Address by the Minister of Public Enterprises, Alec Erwin, tabling the Budget Vote 30 to the National Assembly

Introduction

Honourable Chairperson and members it is a privilege to once again table Vote 30, that of the Department of Public Enterprises. Time always passes faster than we expect and it is a salutary thought that this is the fourth time that I deliver my Budget Vote address as the Minister of Public Enterprises. I am sure that the members of the portfolio committee will feel as I do, torn between the realisation of how much we have to do and a recognition that much has been done in this period. In 2004 no one anticipated just how large the infrastructure investment programme would become and the opportunities it would present to impact upon manufacturing and technological development in the economy. These developments are important and brought about new challenges.

Looking back at my budget address last year, I believe that all the issues raised there are progressing well. We have also added a few new work areas. The most important of these is the work around the nuclear build and the impact that this could have on the economy.

The experience gained over the last three years has allowed for an increasingly coherent approach to the State Owned Enterprises (SOE) and the role that they can play to enhance the capacity of a developmental State. As the economic reforms have progressed since 1994 and as resources have become available there has been increasing emphasis placed on the precise role, meaning and institutional form of a developmental State.

The challenges facing all political economies in this era have become more complex and dynamic as a truly global economy gathers momentum. The power of markets and the surges of global investment patterns pose challenges for all States as they try and ensure the development of their own economies and societies. However, the notion of a developmental State is not an easy one and probably can only exist in particular situations. Key to their formation is political will and capacity, institutional strength and responsiveness and resources to give leadership to the national economy and provide for the most vulnerable in society.

This is not the time or place for a discourse on this fascinating and important socio-economic topic. However, what is clear is that effective SOE will be critical to the success of any developmental State and the SOE are very much the topic of this address.

There is merit in once again stating what defines an effective SOE in the context of the developmental State we are forging. The first key issue is that of strategic intent and purpose. Clarity of objective and the long-range stability of that objective are imperative. In modern markets and particularly global capital markets, the ability to maintain strategic intent within any one economy is a very complex issue, given the nature of shareholder control in large modern corporations. Accordingly the development of key infrastructure, industrial and scientific capacity and sustained investment programmes poses new challenges in any one economy. Hence, we have decided to use State ownership in key economic areas to ensure that we sustain the strategic intent of the enterprise.

However, to sustain this strategic intent other key objectives have to be reached. The SOE have to be financially sound and stable in order to mobilise resources in the national and international capital markets. Whilst the State may capitalise the SOE in the start up phase and in other defined circumstances they thereafter have to be able to augment this from their own financial efficiency and from the capital markets. This requires a strong balance sheet and the ability to partner with private capital. This is not a simple issue since if the enterprise is defined by a long-range strategic intent then it needs to maximise economic outcomes rather than the narrower financial bottom line.

In the global economy the power of markets and competition across borders makes operational efficiency an imperative for the SOE. If operating efficiency falls far behind international benchmarks then investment will stagnate and even decline. Such operational efficiency requires managerial, human resource and technological capacity that is on a par with best practice. It will also frequently require partnerships with enterprises in the private sector that can provide access to such operating efficiency.

The SOE have to be orientated towards growth since they are responsible for the development of key infrastructure and manufacturing capacity. Yet they have to implement major investment programmes whilst maintaining their financial strength and operating efficiency. This is no small challenge, given both the scale of the infrastructure investment programme and the need to make lead investments to inspire confidence in the economy.

Taken together the SOE can have a major impact on the economy through their investment, human resource development and research and development programmes. Maximising this potential requires that the state provide strategic co-ordination to achieve powerful synergies that can have structurally positive effects on the economy. These activities have to be undertaken within a predictable, effective and transparent governance system.

The key question is therefore whether we are making progress toward these objectives. This is important if we are to achieve the developmental goals of Accelerated and Shared Growth for South Africa (AsgiSA).

