PUBLIC ENTERPRISES

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PUBLIC ENTERPRISES 2006-2009 STRATEGIC PLAN AND
FINANCIAL OVERVIEW PRESENTATION TO THE PORTFOLIO
AND SELECT COMMITTEES 9 10 MAY 2006
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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 departments contribution to the Accelerated
  and Shared Growth Initiative of South Africa

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Contents

• Introductory remarks
• Mandate, vision and mission
• Key achievements
• Priority areas and planned activities

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THE MANDATE, VISION and MISSION
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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
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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

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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

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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

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Major changes to the structure

• 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 Investments
• Energy Pipelines
• Human Resources Capacity Building
• ICTs
• Property
• Investment Optimisation

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Major changes to the structure

• 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
  Transactions
• To 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

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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.

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Organogram
Minister Public Enterprises
Filled Posts 127 Vacancies 30
Office of the Minister (support staff)
Special Advisor
Director General Public Enterprises
Office of the Director-General (support staff)
DDG Corporate Strategy and Structure
DDG Legal,Governance Transactions
DDG Analysis Risk Management
DDG Special Projects
Chief Operations Officer
Director Internal Audit Compliance
Chief Financial Officer (CFO)
Head Communications
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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
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DPE Statistics2005/2006
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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
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Budget vs Expenditure Review
DEPARTMENTAL TOTAL DEPARTMENTAL TOTAL DEPARTMENTAL TOTAL 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.
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Five priority areas for the DPEs 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

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Shareholder Management Model

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

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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 DPEs contribution will be presented in the
  following categories
• Infrastructure programmes
• Property and Sector Development
• Skills and education initiatives and
• Second economy interventions

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Accelerated Shared Growth Initiative
Infrastructure programmes

• 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.

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Accelerated Shared Growth Initiative
Property and sector development

• 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 SOEs 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.

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Accelerated Shared Growth Initiative
Skills

• 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.

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Accelerated Shared Growth Initiative
Integrating the second economy

• Without interventions directly aimed at reducing
  South Africas 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

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PRIORITY AREAS AND PLANNED ACTIVITIESPROGRAMMES
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Programme 1 Administration

• Measurable Objectives, Medium Term Outputs and
  Expenditure Estimates Management and
  Administration
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• Purpose Responsible for the overall direction
  and management of the Ministry and the department
  and provision of administrative support services
  to the department.
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• Measurable objective
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• 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
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• 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.

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Programme 1 Administration
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Programme 1 Administration
ITEMS BUDGET 05/06 BUDGET 06/07
COMPENSATION OF EMPLOYEES 24 309 469 30 313 000
GOODS AND SERVICES 17 938 036 13 258 000
TRANSFERS 171 344 619 000
CAPITAL 822 386 139 000
TOTAL 43 241 235 44 329 000

• Subprogramme
• Minister
• Management
• Corporate Services
• Property Management

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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.
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Programme 2 ARM
Analysis
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
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Programme 2 ARM

• Risk Management

Output 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
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Programme 2 ARM
ITEMS BUDGET 05/06 BUDGET 06/07
COMPENSATION OF EMPLOYEES 5 614 014 6 941 000
GOODS AND SERVICES 1 739 986 9 772 000
TRANSFERS 17 520 10 000
CAPITAL 30 000 -
TOTAL 7 093 682 16 723 000

• Subprogramme
• Management
• Analysis
• Risk Management

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Programme 3 LGT

• Measurable 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
  Secretariats 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.
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• 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.

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Programme 3 LGT
LEGAL
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
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Programme 3 LGT
GOVERNANCE
OUTPUT INDICATOR 2006/07 2007/08 2008/09
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
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Programme 3 LGT
GOVERNANCE
OUTPUT INDICATOR 2006/07 2007/08 2008/09
Annual Shareholder Compacts Shareholder Compacts for SOE Generic Compact Key Performance Areas/Indicators Shareholder Compact Negotiation Conclusion Shareholder Compact Negotiation Conclusion
SOE Board Management Board Induction Demand responsive Board appointments Harmonised Remuneration Alignment of Board Performance with Strategic Intent Remuneration Guidelines Board Induction Toolkit Board profiling Shadow Board Database Improved AGM Strategic Intent General Meetings Board Evaluation Implementation Implementation
Governance Workflow Improved integration DPE-wide Government-wide communication with SOE Governance Practice Manual Implementation Implementation
Management of SOE Fora Regular Chairperson/ CEO and CFO Fora Continued Secretarial support to Fora Continued Secretarial support to Fora Continued Secretarial support to Fora
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Programme 3 LGT
TRANSACTIONS
OUTPUT INDICATOR 2006/07 2007/08 2008/09
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 Implementation Implementation
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 Implementation Implementation
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Programme 3 LGT
ITEMS BUDGET 05/06 BUDGET 06/07
COMPENSATION OF EMPLOYEES 5 537 000 9 318 000
GOODS AND SERVICES 6 688 965 5 646 000
TRANSFERS 17 129 9 000
CAPITAL 164 000 231 000
TOTAL 12 407 094 15 204 000
CFT ITEMS BUDGET 05-06 BUDGET 06-07
COMPENSATION OF EMPLOYEES 2 516 000 4 201 000
GOODS AND SERVICES 1 276 783 1 795 000
TRANSFERS 2 017 217 163 441 000
CAPITAL 6 000 -
TOTAL 2 021 015 946 6 437 000

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

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Programme 4 CSS
Measurable 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 Governments economic growth
objectives. This will be achieved
through         Increased competitiveness o    
   Lowest sustainable input costs o      
Globally competitive services o       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.
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Programme 4 CSS
Measurable Objectives, Medium Term Outputs and
Expenditure Estimates Corporate Strategy and
Structure
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Programme 4 CSS
Measurable Objectives, Medium Term Outputs and
Expenditure Estimates Corporate Strategy and
Structure
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Programme 4 CSS
Measurable Objectives, Medium Term Outputs and
Expenditure Estimates Corporate Strategy and
Structure
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Programme 4 CSS
ITEMS BUDGET 05/06 BUDGET 06/07
COMPENSATION OF EMPLOYEES 4 638 800 7 115 000
GOODS AND SERVICES 3 881 200 13 546 000
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

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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)

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JPF
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JPF
PROJECT Project Leaders External External Consultants TOTAL
Continental Investments - 1 200 000 1 200 000
Energy and Pipelines 1 020 000 300 000 1 320 000
ICTs 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
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• THANK YOU

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