DEPARTMENT OF PUBLIC ENTERPRISES BUDGET VOTE, VOTE 9, BY MINISTER OF PUBLIC ENTERPRISES, MR ALEC ERWIN, National Assembly
14 June 2004

Colleagues and Visitors to this House

It is my privilege to present the Budget of the Department of Public Enterprises (DPE). For me it is a new and exciting challenge and I look forward to working with the Portfolio Committee to achieve our objectives.

There has been much comment and assertion as to whether the government has changed its policy on the issue of restructuring of state assets. I shall take this occasion to once again address this matter.

The DPE is in the unusual situation where its own Budget of R75, 9 billion is very small in comparison to other departments but it is responsible for the oversight of approximately R170 billion in state owned assets. There are about 120000 people employed in the SOEs that report to DPE. For this reason we accept that it is important to have clarity on the government policy on the restructuring of state assets and to define the role of a State Owned Enterprise (SOE). We have been remarkably consistent on this from the beginning of the democratic government but there are certain refinements that we are now in a position to embark upon.

However, on this occasion I seek your patience as I go into the matter in some detail, as this will allow us to set out the initial shape of the work to be done in this third democratic Administration and the role we see for the family of SOEs reporting to DPE. Since we are committed to provide more detailed plans for investment and the financing of that investment to Cabinet by the end of September it follows that much of the detail will have to wait but I shall provide the basic architecture of our approach.

In view of what I shall be dealing with today it is a special privilege to be able to introduce to you the people that will play a central role in the management and operation of our SOEs. These are the Chairpersons of the Boards and Chief Executive Officers of the major SOEs in the DPE stable. Also present are trade union leaders who represent the interests of the workers in the public sector. I hope that you will interact with these leaders of our public sector after you have approved this Budget and as we reward you with some refreshments.

Let me conclude my introduction by assuring you that I will say something about the money you have given us and how we will spend it.

The Logic of a Public- Private Partnership

From the outset of the new democratic administration there has been ongoing guerrilla warfare in the media between the terms restructuring of state assets and privatisation. This is an ideological battle which at one level will continue to be waged precisely because it is ideological and yet at another level obscures what is actually happening which is a much more pragmatic policy approach based on sound economic principles and experience. In this later approach we have not deviated for the last ten years and it is not our intention to do so now.

As with all ideological battles there is a basis in real interests. There is also a contestation at the level of economic theory and practice. The stress on privatisation attempts to champion a particular view to the benefit of particular interests and it seeks justification in interpretations of economic theories. Naturally this approach evokes suspicion and opposition from inherently more publicly orientated trade unions. There is nothing wrong with attempting to champion certain interests or for the unions to oppose these, however, for policy purposes we need to be more dispassionate and thoughtful.

There is no economic theory of any note that does not incorporate the concepts of public and private goods. Even at its height neoclassical economics acknowledged that certain production processes and therefore products exhibited externalities. Historically from a more practical point of view the largest category of public goods have been those with large externality effects - transport, telecommunications, roads, sewerage and water systems, health care and education - where markets conditions would lead to under investment if the private sector were to be the sole providers.

An externality is a value addition or a value destruction emanating from the production or consumption of the product that the producers cannot really recover or allow for in the price of the product produced. Road users add value in a host of different ways but how would we charge each user for that value. An educated person will add value to many other enterprises that would be very difficult to capture in the price you charge for the person's education. The real benefit is to the overall economy and society, in fact the activity is elemental to the functioning of that society and economy - hence the reason it is essentially a public good. These forms of public good tend to serve economies over long periods. As the volumes of usage of the service or infrastructure rises it becomes easier to exact user charges that will not impact adversely on the economy thereby creating a revenue stream.

This income stream is steady and reliable because the asset is so central to the economy but the rate of return is not high. In general such long time horizons are not attractive to the private sector in a capitalist system because the capital market prefers shorter payback periods. For these reason it has been the state that has stepped in with systems of taxation to provide these public goods. The provision of public goods has been an essential part of state formation and, indeed, of civilisation as it is the basis for social and economic development. So important changes in the overall political economy had to occur before the private sector became interested in these long-term revenue flows and before the state saw it fit to allow the private sector into these essentially public goods.

On the value destruction side the examples of the wider environmental, economic and social impact of excessive destruction of natural forest or drug production or pollutant by-products are in the same category in that they force, in responsible societies, a public intervention.