Each of the SOE reporting to the Department of Public Enterprises (DPE) faces different circumstances and start with differing financial strength. Accordingly we have progressed to greater and lesser degrees, however, I am confident that there is progress in each case. Let me therefore set out briefly key developments within each of the SOE. A full report on each SOE is best dealt with in the annual reports. I will deal with the SOE in alphabetical order and then look at the cross cutting issues.

Alexkor

Alexkor is somewhat of a special case when it comes to the SOE reporting to the DPE. In so far as the State wishes to promote the beneficiation of diamonds in South Africa, Alexkor is a vehicle to do this. However, it has two additional roles to play and both are important for more complex developmental reasons. The first of these is as a commercial vehicle to involve the Richtersveld Community in their own development. This can be achieved if we are able to implement the important land claim settlement that I shall refer to shortly. The second is a more recent but in effect associated objective and that is to provide the basis for the rationalisation of the Namaqualand diamond fields. However, the uncertainty around the land claim has placed Alexkor in a very precarious financial and operational position. Time is now of the essence otherwise we will have no option but to mothball certain of the activities and dispose of non-core assets on a commercial basis.

We have reached a crucial and indeed historic landmark with this brave community. On 22 April this year, we concluded a settlement agreement with the Richtersveld Community. The agreement allows for restoring of ownership rights and the payment of compensation to the community. A number of positive spin offs such as burgeoning of new companies are anticipated. The negotiation was a long process, spanning almost 10 years of extensive consultations. In my contact with this community I have been immensely impressed by their determination, courage in the face of vastly superior resources and their insight and understanding of the diamond industry.

I wish to express the sincere hope that we are able to implement the settlement agreement which I am convinced is of benefit to the community. The community leaders are correct in wanting to proceed with it. It is a matter of regret that the Legal Resources Centre who has done so much to support the community now seeks to derail the settlement against the wishes of the elected leaders. This does this important public law institution no credit and if they succeed they will only bankrupt Alexkor and place many hundreds of people in the precarious position of being unemployed. I am quite certain in my mind that their counsel in this case is now ill advised. We should not 'snatch defeat from the jaws of victory'.

Broadband Infraco

A ground-breaking event is occurring in the area of broadband infrastructure. Broadband is the backbone of modern communication systems, allowing for the rapid transfer of digitised information. Infraco has been established under the leadership of Dave Smith to ensure that we develop this essential communication backbone. It is simply no longer possible to compete in the global knowledge economy without low cost, reliable and widely available bandwidth. There are businesses which could exist in our economy and do not because we have bandwidth costs that they cannot absorb. South Africa's economic growth remains constrained by patchy, high cost broadband availability. This excludes key stakeholders from full participation in this important domain of global activity. Whether in education, research and innovation, business process outsourcing, leading edge design and access to services, our model can no longer depend on the environment of the early to mid 90s.

Infraco will, with other partners, such as the South African Research Network and the South African Square Kilometre Array Radio (SKAR) telescope consortium provide a series of new platforms for bandwidth expansion and affordability. There is a clear public interest in developing the necessary infrastructure to achieve this goal. This means consistent, coherent and purposeful action in leading this initiative and in ensuring that our citizens have the connectivity, content and capability to fully participate in this domain. Legislation for the establishment of this entity will be processed in the current parliamentary session and we trust that we will get the full support of this House. I should point out that as a subsidiary of Eskom, Infraco is in fact already operational and building the necessary infrastructure.

Denel

Reflecting on the year that has passed, the restructuring of Denel is firmly underway. Cost cutting initiatives have been embarked on and Denel has assessed the viability of its business units. An amount of R400 million has been realised thus far from the disposal of non-core assets. The disposal of Denel's remaining non-core properties will be finalised during the 2007/08 financial year. The further consolidation of Denel is a central objective and my Department, Denel and the Department of Defence are working closely together in this regard.

A key pillar of Denel's strategy is the formation of equity partnerships with global Original Equipment Manufactures (OEMs). In this respect a partnership between Denel Aerostructures (aviation structural manufacturing) and SAAB was finalised during the year. This will not only ensure the industrialisation of this capability but will place this business on a sustainable footing, through the transfer of skills and further integration into global supply chains. Negotiations relating to optronics with Karl Zeiss are proceeding well.

