14 April 2000
In his opening address to Parliament in February this year President Mbeki indicated that At no other point of time have we ever been as well placed as we are today to take decisive forward steps, towards the creation of the humane and people-centred society for which the organisations that were unbanned ten years ago struggled for many decades. In recent months confidence in the economic recovery of the South African economy has been reinforced. The recent elevation of South Africa's credit rating to an investment grade signifies the growing global confidence in our economic policy and fiscal management. Just yesterday for example, the Business Day reported that the International Monetary Fund's "World Economic Outlook", predicts an economic growth rate for South Africa of 3.8% for 2000 and 4% for 2001.
This upbeat forecast underscores the economic climate within which the Restructuring Program will unfold. Foreign direct investment is expected to grow considerably over the next five years and portfolio inflows should also remain strong. I believe that the Restructuring Program will make a direct and significant impact on capital inflows into the South African economy. The proceeds from the Restructuring Program will enhance the ability of this Government to give effect to the imperatives of socio-economic development. We will unlock value and resources that will contribute significantly towards the building of houses, schools, hospitals and other infrastructure in poor rural areas.
Our vision for the next four years is to have restructured SOEs that operate in a globally competitive environment, promoting economic growth and a better life for all. Thus, our task is not simply to keep an eye on SOEs, nor indeed merely to monitor their performance as a passive shareholder. Our aim is to guide, interact and ensure the successful restructuring of these entities so that they become more valuable corporate citizens in our country, performing tasks in a manner that makes us proud, and to show our people and the world that we are capable of responsible, efficient and effective business management. We believe that in specific areas of strategic importance to the economic well-being of our country and people it is better to coordinate and integrate the expertise of private endeavour and enterprise with the necessary developmental direction of government. Let me expand a little.
It is generally accepted that the state has an overall policy making and regulatory function, and in those areas where the private sector provides goods and services efficiently and effectively, the role of the state is largely to create an enabling environment for such activities. However, modern economies, including ours, do not simply run smoothly without hiccups, nor do they cater only for those with wealth or privilege one way or another. Market failure is a frequent and ever-present bugbear that has the potential to inflict massive social and economic pain on many of our people who, as we know, fall into class and race definitions that have been shaped very largely in the crucible of uneven, unjust and apartheid-driven laws, codes and cultures. Introducing market incentives and practices into the operation of state-owned enterprises is likely to introduce greater efficiencies, effectiveness and wealth generation opportunities. Moreover, the introduction of private sector capital and expertise will provide new impetus to the competitiveness of the SOEs and will go a long way to improving economic performance and improved service delivery. However, we are still engulfed with a poverty problem that holds back the participation of large numbers of our people and retards the enjoyment of those rights that we South Africans have unanimously endorsed in our Constitution's Bill of Rights. To give flesh to these rights the state is required, as an instrument of social justice and popular power, to move beyond just being an enabler to being an active participant in the development of our economy, our people and our region.
It is no accident of history that the major SOEs in South Africa are located in critical sectors of our economy. These are the transport, energy, communications and defence technology areas. It is also patently clear that efficient and effective goods and service delivery in each of these areas is critical not only to our well being now but to the future of this country and indeed Southern Africa as a whole. Between them, Transnet, Eskom, Telkom and Denel account for approximately 91% of estimated total assets, provide 86% of turnover, provide 94% of net income and employ some 77% of all employees in the top thirty SOEs. It is no exaggeration to state that practically every person living in South Africa bumps into one or other of these SOEs on a daily if not hourly basis at present. The radio channel, the lampbulb or kettle, the train in the distance, or the harbour on the coast, sometimes the aircraft in the sky that casts its shadow fleetingly across the highway running through the countryside, or the soya-extract you nibble at, come to you courtesy of SOEs. But these little facts are not meant to make us feel complacent or smug. They highlight the possibilities of what impact can be achieved if these entities perform their tasks even better, with more direction and purpose, and with greater effectiveness that they do at present. Essentially that is our challenge and one that we have chosen to address through the restructuring of SOEs.
The objectives that we have identified for the restructuring programme can be identified by their relationship to micro- and macro-economic and social impacts. Thus, at the micro-economic level, restructuring involves enhancing the efficiency and effectiveness of state enterprises, accessing globally competitive technologies, creating effective market structures in the sectors currently dominated by the SOEs, and mobilising private sector capital and expertise. At a macro-economic level, restructuring aims to achieve a reduction in the public sector borrowing requirement, to attract foreign direct investment, and to finance growth and provide the requirements for industrial competitiveness. At the social level, restructuring of these assets seeks to ensure wider participation in the South African economy, particularly of formerly disadvantaged groups and individuals, and to mitigate possible negative social impacts that arise from some restructuring efforts such as marginal job losses, erratic price increases, or even the withdrawal of services.