What were the key changes in the political economy? As capitalism developed the quantum of investment funds grew and new investment needs arose. New societal needs and expectations arose. The introduction of mass pension systems meant that these funds needed long term and stable income sources, as did large insurance companies. The size of enterprises grew and multinational corporations developed massive surpluses that had to be invested under pressure of the harsh laws of accumulation and profitability enforced by capital markets. These factors lengthened the investment time horizons and the private sector began to move toward an interest in investing in public goods. This was and is not some newfound altruism and public spirit it is hardnosed commercial pressure. This happened as the state began to experience systemic problems in taxation and the operation of the public sector that impelled it toward finding new ways of funding and managing state enterprises and the public sector.

There will be those who point to the railroads in the USA and much infrastructure construction in Africa where the private sector was involved. But this illustrates a very important tension between the public and private sectors. If the private sector sees an economic opportunity it will seize it and if it can capture the value addition for itself it will build the requisite infrastructure. However, in the above two examples a profound misunderstanding will arise if we ignore the fact that the State's role was to provide the cavalry, army and gunship to seize the economic assets for appropriation by the private sector. If the private sector had to negotiate with the peoples that owned the assets at the time and provide them with the benefits of the infrastructure then the private sector would not have built that infrastructure. History and ideology may sometimes conflate the rapaciousness of imperialism with the benefits of market economies but intellectual honesty and sound economic policy in a democracy cannot.

What is the tension? It is that the private sector is inexorably impelled toward appropriating value for itself - that is why it is a private sector and that is why it is imbued with a feverish and oft times self-consuming dynamism. This has a number of effects when the private sector gets onto the terrain of public goods. They will tend to 'cherry pick' i.e. seek out the most profitable opportunities, maximise the rate of return, avoid externality type costs and seek to shorten the payback period - all sensible commercial practice for a private corporation. However, this can create many public problems. It can mean that the overall infrastructure or delivery system can be weak and badly integrated or that important communities are under serviced or poorer persons are impoverished further because the cost of necessities is rising. The fragmentation of the US rail system, the pricing problems of the UK water system or their safety problems in rail are an example of this tension at work.

Accordingly economic imperatives drove governments and the private sector, each for their own reasons, into seeking partnerships but in turn the success of such a partnership required new conceptions of regulation to manage the partnership. This is essentially a deal between public and private that try to ensure that public objectives are met and that the role of the private sector is beneficial and not a 'cherry picking' operation. It should be stressed that this cannot be conflated with competition law, which relates to market structure and market practices. The regulation we are talking of here is a complex system that really attempts to establish and then monitor a very detailed compact between two different financing and operational systems - public and private. Experience and operational efficacy in regulation is an evolving art and an art we are new to in South Africa. The interrelationship between regulation and competition law is an important area, which we do not have the time to canvas here.

It is important to understand why states in the developed capitalist economies began to seek out this growing appetite for long-term investment on the part of the private sector. There are a number of reasons for this and time prohibits their full exploration now. However, as incomes rose and expenditure and investment patterns changed the burden of public financing grew and the choices wealthier citizens wanted became more diverse and particular. The public sector, in its then form, placed too much burden on the state budget and the public sector was not responsive enough to changing demand patterns in the economy - it was rigid and bureaucratic in the face of these challenges. Ways had to be found to inject new dynamism into the provision of public goods and reduce the fiscal burden. Some radical governments such as those of Margaret Thatcher and the late Ronald Reagan, fired up by hungry private sector interests, commenced a fire sale. Others such as the Scandinavians moved more systemically and sensibly as the process was led from the left and not the right. Soon Perestroika emerged in the Soviet Bloc that explored the problematic within the context of planned economies with major political economy effects. However, either way the lessons of the need for regulation were learnt and new systems evolved.

In the ANC's Department of Economic Policy we studied and debated these developments carefully and after much debate the basic approach - although not the operational experience - was captured in paragraph 4.2.5 of the RDP in the following way:

4.2.5. In restructuring the public sector to carry out national goals, the balance of evidence will guide the decision for or against various economic policy measures. The democratic government must therefore consider:

4.2.5.1. increasing the public sector in strategic areas through, for example, nationalisation, purchasing a shareholding in companies, establishing new public corporations or joint ventures with the private sector, and

4.2.5.2. reducing the public sector in certain areas in ways that enhance efficiency, advance affirmative action and empower the historically disadvantaged, while ensuring the protection of both consumers and the rights and employment of workers.

