Pretoria, 10 August 2000
It is with great pleasure that I welcome you all here today for the official launch of the Policy Framework of the Accelerated Agenda towards the Restructuring of State Owned Enterprises. At the outset let me thank you for the interest you have shown in the restructuring of the SOEs by being here today.
Our schedules are tight today so let me outline very briefly how I will deal with the Policy Framework. I propose to follow the outline of the document. Hence I will outline the process we followed to reach this stage; the concepts and principles that inform our vision and understanding of the restructuring process in South Africa; the programme itself; the institutional and decision- making processes; and provide details about the plans we have for the Big Four - Eskom, Transnet, Telkom and Denel - and some of the other entities.
In September 1999, the Office for Public Enterprises was upgraded to a Department with the principal task of accelerating the restructuring process. With new personnel and skills, we undertook a review of the previous five years. A report was presented to the IMCC in November and we were then given the task of refining and developing a coherent and comprehensive policy framework. Since then, my Department has engaged other government departments, the SOEs, SACOB, NAFCOC, the Black Economic Empowerment Committee, Nedlac, Cosatu and other stakeholders as the various drafts of the policy unfolded. It was also tabled at the Restructuring Oversight Committee, at FOSAD, and finally Cabinet and its relevant sub-committees. At every step of the way it has been amended and refined in an inclusive a manner as possible. In fact, the document you have before you is its 22nd version!
The Policy Framework describes a dynamic process that will require careful monitoring and constant evaluation. As implementation unfolds, I am sure that there will be areas that may require revisiting. What, then, does the Framework cover?
Vision
At a Lekgotla in November last year, the Government's overall strategic vision for the restructuring of state owned enterprises was confirmed. This vision seeks to define clearly and coherently the continued role of the state in light of recent international experience with restructuring of state owned enterprises and the developmental needs of the country. The starting point of the discussion remains the RDP, statements included in the GEAR strategy and the 1996 Framework.
There is an unambiguous need for the state to play a developmental role in South Africa to deal with the legacies of apartheid, widespread poverty and unemployment. State owned enterprises in South Africa represent massive financial, investment, labour, technology and infrastructure resources. The restructuring strategy aims at maximising the contribution that state assets can make to development. The goal of restructuring is to contribute to sustainable economic and social development that is more likely to occur where there is a mixed economy, that is, an economy that is responsive to market incentives within a framework of socially integrative institutional mechanisms.
The restructuring of state owned enterprises is therefore aimed at the integration of public, private and social capital and expertise to ensure that our developmental objectives are achieved.
The economic and social effects of restructuring
Our restructuring objectives are broadly categorised into the following: those internal to the firm, industry or sector, broader economic objectives and social objectives. At the enterprise and sector level, restructuring involves improving the efficiency and effectiveness of the entity, accessing globally competitive technologies where appropriate, mobilising private sector capital and expertise, and assisting in the creation of effective market structures in sectors currently dominated by SOEs. At the macroeconomic level, the initiatives aim to attract foreign direct investment, to contribute to the reduction in the public borrowing requirement, and to assist the development of an economic context that promotes industrial competitiveness and growth. Social imperatives include the need to ensure growth in employment, particularly in new areas of endeavour, and to rationalise or develop new skills within the labour force and their deployment throughout the economy. We need to ensure wider ownership and participation in the South African economy and improved service delivery in terms of cost, quality and access.
Former World Bank Chief Economist, Joseph Stiglitz noted that privatisation is important. The government needs to devote its 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 organisations. But… there are critical issues both about the sequencing and scope of privatisation: even when privatisation 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.
He went on to state that many of the gains attributed to privatisation actually occur prior to privatisation "from the process of corporatisation, from putting in place effective individual and organisational incentives".
Stiglitz and other authors support the view that restructuring needs to take place in a context where the institutional preconditions have been established so that market incentives can operate effectively. This does not mean that other social and political objectives should be thrown out but that these should be dealt with separately to ensure that the enterprises operate as businesses that respond effectively to market incentives.
