Presentation to the P ortfolio Committee on Public Enterprises

1. Presentation to the Portfolio Committee on Public Enterprises Presenter: Malixole Gantsho Venue: Cape Town Date: 19 August 2002

2. DPE - Background • The Office for Public Enterprises was originally established in 1994 as a Schedule two organisation. At the time the primary objective of the Office was to champion and direct the restructuring of State Owned Enterprises (SOEs) to ensure optimum economic and development impact. • On 25 July 1995 the Ministry of Public Enterprises, issued a "Discussion Document by the GNU on the Consultative and Implementation Framework for the Restructuring of State Assets". • HSBC was government’s overall restructuring adviser from October 1996 to October 1999, with various advisors’ involvement at a specific transaction level. • Their mandate allowed various government departments to draw heavily (transfer skills) on their expertise and resources at a fee.

3. DPE - Background • At a Government “Lekgotla” in November 1999, a decision was taken to accelerate the restructuring of State Owned Enterprises (SOEs). • In 1999 the Minister of Public Enterprises made a representation for the upgrading and re-designation of the Department of Public Enterprises as a schedule I National department, from being a schedule III Office. • This necessitated the need to source sector specific skills in energy, telecommunications, defence and the transport sector. • Furthermore, the department also focused on non-core assets and specialist services where transaction are managed within the restructuring programme of the department. • In August 2000 Government through the Department of Public Enterprises unveiled its restructuring of state owned enterprises framework – Policy Framework: Accelerated Agenda for the Restructuring of State Owned Enterprises • This framework forms the basis of the South African Government’s restructuring programme.

4. DPE - Vision • The Department feels that it is important to have one common, shared understanding of where it is going as an organisation. That a clear vision would provide the rallying cry and spirit of camaraderie needed in order to enable it to deliver on its mandate. The Department has formulated the following organisational vision to guide it through the next four years: “Restructured SOEs in a globally competitive environment promoting economic growth and a better life for all”. New Vision (confirmed): Restructured State Owned Enterprises, in a globally competitive environment, promoting economic growth and a better life for all.

5. DPE - Mission • The vision can only be accomplished if it is translated into actions that people can engage in and having done so can be measured in terms of how well their efforts contributed towards achieving the vision. Therefore the next level of operation of the vision is the mission. The Department has formulated the following organisational mission to guide it through the next four years “To direct and manage the accelerated restructuring of SOEs to maximise shareholder value”. New Mission (revised): Maximize shareholder value, to support the achievement of economic and social objectives of Government.

6. DPE’s Mandate • Accelerate the restructuring agenda of SOEs • Maximising shareholder value • Promoting macro-economic growth and competition • Promote wider participation in the economy (IPOs retail offer for HDIs) and restructuring (BEE) • Mobilise private capital and expertise • Ensure that SOEs are efficient, competitive and promote service delivery • Monitor and measure performance • Contribute to lower public sector borrowing • Mitigate country risk associated with implicit contingent liabilities and also those that are explicit (guarantees)

7. Internal to the firm, industry or sector Broader economic impacts Social impacts Enhancing efficiency and effectiveness of state enterprises Reducing the public sector borrowing requirement Ensuring wider participation in the South African economy Accessing globally competitive technology Attracting foreign direct investment and portfolio inflows Mitigating possible negative social impacts arising from restructuring Creating effective market structures in the sectors currently dominated by state owned enterprises Financing growth and the requirements for industrial competitiveness Promote sustainable employment, either directly or indirectly, through improvements in the economy Mobilising private sector capital and expertise Social and Economic Impact

8. INSTITUTIONAL FRAMEWORK INSTITUTIONAL FRAMEWORK NEDLAC NFA PARLIAMENT Other

9. DPE Organisational Chart Sivi Gounden Director-General Jeff Radebe Minister Eugene Mokeyane DDG IPO Office Ike Nxedlana Chief Financial Officer Finanical Management Nonkululeko Msomi Chief Director Performance Monitoring & Benchmarking Malixole Gantsho DDG Restructuring Nthabiseng Seperepere Director Alternative Service Delivery Moretlo Mokuele Chief Director Corporate Services

10. Executive Summary - Biography Jeffrey Radebe, MP, Minister of Public Enterprises Minister Radebe is the political head of the Department of Public Enterprises. He holds advanced international law degrees and was an awarded an honorary Doctrate in Humane Letters by University of Chicago. His development and thinking is insipired by writings of progressive thinkers like Karl Marx, Angela Davis, Albert Luthuli.He is currently serving his second term as a cabinet Minister, and was previously Minister of Public Works. His long standing political history and activism in liberation struggle of our country contributed in his vision and commitment to the cause of the people. It is this experience that inspire his work in his current potfolio in ensuring that the plight of State Enterprises contributes to the socio- economic developments in our society.

