Minister Malusi Gigaba: Inaugural Annual South Africa – United States Business Summit
6 Aug 2012
There is a high level of uncertainty surrounding the immediate prospects for the global economy, particularly as the Eurozone crisis seems unrelenting and continues to draw into its vortex the economies of the entire world, especially those with which it has high trade relations.
The fact is that we are in prolonged crisis the recovery from which is still far from sight. A dramatic downturn in the European economy could and will impact the demand for exports from emerging economies.
This situation has not only impacted on the availability of capital for investment purposes but it has resulted in the decline in global trade, which makes doing business within such a constrained situation difficult.
The prolonged nature of the EU crisis places the global economy in a vulnerable position and I am sure the US economy shares similar concerns about this as emerging economies Countries need collectively to find a policy mix and implement prudent measures that will promote economic stability, growth and employment creation.
The recent G20 summit held in Mexico concluded that the global community will work collectively to strengthen demand and restore confidence with a view to support growth and foster financial stability in order to create high quality jobs and opportunities for all of our citizens.
I believe that today’s engagement seeks to advance this global pact and find areas of common interest.
Ladies and Gentlemen:
In the context of this market uncertainty, the South African government has taken the prudent decision to play a key role in sustaining demand and, in so doing, to crowd in private investment and foreign direct investment in particular.
Perforce, Government has adopted an extensive infrastructure rollout programme spearheaded by the President under the auspices of the Presidential Infrastructure Coordinating Commission consisting of seventeen ambitious integrated infrastructure and development projects ranging from to road, rail, electricity, ICT, dams and others.
The strategic integrated projects identified by the Commission will change South Africa’s apartheid spatial patterns and redirect capital investments to areas hitherto neglected, and would connect our country by rail, road, electricity network and even ICT, creating the possibility for domestic and regional trade by, among others, promoting regional economic integration.
In this regard, President Zuma has said that:
“The massive investment in infrastructure must leave more than just power stations, rail-lines, dams and roads. It must industrialise the country, generate skills and boost much needed job creation.”
These projects are effective game changers in the sense that they will immediately enable qualitatively new economic activity on a significant scale. The successful implementation of these projects will require an extremely high level of coordination between the different State-Owned Companies, Government Departments and agencies as well as private sector companies.
For example, the Waterberg coal projects which will result in the establishment of the first post-apartheid city will require coordination between the Department of Mineral Resources, the Department of Water and Environmental Affairs, Eskom, Transnet, Municipalities, Sasol and Coal mining companies amongst others.
Ladies and Gentlemen:
We need to acknowledge that the ability to design and efficiently implement game changing mega-projects is an extremely strategic capability for our government.
Mega-projects create an economic momentum, both through the process of their construction as well as the on-going economic activity that they spawn.
Coming off a low base in 2004, both Eskom and Transnet have put considerable effort into building their capabilities to manage and leverage the procurement of large capital projects and complex capital equipment to get both value for the enterprise and drive an industrialisation process in their supply chains.
In the interim, some profound lessons have been learnt by both Eskom and Transnet and significant new organisational capabilities have been, and continue to be, built to manage these programmes which means that Eskom and Transnet are fast becoming leaders in this field and will be able to implement and leverage projects of a scale and complexity that is beyond the capability of any other organisation in South Africa.
My Department is establishing a dedicated office to monitor and provide strategic support to the roll-out of the infrastructure programmes of the State-Owned Companies so as to optimise both the efficiency of project implementation as well as the developmental impacts of the process.
The Office will also support the collection and dissemination of best practices related to the management of complex procurements and projects so that government should in the future avoid the escalation of prices during the implementation of capital project due to poor project management.
Ladies and Gentlemen:
Investing in knowledge management will, of necessity, be of value to the African region as well.
Regional economic integration is an immediate strategic necessity, a core element of not just securing our growth for the future, but managing the turbulence of the present by contributing to increasing intra-African trade and investment for the benefit of our whole continent.
This will further contribute to creating a vibrant and dynamic new market that can hold its own among the emerging markets of the whole.
In this regard, we are duty-bound to ensure that through exemplary and bold leadership, we influence the rest of our continent to pursue a conscious and deliberate industrial policy supporting the mineral resources sector and continent-wide infrastructure development.
Through our own efforts as Africans, we must evolve a new paradigm of partnership with the world markets, characterised by equal relations, which was historically characterised by Africans being the producer and exporter of mineral resources, which mineral resources we produced and exported not for our own benefit, but to enrich others elsewhere in the world who then turned around and converted us into beggars.
Even the infrastructure that was developed to support these endeavours in the past has left Africa as a beggar; her member-countries divided, often isolated from one another and unable to forge equal and friendly partnerships of trade and to communicate and interact with each other.
As we stand, Africa’s infrastructure lag is enormous and would require about $93 billion in order to address.
Africa must develop policies strategically and the better to use her mineral resources for her own benefit, supported by an infrastructural capacity and driven by an industrial policy that will develop the continent. The SADC already accounts for 22% of SA manufactured export goods, just behind the EU.
There is a legitimate case for regional trade.
