Address by Jeff Radebe, Minister of Public Enterprises, at the Consultative Business Forum
Durban, 12 September 2000
Today is the anniversary of the brutal murder 23 years ago of Steven Bantu Biko. I mention this fact not to stir up the rage that fired millions of us at the time, but rather to reflect on how far we have come as black people in the intervening years, and subsequently as a nation, in our democracy. The Conference on Racism recently highlighted, amongst other things, the contribution that this great son of Africa made to the building of our new nation. Essentially, we are building a new society on the foundation of grassroots organisation and the conscious mobilisation of all sectors of the black community towards a better life for all. We are infused with a vision of a truly non-racial South Africa. We strive to achieve our goals with pride in our past and in our present achievements. But, as Biko himself recognised, there appears to be no end to the challenges that confront us along the path towards a true humanity. But, Biko was no armchair theorist, and valued practical work to get things done. So we, tonight, must concentrate on practical steps towards black advancement.
It is in that spirit that I thank you for inviting me to share some thoughts about black economic empowerment and the restructuring of state owned enterprises. All of you are aware that government released the Policy Framework on the Accelerated Agenda for the Restructuring of SOEs. Since then, too, my Department has released its Business Plan to show how it intends implementing government policy in this regard. Both are available on the department's website and I would recommend these to those of you who have not yet had the chance to study them. The Policy Framework in particular provides important details that I will not elaborate on tonight. Let me add, further, that the document should also be read in conjunction with government's procurement policy paper, and the new procurement legislation passed earlier this year. Let me start, then, by giving you some background about the vision and objectives behind the Policy Framework and then I will provide an overview of our ideas on Black Economic Empowerment.
Government's overall strategic vision for the restructuring of state owned enterprises defines clearly and coherently the precise economic role of state and its enterprises in pursuit of the developmental needs of the country. Our reference point is the RDP, and advances through the GEAR strategy and resonates with various sector specific policy white papers and related legislation.
The political demise of apartheid in 1994 did not end the grip of its socio-economic legacies such as widespread poverty, structural unemployment, maldistribution of infrastructure, and the overall ownership and participation patterns of the economy. For their part, state owned enterprises retained massive financial, investment, labour, technology and infrastructure resources. In fact, in major sectors that have a direct bearing on economic development such as transport, energy, communications and technology, SOEs dominated productive and market capacity. Private sector initiatives are for the most part concentrated in mining and agriculture and most manufacturing areas, and in many instances large conglomerates whose origins stretch back into the apartheid era as well dominate these.
The democratic state has adopted policies and programmes that by their very nature are considerably different to those that went before. As a result, not only the context of economic activity but also the direction of that activity has had to undergo a sea change of dramatic proportions. At the same time the expansion of government's developmental priorities to reach the whole population, the majority of whom are black and poor, requires a major overhaul of all our resources in line with our new priorities. In straightforward terms this means that we have to rethink the relationship between the private and public sectors to make sure that we maximise the contribution that the assets of both sectors can make to development. Thus, the primary goal of the restructuring of state owned enterprises is to contribute as much as they can to sustainable economic and social development. We expect the private sector to adjust to the priorities and requirements of a democratic system, and to build the new society as a partnership. We also expect our SOEs to adjust and this requires that they restructure in a manner that ensures efficiency, effectiveness, and in ways that will allow us to grow our technological and service-provider base, without losing sight of the need for directed and conscious development. 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, and are not simply left up to chance.
Among the most pernicious aspects of apartheid were the prohibitions on black people to substantial property ownership, access to education designed for economic advancement, and the promotion of entrepreneurial skills. Restricting access to these areas to a tiny minority effectively strangled any prospects for the type of development that we needed. Thus, in general, Government views transformation as a process aimed at raising the level of basic living conditions enjoyed by the vast majority. Correcting past wrongs requires a systematic, genuine empowerment strategy to bring black people and others who faced discrimination into the mainstream of the economy. This includes the questions of ownership, procurement and training relationships with SOEs. Together with developments in the private sector, we will be able to build more harmonious, productive relations with each other. Once again, the objective is a better life for our people by using skills, practices, and the distribution of resources in a manner that encourages long-term initiative, entrepreneurship, job creation and ultimately development.
We are aware of the failures of many of the past attempts at black economic empowerment to create meaningful empowerment. We do not just want to enrich a few fortunate players and leave most of our constituents behind. Widely different conditions have prevailed in the existing SOE empowerment deals. None have been unequivocally successful. The need for a more appropriate strategy for Black Economic Empowerment is widely recognised and the work particularly of the BEE Com in this regard is appreciated and we look forward to its results.
New, creative, diverse strategies for genuine empowerment that permit SOEs to more effectively spread the benefits of restructuring include broadened ownership, training, procurement and self-management opportunities for black people, women and the disabled. This can happen both directly, through strategic involvement in SOE management and Board appointments, and indirectly, through widespread public share-ownership opportunities. In the former instance, we must ensure that appointments and promotions are conducted according to the best corporate governance principles and objectives we have available through the Protocols on Corporate Governance and the Shareholder Compacts we have negotiated with the SOEs. In terms of share-ownership opportunities, we are engaged with the JSE in the development of an ambitious public, and particularly, worker and community, education programme that we hope to launch soon.
The National Empowerment Fund provides a useful vehicle (with its goals of broadened ownership), but needs further instruments such as procurement and subcontracting, training, managerial skills' development and transfer, and a more imaginative role for worker and community investment and/or self-management. It is our intention to capitalise the NEFT primarily through receiving shares of SOEs undergoing restructuring. So far, it has received shares with a nominal value of about R2 billion, and may receive up to 10 per cent of the shares of other SOEs, with a nominal value of between R10-20 billion. This would make it potentially one of the most significant investment entities in the South African financial markets.