11. Dr Sivi Gounden – Director General Dr Sivi Gounden In April 1999, he was appointed Director General of the newly established Department of Public Enterprises. He holds a PhD – Engeneering from Univesity of Natal. He has extensive experience in developmental projects through public sector procurement. His previous position at Department of Public Works saw him introducing the concept of Public Private Partnership for Public sector procurement and he also contributed to government’s green paper on Public Sector Procurement in 1996.

12. BACKGROUND OVERVIEW“WHY RESTRUCTURING” • Macro- economic benefits – reduction of Government’s borrowing requirement, contingent liabilities (guarantees) and lower interest rates • Ensure wider active participation in the South African economy • Enhancing dynamism & competitiveness thereby enhancing the efficiency of the various SOEs • Unlocking Private Sector – led growth • Free resources for social services and infrastructure spending • Consumers to benefit from lower prices and higher quality services brought by expanded competition • A catalyst for Foreign Direct Investment (FDI) a.k.a “brick and mortar” • Accessing globally competitive technology • Development of Capital Markets

13. Forms of Restructuring • Concessions (BOT) • Strategic Equity Partner (SEP) • Strategic Management Partner (SMP) • Public Private Partnership (PPP) • Privatisation (Full or Partial) • Securitisation • Equity Linked Products (Convertibles) • Floatation of SOEs (Initial and Secondary)

14. Overview of Restructuring 2001-2002 Government remains strongly committed to restructuring of state owned enterprises as an integral part of our economic and social transformation. Commitments Made to the Portfolio Committee Last Year • 2002/2003 represents acceleration in the implementation of SOE restructuring. • Need for the alignment of Portfolio Committee program with Departmental program to ensure constructive engagement prior to implementation. • Commitment to avail Ministry and Departmental resources to support Portfolio Committee program.

15. Overview of Restructuring 2001-2002 Commitments Made to the Portfolio Committee Last Year (Cont) • Finalization of sectoral policies. • Finalisation of critical legislation • Interaction with organised labour on restructuring initiative • Careful review of current shareholder compacts and development of future shareholder compacts 2002/2002 represents acceleration in the implementation of SOE restructuring

16. Overview of Restructuring 2001-2002 Progress Made 2001 – 2002 • Significant progress was made in key sectoral polices, such as telecommunications, energy, mining and ports. These policies and legal frameworks lay the basis for accelerated restructuring this year and beyond. • Last year saw also a concentrated emphasis on non-core assets, such as Aventura, Alexcor, and Air Chefs. • Significant progress was made also in developing a culture of corporate governance in SOEs through strengthening of boards, conclusion of shareholder compacts, and a framework for managing shareholder interests.

17. Overview of Restructuring 2001-2002 Progress Made 2001 –2002 (continued) • Significant progress was made in key sectoral polices, such as telecommunications, energy, mining and ports. These policies and legal frameworks lay the basis for accelerated restructuring this year and beyond. • Last year saw also a concentrated emphasis on non-core assets, such as Aventura, Alexcor, and Air Chefs. • Significant progress was made also in developing a culture of corporate governance in SOEs through strengthening of boards, conclusion of shareholder compacts, and a framework for managing shareholder interests.

18. Overview of Restructuring 2001-2002 Progress Made 2001 –2002 (continued) • We have clearly demonstrated our commitment to engage and consult with all relevant stakeholders to build consensus and support for restructuring initiatives. • We have strengthened the functioning of the NFA, which has seen greater participation by labor in the development of restructuring models for energy, (rail) transport and defense. • DPE and SOEs have continually provided briefings to the portfolio and select committees to ensure a common understanding of restructuring challenges and for Parliament to effectively fulfill its oversight role.

