22 May 2001
It is my great pleasure to address you at South Africa House on the case for investment in South Africa today and, more particularly, the restructuring process and to introduce Telkom's IPO as an example of our intentions. The South African Government recognises the importance of international portfolio investment in South Africa and I would like to thank you for taking the time to attend this presentation today. My thanks to the South African High Commission who have provided this venue and to Deutsche Bank and JPMorgan, the Joint Global Co-ordinators for the IPO who have arranged this meeting.
If there is one message that I would like each of you to take away today, it is that the South Africa that exists today and the South Africa we are building for tomorrow represents an exciting, diversified and compelling investment opportunity. Across the board, from education to primary health care, from support for small, medium and micro enterprises to dramatically increased investment in infrastructure, from proactive steps with our SADC neighbours to integrate the region economically to decisive steps to ensure regional peace and security, the South African government daily promotes our human resources, our industrial capacity and our economic potential. In this presentation I hope to show you why this is the case now, and also highlight the steps that are being taken to enhance our attractions in future.
We have in place a first-rate economic infrastructure that is built on an established legal and business framework, a strong regulatory environment, sophisticated financial markets and significant growth prospects. Since 1994 we have built a strong macroeconomic foundation based on prudent monetary and fiscal policies. Against this backdrop, we are equally focusing on microeconomic reforms and the restructuring of state-owned enterprises in order to ensure South Africa's future growth and continued development as a market- driven economy to ensure that we provide a better quality of life for all our people by ensuring higher standards of social infrastructure.
My presentation will follow four key themes that we believe create a compelling investment case for South Africa:
Many of you are well versed in South African matters, so I would like to restrict myself to but a brief overview of the substantial progress we have made over the past seven years. Our fiscal and monetary reforms have now created a strong macroeconomic platform, which is reflected in consistent real GDP growth, falling inflation and sustainable external debt. This strong performance has been recognised in the fact that for the first time South Africa has been accorded an investment grade rating. By nurturing our macroeconomic successes to date, we are now in a position to focus on our microeconomic restructuring and privatisation programme in key sectors of our economy. This restructuring will allow our firms to operate efficiently and effectively in a more competitive marketplace. These key sectors: transport, energy, defence-related industry and telecommunications we will focus on a little later in the speech, and this restructuring will expand the vibrant and growing private sector which is increasingly active internationally as well as domestically and regionally.
As I am sure most of you know, South Africa has a diversified and productive economy, which compares very favourably with its peers. Contrary to public perception, the contribution from the "natural resource" sector has fallen significantly. Of particular relevance today, I would like to draw your attention to the importance of our financial and business sectors, which contributed 19% towards real GDP in 2000. These sectors, representing many firms, banks, companies and financial services providers, are excellent examples of the strong and vibrant economy that we find in our country today, and we believe that are well-positioned to withstand global downturn.
Let me now turn to what I believe are the impressive economic reforms that we implemented since 1994, fully cognisant of the need to reconcile our very real need to address the primary issues of poverty and development with a growth- oriented strategy based on competition and deregulation.
The market-oriented direction that our economy is taking is demonstrated by the reforms that have taken place thus far. Our domestic policies have created an economy with prudent spending targets and lower taxes. We have reduced trade barriers and have reviewed labour legislation to improve productivity and competitiveness. We have been mindful of the need to address the legacies of our past by creating a stable and tolerant political environment.
Our financial market reforms have aimed to create a more transparent and accountable marketplace. Two of the reforms of particular note have been exchange control liberalisation and the establishment of an independent Central Bank. These factors have already markedly improved the attraction of South Africa as a destination for both direct and portfolio foreign investment, with net portfolio investment at over Rand 50 billion for 1999.
Since 1999, our trade performance has been impressive. Today, we have a current trade surplus of 4% of GDP. This, combined with an improving current account, which is now in surplus, makes us today a much stronger economy. The resilience of our economy makes us far better prepared to address a slowdown in global economic conditions than in 1998 after the Asian crisis.
From 1994, we have adopted a course of prudent fiscal management that has reduced our budget deficit. South Africa has always been able to raise capital domestically. Now that South Africa has an investment grade rating we are able to raise external debt more easily. You will note our low level of foreign debt exposure. Our commitment to privatisation will enable us to further reduce indebtedness. This performance, coupled with an aggressive approach to debt management, have resulted in the debt rating agencies recently awarding us investment grade ratings from both Standard & Poors and Moody's.