Within the literature there is virtually unanimous support for the argument that establishing competitive markets is the most important policy component of any restructuring initiative. The failure to establish such competitive conditions will, at best, lessen the full microeconomic improvements and, at worst, lead to serious economic abuses of monopoly power.
In terms of the impacts of restructuring internal to the firm, industry or sector, it is generally agreed that the result is improved efficiency and effectiveness of SOEs and that this is reflected in improved productivity, profitability, innovation and levels of investment.
While many forms of restructuring can improve SOEs efficient use of resources, a process that involves a transfer of ownership can have important additional macroeconomic benefits. Restructuring initiatives can have fiscal impacts through lowering the cost of state debt and increasing fiscal resources available for other social and economic programmes. They can have financial market impacts including the reduction of domestic interest rates and improving the country's credit rating and they can have balance of payments impacts through increasing foreign capital inflows and a reduced forward book or increased foreign reserves.
In terms of the social impacts of restructuring, it is generally agreed that the immediate impact of restructuring may involve some employment losses. In order to mitigate negative social impacts of this, Cabinet recently approved a Social Plan Framework. We believe that the longer-term benefits of restructuring, in the form of more efficient firms and a more competitive economy, create more sustainable employment. For example, the restructuring of port operations is likely to increase movement through our ports thereby stimulating the development of back-of-port activities that by their nature are labour intensive. The restructuring of SOEs will also create new employment opportunities in niche sectors such as IT, and telecommunications.
Government remains committed to the National Framework Agreement as a mechanism of engagement and consultation with organised labour. In particular we have consulted with the leadership of Cosatu and have reached consensus with them on various aspects included in the Framework. Both of us appreciate the impact that restructuring can have in the short term on employment and we are working on viable mechanisms to mitigate this impact. Furthermore, both of us are committed to pursue medium to longer term expansion in the job market, within and beyond the scope of SOEs.
The following key guiding principles arise out of our vision:
These principles will be used to inform specific restructuring options. It should not be expected that each initiative will incorporate all aspects of the principles in equal measure but where restructuring deviates from the principles, the reason for this deviation should be spelt out.
Promoting appropriate regulatory and competitive frameworks
As noted in the principles for restructuring, competition forms a key element in the restructuring of state owned enterprises. There is clearly a 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. Given the prevalence of residual natural monopolies in SOE sectors and the size of SOEs in relation to potential local competitors, Government assures all stakeholders that restructuring will lead to competition with an appropriate degree of regulation. We are currently working to clarify the regulatory environment within which the state owned enterprises operate, so that potential investors are fully aware of the rules within which they would operate.
Restrictive practices and abuses of dominance will require a sector-specific approach, depending on the nature of the industry. Economic regulation is warranted in an industry where the competitive forces do not lead to optimal outcomes, be it for consumers, the environment or related industries. Due to the global trend towards liberalisation and technological advances, the notion of what constitutes a natural monopoly is constantly being eroded.
Regulation is often thought of only in terms of restraining unscrupulous business activity when competition is being introduced. Sectoral regulation will also incorporate measures to ensure that restructured SOEs function in a manner akin to the interests and well-being of the public, who are both the consumers of services and indirect "shareholders".
Regulatory reform will take issues such as network industries and the history of regulation and public interest concerns into account. Concurrent jurisdiction in transition industries will be formalised and clarified. The competition authorities could also play a leading role in assessing industry structures and desirable changes. The Competition Commission, in consultation with the regulator, should deal with competition issues. The final decision- making powers should preferably rest with the competition authorities. In regulated industries with little potential for competition, the regulator should remain the sole actor, although the Competition Commission should be able to investigate mergers, as well as abuses of dominance by the incumbent, where applicable. In regulated industries with a high degree of competition, the Competition Commission should have jurisdiction on all competition matters and be required to consult with the relevant regulator. Final authority should be clarified and ideally rest with the competition authorities.
