PUBLIC ENTERPRISES

BUDGET FOR THE MTEF PERIOD

2008/09 – 2010/11

27 FEBRUARY 2008

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CONTENTS Public Enterprises Budget for the MTEF period 2008/09 – 2010/11

• Consolidated Departmental Budget • Economic Classification• Summary of transfer payments• Operational funding requested and approved • Programme 1• Programme 2• SOE funding requested • Programme 3• SOE funding requested• Programme 4• SOE funding requested• Programme 5• SOE funding requested• Programme 6• 2006/07 Audit findings

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DPE BUDGET

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

ITEMS

R thousand

BUDGET 07/08

BUDGET 08/09 BUDGET 09/10 BUDGET 10/11

ADMINISTRATION 62 695 65 986 69 542 73 987

ENERGY AND BROADBAND ENTERPRISES 2 511 880 2 137 580 1 973 236 153 253

LEGAL, GOVERNANCE, RISK & TRANSACTIONS 96 778 158 163 157 402 29 049

MANUFACTURING ENTERPRISES 1 164 342 11 641 11 853 12 604

TRANSPORT ENTERPRISES 753 995 605 669 19 207 20 040

JOINT PROJECT FACILITY 14 368 28 823 34 451 27 058

TOTAL 4 604 058 3 007 862 2 265 691 315 991

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DPE BUDGET continued

ITEMS

R thousand

BUDGET 07/08

BUDGET 08/09

BUDGET 09/10

BUDGET 10/11

COMPENSATION OF EMPLOYEES 62 010 71 492 77 459 83 55

GOODS AND SERVICES 66 606 93 345 97 477 91 826

TRANSFERS 4 473 962 2 842 650 2 090 680 140 710

OTHER - - - -

CAPITAL 1 480 375 75 -

TOTAL 4 604 058 3 007 862 2 265 691 315 991

Economic Classification

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DPE BUDGET continued

R thousand

BUDGET 07/08

(Adjusted

Appropriation)

BUDGET 08/09

BUDGET 09/10

BUDGET 10/11

Alexkor *72 700 130 000 130 000 -

Broadband Infraco - 377 000 210 000 140 000

Denel 1 155 000 - - -

Pebble Bed Modular Reactor 2 502 273 1 750 000 1 750 000 -

South African Airways **744 400 - - -

South African Express - 585 000 - -

TOTAL 4 474 373 2 842 000 2 090 000 140 000

Summary of transfer payments

*R 2.25 million is included in this amount for VAT, subject to confirmation from National Treasury and SARS whether VAT is applicable to a specific portion of the funding earmarked for restructuring.** R 91.4 million is included in this amount for VAT, subject to confirmation from National Treasury and SARS whether VAT is applicable to the nature of this funding, being in respect of restructuring costs.In the event that SARS finds that VAT is not applicable in these cases the funds will not be drawn. However, this will once again impact on the department’s expenditure where it will not meet its target of 2% for the year.

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DPE Operational Funding requested from and allocated by National Treasury

Item

R thousand

08/09 09/10 10/11 Total

Operational funding requested in the MTEF 160 634 158 858 167 154 486 646

Initial allocation December 2007 144 286 158 771 172 859 475 916

Total deficit on 1st allocation (16 048) (87) 5705 (10 430)

Final allocation with inflationary increase January 2008 165 862 175 691 175 991 517 544

TOTAL INCREASE 5 228 16 833 8 837 41 628

During the MTEF process the department requested an amount of R486 646 million over the three year period, which included the normal baseline inflationary increase as well as additional funding for projects. In December 2007 National Treasury allocated an amount of R476 216 million, a deficit of R10 430 million. The allocation for the first year being in deficit of R16 048 million which meant that projects had to be re-prioritised to the outer years.

However, in January 2008 National Treasury advised the department that the allocation had been revised to include further inflationary projections. The allocation was increased from R475 916 million to R517 544 million, a total amount of R41 628 million, comprised of R2 817 million for personnel and R38 811 million for non-personnel components of the vote budget by National Treasury to mitigate inflationary pressures. If inflation outcomes are above projections, it will be incumbent on the department to absorb additional costs within the baseline.

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PROGRAMME 1ADMINISTRATION

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

ITEMS

R thousand

BUDGET 07/08

BUDGET 08/09

BUDGET 09/10

BUDGET 10/11

COMPENSATION OF EMPLOYEES 29 014 33 979 37 092 40 033

GOODS AND SERVICES 31 629 30 982 31 695 33 244

TRANSFERS 620 650 680 710

OTHER - - - -

CAPITAL 1 432 375 75 -

TOTAL 62 695 65 986 69 542 73 987

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PROGRAMME 2

ENERGY & BROADBAND ENTERPRISES

The slight increase in the operational expenditure in this programme over the MTEF period is mainly due to projects in the sector commencing in 2009/10.

