Budget Vote Speech 2022 by Minister Pravin Gordhan, MP

20 May 2022

Time to Rebuild, Better, Together

A People Centred Approach

CHAIRPERSON,
HONOURABLE MEMBERS,
CHAIRPERSONS and CEOs OF SOE BOARDS,
LADIES AND GENTLEMEN

I have the honour to present the Budget Vote for the Department of Public Enterprises for the 2022/23 financial year.

We do so in a complex economic, social, and political world in which:

  • Geopolitical tensions and war prevail and have resulted in the shocking rise in energy prices (oil, gas, and now renewables), as well as a rise in food prices and other costs of living.
  • Huge economic stresses have emerged in many parts of the globe: rising inflation, increasing interest rates, risk of stagflation, and even recession.
  • A battle between a multilateral/ multipolar vision of the global order is systematically contested by a unilateral / unipolar vision and actions that pursue this vision.
  • The impact of the Covid pandemic leading to a reordering of productive capacity and its location, as well as the disruption of global supply chain.
  • The impact of climate change has hastened global efforts to transition to a net zero carbon resilient economy that is just and fair.
  • Gross inequality in most parts of the world, is matched only by the extraordinary greed and rapaciousness of elites across the world.
  • Fake news, bots, populist narratives, bullying now seek to intimidate and mislead desperate people into wrong political choices.

These factors greatly impact South Africa, its economy, and its people. This compounds the many challenges we have in South Africa: unemployment, low growth, erratic investment, poverty and inequality. We have been through heartrending tragedies in the recent past: state capture, the July unrest, the pandemic, floods earlier this year in KZN, and now the impact of war elsewhere in the world.

In all of this, ours is the responsibility to ensure progress, redress, recovery from the damage caused and unite the progressive forces and people in a joint effort to rebuild, recover, and reinvent SOEs. This is central to government’s Economic Reconstruction and Recovery Plan (ERRP).

The DPE has the mandate to oversee this process in some of the important SOEs. We must, therefore, seize the many opportunities we have and overcome the challenges left to us by our past, to:

  • Enhance the governance and integrity in SOEs and not only at the level of the Board, but in all other levels;
  • Introduce a new ownership model with the guidance of the Presidential SOC Council;
  • Implement the structural reforms needed in the network industries;
  • To take account of, and implement the recommendations of the Zondo Commission;
  • Relentlessly focus on operational improvements and efficiency;
  • Improve the financial resilience;
  • Reinvent their business models and strategies to take account of global developments and national imperatives;
  • Constantly build the professionalism and competence of managers and staff;
  • Contribute actively to economic transformation and the creation of new opportunities;
  • Cooperate with workers to lead and embrace the substantial changes needed to ensure the sustainability of SOEs;
  • Create a collaborative partnership with customers and stakeholders to arrive at mutually beneficial outcomes;
  • Encourage public – private partnerships that mobilise the necessary resources and skills to advance the SOE programs; and to
  • Actively combat corruption and disruption, whether from within SOEs or from counter-revolutionary quarters / criminals outside SOEs. In this latter context, this morning I heard that the Hendrina power station has been subjected to another act of sabotage. Only insiders could have carried out this crime.

A People Centered Approach

It is appropriate to ask: Why do we do all this? Who benefits?

Because the acts of the greedy, the corrupt, the bully, the counter-revolutionary set back our progress as a democracy and stop us from becoming a caring nation. While they sit back to enjoy their spoils, the damage they cause is borne by our communities – by workers, by small businesses, by the unemployed and youth

Now is the time for all of us to join the ranks of those who want to build a better future and better institutions and not just point fingers among us.

Now is the time to care for the hungry, the marginalized, those in despair.

Nothing can destroy the might of an organized people driven by a clear vision and who take their destiny into their own hands and change the course of history.

Strong, organized communities are fundamental to the security of our country’s infrastructure. We must have a sense of national pride in our electricity, rail, water, and other infrastructure assets and protect them from being broken.