In terms of defence acquisitions, a number of contracts have been placed with local industry including the Hoefyster Infantry Fighting Vehicle contract and the development of the fifth generation A-Darter missile. The mechanical upgrade of the Oryx transport helicopter has been contracted and the avionics upgrade is in process. This will involve a number of industry players. The offset contracts under the A400M work share allotments for South Africa continue to provide opportunities for the aviation industry in general. These opportunities also provide a platform for the future growth of this segment. In addition, the Department of Defence is in the process of finalising its command and control requirements.

The government and representatives of the South African defence related industry (SADRI) are working closely together to align policies with the objective of further developing the SADRI. In this respect, a detailed study by the relevant line function departments and industry representatives has been concluded. The study provides the framework for strategic focus by government and industry. The SADRI is fragmented across a number of suppliers (estimates range between 49 and over 70 companies) with a multitude of different capabilities. In addition, an estimated eighty five percent of total industry revenue of R9,5 billion is produced by the top 15 companies. Fragmentation makes it unlikely that all capabilities will be sustainable and we believe that consolidation is desirable and inevitable. The relevant government departments will be focussing on interventions to develop the industry over the next couple of years. It is imperative that consolidation and upgrading of capabilities, plant and equipment is achieved for our industry to serve South African, regional and international defence requirements.

On a national level, as recently indicated by the Minister of Defence, the consolidation of test and evaluation facilities is firmly underway and the Defence Evaluation and Research Institute (DERI) will be established in this regard.

In terms of the future, Denel will drive the establishment of manufacturing clusters that will be a catalyst for the transference of advanced manufacturing technologies and know how to the broader manufacturing sector. The clusters will be a world-class supplier of sub systems and components and will provide a platform for the development of skills. There will be sustained export growth and our national sovereignty will continue to be protected.

We look forward to a year ahead that will be characterised by continued implementation in the restructuring of Denel and consolidation of the industry around core capabilities.

Energy, Eskom and the Pebble Bed Modular Reactor (PBMR)

Our key objective through Eskom is to secure long term, environmentally sustainable electricity for the country which addresses the pricing requirements and general reliability of supply demanded by both bulk users and households. Eskom has announced its R150 billion investment programme for the next five years. Although timelines in respect of implementation of the build programme are tight, we are satisfied with the progress to date. By June this year, when mothballed stations have been returned to service, Eskom will have a supply capacity exceeding 38 000 MW enabling it to meet peak winter demand estimated at just above 36 300 MW, albeit with a slim reserve margin. My Department will continue to monitor the build programme as well as the status of security of supply. We are in discussions with Eskom, Department of Minerals and Energy (DME) and National Energy Regulator of South Africa (Nersa) to start publishing a systems adequacy report.

The timely provision of new generation capacity will however require a change in the composition of South Africa's primary energy source. In his State of the Nation Address (SONA) earlier this year, the President indicated that a larger contribution to the primary energy source for electricity will be derived from nuclear power. This will be a combination of conventional nuclear technology and the new fourth generation high temperature reactors offered by the PBMR.

Our commitment to address global climate change and break our dependence on carbon fossil fuels requires this focus. With growing public support, an effective regulatory environment including our continued positive engagement with the International Atomic Energy Agency (IAEA) and an excellent scientific infrastructure, South Africa will take its place among the nations that benefit from peaceful and sustainable nuclear programmes.

In the next period PBMR will go on site for the construction of the pilot fuel plant at Pelindaba and progress the approvals for the construction of the first power plant in the Western Cape. The 700 members of the PBMR company have created a national resource to address our energy challenges using the most modern, safe and proliferation resistant technologies.

International interest has continued to grow and locally Sasol has indicated that it is in discussion with PBMR on a number of process heat applications. Excellent progress has been made in aligning the Eskom Pressured Water Reactor (PWR) programme planning with our generation IV plans. This will maximise the localisation of key technologies allowing South Africa to compete and partner in the new era of nuclear energy.