I hope it is evident from this brief theoretical detour that the simple notion that the private sector is more efficient and that the state should leave everything to it is fundamentally flawed in terms of theory, policy and citizen welfare. The distinct problematic of the efficiency and dynamism of the public sector is facilitated by the correct macroeconomic framework, the corporate structures and the managerial practices within the SOE. This is true when we look at the overall efficiency of the private sector as well. Given the different economic location of the enterprises there are important corporate and managerial differences between public and private enterprises. The managerial science of the public sector and the private sector has a great deal in common but they are not identical.

What can be distilled from this review of the situation is that all states are increasingly confronted by the need to create a new relationship between the public and private sectors of their economy. This is driven by opportunities for financing, technology and human capital partnerships between the state and the private sector. These opportunities emanate both from the investment calculus in world capital markets and the need for a new dynamism in highly developed public sectors. However, the partnerships have to be located within sophisticated, adaptive and administratively strong regulatory systems.

A sad irony emerges from this summary and it is that public-private partnerships are more effective within relatively developed states and economies. They are far more difficult in weaker states and economies where they all too often become public risk and private profit. Redressing this impediment to development is at the core of NEPAD since official development assistance alone has no prospect of initiating development.

We also need to understand and unpack the purported efficiency of the private sector versus the public sector. As indicated above there is dynamism about the private sector in general arising from the pressures for private profitability. This generates innovative energy and appropriate and specialist human resource capacities. The responsiveness to customers, not universally present because of the impetus to monopoly and oligopoly, makes the enterprise more adaptive and aware of its external environment. These attributes are vital and important but as we have discussed not always capable of being fully reconciled with a wider public good. Mixing and matching the commitment to and awareness of public good with attributes of private sector behaviour is the essence of the managerial science of the public sector. As already indicated this requires appropriate macroeconomic and institutional frameworks to achieve the necessary adaptability and dynamism in the SOEs.

Restructuring State Assets

We embarked on a restructuring of state assets ten years ago. We started with urgent matters and now need to establish a more lasting institutional efficacy and a more conducive macroeconomic terrain for the SOEs. We started by dealing with weak and reactive corporate structures often saddled with large debt, poor technological innovation capacities and aging capital equipment. To address this required the range of policy instruments envisaged in the RDP. Where an asset or entity did not relate to the main activity be it in transport or in the energy system - we moved to sell the asset to the private sector. Where we needed technology and human capital we moved toward strategic equity partners. We have not as yet used concessions (outside of BOT toll roads and gambling) and joint ventures to a great extent, as this requires sound corporate and regulatory structures in the public sector. Recently we have successfully used specific public private partnerships (PPP) to finance and service infrastructure for public use purposes (prisons, the Albert Luthuli Hospital and the new dti Campus). These are sophisticated arrangements.

Questions of Emphasis

So precisely where are we going now? To answer this we first have to make brief mention of the Microeconomic Reform Strategy (MERS). Having established more favourable conditions for macroeconomic stability and balance we needed to improve the efficiency of our systems in order to open the way for more investment in competitive enterprises. We cannot expect to increase the levels of investment if our infrastructure cannot match demand or if it offers services that do not match other economies that we inevitably must compete against for investment. The MERS deals with critical crosscutting activities that are central to modern and competitive economies. Energy, telecommunications, logistics, research and development and access to finance are the areas focussed on. Launched in the Presidents State of the Nation Address in 2001 initially as an Action Plan and then as the more coherent MERS this programme has to now move faster.

This requires that in DPE we focus on getting our systems working. This in turn requires that we need corporate structures that can invest on their own balance sheets and provide efficient and reliable service to the economy. We will need the private sector to be involved with this endeavour.

A State Owned Enterprise

To understand this point more fully we need to now more carefully define a SOE. The state has many institutions that constitute the public sector in that in their legal form they are an organ of the state or owned by the state. Many of these are institutional forms that really have to reside in the state. Some like the Company and Intellectual Property Office (CIPRO) fulfil critical functions for which a user charge is extracted. Conceptually one could ask a private company to do this but effectively the state would set the prices and lay down the rules. In our current situation we exact a user charge and operate the institution on a trading account formula. What could not happen is to allow the CIPRO to be some profit maximising entity owned by private companies as their actions impact on the whole commercial environment. CIPRO earns revenue but it does not have a balance sheet and does not raise capital in the capital market.