BUILD PARTNERSHIPS

Working in partnership with all stakeholders is vital in a period of transformation and change:

  • COMMUNITIES are impacting by loadshedding, illegal connections, and the energy transition. They must be informed and participate in shaping the future.
  • WORKERS both in SOEs and industry play a crucial role, and are impacted by changes in technology and other processes. We must build constructive partnerships that enable us to recover and rebuild SOEs. Most importantly they must be in the frontline of protecting our infrastructure against criminals and detect any sabotage.
  • PRIVATE SECTOR partnerships will take various forms – from joint investments, to solving challenges, to proactive collaboration. In respect of the latter: Minister Patel and I have agreed, that in view of energy and logistics being vital to the success of our industrialisation efforts, we will launch a forum in which industrialists in key sectors together with Eskom, Transnet and other entities, will enhance collaboration, advance planning, and problem solving. This will enable a better climate for investment and job creation.

We are both making this announcement in our respective budget votes which are taking place now.

THE ZONDO COMMISSION

Judge Zondo finds that the evidence presented to him revealed that the systemic corruption that collapsed governance in these institutions was led by certain board members and senior executives. These people need to be held accountable.

The Report confirmed state capture tentacles were deeply rooted in Transnet, Eskom, Denel, and SAA, unfortunately overseen by the DPE.

The Department has moved swiftly to ensure the SOES reporting to it:

  • Open criminal cases with the law enforcement authorities;
  • Pursue civil recoveries to claw back billions of rands;
  • Refer cases to the registrar of companies so that former directors of SOEs found guilty are prohibited from ever-again serving as company directors;
  • Blacklist companies on the Central Supplier database to prevent them from accessing state procurement opportunities; And
  • Refer cases to professional bodies for enquiries to ensure perpetrators of state capture are prohibited from practicing in their respective disciplines.

We must do these things so that the people responsible can be made accountable, and so that we never again allow our institutions to be destroyed,

I applaud the bravery of whistle-blowers who put their lives at risk to expose the rot of state capture. They must be protected and celebrated for their courage.

THE SHAREHOLDER MANDATE

The following are some of the plans that will be implemented in this financial year by the SOEs in the DPE portfolio.

ESKOM

Eskom’s generation is not under-performing with the Energy Availability Factor languishing at 58% YTD, as opposed to the target of 75% set out in the IRP 19.

The reasons for the poor performance are well known.

Generation Performance

Eskom is taking urgent steps to improve the performance of Generation. Daily production and oversight meetings are held to hold power station management accountable for performance. An operations excellence initiative is also in place which to identify the major causes of underperformance and to make improvements. At selected power stations war rooms will be set up to ensure that production challenges get tackled in a systematic way.

A skills mentoring programme using highly experienced power station managers has been launched. This team will be deployed to power stations where load losses are particularly severe.

Neglected and poor maintenance

Because past neglect of maintenance is not easily overcome. Contractors are held accountable for direct improvement in the EAF as a result of the work undertaken.

Upgrade skills & training: A lack of engineering and technical skills and experience in Eskom remains a significant challenge. These are pre-requisites for a major industrial operation like Eskom. Eskom has introduced a new training programme at its Academy of

Learning to upgrade skills.

Lack of generation capacity: Eskom estimates it needs 4 – 6 GW of additional capacity immediately if it is to properly maintain its power stations. This will allow it to take units off-line for repair while maintaining a supply of electricity.

Bid Windows 5 and 6, as well as the RMIPPP, will, at best, deliver an effective 3,000MW which alone will not create the buffer needed.

The President’s announcement of the lifting of licensing restrictions on own generation to 100MW will undoubtedly assist the position. However, red-tape is holding up the development of these projects.

Recently, Eskom has opened up land it owns in Mpumalanga for long term leases to renewable energy developers.

Poor coal quality, which is often caused by syndicated coal delivery is causing major damage to plants. Eskom is seeking collaboration with the coal mining industry to solve this problem.

Sabotage continues to be a problem. For example, Eskom yesterday announced it had discovered cut cables and tubes which caused a breakdown at Tutuka power station.