Let me make one thing very clear: there are no easy answers to the difficult questions that a restructuring programme suggests. Although restructuring, and more specifically privatisation, has been practised internationally for more than twenty years now [less so in the developing world], there is still no even consensus about their consequences. Even though most commentators have indicated that restructuring and privatisation have yielded generally positive outcomes for individual nations, almost all analysts concede that there have been failures. These resulted largely from institutional arrangements within former SOEs, as well as structural problems associated with the market and financial environments within which they operate. We have to be aware of all of these factors. Our own brief experience in the area has revealed some marked successes, such as the SAA-Swissair deal or the inclusion of SEPs or management contractors with Telkom and the Post Office. However, Sun Air, which has been dealt with at length in this House on previous occasions, has provided us with some valuable lessons.
Partly as a result of the experience of the first five years of restructuring, but more because of our need to experience the benefits of the objectives of the programme I have just outlined, Government has adopted the definite view that restructuring must be accelerated. This does not only mean that we must speed things up, it also means that we must embark on a more thorough transformation exercise both within the enterprises themselves and to ensure that the major players, such as Transnet, Eskom, Telkom and Denel proceed with restructuring without unnecessary delay.
Thus I am pleased to announce today that my department has fulfilled all the initial tasks given to it by government in November last year. Thus, as we move into the 21st century we will be guided by a coherent, integrated and transparent approach to restructuring as a whole. Furthermore, we coordinate interdepartmental efforts around one lead department, namely Public Enterprises. Thirdly, we have established a systematic method of monitoring the performance of SOEs and can ensure that their activities and functions are aligned with and in compliance with government policy and legislation. Fourthly, we promote the process of internal business re-engineering and/or the rationalisation or integration of similar functions between different enterprises. Fifthly, we shall develop a comprehensive approach to public- private partnerships and the use of alternative service delivery as a means of restructuring.
Government has adopted seven basic principles that form the backdrop of our restructuring programme. Thus we believe that the promotion of competition and the development of competitive markets is an integral element of any restructuring strategy. In those business areas where competition is not feasible, such as in residual natural monopolies, a regulatory framework needs to accompany any restructuring initiatives. The Government's relationship with SOEs should be spelt out in individual shareholder compacts with enterprises, in a framework for corporate governance for all SOEs, and in a clear policy context and programme for restructuring. Furthermore, a range of options is needed to ensure that productivity, profitability, investment and innovation are enhanced. This entails options such as equity sales (full or partial privatisation) to access additional funding, technology or markets, but where this is not required, other approaches to restructuring may be used. We need to maximise the ultimate return to the shareholder (fiscus) through the proceeds from equity sales, dividends and/or tax returns on the basis of adopting the optimal approach to restructuring. And in order to better account for public goods and services, restructuring proposals should incorporate a rigorous cost- benefit analysis of their impact on overall social welfare. To overcome undue political influence and avoid 'soft budget constraints', 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.
We are currently engaging different government departments on our Draft Policy Framework to ensure that we complete interdepartmental consultations prior to presenting the document to parliament and public by early May 2000 for your consideration and debate. Experience shows that our approach of consulting widely with important stakeholders, including labour and the business sector, prior to the adoption of strategic policies is a critical component of success. I have initiated the process of engaging non-government stakeholders directly on the process of Restructuring and the policy framework that underpins it. All stakeholders, including organised labour, will have the opportunity to participate constructively in this dialogue. I can give prior notice that at this stage that the policy document includes the following elements: Government's strategic vision for restructuring; The macro, microeconomic and social impact of restructuring The promotion of competition and the establishment of appropriate regulatory frameworks and mechanisms; Enhancing empowerment and broadening participation in restructuring; Improved corporate governance; Reorganising the restructuring process; A review of the four main or key sectors; and the identification of Government's priorities and the restructuring timetable for the next 4 years.
The Department is in the process of completing a database of SOEs. Currently the database contains information of some 192 SOEs and we are busy mopping up the others at the moment. I expect the database to be completed in the near future and aim to use it as a management tool that will be updated on a continuous basis. Although the work is still in progress, I can indicate that the amount of information is impressive. It includes basic details [such as the legislation governing a particular SOE, whether it is a key national or strategic asset, its competitive environment, and ownership], as well as detailed information on the shareholder[s], management structures, pension funds, medical aid, unions, employment equity compliance, financial statistics, restructuring progress, valuations, and short profiles of each SOE.
Another important development is the finalisation of a policy document in conjunction with the Department of Labour that covers a framework for a Social Plan that is consistent with the Jobs Summit National Social Plan framework. I am committed to ensure that any potential negative consequences of restructuring are mitigated by a comprehensive Social Plan.
