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18 June 2008

Introduction

Chairperson, Honourable Members of the National Council of Provinces, ladies and gentlemen, it is a privilege to table Vote 30, that of the Department of Public Enterprises, before this House.

The perceived role of State Owned Enterprises (SOE) has evolved over the years. We would argue that effective SOE are crucial to the success of a developmental state. In the 1990s, investment by SOE decreased sharply and between 1994 and 2004 the focus was on restructuring. By 2004, a decisive role for SOE was defined, and SOE were seen as key enablers of growth, and critical to South Africa's goals of accelerated and shared economic growth.

From 2004 we intensified the work of restructuring these enterprises to focus on their core business so as to deliver on the State's strategic intent. The work of the SOE, particularly Transnet and Eskom, has expanded over the past five years, in order to meet the escalating demands of a growing economy. As a result, their combined infrastructure investment programmes now stand at almost R400bn for the next five years.

The Energy Sector

This poses its own set of opportunities and challenges, particularly in the energy sector. South Africa plans to double its electricity capacity over the next twenty years, and to diversify its primary energy source from fossil fuels, to nuclear and renewable energy sources. The estimated cost of this over the next two decades is approximately R1 trillion, a staggering figure, which, when used optimally, could provide South Africa with the opportunity to develop relevant design and manufacturing capabilities to globally competitive standards, allowing South Africa to localise a high proportion of its equipment needs and develop export capacity as a part of the global energy equipment supply network.

This is the aim of the South African Power Project, which provides a comprehensive framework that links new investments in plant, skills, technology transfers, as well as research and development projects, with the procurements associated with this twenty-year build programme.

The Competitive Supplier Development Programme

In addition, the Competitive Supplier Development Programme (CSDP), which was established last year with the objective of leveraging the planned SOE investment programmes of Eskom and Transnet, as well as the Pebble Bed Modular Reactor's investments in advanced manufacturing, aims to promote investment in the national SOE supplier base, and thus optimise SOE impact on industrial development.

The success of the investment programmes in electricity and transport, and our general programme to transform SOE, depend, in part, on how we systematically and meaningfully engage with the unions operating in these industries. We have assembled a programme which involves discussions with both the federations and sector unions around these long term investment programmes.

Eskom

Earlier today National Energy Regulator of South Africa (NERSA) announced the tariff increases. As government we welcome this difficult decision as it will provide a degree of certainty. NERSA have also accepted the basic smoothing approach over the next three years and also provided for lower increases for poor households. The proposed shareholder support for Eskom will have to be invoked and more detailed announcements will be made at a later stage.
Historical underinvestment in capacity, and sustained levels of growth in electricity demand have placed undue strain on Eskom's generation capacity and operational performance. Rising primary energy costs, as well as the need to fund the accelerated Demand Side Management programmes will have an adverse effect on its cashflow. The strength of Eskom's balance sheet therefore becomes crucial, if the enterprise is to successfully borrow on international capital markets. With the announced tariff increase and the shareholder support we believe that we will secure this objective.

The construction of Medupi Power Station has created a hype of activity in the Lephalale area, with approximately 800 local people from the Lephalale area already employed to work in the construction phase. Murray & Roberts, who won the civils contract, are now also in the process of building a training centre to train 700 local people in all kinds of trade over the next three years.

Review of the SOE

In the main, our SOE operate in critical areas of the economy, such as electricity, infrastructure, telecommunications and advanced manufacturing. A lot of work has taken place in each of our SOE in the past year, and I will now proceed to give a brief update on each (Eskom has been dealt with above):

Alexkor

A community claim to the land has recently been resolved, which paves the way for a restructuring of Alexkor. The settlement provides for the formation of a Pooling and Sharing Joint Venture (PSJV) between Alexkor and the Richtersveld Community. The PSJV will put in place a mine development plan and programme to upgrade the land and sea diamond resources and will develop a business plan to constitute a viable mining venture. Transfer of Alexkor's agricultural and mariculture assets to the community will empower the community and create a basis for future development and wealth creation, not only for the Richtersveld community, but for the Northern Cape region as well.

Broadband InfraCo

Broadband Infraco, which became a stand-alone SOE in January this year, has succeeded in operationalising and strengthening the national long distance network, as well as provisioning of additional capacity. Infraco has increased its footprint by 30% and doubled its capacity during this period. Infraco has provisioned route connectivity services at the core backbone and regional expansion sites. Additional fibre routes were added to close the long distance ring and to provide redundant capacities. As we have stated before, the Africa West-Coast Cable will be prioritised by Government in order to meet 2010 objectives as well as other short-to-medium term, strategic projects.

Denel

South Africa's defence spend has reduced by 54% in real terms since 1990, which has driven the need for Denel's restructuring. In 2004 Denel was in a critical state but progress is being made in terms of its turnaround strategy. A restructuring process has been undertaken, focused on the corporatisation of distinct operating divisions. The introduction of strategic equity partnerships at business unit level is aimed at increasing market access and ensuring the transference of global skills, technology and manufacturing know-how to Denel.

The Pebble Bed Modular Reactor (PBMR)

The PBMR a major developmental project and as such requires considerable initial investment by the project partners. The negotiation of the new shareholder's agreement, which will create a platform to attract additional equity partners, is currently at an advanced stage. This project is important for a number of reasons. One of these is the retention of very skilled professionals within the South African industry. However, the success of the project could have a major positive impact on our manufacturing sector and would provide a leading technology in the reduction of green house gases.