19. Overview of Restructuring 2001-2002 Progress Made – 2001 2002 (continued) • We have continued to enhance our internal capacity to manage the complex challenges of restructuring. • For the past financial year, the Department achieved an unqualified audit report, which reflects prudent financial management systems and controls, in compliance with the PFMA. • In spite of major difficulties and challenges in 2001, including volatile financial markets and a global economic slowdown, especially in airline and telecom sectors, government’s restructuring program remains on track and moving ahead.

20. Key Challenges 2002-2003 • Continue to make a meaningful contribution to government’s macroeconomic objectives • Continuous engagement with labor • Unfavorable market conditions • Communicating restructuring program to the wider South African community • Achieving meaningful Black Economic Empowerment

21. KEY PROJECTS FOR 2002 - 2003 • Restructuring • Initial Public Offering (IPO) • Performance Monitoring • Strategic Analysis • Alternative Service Delivery • Communications • International Relations • Finance • Non-Core Restructuring • Summary of Challenges and Proposed Way Forward

22. Restructuring of State Owned Enterprises Overview • Introduction • Energy • Telecommunications • M-Cell • Second National Operator (SNO) • Defence • Transport • Forestry • Mining – Alexkor • Aventura • Non-Core Restructuring

23. Introduction Purpose Statement of Restructuring Branch “To co-ordinate development and accelerate the execution of restructuring plans for state owned enterprises in line with the Department’s vision” Key Objectives * Coordinate, Develop and Implement Restructuring and Transaction Plans * Promote Wider Economic Participation In the SA Economy * Realize Proceeds from Restructuring Transactions * Enhance Global Competitiveness of SOEs * Promote Long Term Sustainable Employment * Ensure Stakeholder Support for Restructuring Plans * Safeguard the Integrity and Transparency of the Restructuring Process Key Functions and Activities • Support services; Legal Services; Financial Modeling and Risk Analysis; Projects and Transaction Management; • Sectors: Energy; Mining; Hotels and Resorts; Defence; Forestry; Telecommunications; Non-Core Assets Core Values Honesty/integrity; Trust; Professionalism; Teamwork; Respect; Commitment;; Transparency; Accountability; Effectiveness/efficiency; Discipline.

24. Energy Sector Global Trends • The electricity sector of most countries in the world are being • driven by: • The desire to improve allocative and operational efficiencies • The desire to widen customer choice • Technological change • Financing needs and markets • Environmental pressures • The particular needs of the country

25. Energy Sector(cont.) Progress to Date • 2002 • Incorporation of Eskom as a company in terms of the Eskom Conversion Act - Act No. 13 of 2001 • Appointment of new Board of Directors by end of 2001. • Generation, Transmission and Distribution set up as operating divisions, as a result of the Act • Ongoing restructuring of the Eskom Enterprises of Eskom - process of identifying a SEP for Rotek underway to complete 2002 • Technical team comprised of DPE, DME, DPLG, NER, Eskom, SALGA set up and submitted recommendations on key issues regarding restructuring of the energy sector.

26. Energy Sector (Cont.) 2002 – 2003 • Implement Generation, Transmission and Distribution as wholly owned subsidiaries of Eskom • Ringfencing of Distribution Business: Distribution moves out of Eskom Holdings into a separate EDI holdings company (Dependent on EDI process led by DME). Legal documentation setting up EDI Holdings in process of cabinet approval • Commence commissioning and sale of 10% of Eskom’s capacity with BEE focus. Introduction of 20% SEP stake to commence, with focus of foreign direct investment . • Further planning and development of the market structure will be dependent on prevailing conditions • This is subject to the development of an appropriate regulatory framework and market rules being in place. • Multi Market Model is currently being developed

27. Telecommunications Sector(cont.) M-Cell • Our objectives are • to encourage the development of a strong local telecommunications sector with strong growth prospects and high quality service, and • to maximise value through an efficient and orderly sale process • The disposal of Transnet’s stake in M-Cell is an important part of the programme of restructuring of Government ownership in the telecommunications sector • In July 2000 Government sold 75 million shares to Johnnic Communications @ R33 per share resulting in Transnet holding 24% of M-Cell • The detailed preparatory work is now complete for the next phase of the disposal to be implemented