Our financial markets today are sophisticated and improving and we have a vision of South Africa as an international hub for foreign portfolio investment. Our successes to date include a large benchmark weighting in international indices and increased fund flows, with a daily turnover of USD 310 million. Equity capital raised on the JSE increased from under Rand 20 billion in 1995 to over Rand 70 billion in 2000. We have a very active and liquid Government bond market; a broad range of financial products available for investors; and a well-developed and well-regulated banking sector with total assets worth USD103 billion.
We already have over 600 companies listed on the Johannesburg Stock Exchange and we are committed to a series of new initiatives, which will bring our financial markets right up to date in line with international standards. We are introducing state of the art technology and systems in order to further integrate the Johannesburg Stock Exchange into the globalisation of international financial communities. The new partnership with the LSE reflects and demonstrates commitment of the JSE to promoting South Africa as a global marketplace and hub for Africa: the immediate improvements will include SETS trading and dematerialised settlement by year end, and other initiatives include introducing stabilisation procedures in line with international norms. However, we believe this to be the start, and not end of the process. Next steps must include improved corporate governance, greater transparency, and codes of conduct that conform with the best international practices in order to reinforce South Africa's position as a leading international financial centre. South Africa's equivalent of the Cadbury Report is the King Report on corporate governance and higher levels of disclosure and it reflects our appreciation of international best practice.
Let me turn to Government's restructuring of state assets programme. Our restructuring objectives broadly cover those state owned enterprises where we can influence company, industry and broader economic objectives. At the company and industry level, they involve improving the efficiency and effectiveness of the entities in question, accessing globally competitive technologies and practices, where appropriate, mobilising private sector capital and expertise, and assisting in the creation of effective market structures. At the macroeconomic level, we recognise the need to attract foreign direct investment, to manage our public borrowing requirements responsibly, and to assist the development of an economic context that promotes industrial competitiveness and growth. We are committed to strong corporate governance in State Owned Enterprises, now and after restructuring, focussing on accountability and transparency. Social imperatives include growth in employment and. we seek wider ownership and participation in the South African economy by all South Africans. Our commitment to private public infrastructure partnerships in many sectors has already been reflected in the part privatisations of Telkom, ACSA and SAA.
Our State Owned Enterprises represent a critical element in South Africa's economy. Through our restructuring programme, we are committed to promoting a market-driven environment supported by private, public and social capital. We believe this will improve the attractiveness of these enterprises to investors, both at home and abroad. These sectors are similarly critical to developing a stable social environment by improving key public services.
Competition forms a central 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, our aim is to ensure that restructuring will lead to greater competition with an appropriate degree of regulation. We have targeted four key sectors, which underpin economic growth: these are transport, energy, defence and telecommunications. Our aim is to complete all of these major restructuring initiatives by 2004. We have taken due cognisance of our experiences to date in South Africa and developments in the sectors internationally. We believe that international capital, expertise and markets can complement the value that can be added domestically.
Our restructuring programme has already generated significant results. In the transport sector, restructuring is already underway for our transport utility, Transnet, where its debilitating debt burden has now been addressed through the successful implementation of legislation and the radical reorganisation of its pension fund; we have separated the state owned port's company, Portnet, into two business entities covering port operations and the establishment of a Port Authority; Spoornet, our railway utility, is on its way to incorporation; and South African Airways has had a successful turnaround after partial privatisation in 1998.
In the energy sector, we have committed to the introduction of private sector participation to provide additional generation capacity. Legislation is currently before Parliament to incorporate our power utility, Eskom, as a limited liability company. Restructuring of Eskom will allow it to expand its power generating capability in the rest of Africa. We will also be promoting competition among generating companies and regional electricity distributors within South Africa.
In the defence sector, we are engaged with BAE Systems as the primary potential SEP to ensure that our well-developed aerospace group remains competitive in certain niche sectors. Discussions are well advanced with regard to our ordnance divisions, as well as in the airmotive industry. It is likely that these strategic equity partners will provide capital injection into the various Denel business units and greater access to technology and expanded access to markets. The disposal of Denel's peripheral business units continues. We intend to use this restructuring to develop further our manufacturing base in South Africa.
In the telecommunications sector, Government is committed to a process of managed liberalisation. This will be led by the IPO of Telkom SA, which is planned to take place later this year. This will build upon the success already achieved by the earlier investment by SBC and Telekom Malaysia in 30% of the company and the management and operational support that they provide.