The SOEs that we are dealing with in DPE are functions that can be given a corporate identity for contractual purposes in the market place. In particular the enterprise can enter the capital market to raise finance as a corporate entity and not as the National Treasury. Accordingly, it can be made into an entity that charges prices and which can develop a balance sheet that can be used to attract capital in the capital market. To be corporate in this sense is to have a structure and a decision making process that is predictable within commercial principles known to the capital markets. Decision-making cannot be capricious or at political whim. However, it is also the case that the enterprise cannot operate in order to maximise profit, it has to maximise certain economic benefits (externalities if you like). We have canvassed the reasons for this above. So a SOE operates in the market but within rules that are not derived from the logic of the market place alone. This is a relatively sophisticated institution and as we indicated requires a management science of its own.

In South Africa, as in most countries, we have moved from entities that were functional agencies of the state and that had to be understood within the logic of fiscal policy to enterprises that had to be understood as corporate enterprises. So in the first years after 1994 we focussed on making the entities we had inherited into enterprises - usually referred to as corporatisation. In the case of Transnet the previous regime had moved to corporatise it in 1990 but had left a very cumbersome structure saddled with large debt in the pension funds. With Telkom and SAA we needed partners that could take the enterprise out of being funded utilities into enterprises that could compete on the managerial and technology terrain increasingly characterising these sectors globally. We had to develop new regulatory structures. We also found many enterprises where there was no economic logic to having them in the public sector and we moved to sell them to private interests.

So a SOE should have a clear public strategic purpose based on an economic and financial calculation in relation to the likely conduct of the private sector and the public needs our society and economy has. It needs to be capable of generating a revenue stream that can establish a viable balance sheet but in doing all of this it cannot detrimentally affect the working of the rest of the economy - it cannot 'cherry pick'. It is for these reasons that Eskom, Transnet and Denel will remain as SOEs.

We are entering a phase where we have to make the SOE work with the private sector to operate and finance components of the overall infrastructure systems we seek to build to world-class levels of efficiency and capacity.

As we bring in the private sector we need to briefly look at the question of competition within a regulated system. Clearly some degree of competitive pressure is useful as it provides an inducement toward efficiency and acts as a check on rent seeking behaviour. Let me illustrate this by using the energy system as an example. The involvement of private independent power producers (IPP) can provide an internal form of competition within the system that can improve efficiency - that is if the IPP is efficient which is not an automatic consequence of their being private. Generally therefore one would seek an IPP that has experience and a track record in another system. Even within a SOE such as Eskom moves are made to ensure that the management of the generation plants manage their plant to its optimal efficiency. In Eskom this is now done by clustering generation plants and having a 'trading system' within their overall supply capacity. This is the use of competition to ensure the efficiency of a system, which is of a public/private nature. Having different terminal operators within our ports will also offer a degree of competition that should improve efficiency. The model is complex but can be implemented in many areas. It is an area that we will now be moving into.

It is important to understand that this is not some sell off type privatisation and requires strong and effective SOEs as well as efficient private partners. The purpose of such a partnership is to achieve higher levels of investment; overall system efficiency for the economy; improved technological capacity; improved management (within public and private entities) of public assets; enhanced human resource capacity, sustainable non-recourse financing options and better customer service.

For DPE in the next five years our objective is to locate Eskom, Transnet and Denel, as SOEs, within a system of public/private partnerships with the above characteristics in the energy, logistics and defence sectors where they play the pivotal and decisive role. In addition we will deal in various ways with SOEs in the ICT, forestry, recreational and mining industries that report into DPE. In these latter cases the SOE concerned does not occupy a central position in the sector and therefore the objectives will perforce be different. It is my intention to provide finality of intent in these latter cases by the end of the year.

In the cases of Eskom, Transnet and Denel we will simultaneously ensure policy certainty with the responsible policy departments (DME, DOT and Defence), finalise the appropriate corporate structure, establish a coherent and sustainable financing strategy and move to implement - as appropriate to the situation - concessions, joint ventures and PPPs in various areas. We are not starting from scratch but completing work commenced by the previous administration. The September deadline for the financing strategy will require that we have clarity on the policy and corporate structures by then. In regard to the latter there is work already in hand and announced such as the recent announcements by Spoornet.

