9 Summary and conclusions

The main conclusions of each section are summarised below.

Factoring the effects of restructuring into the process

The growing consensus allows Government to pursue an accelerated programme of restructuring that should incorporate the following principles:

• The promotion of competition and competitive markets should be an integral element of any restructuring strategy.
• The need for a mixed economy to address the legacies of apartheid should be acknowledged; the state will continue to play a role in the economy.
• Although the scope for promoting competition has increased with globalisation and technological change, in those business areas where competition is not feasible (residual natural monopolies) a regulatory framework needs to accompany any restructuring initiatives. The establishment of such regulatory regimes should assist in ensuring that these residual natural monopolies do not distort the development of competitive markets in the non-regulated sectors of the economy.
• Government’s relationship with restructured SOEs and its intentions when restructuring should be clearly spelt out in individual shareholder compacts between enterprises, in a framework for corporate governance for all SOEs, and in a clear policy framework and programme for restructuring.
• As far as the microeconomic benefits of restructuring are concerned, Government should explore a range of options to ensure that productivity, profitability, investment and innovation are enhanced. While this will often entail equity sales (full or partial privatisation) in order to access additional funding, technology or markets, where this is not required, approaches such as incorporation, joint ventures, employee participation schemes and community participation, may be found to be more beneficial.
• In terms of the macroeconomic benefits, Government should maximise the ultimate return to the shareholder (fiscus), whether through the proceeds from equity sales, dividends and/or tax returns. This should not, however, be at the expense of the poor and marginalised and neither should it affect the access to services and wider coverage. By adopting the optimal approach to restructuring, Government can maximise its ultimate long-term returns on its shareholding by trading off short-term gains from equity sales in depreciated assets for medium- to longer-term gains (dividends, taxes, deferred equity sales) from successfully restructured SOEs.
• In order to account for the implications of public goods and services (or externalities) on the lives of all South Africans, restructuring proposals should incorporate a rigorous cost-benefit analysis of their impact on overall social welfare.
• Lastly, Government should address its social objectives (social plans, employment creation, price subsidies, optimisation of public goods, empowerment, etc.) through transparent means, so that all stakeholders can reach agreement on the logic and methods of the restructuring process. This will enable both Government and the restructured SOEs to account for their individual actions towards meeting their objectives, and will ensure that poor performance can be identified and remedied.

Recommendations on competition and regulation

There is a clear need for a sector-specific regulatory regime within the broader framework of current competition policy, based on the type of industry and the potential for competition, as well as the competence of the regulator in question.

In the interim, Section 3 (1)(d) of the Competition Act should be removed and concurrent jurisdiction should prevail in all regulated industries. Both authorities should approve mergers, and abuses of dominance require a sector-specific approach. In the longer term, regulators could concede jurisdiction on competition matters to competition authorities and seek their advice and opinions regarding other regulatory decisions.

A better regulatory environment in the key sectors dominated by SOEs (energy, telecommunications and transport) should benefit all. South Africa’s globalising economy will benefit from lower prices and/or improved service outputs, which will enable it to become more competitive and to create more employment and investment opportunities. All people, but especially unemployed and poor people, will benefit from increased job opportunities and more affordable and available services. Greater certainty will stimulate investment and customer satisfaction, ensuring that the quality of life of all is improved.

Promoting empowerment

This policy paper proposes a multi-faceted approach to empowerment through three kinds of intervention in SOE restructuring processes:

• SOE ownership can be broadened through the National Empowerment Fund and other kinds of unit trust structures, in ways that address the problems in existing empowerment-related financial engineering. These new approaches can take the best lessons (and avoid the most serious drawbacks) of international experiences of collective investment vehicles, to provide a range of equity schemes for those previously excluded from mainstream economic participation.
• Operational empowerment strategies should be improved to ensure that beneficiaries are not merely absentee owners. They should be able to gain meaningful access to state-regulated activities, through training and skills development, affirmative action in management, and entrepreneurial opportunities through outsourcing, partnerships, affirmative procurement and easier access to financing.
• Combining the first two strategies, alternative vehicles for empowerment, such as employee share ownership plans and community trusts should be piloted. This will improve enterprise self-management and community involvement, and in the process raise investment in and take advantage of social capital.

Improved corporate governance, ethics and probity

The 1997 Protocol on Corporate Governance covers most of the issues commonly found in other corporate governance frameworks, but it should be refined to be in line with international best practice. It is, however, still sufficiently sound to be used to establish the foundations for corporate governance in the SOE sector over the next few years.

The largest four SOEs (Eskom, Transnet, Telkom and Denel) have been asked to sign off on the 1997 Protocol. They have also been requested to conclude a shareholder compact with the shareholder departments. Since the shareholder compact will primarily serve to develop an enterprise-specific relationship between Government and the SOE, most if not all the limitations of the 1997 Protocol can be addressed in the shareholder compact. The compact is understood to be an interim agreement designed to assist Government in the restructuring process. As the restructuring proceeds, a revised protocol on corporate governance is drawn up and adopted by the SOEs, the compact will be revised and/or superseded by more formal corporate governance practice. Furthermore, since the compacts will largely define the relationship between specific SOEs and Government, each compact will be tailored to the distinct requirements of each enterprise.