Corrupt procurement: several syndicates are involved in delivery of coal, oil, and other supplies, including spares. Measures are being taken to identify the insiders enabling syndicates to gain access. Measures are also being taken to eliminate overpricing and other malpractices.

Eskom’s financial stabilization

Eskom has been able to achieve a significant improvement in its EBITDA for the 2022 financial year with early indications (pre-audit finalisation) showing an improvement of over 85% compared to the 2021 financial results.

This is driven by:

  • the general recovery in energy consumption after the initial hard lockdown due to the COVID-19 pandemic;
  • revenue improvement supported by the NERSA’s standard tariff increase of 15.06%; and
  • cost control saving of about 99.5% of the R20 billion target for the year.

Eskom has achieved savings of over R50 billion since inception of the program in the 2019/2020 financial year.

A further reduction in debt to R396 billion (from R401 billion) was also achieved.

However, Eskom’s liquidity issues relate specific areas which need urgent attention:

  • A lack of cost-reflective tariffs;
  • Non-payment by municipalities;
  • Widespread electricity theft and non-payment;
  • Infrastructure vandalization and theft.

Eskom’s restructuring

The legal separation of the Transmission business has made good progress: key asset transfer agreements are signed, a legal entity registered; and engagements are under way with lenders for their consent to the unbundling.

However, enabling amendments to the Electricity Regulation Act, as well as a new Electricity Pricing Policy, need to be approved as a matter of urgency.

Climate Change and JET

Eskom’s has a holistic approach to de-carbonization and environmental compliance as part of the country’s Just Energy Transition strategy. This includes accelerating the shutdown of ageing and unreliable coal plants, and the roll out of new no and low carbon generation capacity, in a socially and environmentally responsible manner,

TRANSNET

Transnet is key to ensuring an efficient network industry which enables customers supply chains to be globally functional and for transport and logistics to act as a catalyst for economic growth.

Transnet is driving a portfolio of initiatives intended to address challenges to competitiveness of South Africa’s value chains. These initiatives include the following efficiency improvements:

Transnet National Ports Authority (TNPA) plans to improve operations by refurbishing tug and pilot boats, acquiring a new helicopter for pilotage services, and 12 new tugs for the port system.

Transnet Port Terminal (TPT) will focus on three aspects: people, port equipment and processes to reach the desired port efficiencies.

The plans in place entail:

  • Equipment operators able to operate more than one type of equipment;
  • Replacing and refurbishing equipment;
  • Reviewing incentive schemes; and
  • Further improving workforce planning.

Transnet Pipelines (TPL) where pipeline tapping is just as detrimental as cable theft, as these incidents adversely affect the operations of the New Multi-Product Pipeline (NMPP), thus undermining TPL's ability to ensure fuel security.

Tapping also has a serious environmental impact requiring affected areas to be rehabilitated, often over several years. TPL has the following measures in place to reduce incidents:

  • Reducing incident response time,
  • Implementing volume optimisation strategies in line with orders and demand, and
  • Enhanced security measures to reduce fuel theft incidents and associated environmental rehabilitation costs.

Transnet’s Successes

Transnet is implementing the following policy objectives across its operations in rail and ports:

  • Approved branch line concession approved and fully operational;
  • Recently announced the slots sales on the container and cape corridor for private sector participation (3rd party access on operations);
  • Procurement of port equipment [i.e., straddle carriers, Rubber Tyred Gantry (RTG)]; and the
  • Corporatisation of Transnet National Ports Authority (TNPA);
  • Road to rail migration strategy (capacity) initiatives are being implemented across Transnet operating divisions to attract freight volumes. The focus is on the key corridor segments areas where Transnet will leverage its position.