In his state of the nation address in February of this year, President Mbeki highlighted our commitment to the telecommunications sector, which is likely to serve as a catalyst for growth in other key sectors of the economy. In pursuit of the need to enhance our manufacturing competitiveness, telecommunications represents an important element of the overall manufacturing logistics chain. Hence, the promotion of competition in the telecoms industry is aimed at reducing the cost of doing business in South Africa. Furthermore, this sector should not only be seen as an input sector in our economy, but also as a growth sector in its own right, with a tremendous potential of integrating the Sub- Sahara African economy. Our objectives in pursuing our restructuring in the telecommunications sector are to promote greater competition, thereby ensuring a cheaper and reliable telecommunications service to South African citizens and businesses and to establish fair terms of interconnect.
The telecommunications sector has already undergone major developments in recent years. Since 1994 around 1.3 million homes have been connected and overall teledensity has improved to around 13 lines per 100 people. In addition, Telkom has improved efficiencies, focussed on the development of new technologies including data, internet and mobile communications. Mobile penetration in South Africa has also increased and Vodacom, in which Telkom has a 50% shareholding, now has 4 million active subscribers. Southern Africa's comparatively low teledensities today represent one of the largest growth opportunities in the world.
Our managed liberalisation approach to reforming the telecoms sector is intended to ensure that competition is introduced in a responsible manner, both at a facilities or infrastructure level and also at a service based level. The introduction of an additional infrastructure based competitor, does not preclude the introduction of further competition but rather reflects our position at this juncture, based on a careful analysis of the absorptive capacity of the market.
To increase competition in the sector, from May 2002, there will be one additional facilities based licence. The new operator will be offered the telecommunications infrastructure platform that exists within our energy and rail utilities to ensure a rapid roll-out of services.
We are committed to additional competition from the end of 2005 with at least one further service based licence. We believe that these policy objectives will result in an internationally competitive sector.
As far as the timetable for the implementation of our objectives is concerned, Telkom's fixed voice monopoly expires in May 2002. The Department of Communications published draft policy directions in March 2001, and is preparing legislative amendments to the Telecommunications Act and finalising policy directions
ICASA, the telecommunications regulator, is developing detailed regulations and the key legislation resulting from that process is expected to be in place before Telkom's IPO later this year.
South Africa has made great progress since 1994. We have addressed our socio- economic objectives through a strategy of competition and deregulation to enhance growth. We have made great strides both in fiscal and monetary policy to create a strong economic platform for growth, which has been acknowledged by our investment grade rating.
The Government recognises that South Africa's continuing success depends on a strong macro and microeconomic environment, which can only be achieved through open and transparent government conforming to international practices. In the financial sector, we have set about creating an open and transparent environment, which will attract domestic and foreign capital. In our restructuring programme, we have begun the process of increasing competition and improving efficiency within previously state owned enterprises, which will allow comparison with international companies.
Within the telecommunications sector, the managed liberalisation that we are undertaking will promote a modern and competitive telecommunications environment. Telkom's IPO will be a critical part of this restructuring process.
You will have noticed that in my discussion I have traversed a number of sectors, entities and highlighted a range of initiatives. Our restructuring programme is constructed on an analysis of case histories drawn from international experience that has identified certain generic strengths and weaknesses of policy and implementation. It provides a multifaceted approach to include different instruments for success. Our philosophy is rooted in the reality of a mixed economy functioning in a legal and regulatory environment designed to ameliorate problems and tensions as these arise. Our relations with labour are conducted through a commonly agreed National Framework Agreement that brings together government, the SOEs and labour at entity, sector and national levels to address issues of common and particular concern. This is a difficult path to follow, but we are nonetheless agreed that negotiation and concession are required, but that in the end, government determines the way ahead. Within government itself, a professional and highly competent civil service led by Directors General provides a coordinated and critical role in accelerating our agenda. My department coordinates all restructuring initiatives with relevant line function departments, and Cabinet oversees the process and direction through a specific committee structure. The overall effect has been the creation of a streamlined organisation with clearly defined roles and functions, responsibilities and authority.
As I noted at the start of my presentation, we acknowledge the importance of the international investor community to our continuing success and it is our firm desire to maintain contact so as to continue to affirm the progress of our nation in a globally integrated financial community.
Finally, allow me the opportunity of your presence here today to acknowledge the SA government's appreciation and thanks for the sterling work that our High Commissioner Cheryl Carolus in particular, and her support staff in general, are doing to promote our country. Quite frankly, without them, we would have a hard time trying to meet as many people as we do. The TVs focussed on your wonderful concert just a stone's throw away from here, but we really do applaud the hard work that goes on behind the impressive façade of South Africa House.
I thank you all. I note that my colleague the Minister of Finance will be in London in the very near future, and I am sure that he will also be meeting an audience such as this one. Thus, I would now be happy to answer any questions, queries or concerns that any of you may have on the restructuring programme.