Sub-Sahara Africa is projected to grow at an average of 5.4% per annum over the next five years and the market size will grow by 30% to $1.7 trillion. Consequently, during the course of this financial year, we will be implementing an Integrated Africa Expansion Strategy, which will seek to leverage our SOC capabilities and competitive advantages
This is also an area where the SOCs will work closely with the private sector so that our value proposition to our partner countries can be optimised.
Ladies and Gentlemen:
The Department of Public Enterprises is responsible for the oversight of eight strategic State-Owned Companies, including those responsible for the provision of key infrastructure such as electricity, rail and ports.
These Companies are playing a leadership role in driving the national investment programme.
The fact is that State-Owned Companies’ investments are what is keeping the South African economy going at the present moment as private sector investments have shrunk.
In this regard, we are doing a lot more than just stimulating demand, but are driving programmes that will put in place the infrastructure, skills and the industrial and technological capacity to drive our future economy.
The critical issue is that we should make sure that we implement our capital investment programmes, within budget and within set timeframes in order to avoid delivery delays and cost-overruns as a result of the delays which might be caused by failure to adhere to timeframes.
Should we implement the capital investments we have identified and approved, I believe South Africa’s economic landscape will have been significantly transformed in the eight years.
Based on our existing plans, by 2020:
- An additional 11 719 MW will have been added into the electricity system and 6596 km of transmission network installed to support security of supply;
- Existing logistics corridors will be expanded upon and new corridors will have been established, and 1317 new locomotives and 25 000 new wagons will have been procured in a manner that puts in place a world-class, exportoriented, rail manufacturing sector;
- 6405 km of rail will have been replaced for the general freight, coal and ore lines, increasing the rail network capacity by 149.7 million tons; and
- 13 125 km of fibre optic cable would have been refurbished and strengthened to ensure carrier grade status and our broadband network would have been expanded to include metros and underserviced areas
We have begun to witness State-Owned Companies embarking on long-termplanning and moving beyond their balance sheets to invest in game-changing projects.
Transnet our rail, ports and pipeline company has expanded its capital expenditure budget from R110 billion over five years to over R300 billion over seven years.
Critical in this strategy is that 55% of the Capex will be investments in new logistics capacity, which goes beyond the predominant focus on maintenance of the previous Capex plans.
Over the seven years, excluding electricity and fuel, Transnet will also be procuring an additional R62 billion on operational expenditure.
At the same time, Eskom – our electricity generation, transmission and distribution company – is projected to spend over R330 billion in capital expenditure over the next five years.
In addition, excluding primary energy, Eskom will be spending over R150 billion in operational expenditure over the same period.
When Eskom’s role in the updated Integrated Resource Plan is announced later this year it is possible that these amounts may be revised upwards.
While two-thirds of the Transnet capital expenditure programme is to be funded from revenues generated from its operations and only a third is to be raised from the capital markets; Eskom’s on the other hand is already 77% funded.
Recently, Transnet went to raise half-a-billion dollars from the international capital markets and they were over-subscribed, ending up closing the deal at a billion dollars.
What I am trying to emphasise here is that our major State-Owned Companies are well-funded, and therefore their challenge is execution and ensuring they have the right kind of skills for such execution of capital projects of this size and scale.
To augment this infrastructure investment in the South African economy, our State-Owned Companies are placing considerable amount of financial resources to technical skills development so as to meet their immediate needs and the requirements of a growing economy.
Over the years, we have discovered that the inadequate investment in skills has led into sluggish growth and meant that the South African economy could not be well integrated to the global knowledge economy which is driven by technology and as such was not reaping the benefits of previous global growth.
Our State-Owned Companies have been ramping up their training budgets and stretched their training budgets, which while it is not enough, it is still a commendable and bold response to the challenge the Government gave them.
Ladies and Gentlemen:
Our vision envisages a relationship between our State-Owned Companies and their customers that drives investment and enhances our national competitiveness, particularly in sectors identified as important in our industrial policy and the New Growth Path.
In many areas, the capacity made available by State-Owned Companies can make or break the development of sector and thus we need to encourage dialogue between the SOCs and private companies that more systematically allows us to support innovative plans to grow and develop our economy.
In pursuit of this, we are establishing project-based forums between SOCs and key customer sectors. For example, we have established an Automotive Forum focusing on improving operational efficiencies on rail and at the ports and on increasing investment in specialised automotive related rail and port capacity as well as on ensuring security of electricity supply.
We are working with the Department of Trade and Industry to establish additional forums in prioritised sectors such as oil and gas, mining, agriculture sectors. The objective of these engagements is to smoothen out sectoral bottleneck and reduce the transactional cost of doing business with our SOCs.
Ladies and Gentlemen:
I will now move onto the area that I am sure you have all been waiting for – how our investment plans are translated into a procurement programme.
Firstly, I think it needs to be emphasised that choosing our technology partners to provide equipment that is core to the reliability and competitiveness of our national infrastructure is not something that we delegate to anyone, since poor design and quality will negatively affect the entire economy.
Should the ability to maintain this equipment be inadequately localised, this will put our economy at vulnerable position in that it will perpetuate the import dependency, limit our technical innovation and will not contribute to the most needed job creation.