The successes and developments of the corridor segment initiatives for noting in this regard, include:

  • Automotive - The development of the pre-feasibility business case and RFI for Kaalfontein and 3 Auto Port Terminals are in progress. Manganese - A decision was taken to limit the expansion via the Port of Ngqura to 16Mtpa, via the Port of Saldanha to 6Mtpa and to accommodate growth beyond 22Mtpa in the Boegoebaai development.
  • Energy - The Richards Bay natural gas import terminal initiative RFI closed on 14 April 2022, with an extension of 1 month as per request from respondents.
  • Private Sector Participation (PSP) - Transnet is actively seeking collaboration with private sector partners, for example, by bringing in partners to Pier 2 in the Durban Container Terminal (DCT) and the Ngqura Container Terminal (NCT).
  • Furthermore, Transnet has issued several requests for quotation for operations in ports and railways, to increase capacity and partnerships for funding and operations.

Financial Performance

Preliminary results for the 2021/22 financial year have reflected a marked improvement since the previous year, when the COVID related lockdown was at its worst.
Lingering after-effects of the previous year’s financial challenges remain.
Recoveries in revenues and significant cost savings during the recently ended financial year should enable Transnet to return to its previous position of solid financial sustainability in the near future.

SAA

SAA is on the threshold of concluding the acquisition of the strategic equity partner and concluding the transaction which will ensure the viability and survival of SAA. Certain regulatory processes are now progressing.
Arrangements are also in place to finally implement all the provisions of the Business Rescue Plan. Two key subsidiaries have also been restructured will be operating on a profitable basis in this financial year: SAA Technical and Airchefs. Mango is undergoing the final stages of a business rescue process.

We reiterate that these processes have the approval of cabinet and have all been consistent with legal requirements. There have been deliberate efforts to undermine the effort to restructure and reposition a state asset and introduce a majority private sector partner.

We are particularly pleased that the company under an interim leadership at both board and executive management re-started flight operations in September 2021. The current routes include Cape Town, Durban, Lusaka, Harare, Accra, Lagos, Kinshasa and Mauritius.

The airline’s launching focus on African regional routes has been greeted with much admiration and pride across the African continent. As the airline’s management awaits working with the SEP, the development of the second phase of the re-start strategy is already under consideration, which is an expansion into additional regional routes and selected international cities.

The airline will be developing a medium to long-term strategy which will no doubt grow its market share locally and globally.

The priorities around SAA for the new fiscal year are: to ensure the successful conclusion of the SEP process; the injection of R3 billion of working capital by the SEP; and the consolidation of the state’s preference shares and its “golden share”.

SOE GOVERNANCE: A NEW ERA

In the 2022 SONA, President Ramaphosa said that:

“SOEs play a vital role in our economy.

From water and roads, to energy and ports, to defence and aviation, these strategic assets are necessary to keep our country running.

It is essential that we reverse their decline, and position them to contribute positively.

We have therefore embarked on several immediate measures to restore these companies to health, at the same time as we undertake far-reaching reforms that will make our SOEs more efficient, competitive, accountable and sustainable.

The Presidential SOE Council, which I appointed in 2020, has recommended that government adopt a centralised shareholder model for its key commercial state-owned companies. This would separate the State’s ownership functions from its policy-making and regulatory functions, minimise the scope for political interference, introduce greater professionalism and manage state assets in a way that protects shareholder value.

As part of this, preparatory work has begun for the establishment of a state-owned holding company to house strategic SOEs and to exercise coordinated shareholder oversight.

To ensure that SOEs are effectively fulfilling their responsibilities, the Presidential SOE Council is preparing recommendations on SOEs to be retained, consolidated or disposed of.

Any recommendations would be subject to extensive consultation with all stakeholders.”

Further progress will be made in implementing this injunction. A shareholder Bill will be introduced after cabinet approval; the necessary legal documents for the establishment of the holding company are in progress; and the necessary consultations will be concluded.

In addition, PSEC’s work includes:

  • Investigating possible financial models;
  • In-depth analysis and determination of SOEs that should be consolidated and those that should be disposed of;
  • Repurposing those consolidated SOEs; and
  • Development of criteria for SOEs that need crisis management.

