The principal objective of the CSS Unit is to design strategies and structures for SOE and the industries in which they operate that will ensure delivery on Government’s economic growth objectives. This will be achieved through: Increased competitiveness:o Lowest sustainable input costso Globally competitive serviceso Sufficient capacity provision Utilising SOE to strengthen key sectors The following are the other objectives: To review level of investment in SOE infrastructure and improve quality of investment Development of back of port IDZ industry To liaise with the Joint Project Facility in the development of strategies The branch is comprised of four sub-branches including Energy, Transport, Defence and Forestry. The above programme objectives cut across the four branches. The JPF is a financial facility that will enable the development of projects that enhance the value of an industry or can leverage off the assets and/or capabilities of the SOEs to the benefit of those SOE and the economy as a whole. An investment dashboard will serve as a tool to monitor key objectives.

39

Programme 4: CSS

Measurable Objectives, Medium Term Outputs and Expenditure Estimates : Corporate Strategy and Structure

40

Programme 4: CSS


41

Programme 4: CSS


42

Programme 4: CSS




TRANSFERS 15 205 580 007 000

CAPITAL 52 000 96 000

TOTAL 8 587 205 600 764 000

Subprogramme• Transport• Energy• Strategy• Economic Research Unit• Joint Project Facility#

43

JPF

•The Joint Project Facility is a financial facility that will enable the development of projects that enhance the value of an industry or can leverage off the assets and/or capabilities of the SOEs to the benefit of those SOE and the economy as a whole.

•Measurable Objectives: to facilitate the rapid development of projects to the point where an investment case and/or costed operational plan has been accepted by relevant operational companies and, where appropriate, financial investors.

•Six areas have been identified for projects, namely Continental Investment, Energy & Pipelines, Human Resources & Capacity Building, Information Communication Technologies (ICTs), Property and Optimisation.

–Continental Investment: The development of a SOE to consolidate Africa initiatives in a systematic manner.–Energy & Pipelines : identification of pipeline projects & development of the gas & liquid fuels pipelines masterplan–Human Resources & Capacity Building: Enhance national skills development through better and fuller utilisation of the capacity for skills development in SOE in South Africa–ICTs: The establishment of a telecommunications infrastructure company and a business process outsourcing development initiative. –Property: To unlock economic value through SOE property development project –Investment Optimisation (this project aims to reduce imports and build a capital goods industry for the capital expansion programmes of Eskom and Transnet)

44

JPF

45

JPF

PROJECT

Project Leaders

ExternalExternal

Consultants TOTAL

Continental Investments - 1 200 000 1 200 000

Energy and Pipelines 1 020 000 300 000 1 320 000

ICT’s 1 500 000 - 1 500 000

HR & CB 960 000 - 960 000

Property 1 500 000 2 000 000 3 500 000

Optimisation 1 020 000 300 000 1 320 000

TOTAL 9 800 000

46

THANK YOU

public enterprises 2006-2009 strategic plan and financial overview

Documents

policy departments

soe investment programmes

national policy

policy fundamentals

policy coherence

policy incoherence work

soe boards

soe reporting