Consequently, we will be looking for partners who will give priority to our needs and show a serious commitment to delivering on the value we are looking for.
Secondly, it must be emphasised that we have the objective to leverage our SOC procurements to promote investment in plant, technologies and skills in our national supply chains.
Our overarching economic objectives from this process are to increase national economic activity, create jobs, decrease imports and increase exports. A key element of this process will involve moving from a transactional relationship between SOCs and their suppliers to a longer-term, developmental relationship.
We have been putting considerable effort into enhancing our procurement planning so as to create a coherent demand platform on which these relationships can be built.
I need to emphasise that when we buy complex capital equipment we are looking at three different dimensions of value, which means that we are procuring equipment, we are procuring an industry and supplier development process and we are procuring a process of addressing the racial and class inequalities in our economy.
I want to stress that we are procuring all these different dimensions of value and we are consequently not asking for any favours.
Let me briefly expand on what I mean:
- Firstly, when we buy equipment we take into account the projected productivity of the asset, the initial capital cost, the full life-cycle cost as well as a risk factor related to the reliability of the equipment. Hence, we strive to select the supplier whose equipment will give us the best over-all return on our investment;
- Secondly, when we buy equipment we are procuring commitments by suppliers to enhance the capabilities of our national industry. This can take the form of, for example, direct investments in plant, technology transfers, skills development programmes and commitments to promote exports from South Africa. All suppliers are given an equal opportunity to compete to make the best industrial development value proposition to us. Those who are most competitive in this area will have a considerable advantage; and
- Thirdly, when we procure equipment we are procuring a process of empowering historically-disadvantaged people like women, youth and people with disability to participate in the mainstream of our economy. This can include, for example, equity participation opportunities, management development programmes and small business development processes.
For instance, in the next quarter, Transnet will implement a locomotive fleet procurement amounting approximately to R35 billion for 1064 locomotives. The procurement will lay a platform for a seven-year strategic partnership between Transnet and their suppliers in the locomotive cluster.
We expect to more than double the amount of national content in locomotives during the course of the process and expect the scale of the procurement to increase in the second phase of the procurement in seven years’ time.
Ladies and Gentlemen:
I would now like to give you insight into our philosophy towards and expectations of multi-national Original Equipment Manufacturers (OEMs). Our starting point is that although OEMs still have a strong base and loyalty to their countries of origin, they have become multi-national corporations in the true sense of the word.
According to UNCTAD, after three decades of globalisation, the international assets, sales and employment of giant companies have outgrown those of the economy where they are headquartered.
The foreign assets of the world’s 100 largest multinational companies are 57 per cent of their total assets, foreign employment amounts to 58 per cent of total employment and foreign sales amount to 61 per cent of total sales.
Investment into developing economies has been a key element of this process. According to UNCTAD, between 1990 and 2009 the inward stock of FDI in developing countries rose from $525 billion in 1990 to $ 4.9 trillion in 2009, rising from 14 per cent to 29 per cent of GDP.
Secondly, we recognise that the multi-national OEMs are the key drivers of global technology development for the sectors in which they operate. For example, the top 100 firms out of a survey of the global top 1400 firms account for 60 per cent total investment in Research and Development. Thirdly, we recognise that the multi-national OEMs are key drivers of exports from emerging economies.
Integration into OEM supply chains literally opens up access to global markets that would be beyond the reach of firms operating in isolation in emerging economies.
Finally, we recognise that the USA remains the largest source of foreign direct investment into emerging economies and the OEMs of USA origin continue to lead the world in technology investment and development.
While there is little doubt that China is developing rapidly, rumours of the decline of the importance of the USA economy are somewhat exaggerated.
In this context, we want to see multi-national OEMs with USA origins to become truly entrenched in the South African economy in exchange for a partnership with the SOCs in our infrastructure build programme. We would like to work with you to make direct investments into the South African economy and to develop South African companies to become part of your global supply chains.
We do not want you only to buy from South African companies for the South African market; we want to see these companies exporting into the regional and global market through your supply chain. We do not want you to limit your manufacturing activities to the infrastructure supply sector but also to include other significant sectors such as mining equipment supply. In summary, we would like to see you make South Africa the design and manufacturing hub for your regional activities.
Our Departments of Trade and Industry as well as Science and Technology and Department responsible for scarce skills development have a range of incentives and our Development Finance Institutions have cheap debt facility to support your investments.
To put it in a nutshell our aspiration is to leverage the demand we create through our investment programmes to partner with leading global OEMs to industrialise our economy.
Ladies and Gentlemen:
The growth of our economy will enable our government to meet the needs of its population by eradicating poverty, unemployment and inequality. I hope I have successfully communicated to you that we are in the process of building a well-oiled machine to drive investment in the economy and unlock new opportunities for economic growth and development. We need to be in continuous dialogue around how our investment plans, build processes and infrastructure operations can be seamlessly integrated with those of the private sector, particularly SOC suppliers and customers.
I believe, even in these globally turbulent times, that we can build a compelling national context for investment and competitiveness and I look forward to working with companies from the USA to make this happen.
I thank you.
Issued by: Department of Public Enterprises
6 Aug 2012
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