28. Telecommunications Sector(cont.) M-Cell • On 30 May 2001 Request for Proposal (RFP) and other transaction documents to suitable potential bidders issued • In January 2002 the 20% Transnet M.Cell stake was “monetized” , for 18 months and taken by Ice Finance BV, a Dutch company, yielding USD 475 Million. JP Morgan facilitated the transaction. • Payments have since been transferred to Transnet bank account by Ice Finance BV Transnet will benefit from the economic performance of these shares during the 18 months but have hedged against poor performance • Process of identification of buyer of the 20% stake is ongoing, with intention to dispose in the 2002/2003 financial year. • Government is committed to sell its strategic stake in M-Cell at a price that reflects the true market value of the stock • Different options are now being considered.

29. Telkom IPO Report - Introduction SNO • It has been agreed that there will be a 30% set aside for Eskom (Esi-tel) and Transnet (Transtel) in the SNO • DPE has facilitated that Esi-tel and Transtel” participation in the SNO by making recommendations as to the value added that these entities will bring to the SNO • SOE partners set data rooms in preparation for due diligences • Esi-tel and Transtel will be able to begin operations once the licence is issued

30. Defence Sector Denel • BAE Systems invited to become SEP in Denel on the basis of the complementary fit between the two broad based defence groups. Negotiations are at an advanced stage with BAE Systems to acquire significant minority stake in Denel • Turbomeca of France invited to become a SEP for Denel's Airmotive division and acquire a majority stake . • Negotiations currently underway with both SEPs with regard to shareholders agreements and transaction documents. • On basis that acceptable commercial terms are reached, aim is to complete both transactions by end March 2002. • Heads of agreement with Turbomaca signed 25 Feb 2002

31. Transport Sector(cont.) Transnet End State • Government and Transnet’s management are currently of the view that Transnet should remain a holding company and position itself as an integrated transport infrastructure and logistics company. • A Cabinet decision on the Transnet end state is expected before end March 2002. This will clarify the future of its divisions and subsidiaries, give direction to finalization of Transnet restructuring plans and help to coordinate concurrent restructuring projects.

32. Transport Sector(cont.) Spoornet • Establishment of Rail Safety Regulator including legislation by end of calendar year – DoT (provisional) • Adoption by Government of a restructuring model for Spoornet’s freight business in December 2001 • Spoornet to be run as an integrated freight company on an extended rail network • Internal restructuring and efficiency improvements to be implemented • Options for Orex to be reviewed • Shadow incorporation of division to be performed – to establish accountability and address cross-subsidization audit trails and impact

33. Transport Sector(cont.) Ports • Draft Establishment and separation from Transnet of National Ports Authority and Port Operations Division ( 2002) • Establishment of Ports Regulator (March 2002) – NDoT (provisional) • 3 year tariff reform process started December 2001 • Concession of some port operations to commence after enabling legislation has been finalised (Mid-2002) Ports policy was finalised in January 2002 and is has served before Cabinet. DOT has been expected to publish this as far back as May 2002 • This will be followed by new Ports legislation – NDoT • Consideration is being made to the fast tracking of the Durban Container Terminal concession, due to congestions at this port. • An Economic Impact Study is underway for the development of a concession architecture and framework on the basis of which this concession will take place

34. Transport Sector(cont.) Petronet • Technical analysis on restructuring model for Petronet was completed in November 2001 • Implementation of policy framework for regulation of liquid fuel pipelines (March 2002) – DME (provisional) • DME engaged in finalizing liquid fuel industry framework • Legislation for regulator (March 20010) - DME (provisional) • Establish liquid fuel pipelines regulator (June 2002) – DME (provisional)

35. Transport Sector(cont.) SAA • Decision taken to reacquire SairGroup 20% stake • Transnet has finalized negotiations and reacquire the Group’s 20% stake in SAA at a significant discount translating to over R 1billion gain for the Group. Price for reacquisition had been agreed to in terms of the original shareholders agreement. • Global market conditions in the airline industry and the financial standing of SAA will determine the timing of the decision to either to list SAA or sell minority stake to an SEP, or any other option. • A Government Task Team has been set up to review and consider different options for the restructuring of SAA as well as a merger of SAA and SA Express, and possibly SA Airlink