South African Airways (SAA) and South African Express (SAX)
The DPE portfolio has recently been expanded through the acquisition of SA Express (SAX), a domestic airline focused on secondary routes. The South African Express Board of Directors has approved the introduction of a South African Express exclusive Cadet Pilot Programme which is aimed at addressing the current shortage of pilots. The Airline recently won the 2007 Annual Airline Reliability Performance Awards. The awards were presented by Bombardier Aerospace two days ago (June 16 2008) in Canada.

The benefits of an effective regional airline will be well understood by the Honourable Members representing the Provinces. South African Airways (SAA) was transferred from Transnet to the Department on 31 March 2007. At the time the airline was financially and operationally challenged and its continued sustainability was dependent on the implementation of a fundamental restructuring programme.

The focus of this programme is to return the airline to profitability which required cost cutting, route and fleet rationalisation and the implementation of more innovative revenue management practices. I believe the results will show that we have made very substantial progress in the restructuring process.

South African Forestry Company (SAFCOL)

The financial performance of SAFCOL has generally been positive in the recent past and the Group has a strong balance sheet, including a positive cash position. A substantial portion of the land on which Komatiland Forests (KLF), SAFCOL's main forestry plantation subsidiary, operates is subject to land claims and this may delay the execution of the transaction to dispose of KLF during the current financial year.

Transnet

The strong growth experienced by the economy over the past decade, coupled with the rapid pace of globalisation, has seen the demand for freight traffic surpass all previous expectations – putting ever increasing pressure on an already strained freight network which is suffering from decades of underinvestment in both fixed and operating infrastructure. Transnet has already made some progress towards addressing this challenge. Transnet has, over the last three years, achieved financial stability and has focused on the reorientation of the group around its core functions of freight transport within the rail, ports and pipelines sectors.

Transnet has also been successful in the continued implementation of a capital investment programme aimed at improving the quality and capacity of its asset base over the last two years in particular, with a combined spend of some R27 billion. Almost 60% of the R84 billion capital programme will go towards capacity expansion projects while just above 40% will be spent on replacing outdated and unsafe infrastructure.

The R11,2 billion New Multi-Product Pipeline (NMPP) between Durban and Gauteng is a priority project to ensure security of supply of liquid fuels to the Reef. The NMPP project, the largest single project in Transnet's portfolio, encompasses the replacement and expansion in capacity of the Durban to Johannesburg Pipeline (DJP). The NMPP also addresses the capacity constraints in the Inland Network (IN) which services Alrode, Tarlton, Rustenburg, Witbank, Pretoria, Kroonstad and Klerksdorp regions, resulting from the increased demand requirements in these regions.

Turning now to the Ports, Transnet intends to invest approximately R26bn in the next five years between its Port Authority and Port Terminals divisions, primarily to support growth in the Dry-Bulk, Liquid Bulk, Containers, Automotive and Break-Bulk sectors across the seven existing commercial ports and the new Ngqura Port.

Defining Government's role as shareholder

Given the strategic importance of the State Owned Enterprise (SOE), it is critical that government move towards best practice and consistent shareholder management to both optimise performance of individual SOE and of the portfolio.
The underlying rationale for State ownership in the enterprise sector in South Africa is a developmental one it is the desire of government to use its shareholding in SOE to exercise control over strategic assets and investment programmes in order to achieve specific developmental objectives. However, it is increasingly clear that in pursuing such objectives a commercial approach has a number of advantages.

It imposes efficiency disciplines on the enterprise but in so doing it allows the enterprise to be understood by market players and in particular the capital markets. This allows for two very important further advantages – the raising of capital by the SOE in the capital markets and the formation of commercial partnerships with private enterprises. These features allow the State to mobilise resources across a wide front and allow for greater flexibility of operation.

However, such advantages have to be balanced against the fact that the SOE are not commercial enterprises in the pure sense. Their mandate is to achieve longer term strategic objectives emanating from the state as opposed to the market place alone. The challenge is to achieve strategic national economic objectives through enterprises that are subject to the disciplines associated with operating a commercial enterprise that achieves a sustainable return on capital, which enables reinvestment and ensures value for money. Governments in many countries across the globe are now evolving towards this model of the State as shareholder.

The ability of SOE to raise capital on the markets means that a significant amount of money can be freed up from the fiscus to fund objectives requiring direct government funding. Their ability to partner with global enterprises that cannot only provide additional capital, but also rapidly introduce new technologies, business processes and markets to the country allowing development to proceed at a far greater pace than what can be achieved in isolation.

The role of Parliament

The oversight role of Parliament is a crucial one. Time and resources have to be invested in our Portfolio and Select Committees, so that they are fully equipped to effectively carry out their oversight function. It is important for us to give full consideration to the complex interrelationship between Parliament, the Shareholder Ministry, the Board and the Management of the SOE. The sensitivity of commercial and strategic issues dealt with by the SOE makes it necessary to consider exactly how the Parliamentary oversight function can be carried out.

Conclusion

The past five years have indeed been challenging and a definite learning curve for all of us. My hope is that we leave behind for the next administration, not only some food for thought, but also systems which will allow the portfolio department and Parliament to have a clearer defined mandate of their management and oversight roles, and SOE which are better able to fulfil their role as enablers of economic growth and development. Much has been achieved, but more work lies ahead. We should not be steered off course our goal of accelerated and shared growth must continue to spur us on, in spite of the challenging global economic environment.

Let me conclude by thanking the Chair of the Select Committee, the Honourable Ms Themba, and the members of the Committee for all their hard work and the real effort they have put into their oversight task.

Honourable member, this Budget Vote is tabled for your consideration.

Issued by: Department of Public Enterprise
18 June 2008
Source: Department of Public Enterprise (http://www.dpe.gov.za)