Over the MTEF period, a total of R727 million has been allocated for Broadband Infraco and R3.5 billion for the PBMR. However, overall expenditure in this programme decreases due to the decline of transfer payments to the SOE. In his budget speech the Minister of Finance indicated that an amount of R60 billion has been set aside in a contingency fund for Eskom over the next 5 years. R20 billion of which is the anticipated requirement over the MTEF. The department will advise the Committee as soon as this allocation has been clarified by National Treasury.

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

ITEMS

R thousand

BUDGET 07/08 BUDGET 08/09 BUDGET 09/10 BUDGET 10/11

COMPENSATION OF EMPLOYEES 6 474 6 915 7 444 7 992

GOODS AND SERVICES 3 133 3 665 5 792 5 261

TRANSFERS (PBMR and Broadband Infraco) 2 502 273 2 127 000 1 960 000 140 000

OTHER - - - -

CAPITAL - - - -

TOTAL 2 511 880 2 137 580 1 973 236 153 253

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Funding requested from and allocated by National Treasury for State owned Enterprises – Broadband Infraco

In the 2008 MTEF the department requested an amount of R2 095 billion over the period which was in respect of the national long distance network and the undersea cable.

An amount of R727 million was allocated over the period in respect of the State’s contribution. A significant equity contribution is critical if the substantial decrease in broadband costs targeted are to be achieved.

The further funds requested, mainly for purposes of investing and constructing a State initiated undersea cable, were not approved by National Treasury. The National Treasury raised major concerns about the extent of Private Sector Participation (PSP) in the cable. There will be significant PSP as will be demonstrated by the Infraco team.

Item

R thousand

08/09 09/10 10/11 Total

Broadband Infraco – requested 1 131 000 872 000 92 000 2 095 000

Broadband Infraco – allocated 377 000 210 000 140 000 727 000

Total Excess / shortfall (754 000) (662 000) 48 000 (1 368 000)

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Funding requested from and allocated by National Treasury for State owned Enterprises – PBMR

In the 2008 MTEF the department requested an amount of R14 763 100 billion being in respect of funding requirements for operating expenses for payments to contractors for design, development and licensing etc in addition to payments for capital assets.

This request was not approved, an amount of R3.5 billion was however approved, being the balance of the R6 billion that was approved by national Treasury during the 2007 MTEF. The Minister has indicated that this is acceptable as further funding will be generated from private investors or other shareholders.

Item 08/09 09/10 10/11 Total

Pebble Bed Modular Reactor - requested 3 763 500 5 470 400 5 529 200 14 763 100

Pebble Bed Modular Reactor - allocated 1 750 000 1 750 000 - 3 500 000

Total Excess / shortfall (2 013 500) (3 720 400) (5 529 200) (11 263 100)

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PROGRAMME 3LEGAL, GOVERNANCE, RISK AND TRANSACTIONS

Operational expenditure in this programme increases in 2008/09, as a result of additional funding for the legal costs for the Alexkor and Safcol transactions, but remains stable for the following two years. The sub-programme Transactions was created specifically for this purpose. At the same time the transfer payment to Alexkor was shifted from Programme 2 to Programme 3 for oversight of the implementation of the Richtersveld settlement, the final payment being in 2009/10. The historical figures between the Programmes were adjusted accordingly.

ITEMS

R thousand

BUDGET 07/08

BUDGET 08/09

BUDGET 09/10

BUDGET 10/11

COMPENSATION OF EMPLOYEES 13 954 13 550 14 576 15 682

GOODS AND SERVICES 10 108 14 613 12 826 13 367

TRANSFERS (Alexkor) 72 700 130 000 130 000 -

OTHER - - - -

CAPITAL 16 - - -

TOTAL 96 778 158 163 157 402 28 049

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Funding requested from and allocated by National Treasury for State owned Enterprises – Alexkor

SOE

R thousand

08/09 09/10 10/11 Total

Alexkor – requested 260 000 - - 260 000

Alexkor – allocated 130 000 130 000 - 260 000

Total Excess / shortfall - - - -

In the 2008 MTEF the department requested R260 000 million to be paid in the 2008/09 financial year.The full amount was allocated, however this was split for disbursement over two years in accordance with the court settlement agreement and is made up of R200 million for State’s final contribution to theJoint Venture to be created between Alexkor and the Richtersveld Community and an amount of R60 millionas the balance of the funds required for the development of the township.