The scientific capabilities and engineering leadership embodied in this programme is consistent with the key role that the public sector plays globally in next generation nuclear programmes. In the past months a series of bilateral interactions with other countries have reinforced our intent and have confirmed that a purposeful, peaceful and proliferation resistant programme is much needed to confirm the importance of smart nuclear technologies as options for developing countries.

To realise these opportunities we will need to develop new divisions in Eskom to deal with nuclear energy, to enhance our engineering capacity and to align Eskom's research capacity with DME, Department of Science and Technology (DST) and Nuclear Energy Corporation of South Africa (NECSA). This is a major new development and requires considerable resources to plan and implement. We have been very fortunate that we have been able to persuade Thulani Gcabashe to lead the project team that will work with his successor Jacob Maroga, the Eskom Board and Department of Public Enterprises (DPE) to carry out this major task.

The introduction of Independent Power Producers (IPP) will form an important component of the capacity generation programme. IPP participation will diversify the revenue sources for the build programme and protect Eskom's balance sheet. We will therefore be working with DME to fast track their introduction.

South African Airways (SAA), South African Express (SAX) and the airline industry

As part of the restructuring of Transnet and because of its strategic significance to the State, SAA was separated from Transnet and established as a stand-alone entity. We have chosen to retain ownership as it will allow for greater control in advancing national objectives such as promoting air links with our main trading partners, contributing to the growth of tourism by ensuring that international routes into South Africa are of high quality, affordable and cost effective and strengthening air transport capacity on the continent.

The legislative process has been completed. Our primary focus now is to finalise the funding requirements and recapitalisation of the turn around strategy for SAA, following which SAA is expected to rely on its balance sheet. Cutting out the legacy costs and practices without significant pain will be a challenge. A review of off and on balance sheet liabilities is required if we are to restructure the balance sheet effectively for the airline to be financially stabilised.

We are fully committed to the turnaround of the airline and are very confident that management and staff will through their full weight into the turnaround strategy. I am also sure that the excellent Board that we have in charge of SAA are more than up to this challenging task.

This year the Department will also remove South African Express (SAX) from Transnet's books and convert it into a stand-alone entity. While SAA and its low cost airline Mango will focus on heavily traded routes, SAX will provide the necessary links on thinner routes focusing primarily on the second economy. The strategic role of each airline must however be located within the broader context of a national aviation strategy and a competitive South African airline industry with other strong companies playing a role. My Department will therefore be initiating an assessment of the strategic role of the State in the airline industry in South Africa.

South African Forestry Company Limited (Safcol) and forestry

After an in-depth review by the Department of the future role for SAFCOL in the forestry, timber, pulp and paper (FTPP) sector and an assessment of the case for continued government involvement in commercial forestry, Cabinet has approved that the last remaining package of Safcol, Komatiland Forests (KLF) should be disposed of.

This decision was based on a realisation that the scale and influence of KLF in the sector is now greatly reduced. Although the company has a significant 30% share in saw log production, it now only accounts for approximately 2,5% of the whole sector's economic impact and 3,5% of employment.

An important task to now be dealt with is to ensure that the disposal process reflects adequately the State's objectives in the sector. We plan to devote suitable resources to ensure that the Department and the board of SAFCOL are able to discharge this responsibility adequately and that the outcomes are aligned with the policy intent set by the Department of Water Affairs and Forestry. The board are currently considering the optimal design of the disposal transaction and will work within agreed guidelines in effecting the transaction. We are also working very closely with the Department of Land Affairs to ensure fair and participatory management of affected land rights.

Transnet and the freight system

We are continuing to consolidate Transnet as a provider of world-class freight logistics. The turn around that Transnet has achieved within the past three years has been a major accomplishment. The fruits of becoming more focused and disposing of non-core activities are increasingly visible, as Transnet advances the implementation of key investment programmes in the areas of rail, port and pipelines.

In 2006/07 the board of directors approved a five-year investment plan of R64,5 billion. This five-year rolling plan has been revised in 2007/08 and now amounts to R78 billion. The investment was aimed at sustaining and expanding operations through increasing capacity in our iron ore and coal lines, improving port infrastructure and terminals and enhancing the pipeline from Durban to Johannesburg.