Climate Change Resilience

While progress has been made in recapturing and repurposing of our SOEs, we must also realise that they operate in a changed environment where issues of climate change and the move to a low carbon economy is having an increasing sway on their operations.
The flood in Kwazulu-Natal is but one reminder of this new reality. In repurposing our SOEs, their critical role in mitigating the impact of climate change should also be recognised.

Economic transformation

SOCs are also important contributors to economic transformation and support for SMMEs, skills development, provision of internships and learnerships, and local procurement:

As at 31 March 2022, the SOEs collectively contributed the following towards skills development:

  • There is a total learner pipeline of 2,715 trainees currently in the system registered in various programmes across SOEs.
  • Of these, 1,621 are artisan trainees, 235 of which are funded through the National Skills Fund as a part of the SOEs programme of Optimising their training facilities; 623 are engineering trainees; 252 technician trainees and 956 trainees in sector specific training programmes.
  • A total of 387 students have been supported with bursaries in the 2021/22 FY.
  • Over and above these, a total of 334 completions were recorded for the financial year under review, with 107 placements into permanent positions.

Empowering Designated Groups

To illustrate, between 2019 and 2021, ESKOM, Transnet and SAFCOL have supported designated groups:

  • R185,72 billion was expended on Black Owned (BO) businesses,
  • R78,07 billion on Black Women Owned (BWO),
  • R13,69 billion on Black Youth Owned (BYO) companies, and
  • R0,91 billion spent on companies owned by people with disabilities.

Furthermore, the concept of Gender Responsive Planning, Budgeting, Monitoring, Evaluation and Auditing (GRPBMEA) will be introduced.

Localisation

The Department has compacted all its SOEs to procure a minimum of 70% of their goods and services from local manufactures to assist with job creation, re-industrialisation of the economy and support the growth of manufacturing and other productive sectors of the economy.

PART C: 2022/ 23 – PROGRAMME OVERVIEW

Chairperson,

The Department has been allocated a budget of R23.9 billion in 2022/23 financial year. Of these funds, payments for financial assets account for 98.2 per cent (R23.6 billion) of the total expenditure over the period ahead. These include additional amounts of R21.9 billion for Eskom and R1.7 billion for South African Airways in 2022/23 financial year.

Compensation of employees is the department’s largest expenditure item, increasing at an average annual rate of 5.8 per cent, from R159 million in 2021/22 to R188.1 million in 2024.25. To ensure that this remains within the expenditure ceiling for compensation of employees over the medium term only critical posts will be filled.

PART D: CONCLUSION

In conclusion, I wish to emphasise that rebuilding a broken institution takes time, courage, bold leadership and single-minded determination. Reinventing strategy in the process of rebuilding requires a clear vision, a recognition of market and community volatility, new technology developments, awareness of the competitive environment and astute change management strategies.

The institutions we work with are vital to the recovery and reconstruction of our economy, as well as the wellbeing of millions of our people.

This must be a united national effort which advances the good and defends against the vile and corrupt intent of counterrevolutionaries and criminals.

We must extend our support to the leadership of SOEs, the tens of thousands of honest staff and the members of the boards who provide a national service in many instances.

I invite all of us, regardless of affiliation to join in this national effort. Surely, most of us want to rid SA of corruption wherever it might be; surely, we want to rid SA of inequality and poverty. Surely all of us want to create hope, jobs and skills for our youth and future generations?

I want to express my gratitude to the Deputy Minister, my chief of staff, and staff in the ministry for their support.

I also want to thank the Director General Mr Tlakhudi and the officials in the Department for their efforts during these difficult times.

The Boards and the CEOs of the SOEs should also be commended for their leadership that has been executed with integrity to guide our SOEs during these difficult times.

Finally, let me remind you of the words of President Ramaphosa in the SONA 2022 when he said we have faced many crises in our past, and overcome them in trying times, showing courage and resilience.

I quote:

“Now, we must do so again.
Let us forge a new consensus to confront a new reality, a consensus that unites us behind our shared determination to reform our economy and rebuild our institutions.
Let us get to work.
Let us rebuild our country.
And let us leave no one behind.”

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