The NEF Trust s likely to play a significant role in providing a range of investment vehicles to small investors, SMMEs and larger firms originating from historically disadvantaged communities through three different investment vehicles: an investment trust, a portfolio trust and an equity management fund. The investment trust will market investment units to historically disadvantaged investors that would include SOE shares and other investments to provide a competitively marketable and balanced portfolio. At the moment we are looking at the unit trust approach, among other collective investment mechanisms, as an instrument that can provide small investors with affordable and accessible investment products. The portfolio trust will warehouse SOE shares until they can be sold on to historically disadvantaged individuals and firms that seek a direct shareholding in these SOEs. The equity management fund will provide venture capital to encourage entrepreneurship among the historically disadvantaged groups through joint ventures, management buy-outs, outsourcing and other forms of spin-offs.
We also need to shift the concept of BEE away from an emphasis on dormant financial investment to "Operational empowerment", or active, hands-on participation in industries affected by SOE restructuring. This participation ranges 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.
The Preferential Procurement Policy Framework (Act No. 5 of 2000), the 1997 Green Paper on Procurement, and the Affirmative Procurement Policy set out a comprehensive scheme for increasing the participation of historically disadvantaged people and enterprises in the activities of the public sector. It is estimated that the procurement budgets of state owned enterprises amount to between R40 and R60 billion. The Department of Public Enterprises has initiated a project to ensure that SOE procurement policy and procedures are aligned with Government policy and the law on procurement. Already marked progress has taken place, including the areas of auditing, subcontracting and services.
Inadequate collateral for financing remains a critical operational constraint that prevents SMMEs from effective participation in SOE restructuring. Even if procurement contracts become available, commercial banks in South Africa have been unwilling to consider financing the particular project because a contract does not offer sufficient repayment security. Indeed, a common concern in the small business sector is a lack of access to debt or equity financing. Banks should, of course, be sufficiently confident of firms owned and managed by black, women and disabled South Africans to review and revise collateral requirements. Given ongoing resistance, government is considering other kinds of financing to help SMMEs gain more operational opportunities in SOE restructuring. One answer may come from the NEF, which is setting aside some venture capital to finance such initiatives. Another possibility may be through the enhanced use of social capital, that is, making better use of the existing fabric of trust and mutual support within communities and work places, to enhance opportunities.
We are asked frequently whether there can be a harmonious combination of broadened ownership options for SOEs and operational empowerment through skills transfer and procurement and whether the broader (low-income, black, women, disabled) constituencies can be better served by SOE restructuring than they have been to date. I believe there is a way, and it is to be found mainly in Employee Share Ownership Programmes (ESOPs) that can be important vehicles in the employment of alternative service delivery tools. There have been mixed signals internationally, but recently ESOP movements have begun to show success at employee ownership and self-management in a range of countries, including Canada, Chile, China, the Czech Republic, Egypt, France, El Salvador, Germany, Holland, Hungary, India, Jamaica, Poland, Russia, Slovakia, Slovenia, Venezuela and Zimbabwe
The introduction of ESOPs in South Africa may be complicated by the social structure of most enterprises that are segmented by racial and class divisions. Simply introducing ESOPs in such an environment, where the majority of skills and resources lie with minority ethnic groupings, will not ensure that participation is broadened sufficiently to address historical inequalities. Their design will therefore need to pay much greater attention to overcoming these historical inequities without undermining the overall benefits associated with greater employee involvement across the range of employment categories in the firm. Such ESOPs may need to provide further resources to empower and train under-resourced and less skilled employees to participate more equally in the operations of the business.
A final area where participation can be enhanced in the restructuring of state enterprises is with 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" and non-pecuniary gain within the production-distribution-consumption process. Community trusts include producer co-operatives, consumer co-operatives, mutual companies, not-for-profit firms and other avenues of collective activity that allow an enterprise to extend beyond the reach of the market.
There are important precedents for introducing community trusts to SOEs undergoing restructuring. These are mainly in areas associated with utility functions involved in the supply of electricity, telecommunications and transport. Non-profit co-operatives may be the only kinds of enterprises willing to reach out to sectors of the population for which markets are uneconomic. Given the geographic and social inequalities in the South African spatial economy, Government support for community trusts is vital. This may include provision of venture capital, technical expertise (business planning), and marketing information/linkages. Ultimately, however, the broader transformation of South African society should also entail a state commitment to investment in social capital, which is where the combination of employee-managed firms and community trusts may have its greatest potential.
In summary, government's policy framework proposes a multi-faceted approach to broader social empowerment through three kinds of intervention, informed by strategies of alternative service delivery in SOE restructuring processes:
In conclusion, let me return to a critical element of the black struggle for freedom. Unity in action around a common programme was the rallying cry that carried us to political liberation. It is time that petty differences that are sometimes reflected organisationally and that continue to divide the black economic community are put aside. It makes great sense, to organise around sectors, professions or regions, but we must understand that government stands above and beyond the procurement processes, employment practices and management decision-making instruments of SOEs, except where required by law or as allowed by sound corporate governance principles. We believe fundamentally that all policies should be implemented through clear and coherent channels and processes, according to acceptable tender and other procedures. Black economic empowerment is an instrument for development. Wielded properly it will enable communities, workers, professionals and business people to apply their different skills towards a greater good. But we can only achieve these things through hard, dedicated work.
I thank you all for your attention.