Progress in the planned projects, i.e. the Saldanha Port/Rail line, the Cape Town Container Terminal, the Durban Pier 1 new container terminal, Durban Harbour Entrance Widening, Port of Ngqura and the coal line capacity is satisfactory and Transnet has achieved at least 90% of the 2006/07 targets set in its corporate plan. In the few instances where targets were not met it was due to a need to re-evaluate the scope, design and resources of projects, revisions in respect of environmental impact assessment outcomes and adjustments to prolonged lead times.

In the current financial year Sosholoza Meyl will migrate to the Department of Transport. The Department will continue to monitor and review Transnet's financing and funding plans and the rollout of its Capex Programme and refine the port and rail master plan. Working with the board we are in the process of designing the framework for a partnership in the operation of the new container terminal currently under construction at the port of Ngqura and will make more detailed announcements on this in the near future.

The Joint Project Facility (JPF)

As I stated in my introduction we can make structurally significant impacts on the economy through strategic co-ordination of the activities of the SOE. We can further enhance economic growth through leveraging the investment programmes of SOE. The magnitude of the investment programme cannot be understated. The rapid increase in global demand for capital goods is resulting in supply constraints. Through the competitive supplier development programme (CSDP) we aim to facilitate the development of South Africa's manufacturing sector and relieve these supply constraints.

There is a powerful economic logic to this strategy. We need to secure our supply lines for vital equipment and the best way of doing this is to develop local capacity. However, such local production will have to be internationally competitive in terms of cost and quality. This programme is also aimed at fostering a culture in the SOE that focuses on long-term supply network development to achieve best value for money over the product life cycle. To achieve this we are engaging the capital project teams to more towards standardisation as this creates real possibility for the South African capital goods industry and allows for greater integration into global supply chains. Eskom and Transnet have both signalled their intent to implement supplier development programmes and are presently working on their strategic plans in this regard.

Improving the capacity and competitiveness of the local supply base will also contribute to the Accelerated and Shared Growth Initiative for South Africa (AsgiSA) goals of shared growth, employment creation, poverty reduction, skills development and Broad Based-Black Economic Empowerment (BBBEE).

The joint project facility (JPF) is also implementing a human resources and capacity-building project. Our SOE and their suppliers have the potential to assist with training artisans, technicians and technologists to alleviate the skills shortage in South Africa. A collaborative effort between JPF, Department of Education, Department of Labour and the related Sector Education and Training Authorities (Setas) and our SOE is underway to identify courses, colleges and graduates who would be able to complete their work place training at our SOE before going on to take the relevant trade test.

We as a Department and indeed our SOE are concerned about the low number of matriculants with maths and science who are able to go on and study further, either in a trade or for a profession. I would like to commend the Denel Youth Foundation for their efforts in this regard where they offer young people a "second chance", an opportunity to spend a year of their lives immersed in the subjects we require most maths and science. At the end of the year these learners re-take their matric exam at a higher grade, with astonishingly successful results. Eskom and Transnet are now sponsoring children in this and other schools programmes.

The project on pipelines continues within the JPF and is exploring other possible pipelines that would provide efficient means of transport. A slurry pipeline from Phalaborwa is being studied. A question we need to answer is the final structure of a pipeline network in South Africa. Is a multiplicity of pipelines efficient or are we not better off as an economy developing a coherent plan for pipeline infrastructure in South Africa?

South Africa's economic success is dependent not only on what happens inside our country, but also what happens in our neighbouring countries. It is for this reason that the Africa project will this year identify key opportunities in Africa where the SOE and private sector in South Africa can assist the development process.

The Business Day newspaper on 12 April 2007, reported that South Africa is the most concerned nation about the effects of climate change. It is encouraging to know that citizens of this country are mindful not only of other people, but also the world that we live in and the things we do to the planet we live on. DPE and the SOE are working hard to conserve our environment as we build much-needed infrastructure such as power stations, electricity transmission and distribution lines as well as expand our ports and rail infrastructure. We are working closely with the Department of Environmental Affairs and Tourism and our SOE to ensure that there is alignment between the need to build infrastructure and to ensure a sustainable environment.

