Cape Town, 12 September 2001
Yesterday’s attacks in New York and Washington represent a most heinous act of global terrorism. Yesterday is truly a day that will live on in infamy. Our horror is matched only by our deep sense of closeness and sympathy to all who have lost loved ones and those countless millions who are traumatised by these attacks.
It is a pleasure to offer some specific remarks about our government’s restructuring of state owned enterprises. I will simply cut to the chase, and so devote most of our time to discussion. The restructuring policy we have adopted is diverse and fairly complex, covering a whole range of issues, thus I will concentrate on only two elements today: namely, progress to date and prospects for future investment and participation in major sectors of the South African economy.
Our restructuring objectives broadly cover those state owned enterprises where we can influence company, industry and secure broader economic objectives. At the company and industry level, we aim to improve the efficiency and effectiveness of the entities in question by accessing globally competitive technologies and practices. Where appropriate, we will mobilise 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, whilst focusing on accountability and transparency. Social imperatives include growth in employment as well as wider ownership and participation in the South African economy by all South Africans.
Given the prevalence of residual natural monopolies in SOE sectors and the size of SOEs in relation to potential local competitors, we aim to ensure that restructuring will lead to greater competition with an appropriate degree of regulation. We have targeted four key sectors that underpin economic growth: these are transport, energy, defence industrial and telecommunications.
Our restructuring programme has already generated significant results. I wish to outline briefly the steps that have already been taken in each of the four sectors mentioned.
Government’s approach to the restructuring of SOEs in the transport sector invokes innovative and bold steps to improve the performance of the transport sector because the reality emphasizes continuing inefficiencies that still hinder the realization of our economic objectives. Export competitiveness, as well as domestic economic development such as the SDIs, is at risk if high transport costs, delays, maintenance backlogs and restrained infrastructure growth continue. The three most significant restructuring endeavours currently underway pertain to the national railways and ports as well as their holding company, Transnet.
In 1994 we inherited an inefficient national rail network that was configured to meet the needs of a minority of the population. Since then, internal reorganization and other elements have secured significant efficiency gains, as Spoornet’s financial results of the last two years indicate. Much still needs to be done, and we envisage restructuring to include a close examination of the viability of concessions and joint ventures as further means to add value to the network whilst retaining and expanding social and business needs. Spoornet is one of the largest SOE employers, and great concern has been raised by both government and labour about the need to keep possible job losses as a result of rationalization and restructuring to a minimum. Thus, government, labour and management have been involved in an intense dialogue to determine the best way forward. A great deal of technical work has been done in partnership with labour so that we can have a common understanding of the problems we are seeking to redress. Government has made it clear that as strategic business units, the General Freight Business and Mainline Passenger Services will remain within state ownership, but need to achieve much higher levels of efficiency. Coallink and Orex (Spoornet’s heavy-haul export lines) whilst not considered critical entities may well continue to operate efficiently whether or not they are operated by government.
As is the case with rail, the restructuring model for Portnet highlights the potential benefits that can be realized through appropriate public-private partnerships. Government intends to retain ownership of port infrastructure through a national port authority that will be responsible for the maintenance and development of ports infrastructure. At present, government is of the view that part of the Port Operations could be concessioned to private operators. The Ports Authority will receive the proceeds of the concessions, and will be responsible for monitoring the concession agreements. This should result in higher efficiencies and lower costs to port users. Announcements about tender proposals and procedures on the concessions for port operations will be made in the near future.
Government’s overarching definition of restructuring, and its inclusion of radical and innovative strategies beyond simple privatization, is amply illustrated through the results of Transnet’s pension fund reorganization. To summarise a complex actuarial arrangement: Transnet has been able to retire R7,4 billion of T11 Bonds that had been acquired in a way that the state only really owned Transnet in theory, as the covenants that accompanied the bonds required the approval of bond holders, ie foreign banks mainly, before any major reorganization of Transnet’s activities could take place. Besides, interest payments of some R1,5 bn per annum placed severe constraints on the company’s ability to recapitalise the business. The bonds’ retirement has paved the way for increased infrastructure investment and a dramatic improvement in its debt-equity ratio from 74% to 54%. Along the way, and through substantial cost to the company itself, the benefits accruing to both black and white pensioners have now been normalized, and the position of widows of black workers corrected. Transnet subsidiaries are now also free of the prospects of complex debt burden sharing agreements of the type that we had to employ with SAA.
This approach to debt and pension fund burdens indicates our appreciation of the negative effect these have both on the efficiency and the independence of the entities that are so burdened.
