Parliamentary Media Briefing February 2005 Economic Cluster, by Minister Alec Erwin, MP
17 February 2005
HIGHER GROWTH, SUSTAINED GROWTH, AND SHARED GROWTH
1. Economic environment
1.1. The briefing takes place at a time when South Africa is experiencing very favourable economic conditions. Macroeconomic stability is firmly entrenched with the fiscal deficit being consistently low; inflation is within the 3 - 6% target range; net foreign reserves are at R11,4 billion up from minus R25 billion in 1994; and the prime overdraft is down from 25.5% in 1994 to 11%.
1.2. The economy grew at an estimate rate of 3.8% in 2004, forecasted at 4% for 2005. Investment by government and the private sector improved from 14% to 16%. Business confidence is at all time highs. Employment is growing and the unemployment rate is declining. There has been expansion of the black middle strata and social grants have eased the impact of income poverty.
1.3. Growth rates at a global level are expected to be slower in 2005. Growth amongst our key trading partners such as the United States of America is expected to decrease from 4.4% to about 3.5%. The Euro area is expected to decrease from 1.8% to 1.6% and growth in Japan is expected to decrease from 3.2% to 1.6%. Furthermore commodity prices are expected to decline and the prices of most metals, with the exception of aluminium, are likely to fall. The effect of this decline is already prevalent in our gold industry. The local farming community is also experiencing strain due to the low levels of world maize prices.
1.4. Since the country’s current growth upsurge is largely based on domestic demand, the economy is expected to remain resilient in the face of these externalities.
2.1. Government’s central and main intervention for the period 2004 to 2009 is to grow the economy. In his May 2004 address to the nation, President Mbeki outlined a four-pronged approach to achieve growth, which will half poverty and unemployment by 2014, namely to:
* Continue macroeconomic stability;
* Increase levels of investment by accelerating the implementation of the Micro-economic Reform Strategy;
* Targeted intervention to bridge the divide between the first and second economies; and
* Improve the state’s capacity to implement.
2.2. The President’s address to the nation on Friday, 11 February 2005, indicated that most targets set for the period 2004/2005 were attained. I will highlight a few of these achievements that pertain to the economic and employment cluster. A few significant highlights of the past eight to nine months are:
* The adoption of the Immigration Amendment Act;
* The finalisation of the National Ports Authority Bill, to be tabled in Parliament on the 1st of March 2005.
* The launch of the Small Enterprise Development Agency;
* The announcement of the Apex Fund;
* The adoption of the Cooperatives Bill and Strategy;
* The announcement of the BEE codes of good practice;
* The selection of two cities (Cape Town and eThekwini) as the first regional electricity distributors;
* The compilation of an asset register of national water infrastructure and finalisation of institutional options for the new national water utility;
* The launch of the Expanded Public Works Programme in all 9 provinces encompassing approximately 1500 projects with more than 70 000 job opportunities to date;
* 21 Employment and Skills Development Lead Employer Agencies commenced training of 4 642 learners at the end of 2004, of which 310 are disabled; and
* Strategies and investment plans amounting to R180 billion in relation to transport logistics, electricity and water resources were developed.
3. Interventions to be undertaken to enhance the effectiveness of SOEs
Government has taken a decision to strengthen its oversight role on SOEs, review and restructure the Boards and how they are rewarded, set explicit mandates for SOEs through the tight shareholder compacts, finalise the protocol on Corporate Governance and the procurement framework for SOEs, and increase its capacity to monitor the performance of SOEs using benchmarks and setting appropriate performance targets. The intention is to enhance the capacity of Government in providing clear guidelines to SOEs on corporate practices, corporate governance and performance practices.
We are also looking at absorbing experiences of other countries in the role of Government as shareholder, policy-maker and regulator, and the mechanisms for addressing the overlapping roles and responsibilities and the provision of conflicting mandates for SOEs.
We have announced the 5-year investment plans of the major SOEs in the energy and transport and logistics sectors. We believe this will make a strong case for the country to be an investment destination and catapult its growth potential to level beyond 3% growth rate, and maintain our cost competitiveness in the energy sector despite the build program and significant reduce our exceedingly high logistics costs.
4. Funding challenges
This requires major funding of which part of it will be financed from the free cash flows of SOEs. The other part will need to be financed through the capital markets and partnerships with the private sector. For SOEs to get cost-effective access to capital markets they need to have strong balance sheets and regulatory issues in their sectors must be clear. We have also focused on the corporate structures and strategies to ensure that they are in line with the Government mandate, especially in Defence, Energy and Transport. The challenge is the loss making operations in the SOEs that are not even strategic and the consume resources, the high level of indebtedness in Transnet, and the historical legacy issues on pensions that put pressure on the balance sheets.
