Paris, 16 October 2000
"The Restructuring of State Owned Enterprises in South Africa - An Investment Opportunity"
It is a great pleasure to address you at this investment conference on the restructuring of State Owned Enterprises in South Africa and more particularly the investment opportunities that accompany the programme. My thanks especially to CFCE and Trade and Investment South Africa who are our joint hosts, and of course, to the tremendous work done by the SA Embassy in Paris, from Ambassador Skweyiya to the staff.
France remains a very important partner for South Africa. At the moment, France is the 3rd largest investor country in the world. French investment in South Africa is in the region of some FF 9bn since 1994. In our view, South Africa should be attracting more of the French investment. Trade relations between the two countries show strong growth of approximately 12% per annum since 1994. The year 2000, however, has seen a dramatic upswing in trade with French imports from SA growing by 20%, and exports to South Africa increasing by more than 35% from January to July, compared to the same period last year. The EU-SA Agreement will provide a major boost to our relations. The names of the major French companies in South Africa are well known in South Africa not only through advertising but also through their active participation in many of our economic development programmes. Thus, Lafarge, Danone, Saint Gobin, Pont-a-Mousson, Alcatel, Thomson CSF, Bouygues, Sommer Allibert, and Accor stand alongside well-known brand names from the rest of Europe and North America. Their participation stretches across a whole range of diverse industries that include infrastructural development programmes, Autos, IT, defence electronics, and food processing.
Quite often statistics hide the very close cultural and political relationships that exist between countries. France and South Africa now enjoy a common ethos based on the age-old principles, if we echo your great republican past, of liberté, égalité, fraternité! It is noteworthy to realise that our relationship dates as far back as the 17th century when the French Huguenots landed at the Cape of Good Hope and started the now famous Vineyards and wine industry. This relationship was further consolidated by the support we received from the French people during our struggle days against apartheid. We believe that this relationship should further be enriched and strengthened by economic and trade relationship.
Presidential visits to South Africa in 1996 and to France in 1998 we remember as highlights of the frequent interactions between our two countries, including those of other senior political and business leaders. These visits have sent powerful signals to all of us of the closeness of our ties, in particular because from them have developed a range of important Bilateral Cooperation Agreements at government levels and Agreements at a localized level, such as those between the Province of Gauteng and Ile de France, between Greater Johannesburg Metro Council and the Departement Val-d-eMarne, or of Soweto and Arcueil.
Our ties strengthen almost daily. Just last week, for example, the South African government announced what for us is a very exciting development, namely the invitation to Snecma/Turbomeca to enter negotiations with us for a majority share in our Denel Aerospace Airmotive division. That announcement is just the latest in a series of exchanges between our two countries and it surely sends an encouraging and truly significant signal of intent and purpose by the South African government to attract foreign direct investment, and to provide French and other entrepreneurs a stable, profitable and worthwhile contact with our country.
Our message to you today is that South Africa offers access and gateway to the whole market of the Southern Africa with more that 200 million people. In fact some of the French companies such as Bouygues who are already engaging in South Africa, are also participating in cross border initiatives such as the Maputo Development Corridor, a spatial development initiative which links South Africa to other countries in the region.
Since 1994, we have been involved in the restructuring of our economy so as to create an investor friendly environment. It is now a known fact that our economic fundamentals are conducive to fixed investment and very high return. This was recently acknowledged by yet another positive Standard and Poor investment rating of SA.
Let me turn now to the crux of my address today and outline the main features of our restructuring and privatisation policy that is a cornerstone of our macro economic policy in South Africa. State owned enterprises in South Africa represent massive financial, investment, labour, technology and infrastructure resources. The contribution these state assets can make to development needs to be maximised to fulfil the unambiguous need for government to promote development in South Africa to deal with the legacies of apartheid, widespread poverty and unemployment. The goal of restructuring is to contribute to sustainable economic and social development through a mixed economy, that is, an economy that is responsive to market incentives within a framework of socially integrative institutional mechanisms.
The policy aims to integrate public, private and social capital and expertise to ensure that our developmental objectives are achieved 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. Rather these should be dealt with separately to ensure that the enterprises operate as businesses that respond effectively to market incentives. Again, I do not need to explain to a French audience the complexity of these relationships, nor the necessity to ensure that it is balanced in a manner that allows entrepreneurial expertise to flourish whilst retaining social mores.
Our restructuring objectives broadly cover company or industry and sector based initiatives, broader economic objectives and social objectives. At the enterprise and sector level, they involve 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, we 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 seek wider ownership and participation in the South African economy and improved service delivery in terms of cost, quality and access.