Through reference to international best practice, Government will encourage the SOEs to periodically review and update their ethics and probity management programmes. Government will also ensure that those managing the restructuring process are subject to appropriate probity investigations, and that any evidence of misconduct is fully investigated and prosecuted, where applicable.

Government’s commitment to ensuring internationally acceptable standards of probity will be enhanced by its transparent and accountable approach to managing the restructuring process. Investors and stakeholders will be able to monitor the process and hold Government accountable for deviations from the published process and programme.

Improving the restructuring process

Suggestions for improving the restructuring process include the following:

• Arrangements to improve stakeholder involvement to take advantage of the Labour Relations Act, Social Plan and National Framework Agreement to make provision for high-level political engagement.
• Government will seek new methods of communicating with other stakeholders, including quarterly bulletins and a web site.
• The new two-stream Government decision-making structure, which distinguishes between day-to-day decisions and those that required a strategic or policy input, will expedite decision-making.
• Periodic strategic workshops and the circulation of short sectoral strategy documents will improve the overall strategic understanding of restructuring priorities in Government and between Government and the SOEs.
• The proposed shareholder compact and a revised protocol on corporate governance will clarify the roles and responsibilities of Government and the boards and management of SOEs in the restructuring process and afterwards.
• The process described in the process maps (see Appendix) should assist in overcoming many of the previous restructuring bottlenecks.

Actions being taken by Government around enterprise restructuring

Subject to Cabinet approval, a programme for the restructuring of all major SOEs has been put in place, signalling the political intent of Government. It is envisaged that the majority of the restructuring activities will be completed by 2004. A summary of specific restructuring actions is presented below. Although the focus will be on the four key sectors, the restructuring of other sectors will take place concurrently.

Transnet/ACSA

• Transnet debt restructuring is being dealt with; significant progress has already been made in dealing with the pension fund debt.
• Spoornet will be corporatised, with its different business units becoming separate corporate entities;
• Coallink, Orex, Luxrail and Linkrail will be concessioned.
• Spoornet’s General Freight Business will be commercialised and either an Initial Public Offering (IPO) or a strategic equity partnership (SEP) entered into.
• A new ports policy and a ports regulatory framework are being drafted. Portnet will be corporatised to form a port authority entity and a port operations entity; the latter will then be privatised.
• Subject to shareholder approval, the processing of an IPO for SAA will be commenced with.
• Petronet will be corporatised, its synergies with other pipeline projects assessed and restructuring options developed.
• Deadlines for the disposal of non-core units within Transnet will be ongoing.
• The airports regulatory framework is being revised; once this has been completed, subject to shareholder approval, an IPO will be processed for ACSA.

Telkom

• Work on the proposed IPO for Telkom is proceeding.
• Work on a policy and a process to determine the Second National Operator (SNO) is already quite advanced.
• Given the possibility that other SOEs may become involved in the SNO, the Department of Public Enterprises will ensure that a full investigation is undertaken into the costs and benefits, and to ensure that appropriate synergies are achieved.

Eskom

• Eskom will be corporatised, with transmission, distribution and generation each forming a separate corporate entity.
• A full evaluation of the different models for restructuring Eskom is currently being undertaken by the Department of Public Enterprises.
• Different generating companies will be formed to promote internal competition before the introduction of private sector participation in generation.
• The Department of Minerals and Energy is currently co-ordinating the design and implementation of the regional electricity distributors.
• Strategic equity partners will be introduced into different Eskom Enterprises business units.
• Private sector participation will be introduced specifically into the generation and transmission entities, either through strategic equity partners or through IPOs.

Denel

• Denel will be corporatised, and an initial strategic equity partnering at the business unit level of Denel Ordnance is expected.
• The local ordnance industry may need to be consolidated; this will be followed by a search for international equity partners at the corporate level.
• The consolidation of aircraft maintenance synergies between SAA and Denel is being investigated.
• The Department of Trade and Industry is co-ordinating a study into the consolidation of the South African aerospace industry.
• The process of finding a strategic equity partner for Denel Aerospace is currently under way.

Conclusion

The current stage of development of the South African economy necessitates a mixed economy model, with both the state and the market playing key roles; this sets the context for the restructuring of SOEs. The restructuring programme will take into consideration a range of models, choosing a model that, on the balance of evidence, will best meet the overall objectives and strategy for restructuring.

While it draws on international best practice and experience, the approach is primarily in response to the internal and external factors that affect the South African economy.

This document outlines the policy framework that will guide the restructuring of SOEs. Restructuring plans for individual enterprises are being developed in line with this framework, while at the same time considering the individual attributes of each enterprise.

Government will use this framework to achieve its objectives, as set out in this document. While each individual restructuring may not achieve all the stated objectives, the overall restructuring programme will enable Government to achieve its aims.

Government is committed to an agenda that will accelerate the restructuring process. The past five years have represented a steep learning curve for Government. Having established a solid foundation, it can now set the framework for the accelerated restructuring agenda, as reflected in this document.