The question of regulation is critical to the success of any restructuring programme. We understand fully the concerns of consumers and investors alike that a coherent, easily understood and cleanly managed regulatory framework is a necessary requirement to ensure that the benefits of competitive environments are forthcoming and to ensure a stable investment environment as well. The Competition Council has developed a draft policy framework on the matter and this is included in the Policy Framework I have already referred to. Let me just add, too, that Transport, DTI, Finance, Public Enterprises, together with Portnet, are in the process of drawing up a ports policy and regulatory framework prior to the submission of legislation in this regard to Parliament by September this year. Work is also well advanced in the other areas such as the energy sector where changes to the regulatory environment are needed.
I am also pleased to indicate that the department has presented me with a comprehensive business plan for its restructuring activities that covers the period down to 2004. It includes timeframes and proposals for all the restructuring initiatives underway. Some processes will be completed in relatively short periods, whilst others that involve the more complex entities like Portnet, the regulated side of Eskom business and the core divisions in Denel will necessarily take a little longer, but I envisage the bulk of the process will be completed by the end of this term of the Mbeki presidency.
The reason for the time factor is straightforward. It is, first of all, not a measure of any reluctance on government's side to proceed with restructuring. Indeed, it is the very opposite and has everything to do with sound economic principles of making sure that wherever possible the asset you offer for private participation, public offerings, concessioning, or even outright sale, is an asset with inherent value that will realise the greatest benefit to the shareholder. We are not holding back, for example, on the disposal of non-core units within SOEs. In fact, we have changed the procedures to the extent that Boards are empowered to make these decisions within the overall government frameworks much quicker. So, for example, in Denel, besides the non-core units already disposed of, we are currently in the process of disposing Ambidex, our share in Massey Ferguson, Prohatch, Fibertech and Corboxy Methy Cellulose. Within Transnet, the following non-core assets are being restructured: Production House, Chemical services, Transmed, Protekon, Transwerk Foundry, Transwerk Perway, Autopax Passenger Services, Apron Services and Airchefs. These are just two examples. Activity is going on in the non-core areas of other SOEs as well.
The question of empowerment and restructuring is critical. Again, we have learnt valuable lessons from the last few years. We believe that SOE ownership should be expanded through the National Empowerment Fund, using broad based unit trust type structures (collective investment vehicles) that avoid the existing empowerment-related financial engineering. Second, operational empowerment can be promoted through outsourcing, partnerships, procurement and easier access to financing. Third, Employee Share Ownership Plans should be piloted to improve enterprise self-management and community involvement, and to raise investment in, and take advantage of, social capital.
I will turn now, by way of example, to Spoornet, to indicate to members the extent to which we have moved with regard to this entity, often described as the problem child of the Transnet family. Spoornet faced increasing competition in its general freight business as a result of the deregulation of road hauliers. This resulted in GFB having a large negative cash flow. In the past this has been mitigated by strong cash generation by COALlink and to a lesser degree by OREX. In addition, the subsidisation of GFB through the profits generated by COALlink and OREX, has resulted in a lack of investment in the latter two entities, thus diminishing their value and ability to continue generating profits.
Members will recall that during the last half of last year both management and labour offered proposals for government's consideration. Elements of both sets of proposals are consistent with general government policies, whereas others were deemed inappropriate, particularly in relation to the extent of labour losses and the potential economic impact of major closure of non-profitable lines. Government's approach was designed to secure the most effective response to a very difficult problem. Thus, it was agreed to augment Spoornet's management with international expertise to assist in the development of transforming management structures and capacity, and to appoint a transaction adviser. A two-pronged approach has been proposed to deal with Spoornet's negative cash flow situation.
The restructuring plan commences with the corporatisation of the 6 business units that comprise Spoornet. Thereafter an industry framework will be developed to regulate the restructured entities and the commercial relationships between them. The following restructuring model will then be implemented: LuxRail (the blue train), Main Line Passenger Services, COALlink, OREX, will be concessioned for specific periods negotiated with prospective concessionaires. The General Freight Business will introduce a strategic equity partner; and LINKrail (which comprises the branch lines) will be concessioned in a number of packages for varying periods.
The process of restructuring these business units should be concluded within about 36 months.
The restructuring plan is based on an analysis of South African transport policy, together with an analysis of the current financial position of Spoornet. It accommodates the existing structure of Spoornet's business in a manner that enables restructuring to proceed more swiftly and with less disruption to the business. I trust this example illustrates the point that we are concerned to identify solutions that eliminate worst-case job loss scenarios, ensuring that we don't sell-off the family silver, and emphasises the role of sound management to effectively turn business units around in an atmosphere of increased competition and private-public partnerships.