Government has a solid relationship with labour in South Africa and we engage frequently on issues that affect each sector. In particular we understand that long term economic policy is best pursued as a partnership based on respect and mutual understanding of the particular interests of all sectors. Thus, at the state level we have approved a Social Plan Framework that informs decisions in individual sectors and entities to address the situation where retrenchments are unavoidable. The extent of poverty in South Africa is such that we have to be particularly sensitive about the social impact of job losses, more so, perhaps than has been the case in some parts of the developed world. Moreover, we believe that the longer-term benefits of restructuring, in the form of more efficient firms and a more competitive economy, will create more sustainable employment.
The following key guiding principles inform our actions:
ˇ the promotion of competition and competitive markets is critical to our success, to ensure that the benefits of restructuring such as efficiency gains are translated into lower prices and/or higher quality goods and services; ˇ in those business areas where competition is not feasible, a regulatory framework will accompany any restructuring initiative; ˇ government's relationship with the SOEs during and after restructuring is guided through Shareholder Compacts which are located within a framework for corporate governance of all SOEs; ˇ productivity, profitability, investment and innovation are ensured through an exploration of a range of options, including equity sales in order to access additional funding, technology or markets, or incorporation, joint ventures, employee participation schemes and community partnerships; ˇ optimum returns to the shareholder will be maximised whether this comes through the proceeds from equity sales, dividends and/or tax returns. ˇ restructuring proposals incorporate an assessment of their impact on overall social welfare, specifically taking into account the legacy of apartheid that forced infrastructure development away from the poorest parts of the country; ˇ Government addresses its social objectives (like social plans, employment creation, subsidies) through transparent means.
Competition forms a key element in the restructuring of state owned enterprises. 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. Rapid progress has been made to effect a regulatory environment within which the state owned enterprises operate, so that potential investors are fully aware of the rules within which they would operate.
The nature of the industry at the end of the day will determine the shape and extent of the regulatory framework. But whilst 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 continue to function in a manner akin to the interests and well-being of the public, who are both the consumers of services and act as indirect "shareholders".
Regulatory structures in transition industries should be clarified alongside normal competition authorities to avoid the pitfalls of potential confusion in concurrent jurisdiction. 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.
An improvement in the regulatory environment in the key sectors that are dominated by SOEs such as energy, telecommunications and transport should benefit everyone. 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. 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 we do not seek a single, one-dimensional approach, particularly given the unsatisfactory record of SOE-related empowerment strategies. Our multi-faceted approach involves some degree of equity transfer or sale, whilst in other instances it focuses on changing operational responsibilities to ensure greater participation by employees and communities.
Corporate governance in SOEs focuses on business prosperity, accountability and transparency in a strong move to remove any hint of undue political interference, conflicts of interest or improper conduct in the operation of SOEs both now and after they are restructured. So far, Transnet, Denel and Eskom have already adopted the Protocol on Corporate Governance. In addition, Government has agreed to Shareholder Compacts with these entities. The others will follow shortly. The shareholder compacts will govern the enterprise- specific relationship with government. It will state the rights and obligations of both government and the enterprise.
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 comply with international best practice. The management and boards of the SOEs uphold these and where codes of conduct already exist, these will be revised where necessary and adhered to. SOEs are required to demonstrate that an ethics and probity management programme is in place. This focus on ethics and probity aims to constrain corruption and provides potential investors with a sense of security that financial and other corporate misbehaviour will not be tolerated.
Interdepartmental work that links both policy and regulation issues with financial management concerns is coordinated by my own DPE, before moving up through various oversight channels that culminate in all major decisions being taken by Cabinet. The paths and responsibilities are clearly mapped out and our experience so far has been very positive indeed.
Since 1994, we have successfully concluded a number of restructuring transactions. The major ones include, for example, the selling of 20% equity share of South African Airways to the Swiss Air group who also have an option to take up another 10%, the successful sale to mixed consortia of a large portion of our state forest, and the sale of a number of state owned radio stations.
I will now highlight some of the restructuring activities that will take place during the period 2000-2004.
Energy:
Cabinet has approved legislation to incorporate our power utility, Eskom, as a limited liability company. This initial step in the restructuring of Eskom will see transmission, distribution and generation formed into separate corporate entities. Whilst we are fine-tuning the actual model to be applied, we have committed ourselves to private sector participation using a variety of instruments including inviting strategic equity partners and public offerings. 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 that cover non-regulated operations within Eskom, including its large and increasing number of activities in the rest of Africa. In preparation for competition, Eskom has embarked on a major programme of developing business opportunities abroad.
Transport:
One of the most significant impediments to the restructuring of the transport utility, Transnet, has been the pension fund debt. Parliament recently passed legislation to reorganise the pension fund to assist in the elimination of the debt burden. Earlier this year, Transnet sold 75 million shares in M-Cell to Johnnic for R2.45 billion and part of these funds will also be used to reduce the Transnet debt, thus opening the way for a more profitable restructuring process.