On the DCT terminal I have commenced discussions with the Department of Transport and Transnet to reach agreement on certain technical aspects of the NPA Bill, which is basically sound and a very important development. We will table the Bill once again at the earliest opportunity and by the end of this year we should be well advanced in the bringing in of a private partner into the DCT.

Where appropriate we will consider initial public offerings (IPO) such as that successfully done with Telkom. Let me set out the logic of such IPOs. An IPO allows savings to be drawn from the private sector into the provision of infrastructure. Since it is a share issue individual investors do not need large financial resources and this has the benefit of spreading the range of assets available as investments for our citizens. When done in the manner we did Telkom it allows for new entrants into the investment markets and in particular our JSEX. For an economy of our size and sophistication an active and large stock exchange is an important aid to capital accumulation and investment. Accordingly, it is an objective of government to ensure we have a vibrant corporate sector and an efficient stock exchange. An IPO would be considered when the corporate structure and balance sheet of the SOE is strong and where we see the opportunity of lowering the cost of capital through an IPO. However no IPOs are envisaged during this financial year. We will concentrate on concessions, joint ventures and PPP arrangements.

Relations with the Trade Unions

It is the job of trade unions to protect the interests of their members and their perspective will always be more public than that of private sector enterprises. Government accepts and welcomes these objectives of the union movement, as they are integral to the working of our society and the democracy within which our economy is embedded. Accordingly the principle that the restructuring of state assets is a process to be negotiated with the unions is fundamental to the process.

We are of the view that the shift in emphasis outlined above provides a great deal of common ground between the government objectives and those of the union movement and private enterprises. We are essentially now in a phase of investment, growth and the more efficient management of public assets. Rising employment in the economy is our target. This may not always mean rising employment in a particular enterprise and such a change will have to be negotiated. Increased skill levels and greater respresentivity in employment within the SOEs are key government objectives. In all these areas we will work with the unions to attain common objectives.

It is inevitable and correct that we may have differences over specific actions and situations. We will seek to negotiate solutions to these. Our objective is however, to establish commonality of purpose in the larger objectives of increasing investment and providing efficient and cost competitive infrastructure through the strategic use of SOEs.

I will meet union leaders on a number of specific issues soon and in July to discuss the National Framework Agreement (NFA) and how we should move forward with it.

Black Economic Empowerment

It is imperative that the public sector plays the leading role in the process of broad based black economic empowerment (BEE). Working with the dti we will move toward a uniform and harmonised approach to BEE on the part of the SOEs in the DPE fold. As envisaged in the Broad-Based Black Economic Empowerment Act we will focus our attention on advanced skill and managerial cadres, procurement and enterprise development in the SOEs. The size of the SOEs means they have a very significant role to play.

Thus far in the restructuring of state assets significant contributions have been made toward BEE. It is our intention to continue with this process. Currently DPE is working with the SOEs to move some 20 or so enterprises into the private sector in a manner that promotes BEE. With the launch of the NEF we will now work closely with them to facilitate BEE within the restructuring of state assets. I will make further announcements in this regard during the course of this year.

The DPE Budget

I believe that the Budget of R75, 9 billion is adequate to our needs. The Department is very human resource intensive. My priority within the department is human resources. It is our intention to add new skills to our personnel complement. In view of the high level of skill needed to engage with the complex financial, corporate and strategic matters ahead we will raise the overall skill level and concentrate staff in the higher grades. It will be necessary to bring in specialists to assist both with the required expertise and to build capacity in the public service. Emphasis will be given to building internal capacity with consultants being used where their expertise is essential.

We are moving toward a slight reorganisation of work within the department. The three core work areas will be analysis and risk management, governance and policy and corporate structure and strategy. This will be supported by the normal support functions. In the light of this we will be adjusting some of the budget lines within the rules of the National Treasury. We will keep the Portfolio Committee briefed on these developments.

Conclusion

Once again let me say how much I look forward to working with you. The Department, under the leadership of Dr Eugene Mokeyane, will provide continuous information and I am confident it will establish a good working relationship with Parliament. I have suggested to the Chairperson, Dr Martins that we should familiarise the members of the Committee with the infrastructure within the SOEs and also to see the challenges we face in the fields of energy, logistics and the defence industry. I believe we will all have the privilege of an exhilarating learning experience whilst representing the aspirations of our people.

Thank you for your attention.

Issued by: Ministry of Public Enterprises
14 June 2004