In the energy sector, we recognise that Eskom is one of the most efficient and lowest cost producers of energy in the world at the moment, and that our low cost of energy and the reliability of supply by Eskom has enabled us to attract large energy intensive manufacturing plants to South Africa, eg, the Hillside Smelter. Eskom also plays a critical developmental role ensuring that energy is accessible to the majority of South African citizens. In recent times, Eskom has also started to partner with entities in other African countries to provide energy and energy related services to transform itself from being a significant domestic provider of energy to becoming a major energy based utility of global stature. It is critical that we ensure that the current strengths of Eskom are sustained into the future as present over capacity dwindles, environmental issues related to our use of brown coal, and the integration of new forms of energy such as gas, emerge as powerful forces to shape the sector. We need to develop the necessary institutional means to assure those needs now, rather than later. It is in this context, therefore, that government notes the view that the introduction of competition in the South African energy-generating sector could serve as a catalyst for further efficiency gains, which ultimately would pass through to the consumers. The restructuring models for Eskom are currently being developed within this context.
Thus, we have committed to the introduction of private sector participation to provide additional generation capacity that according to our current growth trajectory will be required in 2007, so we need a decision on who would provide this by 2003. Parliament recently approved legislation to incorporate Eskom as a limited liability company. Various models for restructuring the energy supply industry in South Africa are currently being investigated and range from a vertically integrated monopoly, as is currently the case, to a competitive model typical of many developed countries.
The work in progress, as it relates to the restructuring of Eskom’s generation capability favours a competitive generating model with Eskom retaining a dominant domestic generating capability down the line. At present, Eskom is in the process of clustering its generating capability, thereby stimulating internal competition.
While Eskom may divest some generating capability domestically, it would procure similar capability continentally. So, whilst there would be a reduction of market share domestically, Eskom would grow continentally.
Significant progress has already been made in defining the framework for EDI restructuring. The current thinking is to consolidate the EDI into six REDs and establish an EDI Holdings company that will be made up of Eskom and municipalities.
A well-developed policy context exists for the defence industrial sector that guides the current restructuring of Denel. Restructuring in the defence sector has been informed by the significant changes that have taken places in the global defence industry over the 1990s. The most important of these trends that included [until recently] declining defence budgets and hence increased competition; increasing technological complexity and rising costs for research and development that encourage collaboration; consolidation and stratification into a small number of large prime contractors versus many sub-contractors focusing on niches; and the development of cross-border alliances and the creation of major multi-national pan European defence companies. Discussions with Turbomeca on the one hand for a majority stake in Denel Airmotive, and with BAE Systems for a minority share in Denel Aerospace generally are well advanced. However, we do not envisage a situation where a successful conclusion of deals with these major international actors will prevent Denel from engaging other companies at business unit or even division levels around joint ventures, strategic partnerships, or other mutually beneficial arrangements.
In the telecommunications sector, Government is committed to a process of managed liberalisation. This will be led by the IPO of Telkom SA, which could take place later this financial year, depending on market conditions. 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.
Hence, the promotion of competition in the telecoms industry is aimed at reducing the cost of doing business in South Africa because telecommunications represents an important element of the overall manufacturing logistics chain. 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-Saharan economy.
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 there will be one additional facility based licence from May 2002. 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.
Telkom’s listing will have significant macroeconomic benefits for the country. Firstly, the transfer of ownership to a large shareholder base will empower historically disadvantaged South Africans to benefit from shareholding in Telkom. Furthermore, it aims to promote a savings culture in South Africa. Government will raise significant funds from the listing of Telkom IPO that will go a long way towards increasing expenditure on social delivery in the National Budget. A successful listing of Telkom has a potential to contribute to the improvement of SA’s rating and investment outlook. These successes will strengthen the share participation already agreed to for Telkom employees who have been allocated 2% of the government’s holding.
The Telkom IPO represents the first large restructuring transaction in this term and will represent the largest telecommunications listing on the Johannesburg Securities Exchange. We also intend to pursue a secondary listing on the NYSE.
It goes without saying that our IPO methodology emphasises both the marketability of the entity itself and the market conditions of the sector as well. Telkom’s IPO is significant because of the domestic environment of expansion and because we are marketing established technologies.
I have traversed a number of sectors, entities and highlighted a range of initiatives. Our restructuring programme is constructed on a case-by-case basis, drawing on international experience of both the developed and the developing worlds. 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.
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.