The railways entity, Spoornet, is moving towards incorporation, with its different business units becoming separate corporate entities on their way to being concessioned. These include activities related to dedicated coal and ore transportation, as well as our luxury passenger train service that is a jewel in the crown of our country's growing tourist economy. The general freight business will be commercialised and then we will explore the options of either an initial public offering or a strategic equity partnership. Recent initiatives have also led to a truly remarkable and sustainable turnaround in the financial fortunes of our rail utility. Rail regulation and a revised rail policy will accompany Spoornet's restructuring.
A new ports policy and a ports regulatory framework are nearly complete as well. The divisionalisation of Portnet into two business entities, port authority and port operations, has already taken place with a view of incorporation following shortly. 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. We are currently adjudicating bids for a global co-ordinator, and should be in a position to announce the global co-ordinator/s within the next month.
Great interest has already been expressed in the second national operator (SNO) and work on a policy and a process for determining the second national operator is already quite advanced. The Department of Communications has recently appointed a policy advisor to finalise this task. We anticipate this task being completed in January 2001. It is likely that other SOEs with telecoms capability will be involved in the SNO. As a result, a project investigating the consolidation of the telecommunications capabilities of Transtel, Eskom and Sentech is in progress and a business case has already been completed. This exercise 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. On 11 October 2000, Cabinet approved the choice of British Aerospace as the preferred Strategic Equity Partner for the Denel Aerospace Group. Cabinet also approved the choice of Snecma/Turbomeca as the preferred Strategic Equity Partner for the business unit, Airmotive. Snecma/Turbomeca, as you all know, is a world leader in the aerospace engine and gearbox fraternity, and we foresee that our joint relationship will significantly increase our global coverage particularly in Africa. Consolidation of Denel's Ordnance Group is currently underway and government has invited BAE Systems to consider taking equity in Ordnance. 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. The disposal of non-core business units continues.
In other areas of state restructuring activity, we have disposed of a number of significant portions of the state forest portfolio to a range of international, domestic and community partners. The state diamond mine on the West Coast near Namibia has chalked up impressive profits over the last few months under the guidance of a management contractor, and we await with interest the final valuation of this entity at the end of the current exploration phase before we proceed with its disposal as well. Over and above these activities, SOEs are engaged in public disposals of a large number of non-core, commercial business units covering a vast array of activities from ostrich egg incubators, emergency medical care equipment, postal courier services, metallurgical foundries, and so on. Overseas interest in acquisition arrangements with local ventures is especially welcome in these areas as well.
Our macro-economic initiatives take place against a growing understanding and commitment in South Africa to the principles of institutional problem solving. The impact of parliamentary approved security, welfare, education and crime prevention strategies is beginning to bear fruit. Incidental acts of terrorism are currently before the courts in the Western Cape, with the alleged perpetrators facing a barrage of evidence and charges linked to a wide range of acts covering a long period of time. The cooperation of our security forces with Interpol and training institutions worldwide has produced the first crop of new officers capable of dealing with the new situation. Many more are about to follow. The public service reform is well advanced and very soon unworkable bureaucratic practice will be a thing of the past in South Africa. The welfare, education and health sectors continue apace, particularly in ensuring that the elderly and the infirm are cared for on a sustainable basis, that the youth are provided appropriate education, and that the primary health care emphasis urges prevention as a better means than simply cure. Government driven campaigns against HIV/AIDS such as the mass distribution of condoms and the popular education campaign, go hand in hand with direct action to attack opportunistic diseases and situations that promote disease.
Our country offers cheap and highly efficient electricity, diverse water resources, a clearly defined environmental framework, strong transport infrastructure, capable communications systems, sound labour relations, and well-rung ports and harbours to carry goods in and out of Southern Africa. We survived the recent Asian Flu reasonably unscathed, and have not been hit as bad by the fluctuations in oil prices as some others. These economic strengths underpin our growth as a proud constitutional state, with a firm understanding of the centrality of its Bill of Rights. Our international relations are based on mutual respect for others, and a constant, proactive record of seeking international support for change in how the rest of the world sees the developing countries. We are pleased with the way in which many countries of the north have welcomed our joint initiatives with other leaders of Africa. United in the global struggles for peace and human security, we believe that we will all emerge stronger. A strong French-South African relationship, in our perspective, is a critical part of the global jigsaw. We have worked together in the past, we are building upon those foundations now, and I believe that we will be able to construct a mighty tower that will be recognised everywhere, just as the Eiffel Tower is landmark for France internationally.
I thank you.