Transnet approved R2 075 m investment to upgrade Durban and Cape Town container terminals. The aim is to improve the capacity within the ports, to upgrade and develop the facilities to meet the growing demands of our economy.
An amount of R1 437 m will be invested in the Port of Durban to develop the container handling facility. This will be jointly funded by SAPO and NPA. An amount of R600 m will be used to upgrade Cape Town Container Terminal –to improve efficiency and capacity.
In addition, R10 m has been invested to increase reefer infrastructure at Port of Cape Town Terminal to meet the demands of the upcoming fruit export season in March and April.
These projects are part of the 5 year R37 billion-infrastructure plan that was approved by Cabinet in 2004. They will strengthen Transnet’s position to provide a seamless inter-modal freight transport service that is consistent with the company’s strategic vision of reducing cost of doing business in SA.
Transnet has presented its strategy, which is aligned to the National Freight Logistics Strategy. The core businesses have been identified as Rail, Ports and Pipelines. A Transnet Corporate Governance project was undertaken and key performance indicators and draft shareholder compact were developed for the core businesses.
The Department in conjunction with Transnet and SAA is working on the separation of SAA, which should be finalised by 2006.
We are also going to accelerate the disposal of non-core, loss-making operations that do not have any strategic fit with the business of Transnet. We will do this through a structured engagement with the Board of Transnet, the Organised Labour and the institutions such as the NEF.
We will also look at the current proposals from the banks on how to restructure the Second Defined Benefit Fund of Transnet and look at the options available to Government. We will also involve the National Treasury and the Government Pension Fund to consider all the options.
* On Denel, Dpe is working on a strategic plan to review its capital structure.
* On 15 December 2004, Government signed a Declaration of Intent with Airbus Military, the European consortium for the development of the A400M multi-role military transport craft. The A400M programme is aimed at boosting the revitalisation of the South African aerospace sector which possesses knowledge, experience and capability in aircraft design, manufacturing, support and maintenance. South Africa will deliver between 8 and 14 aircraft on completion as the programme matures between 2010 – 2014. The cost of 8 aircraft cost Euros 837 million.
4.3. INDEPENDENT POWER PRODUCERS (IPPs)
Current estimates suggest that R107 billion will be needed between 2005 and 2009 to meet the country’s growing energy needs. Eskom will invest R84 billion over the next five years. The balance of R23 billion is reserved for independent power producers (IPP) entrants.
The power plant required will be oil-fired open-cycle gas turbines (OCGTs) operating as peaking plant. It is expected that proposals for one or two power plants, with a combined capacity of about 1000MW, will be invited.
Determinations of the power plant locations are currently being investigated.
A competitive tendering process for the projects will invite the Independent Power Producers (IPPs) first to pre-qualify and then to bid for exclusive rights to build, own and operate the new plants, which would be expected to be fully operational by the end of 2008.
The DME has invited interested parties to register an “Expression of Interest” in the project. The invitation has been particularly aimed at international IPP and local BEE investors, lenders, contractors, operations and maintenance contractors, fuel suppliers and insurers.
The initial process for the tender for the provision of the new generating capacity has started and is proceeding. Eskom will be the purchaser of the IPP power through power purchase agreements (PPAs).
The refurbishment of three mothballed power stations – Camden in Ermelo (1 600mw), Grootvlei in Balfour (1 200mw) and Komati in Middleburg
(1 000mw) – will result in an additional 3 800mw to the system.
Eskom will spend about R12 billion (nominal rand) on the re-commissioning of these three stations. This is approximately 40% of the cost of a new station. Almost half the scope of work is merely maintenance similar to that done on the running plant. Approximately 10% of the costs go towards improving environmental performance such as particulate emissions and water controls.
At least 36 000 jobs are expected to be created, directly and indirectly, until 2007 during both construction and operational phase activities.
In addition, the GDP effect of this project will contribute about R5.8-billion – R4.2-billion generated within Mpumalanga and R1.6-billion generated within the rest of Africa.
In the forthcoming financial year the cluster will focus on creating a climate conducive for accelerating the attainment of higher levels of sustainable, shared economic growth. It is generally accepted that despite our economy’s excellent performance, the current levels of growth is not sufficient to create the number of jobs required to significantly reduce unemployment and poverty. We will therefore be intensifying the implementation of the Microeconomic Reform Strategy in order to provide an environment that will generate higher levels of investment, improved competitiveness and broader economic participation.