In all cases, the competition authority should monitor regulatory decisions on technical issues by the regulator, but it is not its responsibility to replace the sector-specific regulator. Inconsistencies between national and industry- specific competition rules should be addressed and industry rules should be amended to conform to the Competition Act of 1998. Co-operation between the agencies should be institutionalised and embedded in the respective procedures.
All should benefit from an improvement in the regulatory environment in the key sectors that are dominated by SOEs such as energy, telecommunications and transport. South Africa's globalising economy will benefit from lower prices and improved service outputs that will enable it to become more competitive. This, in turn, will create more investment and employment opportunities. The unemployed and the poor, in particular, will benefit from increased job opportunities and more affordable and available services. More certainty in the sectors involving SOEs will stimulate investment and enhance customer satisfaction, thereby ensuring that the quality of life for all is improved.
Promoting empowerment
Government's policy on restructuring SOEs will entail new, creative, diverse strategies for genuine empowerment so that SOEs more effectively spread the benefits of restructuring. These strategies of alternative service delivery include broadened ownership, training, procurement and self-management opportunities for black people, women and the disabled, both directly through involvement in SOE management and indirectly through widespread ownership opportunities. There are many ways to achieve this objective and it would be a mistake to seek a single, one-dimensional approach, particularly given the unsatisfactory record of SOE-related empowerment strategies. Our multi-faceted approach will therefore involve some degree of equity transfer or sale, whilst in other instances it will focus on changing operational responsibilities to ensure greater participation by employees and communities.
The National Empowerment Fund (NEF) Trust was established to facilitate the redressing of economic inequality from past unfair discrimination against historically disadvantaged persons. The NEF Trust must be capitalised primarily through receiving shares of SOEs undergoing restructuring. It is envisaged that the Trust will promote empowerment through an investment trust that will market investment units to historically disadvantaged individuals; a portfolio trust that will warehouse the shares of SOEs which will thereafter be sold to historically disadvantaged individuals; and an equity management fund to provide venture capital among historically disadvantaged groups.
Restructuring will also promote increased participation by the citizens of this country in the ownership of SOEs and encourage and legitimise share ownership as means of enhancing domestic savings. To this end we have already reached agreement with the JSE to embark on a public education programme prior to the listing of some entities. One of our aims is to broaden share-ownership through individual and collective ownership mechanisms focussing on previously disadvantaged groups. This process should avoid the problems of existing empowerment schemes, but draw on international experience of collective investment vehicles to provide a range of equity schemes for those previously excluded from mainstream economic participation.
A key objective of the restructuring process is to increase operational empowerment, or the variety of processes related to active, hands-on participation in industries. These range from more meaningful access to state- regulated activities, training and skills development, affirmative action in management, to entrepreneurial opportunities through outsourcing, partnerships, procurement and easier access to financing. By broadening the range of service delivery models to include greater worker, SMME and community participation, Government will ensure that a broader grouping of the historically disadvantaged is empowered. Cases in point are the SOE procurement budgets that are estimated to amount to between R40 and R60 billion annually. A uniform procurement policy for SOEs that subscribes to the principles of the Green Paper on Public Sector Procurement Reform in South Africa and Preferential Procurement Policy Framework Act, will significantly improve empowerment in South Africa.
We will also actively promote Employee Share Ownership Plans (ESOPs) to ensure that employees have a real stake in the SOEs. Noting that both workers and management contribute to the success of the enterprise we will ensure that employees, and not just management, will have an equal opportunity to acquire shares. ESOPs will need to pay attention to overcoming historical inequities without undermining the overall benefits associated with greater employee involvement.
A final area where participation in SOEs can be enhanced is through community trusts. Such trusts seek to obtain the benefits of small economies of scale, resolve micro-management challenges and incorporate the benefits of social capital within the production-consumption-distribution process. Community trusts include producer co-operatives, consumer co-operatives, mutual companies, not-for-profit firms and other avenues of collective activity. There are important precedents for introducing community trusts to SOEs undergoing restructuring, mainly in the areas associated with utility functions involved in the supply of non-grid electricity, telecommunications and transport.