Sound business principles and practice are as important, if not more so, in the public sector than they are in the private sector. Experience over the past few years has shown that it is necessary to revise and establish more clearly the relationship between the Shareholder and SOEs, more particularly the management and Boards of Directors of SOEs. The state plays a central role in the South African economy, which depends, as we have seen, to a large extent on the drive, efficiency and social responsibility of SOEs. While the Boards of SOEs require sufficient freedom to manage the business in a vigorous and enterprising manner, they must exercise that freedom within a framework of effective accountability. A number of SOEs have taken significant efforts already to establish good practices in corporate governance. For the most part these efforts take cognisance of legislation such as the Companies Act, the PFMA, or entity-specific laws. The DPE subscribes to the Protocol on Corporate Governance in the Public Service, adopted in 1997, and steps are being taken right now to ensure that Boards of SOEs also formally endorse the Protocol. The ultimate objective is to raise the standard of the public services up to and beyond the best at present available, and to ensure that those services are equally available to all citizens.
Furthermore, the Department believes that as we are in a transitional period marked by various stages of restructuring, there have been instances where Boards and the Shareholder have not necessarily been on the same wavelength. Thus, over the next two months each SOE will engage with a team of specialists with a view to establishing a Shareholder Compact between the Board and myself as Minister. The compact represents an agreement between Government as the major or sole shareholder and the Board of each SOE as regards performance expectations and parameters. It does not replace the strategic and business plans they are expected to develop, but is rather complimentary to these. It describes the relationship between the signatories and identifies the behaviour that would be required on both sides to support effective management and performance. The Shareholder Compact finds its origin on the one side in the Protocol on Corporate Governance, which is time independent, whilst on the other side it is anchored in the Strategic and Business Plans of the enterprise, which are time dependent. It results from the need to have a clear understanding of the relationship between the Government and the SOEs in the period of restructuring and should therefore be regarded as a transition document.
It is also my intention, furthermore, to develop and sign Performance Contracts with the Chairs of Boards of Directors to ensure compliance with our requirements and to effect more clearly the responsibilities outlined in the Public Finance Management Act.
I am confident that these combined measures will go a long way to assist the transformation of our SOEs into truly world-competitive entities of the corporate environment.
Let me reflect briefly on a rather disturbing yet important matter that emerged at the beginning of this week. I refer to the public posting on the Internet of a letter purportedly in the format of a submission to the Public Accounts Committee of Parliament by the leader of the UDM. I have always been, remain and will continue to be an exponent of transparent and clean government. I am appalled, however, to see that some of the allegations made in the document are supported in part by documents that emanate from within my own department. On investigation I am satisfied that the security of documents in my department is not at issue, and that the systems are quite secure. It appears that the unauthorised distribution of these particular documents arose from a situation in which one person had specific access to these specific documents. I have accordingly instructed that the state's security agencies be called in to investigate any charges, criminal or otherwise, in this instance. The situation is intolerable and extends far beyond the issue of simple whistleblowing, which itself is a subject of pending legislation and will follow strict requirements.
In conclusion, let me express my pride in the work that is being done by many SOEs in extending their expertise, skills and services throughout the African continent. Eskom, Transnet, Telkom and Denel are actively involved in promoting, generating and building the African Renaissance. I have seen the results of their work firsthand in many instances and it is pleasing to witness the empowerment and improvement in the conditions of millions of our brothers and sisters in Africa through the partnerships these SOEs are developing throughout our continent. There is much work to be done, but it is a job that is truly well done.
Joesph Stiglitz, the former Chief Economist of the World Bank, recently suggested that governments Need to devote [their] scarce resources to areas that the private sector does not and is not likely to enter...Government needs to focus its attention on those areas that represent its distinct advantages, which distinguish it from private organizations. But that having been said, there are critical issues both about the sequencing and scope of privatization: even when privatization increases productive efficiency, there may be problems in ensuring that broader public objectives, not well reflected in market prices, are attained, and regulation may be an imperfect substitute.
To accomplish such a complex task requires leadership built on partnership and teamwork. The reorganization of government's approach to restructuring, and more specifically the establishment of the new Department of Public Enterprises, have provided the basic wherewithal to build the team and establish the necessary leadership to take the programme forward with the speed of an express train without fear of derailment. I wish to extend my appreciation and thanks to the Director General, Sivi Gounden, and the team he is building in the Department. The energy involved in moulding a team of strong-minded professionals is enormous but immensely satisfying. The results are already obvious. But behind that core group of professionals are support and administrative staff and personnel, including my own security and transport staff around the country, who give us the peace of mind that we need to fulfil our tasks. The Boards, management and personnel of SOEs deserve a special word of appreciation for a generally magnificent job that is improving on a daily basis. The SOEs are after all the engine room of much of our economic endeavour. Their strength is our strength.
To each and everyone, I say thank you, and, with the music lovers among you in mind, may I invoke Youssou N'Dour's recent song for youth: My hope is in you I wanna watch your spirit touch the sky So much more we can do My hope is in you
I thank you!