36. Forestry Sector Achievements / Progress to Date KwaZulu-Natal Transaction • Legal Agreements signed by SAFCOL and Purchasing Consortium. • The sale was finalized and Assets were transferred in October 1, 2001. • Sale Value was R100 million Eastern Cape North Transaction • Sale and transfer of assets to purchaser was concluded in August 2001 • Sale Value was R 17 million

37. Forestry Sector(cont.) Future Plans Northern Forest Transaction Package • The Timetable for the Transaction is confirmed. • The Invitation to Offer was available to the three preferred bidders on July 6, 2001 • Formal bids received 14 September 2001 • Cabinet approved two preferred bidders in November 2001 • Negotiations with the bidders are underway • The allegations of impropriety against a DPE official are being investigated by the PSC • Pending these investigations, sale of shares and transfer of assets is anticipated before end of 2002 fiscal year

38. Forestry Sector(cont.) Future Plans Southern and Western Cape land conversion • Cabinet has approved the conversion of 45,000ha of Safcol unsustainable forestry assets to other uses over a 20 yr period • 7000ha immediately available for distribution • This includes 4642ha earmarked for conservation, 1170ha for agriculture and other options including housing 312ha • Over the period to 2005, 12556ha will be available for conservation and 2499ha for agriculture • This process is a major step in the ensuring that uneconomic forestry forestry assets are transferred to and for the benefit of the people of SA. • Advisors have been appointed.

39. Forestry Sector(cont.) Southern and Western Cape - SEP Future Plans • Safcol is in negotiations with Steinhoff regarding the formation of a JV between the two parties to increase the capacity and technology of the Safcol sawmill • This will involve a major capital investment from Steinhoff and downstream employment opportunities in this area

40. Alexkor - Mining Sector • Act introduced and passed by Parliament • Act removes restrictions imposed on government when desiring to dispose its shareholding in Alexkor • Cabinet decision taken to dispose of 30% of Alexkor stake to an SEP with BEE and international marketing exposure to add value. • 10 % Namaqualand community stake (in Trust) set aside. • Process in place to introduce SEP by 4th Q 2002 • Task team in place composed of DPE, Alexkor to accelerate transaction. Terms of reference for advisors and issue of RFP done. Advisors appointed. Expression of interest process and prequalification of bidders complete. Final bids to be invited before end of September. Transaction process to introduce SEP and BEE to be completed Feb 2003 • Retrenchment process in Alexkor halted and Alexkor agreed to look at alternative means to carry on with current work force up to final introduction of SEP later this year • Some employees will engaged in the shallow water contract to avoid permanent displacement.

41. Aventura – Hotel and Leisure • Government owns number of hotel and leisure resorts • In 1999 appointed a management contractor to turn Aventura around with a view to dispose as going entity. • Recently Cabinet resolved to dispose of all Aventura resorts either in single entities or groups. • Process of Phase 1 disposal of the non-viable resorts in place for completion anticipated in March 2002. • Finalization of disposal of two of the three non viable resorts nearing completion before end of March 2002. The 3rd unit is still awaiting offer. • Government guarantee issued to Aventura to cater for period up to disposal of all business units • Phase 2 entails disposal of the rest of Aventura by 2002 calendar year. Currently bids are being considered for some resorts.

42. Other Assets Disposals Apron Services • New mandate from Cabinet will be requested : - Sale of 51% inclusive of BEE - SEP to come with BEE before end of 2002 Air Chefs • Non binding bids received • SAA have been approved as purchasers of Air Chef • Transaction finalized Transnet Housing and Eskom Finance • Consolidation of these entities feasibility study approved • Transaction advisors to be appointed before end January 2002 • Study to be finalized before end August 2002 • Other Assets The Department is in the process of identifying all Non-core assets and projects to be considered for restructuring. The following have been earmarked for a speedy restructuring programme: · Government Printers; ·Autopax; ·Transmed; ·Marine Data Systems; ·SASRIA; ·Government Printers; Arivia.Kom; SABC; Post Office/Post Bank