We recognise the important contribution that the restructuring of SOEs will play in the arena of Black Economic Empowerment, and we look forward to continued engagement with the Black Economic Empowerment Commission in our collective effort to breathe real life into black economic empowerment in South Africa.
Improving corporate governance and ensuring improved ethics and probity
A frequently used argument against state ownership is that it often results in problems like contractual incompleteness, information asymmetries and undue political influence. With appropriate forms of corporate governance these concerns can be addressed. The Policy Framework provides our perspective on corporate governance that focuses on business prosperity, accountability and transparency.
All state owned enterprises will be required, in this financial year, to adopt the 1997 Protocol on Corporate Governance and any future revisions to this protocol. In addition, Government will enter into Shareholder Compacts with state owned enterprises. We are currently in the process of finalising the protocols and shareholder compacts with Denel, Eskom and Transnet. These will be signed within the next month. Other SOEs will then follow. The shareholder compacts will govern the enterprise-specific relationship with government. It will state the rights and obligations of both government and the enterprise.
Just last week there were reports about the need to update the King Commission Report and to bring it into line with current international best practice. We are actively participating in this process and are pleased to report that our corporate governance outline included in the Policy Framework complies with all the requirements in the King Report and in some way advances the debate on corporate governance.
Shareholder compacts represent an agreement between Government as the major shareholder and the board of the SOE as regards performance expectations and parameters. It does not replace the strategic, business and other plans required for the effective and efficient management of the enterprise. Rather, it complements these, and recognises the need for a controlled and managed involvement of the shareholder in its investment, describing the relationship between the signatories. We take the shareholder responsibilities of Government very seriously because we represent millions of people who do not have direct shares in these entities. The actual format of the compacts is negotiated between the shareholder and the enterprise. They reflect international best practice in corporate governance. They will also include corporate goals and objectives, key performance indicators, policies, obligations for service delivery, penalties and rewards as well as various other agreements.
Last, but certainly not least, Government is also committed to the application of appropriate standards of ethics and probity both within SOEs themselves and within the processes and procedures of the restructuring initiative. These standards will comply with international best practice. The management and boards of the SOEs will uphold these and where codes of conduct already exist, these will be revised where necessary and adhered to. SOEs will need to demonstrate that an ethics and probity management programme is in place. This focus on ethics and probity should constrain corruption and will provide potential investors with a sense of security that financial and other corporate misbehaviour will not be tolerated.
Improving the restructuring process
The IMCC Lekgotla in November confirmed that the Department of Public Enterprises is to be responsible for co-ordinating and leading the restructuring process and that I, as the Minister of Public Enterprises, should report to Cabinet on the restructuring process. The Department of Public Enterprises will act as co-ordinator of the restructuring process working with the primary policy departments. It should be noted that policy, regulation and shareholder functions are intertwined and that there is also a need for integration of key issues. Every restructuring process will be dealt with in a sectoral context.
Chapter 7 of the Policy Framework outlines in detail the improvement to the restructuring mechanisms. I wish to highlight the following:
The Policy Framework also includes process maps outlining the restructuring process. The first step is a strategic analysis that involves an analysis of information about the SOE and the environment in which it operates, taking into account macroeconomic issues, sector policies, legislative and regulatory issues. This process highlights the restructuring priorities. A high level restructuring plan will then be developed and interrogated against the information gathered and revised if necessary. Cabinet approval for the plan will then be sought.
After Cabinet approval of the high level restructuring plan, the Department of Public Enterprises will appoint advisors to assist in developing a detailed restructuring plan that includes due diligence, research and the identification of appropriate restructuring mechanisms. The detailed restructuring plan requires Cabinet approval, following which a detailed work plan is formulated. This moves us into the transaction management phase where the Department of Public Enterprises largely project manages the process through steering committees to ensure functional inputs from representatives of relevant government departments. Cabinet approval is then sought for potential bidders, buyers, and concessionaires depending on the type of transaction.