In this light we must as a society, use electricity more effectively. To achieve this it may be necessary to allow the tariff to become more cost reflective and thus enabling us to contribute further to the reduction of global warming. As a start you should insert the energy saving light bulbs distributed here today.

A shareholder with strategic intent

I am sure that the foregoing provides insight into the immense amount of work and the magnitude of resources that are involved in the operations of the SOE if they are to be an effective component of a functioning developmental State. Developing the sophisticated governance system that balances the concept of a strategic intent with other market related capacities and an ability to work easily with and within the private sector business environment is both intellectually challenging and technically difficult. Our objective is to provide a predictable, effective and transparent governance system. We have come to the conclusion that this will require new legislation. This legislation will be aligned with and will complement changes being worked on for the governance of public entities. The latter work is being led by the Department of Public Service and Administration and the National Treasury.

As indicated in the introduction, SOE face very specific challenges. They have to achieve defined positive rates of return in a competitive and rapidly transforming international environment, whilst simultaneously contributing to defined economic targets. Corporate governance practices and operational performance in these sophisticated enterprises have to be impeccable, as these determine credit ratings and ultimately the cost of capital. Balancing enterprise sustainability and strategic intent is an art which has to be guided by a clear, predictable legislative framework. The roles and powers in respect of the enterprise, board and shareholder will be more clearly delineated and more precisely defined. During the processing of this legislation, Parliament will also be able to better refine its oversight role in respect of the performance and transformation of SOE. I am thus looking forward to a number of exciting interactions with members in the coming year.

Along with the SAX and Broadband Infraco Bills the proposed shareholder legislative framework point to a busy year ahead from the legislative point of view.

The DPE and Parliament

I am particularly pleased with the internal changes we are making in the DPE and the relationship that we are building with Parliament. The nature and content of the work performed by the DPE has significantly changed. This has led to a number of organisational changes and to new skill set requirements in the staff complement. I am amazed how the vast majority of the staff has survived these changes whilst dramatically increasing their work output and the quality of that output. This is a very real achievement and all credit should go to Portia Molefe, the Director-General, along with her very capable team of Deputy Directors-General Sandra Coetzee, Litha Mcwabeni, James Theledi and now Andrew Shaw. Katherine Vernier in the JPF has led path-breaking work and Rashida Issel as the Chief Operating Officer (COO) has transformed our systems. However, they all needed the support of a young and talented complement of people that are making the DPE a dynamic organisation that is able to attract exceptionally experienced and very senior people into our projects and programmes.

The working relationship with the SOE has improved dramatically in my view as we clarify our respective roles. We now have strong and experienced boards and strong chief executive officers (CEOs) with excellent executive management teams. All these components mentioned have to be effective if we are to realise the full economic potential of the SOE.

Given the nature of SOE the working relationship with Parliament is critical. Let me express my personal gratitude to the portfolio committee chaired by the honourable Yunus Carrim. Their involvement and support is truly remarkable in my experience and with every meeting and hearing that passes their expertise grows, adding value to all issues we bring before them. The second of our 'schools' last week I think confirms for all of us the value to both Parliament and the Department of such detailed interaction. In future we will seek to ensure the participation of our colleagues in the National Council of Provinces (NCOP) who has a wider brief than public enterprises to cover. My thanks go out to the Select Committee in the NCOP, chaired by the honourable Priscilla Themba, for their support despite this wider brief that they have to oversee.

Let me thank the chairpersons, the board members, CEOs and staff of the SOEs for their commitment to excellence and hard work. We all have a great deal more to do but I remain very confident that we will achieve our objectives.

We trust that based on your detailed hearings and other evidence that you have before you, the Parliament will support the budget allocated to Vote 30 of the DPE.

Issued by: Department of Public Enterprises
17 May 2007