5. Intensifying microeconomic reform
The Microeconomic Reform Strategy, originally announced by President Mbeki in 2001, as government’s Integrated Economic Action Plan, is a coherent framework for action by departments within the cluster to accelerate growth, equity and employment and generate a climate conducive to investment. MERS provides practical actions to exploit strategic domestic and global development opportunities and to remove impediments to growth.
The strategy encompasses the following key elements:
* Improving the efficiency of, and expanding access to, services in four input sectors – namely: transport, energy, telecommunications and water;
* Investing in economic fundamentals that underpin sustainable economic growth – such as infrastructure and technology, research and development, skills development, and access to finance;
* Promoting shared growth through broad-based black economic empowerment, women empowerment, small business development, employment and geographic spread; and
* Developing the growth, employment and equity potential of selected priority sectors.
Departments will elaborate on their programmes for the year in their budget vote speeches. I will thus provide a broad overview of the types of activities we will be committing to over the next financial year.
5.1 Cost-efficient, reliable and accessible input sectors
* With regard to transport, government will focus on providing safe, accessible public transport, and efficient and reliable freight logistics;
* Concerted efforts are being made to give effect to government strategic goal of improving public transport. Public Transport r remains vital to the economy, as well as enabling ordinary South Africans to move and access opportunities. Transport is the key lever in linking the first and the second economy. Investment in public transport infrastructure and fleet is central to the realisation of the objective of a safe and reliable public transport system. There are also major benefits for the economy since this intervention constitutes major injections by government in the economy of the country.
The key strategic interventions to improve public transport are:
Taxi Recapitalisation Programme
* The draft safety requirements for the New Taxi Vehicle are now complete. I intend to release these for public comments before the end of February 2005, which will be followed by Regulations.
* The Department is also finalising the evaluation and assessment of the capacity and readiness of Provinces and the taxi industry itself to implement this programme.
* The Department has also been focused in developing the necessary mechanisms for the scrapping of old taxi vehicles. We intend that the mechanisms for the physical scrapping of old taxi vehicles and payment of the scrapping allowance to operators would be in place by July 2005.
* We will be introducing to Parliament at the beginning of March this year, the National Land Transport Transition Amendment Bill, which is necessary for the implementation of the TRP.
* The Department is working with Transnet, Metrorail and SARCC with a view to consolidate the executive functions of Metrorail and SARCC by 1 April 2005.
* A due-diligence on the three entities (Shosholoza Meyl, Metrorail, and SARCC) started at the end of January 2005, and it is expected to be complete by end of February 2005. The due-diligence will provide the vital information for the development of unified business plan for the consolidated passenger rail entity (PAXCo). The new entity is expected to be in place by December 2005. These initiatives are being undertaken in parallel with the development of an Interim National Rail Passenger Plan (INRPP), which will provide a comprehensive vision, model and investment requirements for passenger rail.
Optimisation of the bus subsidy allocations
* The current bus contracts will be transformed to public transport contracts in order to allow access by taxi industry to the funds allocated for provision of public transport. This process will see subsidies being shifted towards more poor households and regions of our country.
* A review and redesign of existing services provided by the bus industry will take place. Bus services will be extended to some of the new areas of our country for improved service delivery and integration of our public transport modes.
* The development of a new power station will be accelerated to ensure that the deadline of 2008 is met. Furthermore, the National Electricity Regulator in conjunction with its subsidiaries has been requested to urgently establish electricity tariffs that will facilitate investment;
* In respect of the communications sector, specific regulatory action and technological upgrading was identified; and
* It is expected that the proposal for the establishment and governance of a water management agency be completed within this year.
* We have begun some interesting work on the revitalising of branch lines – with the Department contributing R28 million to the Kei Rail Infrastructure upgrade. Collaboration with other Government Departments (DEAT) had seen commitments to the tune of R44 million for the upgrade of the Belmont-Douglas railway line in the Northern Cape and Nkwaleni railway line in KZN. The above projects are collaborative efforts between the Department of Transport, Spoornet and the respective provinces to increase the producers’ access to freight transport and to also reduce cost of doing business in rural areas of South Africa. The projects are labour intensive, rail infrastructure upgrades with specific targets of operational efficiency and economic development support.
* Contributed R1,9 million to the collaborative effort between Home Affairs, SAPS, DOT and SARS, for the upgrading of border post infrastructure.
* The short-term to long-term infrastructure interventions are being made to address current bottlenecks in the logistics system and to provide adequate capacity to meet the demands of the growing economy. These interventions will be implemented within the 2005/06 MTEF period and will be integrated into the National Freight Logistics Strategy.
For the 2005/06 MTEF period, the Department has set aside:
* R7,7 million for the development of a 2014 Freight Transport Demand Scenario and the second level detailed research on the National freight Logistics Strategy.