In addition to restructuring, there is a need to manage the SOE portfolio. This includes developing shareholder compacts, monitoring performance of SOEs and evaluating the impact of restructuring.
Restructuring the key enterprises
It has frequently been asked whether we would release a detailed timetable for the restructuring process as well as the expected value that we expect to achieve from each transaction. Any good analyst will tell you that the publishing of this information would not be sensible. There are various reasons for this. For example, I do not need to tell you that the timing and value of transactions are subject to local and global market conditions. Besides, no country in the world that values its integrity has exposed its hand in a potentially volatile investment environment. Our responsibility as a shareholder is to secure the highest value for our assets. Our responsibility as government is to secure the best advantage for our country. This does not mean that we will withhold any information pertinent to any transaction. The Promotion of Access to Information Act of 2000 adequately protects us in this regard.
I want to emphasise that our original timetable to complete most of the restructuring by the year 2004 still stands. The Policy Framework is complemented by a detailed set of business plans and initiatives for each business unit and SOE. For the reasons outlined earlier, we will not be making those plans public at this stage. However, I can assure you that our target of 2004 is based on the implementation strategy outlined in these business plans.
I will now highlight some of the restructuring activities that will take place during this period. Let me just add, that some of what I am going to tell you now goes beyond what appears in your document because some decisions were taken in the last week.
Energy:
Cabinet has approved the Eskom Conversion Bill, which will see Eskom incorporated as a limited liability company. This is the first step in the restructuring of Eskom. Transmission, distribution and generation will each form separate corporate entities. We are currently evaluating different models for restructuring Eskom. In line with the principles of restructuring, it has been agreed that competition in generation is necessary. Initially different generating companies will be formed to promote internal competition. This will be followed by the introduction of private sector participation in generation via SEPs or an IPO, in conjunction with the introduction of independent power producers. It is likely that the transmission company will be separated from the generation component while remaining in state ownership. This will provide generating companies with the assurance of equitable access to the transmission grid via a power pool. The Department of Minerals and Energy is currently co- ordinating the design and implementation of regional electricity distributors aimed to ensure localised ownership of electricity distributors. We will be looking for strategic equity partners for the different Eskom Enterprises business units. In preparation for competition, Eskom will be developing business opportunities abroad, some of which have already been implemented.
Transport:
One of the most significant impediments to the restructuring of Transnet has been the pension fund debt. Legislation to address this issue will come before Parliament in the coming September session. It will enable us to restructure Transnet without the debt burden overhang that has constrained this process up until now. In addition Transnet recently sold 75 million shares in M-Cell to Johnnic for R2.45 billion. These funds will be primarily used to reduce the Transnet debt.
Spoornet will be incorporated, 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 then we will explore the options of either an initial public offering or a strategic equity partnership. The current turnaround in the financial results of Spoornet provides us with an interesting example of how a careful and imaginative internal re-engineering process coupled with a restructuring process can yield positive results. We are likely to see greater benefits from this process. Rail regulation and a revised rail policy will accompany Spoornet's restructuring.
A new ports policy and a ports regulatory framework are being drafted for Portnet. The divisionalisation of Portnet into two business entities, port authority and port operations, has already taken place with a view of incorporation shortly formed. The ports' operations unit will then be privatised.
We are also preparing IPOs for SAA and the airports company (ACSA). In the case of ACSA, this will follow the adoption of a revised regulatory framework. Petronet will be incorporated. Further restructuring options will be developed based on an assessment of the synergies with other pipeline projects. Transnet has various non-core businesses that are currently being divested.
Telecommunications:
An IPO office to handle all IPOs for SOEs has been located in the Department of Public Enterprises and will include representatives from relevant government departments. The first IPO that the office will handle is the Telkom one. A request for proposals for a global co-ordinator will be published in the State Tender Bulletin shortly.