43. PROPOSED WAY FORWARD - RESTRUCTURING • Develop and execute a plan to bring labour back on board • Develop a clear end state options for each restructuring project. No two restructuring projects are the same. • Develop a clear terms of reference for each advisor • DPE should appoint a team to audit advisors on: • Legitimate roles for BEE and skills transfer • Promising senior staff but allocating junior staff when the project is sold • Scope Management • Quality of Deliverables • Develop from Spoornet and Portnet a template to use on Eskom to develop a restructuring plan • Exert tighter control on SOE management to execute the Departments restructuring mandate • Execute regular strategy forum sessions to discuss project issues • Execute regular internal and external communication

44. Telkom IPO Report • Introduction……………………………….. • Regulatory regime ………………….…… • Governance and other shareholder matters …………………………………… • Telkom IPO budget ……………………… • Syndicate structure ……………………. • Telkom matters ……………….………… • Targets ……………………………………

45. Telkom IPO Report - Introduction Telkom IPO • We are ready for the planned listing of Telkom during this financial year (subject to market conditions) • The Legislative amendments have been published and the process is finalized • The Regulatory provisions have been developed and ICASA has indicated that it will be published in time. • Negotiations with Thintana have progressing well and should be concluded soon • Since the transaction process commenced, market conditions in the sector has continued to slide, depressing the price even further • The telkom IPO is scheduled to proceed in ernest in the 3rd –4th Q of 2002.

46. Telkom IPO Report - Introduction Telkom IPO • The Company preparations for the listing are at an advanced stage • Listing Venues are JSE (primary) and NYSE or LSE (secondary) • The size of the offering will be finalised shortly • IPO will be the largest telecoms listing on JSE • We will also launch the largest Black retail offering in South Africa which will be preceded by an unprecedented education campaign of significant scale to highlight the benefits of share ownership to historically disadvantaged South Africans

47. Telkom IPO Report REGULATORY REGIME 1. Second National Operator (“SNO”) process STATUS The process of licensing the SNO is to be undertaken in 3 phases. RECOMMENDED STRATEGY If the SNO process and the additional substantive regulatory issues discussed below are unresolved at the time of the IPO, the assumptions in Telkom’s business plan, and subsequently by the analysts and investment community, will be significantly more conservative. Consequently, there will be a reduction in demand and a significant discount in the IPO valuation when Telkom is compared to its peers and to previously considered valuations.

48. Telkom IPO Report 2. Regulation: fees and charges in the PSTN STATUS ·    Telkom has been subject to a tariff regulation from 7 May 1997 untill 7 May 2000.    Term of this regulation was extended by a further 18 months to November 7, 2001. . Telkom filed its current tariff proposal with ICASA on 14 November 2001. The Minister of Communications signed the new tariff regulation on 26 November 2001. ·    Regulation will remain in force for 18 months from 26 November 2001 or until such time as a new regulation is promulgated. Telkom contesting this regulation. ·    Telkom indicated both Telkom and ICASA have requested a postponement of the next court date. Telkom wish to prepare an application to set aside the entire regulation. RECOMMENDED STRATEGY The settlement of the tariff structure is now subject to a court timetable, which is inherently uncontrollable.

49. Telkom IPO Report 3. Carrier pre-selection STATUS ·    Based on discussions with ICASA, this regulation will only be issued in Q3 2003. ·    DoC have indicated that they will discuss with ICASA the possibility of accelerating the regulation to ahead of the IPO. RECOMMENDED STRATEGY ·   Do whatever is possible to reduce the regulatory uncertainty by accelerating the regulation, notwithstanding that the discount resulting from the tariff dispute and the SNO process may significantly outweigh the discount resulting from uncertainty regarding carrier pre-selection. ·   Be prepared to proceed with the IPO without this regulation in place.

50. Telkom IPO Report 4. Facilities sharing STATUS ICASA/DoC intend to finalise and issue this regulation in Q1 2002. RECOMMENDED STRATEGY Continue to monitor progress. 5. Number portability STATUS Based on discussion with ICASA and DoC, this regulation will only be issued in 2005 RECOMMENDED STRATEGY ·   The JGCs are comfortable that investors will not need additional information in relation to the introduction of number portability in 2005. ·   Telkom has not disagreed with this position.