* R9,3 million for the Eastern and the Western Corridor Optimisation to assist in identifying and understanding the supply chains within these corridors to link the various logistics networks, clients, infrastructure and operations:
* With reference to aviation and airport safety and security matters, the Minister of Transport has received a number of reports that confirms that overall the situation is under control. However, a number of formal and ad hoc investigations by the CAA and international agencies since December 2004 have confirmed a number of deficiencies in the way the system works. The Minister of Transport therefore has instructed the Chief: Aviation Security to enhance the investigation with international expertise and to make specific recommendations concerning the operation, implementation and management of aviation and airport security and safety within two months.
In the interim, cabinet will shortly be considering measures that will further strengthen the CAA’s capacity to ensure a wider application of the National Aviation Safety Plan that was launched in November 2004.
5.2 Cross-cutting interventions to ensure higher, sustained economic growth
* In respect of skills development, links between SETAs and related sectors and between SETAs and public FET institutions will be established. The 2005 - 2010 National Skills Development Strategy has been finalised and R21.9 billion over five years will be allocated to fund this strategy.
* The commitment expressed in the 2002 Research & Development Strategy to invest 1% of GDP in research and development by 2008 will be accelerated. This resource will be channelled to domestic research institutions, universities and science councils.
* In order to increase access to finance, the Apex fund will be operationalised and active steps will be taken to ensure the effective functioning of development finance institutions.
* In order to attract investment, government will initiate a study to determine the actual costs of doing business in South Africa, benchmarked against competitor countries, with the aim of introducing a simpler and more streamlined system for all businesses by April 2006. Communication to the investment community about available services will be improved inward investment will be directed in accordance with an ‘industrial strategy’ approach, this will include investment towards the 2010 Soccer World Cup.
5.3. Promoting shared growth
* Mechanisms will be put in place to increase alignment between the three spheres of government and spatial economic indicators will be developed to measure the extent of geographic spread of economic activity and resources.
* Additional resources will be channelled to enterprise support programmes within the dti to enhance its support capacity; to facilitate the establishment of an effective model for delivery of services to SMMEs; and to create structures such as the Small Business Advisory Council and Small Enterprise Development Agency (SEDA) provincial offices. As announced by President Mbeki last Friday, government will complete the system of exemptions for SMMEs with regard to taxes, levies, as well as central bargaining and other labour arrangements before the end of the year.
* The department will also receive additional resources to advance the implementation of broad-based black economic empowerment.
* Government will further continue its programmes to strengthen regional economic integration, implement NEPAD, and advance a developmental agenda in multi-lateral forums. From March until September this year, we will once again be participating in the World EXPO 2005 in Aichi, Japan. The EXPO will not only assist to showcase South Africa’s goods and services, but will once again reinforce the vision of pro-poor, eco-friendly, sustainable development
6. Priority sectors
* Government’s nine priority sectors remain: agriculture, tourism, cultural industries, information and communication technology, mining and metals, clothing and textiles, chemicals and biotech, automotives and transport, and services. The sectors identified demonstrate a high potential for growth, employment creation, value-addition, exports and investments.
* A number of specific actions have been identified to exploit the full potential of the priority sectors. These include institutional changes, strengthening of social partnerships and accelerating the completion and/ implementation of relevant sector strategies. The capacity of the dti will also be boosted to enhance the department’s support for sector development.
7. Partnerships for higher growth, sustained growth and shared growth
Active partnerships remain a core element of government’s strategy to achieve higher growth, sustained growth and shared growth. This includes the development of mechanisms to strengthen co-operative governance across the three spheres of government, particularly around local economic development. It also includes the continuous participation in existing social dialogue forums such as NEDLAC, the presidential working groups, and the International Investment Council; as well as establishing additional forums where required e.g. for trade negotiations.
Our outreach to communities will also be broadened through structures such as the multi-purpose community centres, community development workers, continued imbizos, the e-governance portal, and the branches of SEDA. These grassroots interactions with communities will allow for increased public participation and a more integrated, targeted approach to local economic development.
Furthermore in order to intensify intervention in the second economy a targeted communication campaign on economic opportunities is central, in line with this objective, the cluster will seek to extend and sustain the mass economic campaign that was launched in 2004. The core of this campaign was a publication in all languages and popular format that for the first time brought together in one place information about all the economic opportunities created by government programmes. The campaign has seen about ninety workshops conducted in all provinces and yielded tremendous interest among beneficiaries within those unemployed and lacking skills.
Issued by: Ministry of Public Enterprises
17 February 2005