Great interest has already been expressed in the second national operator (SNO) and as a result work on a policy and a process for determining the second national operator is already quite advanced. It is likely that other SOEs with telecoms capability will be involved in the SNO. As a result a project investigating the model for the consolidation of the telecommunications capabilities of Transtel, Eskom and Sentech is in progress and a business case has already been completed. This consolidation draws on international best practice where transmission grids and rail reserves are used to serve as telecommunication corridors. This reflects both a rationalisation of similar capabilities across SOEs and an enhancement of their composite value.
The defence-related industry:
Denel will be incorporated. The process of finding strategic equity partners for Denel Aerospace is near conclusion. A similar exercise is underway for Denel Ordnance. We believe further that there is a need for some consolidation of the local ordnance and aerospace industries and work is well advanced in this regard. It is too early to indicate who the preferred partners may be as we are finalising some details. It is likely that these strategic equity partners will provide much needed capital injection into the various Denel business units and greater access to technology and access to markets. An investigation into the consolidation of aircraft maintenance between SAA and Datam is currently underway. The disposal of non-core business units continues.
Other restructuring initiatives
In terms of SAFCOL, the Eastern Cape North package will be sold for R45m to Singisi Consortium that comprises Hans Merensky and the Eastern Cape Development Corporation. A major feature of the disposal is that rural communities in the northern Eastern Cape will benefit through downstream investment in the area. Noting the unacceptable offers that were received during the initial sale process, the remaining packages are being consolidated and will be re-offered. It is interesting to note this revised plan has already attracted widespread international interest. We plan to follow through with this divestiture speedily.
The turnaround strategy for the Alexkor diamond mine is now yielding monthly profits in excess of half a million rands. As soon as we have completed the exploration phase of the marine, alluvial and land deposits this SOE will be offered for sale.
Turnaround strategies are also being implemented with the Post Office and Aventura. Both initiatives are yielding positive results and various models of private sector participation are currently being considered.
The property portfolios of Denel, Eskom and Propnet are being studied with a view to their rationalisation and possible restructuring.
The above outline clearly demonstrates government's commitment to an accelerated programme for the restructuring of SOEs.
Let me conclude. In sum, government has defined its major task as the development of our economy and the upliftment of our people. SOEs have a role to play. These SOEs have to be up to standard, on the mark and successful. They operate in, and in certain instances dominate, different industrial sectors. They have different capabilities and varied resources. We will re-engineer their internal business practices, how they interact with the broader economy and, in particular, how they improve the contribution they already make to the lives of our people. Solid and profitable relations with domestic and international investors drawn from the private sector can be built only in a context of a clear regulatory framework, increased competition, accountability and transparency. SOEs must, at all times, operate according to the highest ethics. The process of restructuring itself cannot be tainted through corruption or fraud. Finally, a streamlined institutional and decision-making process will facilitate the acceleration of the process so that we meet our target of 2004.
The Policy Framework is a comprehensive statement of what is required to provide government with the means to move rapidly in pursuit of its goals. It ensures that restructuring the SOEs will create tangible and beneficial results for the economy as a whole in the medium to longer term. In conjunction with other initiatives that inform all economic policy, such as the Social Plan, black economic empowerment, procurement reform, as well as a comprehensive legislative environment and appropriate regulation, restructuring remains an important plank in government's overall economic programme. More particularly, the Framework provides the investment community, the SOEs and the various stakeholders who are directly affected by the process, with a clear and transparent vision and set of procedures against which the whole process can be monitored, evaluated and judged. We have identified the reasons for our journey. We have determined the destinations for each SOE. We have the maps and we have the compass. We know how fast we need to move to accomplish the best results. We have the political will and commitment, and above all we have the ability, to achieve our goals. With the continued support of stakeholders, and the participation of investors, both from here and from abroad, nothing can stop us from completing the journey in 2004.
I wish, finally, to thank my Cabinet colleagues for their support and assistance throughout this process, and particularly for the time they have taken to be here today.