The funds will be paid over only after the turnaround strategy for the entity has been agreed upon and aviable business plan together with progress reports on the implementation of the settlement have beensubmitted to National Treasury

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PROGRAMME 4

MANUFACTURING ENTERPRISES

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

ITEMS

R thousand

BUDGET 07/08

BUDGET 08/09

BUDGET 09/10

BUDGET 10/11

COMPENSATION OF EMPLOYEES 5 041 5 788 6 224 6 694

GOODS AND SERVICES 5 316 5 853 5 629 5910

TRANSFERS 1 155 000 - - -

OTHER - - - -

CAPITAL 16 - - -

TOTAL 1 165 373 11 641 11 853 12 604

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Funding requested from and allocated by National Treasury for State owned Enterprises – Denel

In the 2008 MTEF the department requested an amount of R410 million to fund Denel’s consolidation costs at ORTIA (R241 million) and interest costs for the Domestic Medium Term Note (DMTN) (R169 million) over the MTEF period.

This request was not approved and National Treasury did not give any reasons for this in the MTEF allocation letter.

This is of grave concern given the interest cost associated with Denel’s DMTN borrowing programme which commences at the beginning of 2008/09.

Item 08/09 09/10 10/11 Total

Denel - requested 79 000 215 000 116 000 410 000

Denel - allocated - - - -

Total Excess / shortfall (79 000) (215 000) (116 000) (410 000)

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PROGRAMME 5

TRANSPORT ENTERPRISES

Operational expenditure increases substantially in 2008/09 and thereafter remains stable, as the department will be retaining specialist technical expertise that was previously funded by the Department for International Development (DFID), under the Support for the Restructuring of Public Enterprises in South Africa (SPRESA) programme as well as initial funding received from the SOE for the Pipeline project in the Joint Project Facility which has shifted to this programme. The National Corridor Performance Management project also commences in this period. The slight decrease in the budget in 2008/09 is attributed to a reduction in the amount allocated for transfer payments. In 2007/08 an amount of R 744.4 million was allocated to South African Airways (SAA), whereas an amount of R585 million is allocated for South African Express Airways (SAX) in 2008/09. The long term capitalisation of SAA will be resolved over this financial year.

ITEMS

R thousand

BUDGET 07/08

BUDGET 08/09

BUDGET 09/10

BUDGET 10/11

COMPENSATION OF EMPLOYEES 5 212 6 243 6 714 7 221

GOODS AND SERVICES 4 367 14 426 12 493 12 819

TRANSFERS (SAA and SAX) 744 400 585 000 - -

OTHER - - - -

CAPITAL 16 - - -

TOTAL 753 995 605 669 19 207 20 040

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Funding requested from and allocated by National Treasury for State owned Enterprises – SA Express Airways

In the 2008 MTEF the department requested an amount of R104 million for aircraft acquisition transactions. This request was approved as well as a further R481 million in respect of re-imbursement of Transnet loans granted to SA Express (SAX) which constitutes part of the transfer of sale of SAX to Government, which increased the total amount to be transferred to SA Express to R585 million in 2008/09.

This amount is payable after SA Express has been legally transferred from Transnet to Government, outstanding issues on ownership and the transfer of assets and liabilities have been finalised and confirmation has been submitted to National Treasury to this effect.

Item 08/09 09/10 10/11 Total

South African Express Airways - requested 104 000 - - 104 000

South African Express Airways - allocated 585 000 - - 585 000

Total Excess / shortfall 481 000 - - 481 000

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PROGRAMME 6

JOINT PROJECT FACILITY

The overall increase in this Programme is to meet the objectives of the unit, which includes the commencement of the SA Power Project which will leverage the Eskom build programme to enhance manufacturing, technology and skills base;  The Competitive Supplier Development Programme in 2008/09 to research Eskom and Transnet key commodities and South African capability; UNIDO benchmarking and participating in global supplier exchange programme and Regional Supplier Development Programme enabling the integration of regional suppliers to regional and global value chains, the upward trend in continues into 2009/10 and then reduces in 2010/11 as various projects are completed.

ITEMS

R thousand

BUDGET 07/08

BUDGET 08/09

BUDGET 09/10

BUDGET 10/11

COMPENSATION OF EMPLOYEES 2 315 5 017 5 409 5 833

GOODS AND SERVICES 12 053 23 806 29 042 21 225

TRANSFERS - - - -

OTHER - - - -

CAPITAL - - - -

TOTAL 14 368 28 823 34 451 27 058

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2006 / 07 Auditor General Report

The department achieved an unqualified audit opinion without emphasis of matter for the 2006/07 financial year.

4 Audit Committee meetings were held over the 2007/08 financial year, with an average attendance of 90%.

At the commencement of the year under review the committee comprised 5 members, however during the year one member resigned.

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