Department Strategic Plan: Briefing by Minister

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Public Enterprises

28 May 2004
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Meeting report

PUBLIC ENTERPRISES AD HOC COMMITTEE; LABOUR AND PUBLIC ENTERPRISES & SELECT COMMITTEE: JOINT MEETING
28 May 2004
DEPARTMENT STRATEGIC PLAN: BRIEFING BY MINISTER

Chairpersons:
Mr B Martin (ANC, National Assembly); Ms N Mntwanabi (ANC, NCOP)

Documents handed out
None

SUMMARY
Minister Alec Erwin addressed the committees on the streamlining of state-owned enterprises, the forging of public/private partnerships, the healing of the rift between the first (skilled) and second (unskilled) economies, as well as the improvement of infrastructure.

Focus would be on energy, telecommunications, transportation, research and development and access to finance. The priority was to strengthen the corporate structures of Transnet and Eskom, who were "in the DPE stable", to integrate the different components of Transnet which included Spoornet, the National Ports Authority, Port Operations and to ensure that the structure of Transnet allowed it to finance the investment government needed.

The Minister was asked to clarify the restructuring of Transnet, the position of Eskom's mothballed stations, as well as any possible disagreements between Cosatu and the Department. He was asked to specify how exactly the Department would bring the first and second economies together and develop skills. Clarity was also sought on the Department's position on equity deals.

During the discussion Members sought clarity on the progress made by the Department in sourcing the funding for the recapitalisation of Spoornet, the process involving the selling off of 30% of Eskom, the Department's plans to develop skills in the second economy, its plans to bridge the gap between the first and second economies and whether equity financing was a viable option in sourcing funding for Spoornet.

MINUTES
Briefing by Minister on Plan of Action
Mr Alec Erwin, Minister of Public Enterprises, hoped that this briefing would serve to establish contact between the Ministry and the two Parliamentary Committees. On the 14 June 2004 the Budget Vote debate of the Department would deal more exhaustively with the policy and practical issues. The aim of this briefing was to outline and provide some background to the issues raised by the President in his State of the Nation Address. This would assist in understanding the questions of emphasis and the priorities of the Department over the next five years.

The largest of the tasks that would have to be undertaken, as explained in the State of the Nation Address, was to provide a more detailed programme of the investments the Department intends to make in the state owned enterprises and how these would be financed. This was an important task as it would establish far more clarity in the economy and in markets as to what the Department would be focusing on in its improvement of infrastructure.

What emerged from the ten-year review was that the South African economy has changed quite considerably. It is more sophisticated, more diverse in its production and export patterns, more value is added to the economy and this poses some very real challenges to increase the growth rates. These changes have been very positive. The economy in terms of the growth rate, was performing much like a developed industrial economy than a developing economy. The biggest challenge was to increase the growth rate, which would assist in the supporting of development.

The second challenge that emerged from the analysis was that the South African economy was developing a fault line between what the President has called the first and the second economy. Thus the first economy exhibited a rising economy, rising skill levels, rising needs for skills, with much more sophisticated production taking place and a very competitive economy. Yet people with low levels of skill coming from a poor educational background who were slightly older, or even young people who did not have the appropriate skills base in science and technology and computer literacy, would find it very difficult to get into the labour market. As a result, they were being pushed to the margins of the economy and this group of people were now referred to as the second economy.

The challenge was to prevent this fault line from getting deeper and to reintegrate the economy in various ways. The details of this have been very well covered by the addresses to Parliament over the last few days.

With regard to the growth rate in 2001 the President announced the Micro-Economic Reform Strategy and this focused, in addition to specific sectors, on very important cross-cutting aspects of South Africa's economic efficiency. These were identified as energy, telecommunications, transportation or logistical systems, research and development and access to finance. Higher levels of investment and higher growth rates would only be realised once government ensured that South Africa's energy system remained efficient and reliable and very competitive in cost. This meant that as the production methods became more sophisticated South Africa needed very consistent supplies, and breakdowns and brown outs could no longer occur. Far more efficient logistics were thus needed.

Logistics referred to the movement from the point of production to the point of sale, and how efficiently this process was executed. At times this process would span 3000-4000 kms when South Africa traded around the world. Over the last 18 months real problems have emerged with backlogs at South African ports, inadequate alignment between the rail and port systems, as well as inadequate alignment between the road system and the port system. As stressed by the Minister of Transport, and as supported by the President's speech and by the Minister himself, a top priority was to streamline and integrate the logistical system in order to get faster time to market. If this was achieved it would attract far more investments in the agro industries as well as in the advanced manufacturing industries. It would also open up more opportunities around the logistical system for medium- and small-sized enterprises to enter the market. This was thus a very important priority for government.

Telecommunications remained a priority, especially the reduction of costs of telephony and also ensuring that access to broadband was more accessible. The Minister stated that he would not delve into the research and development and access to finance aspects as they were largely other portfolios.

The priority was thus to strengthen the corporate structures of Transnet and Eskom, who were "in the DPE stable", to integrate the different components of Transnet which included Spoornet, the National Ports Authority, Port Operations and to ensure that the structure of Transnet allowed it to finance the investment government needed. This meant grappling with problems that government inherited with regard to the debt, the pension funds and generally ensuring that government was able to fund the high levels of investment that were now required in Transnet.

The Department would continue as it has done all along to deal with those entities that were not strictly speaking part of the core function of the Department, and those would then be sold to the private sector. The Department would, as it has always done, continue to ensure that there was a Black Economic Empowerment (BEE) component when this was done, and the Minister intended to conclude some of the deals the Department has been looking at as quickly as possible.

The Department would continue to use the instruments it has used before - its strategic equity partnerships, joint ventures and concessions - to bring the private sector in wherever it could and wherever it made sense to do so. The recent first phase restructuring proposals for Spoornet which related to its internal operating efficiency, its safety levels and human resource levels, make a very important proposition to develop a customer-specific solution, and the Department was very supportive of this. It was thus beginning to differentiate its customers and this would allow government to bring partners into the rail freight system via joint ventures and private investment in the supply of rolling stock and specialist equipment used to transport freight.

The Department was thus looking to speed up some of these processes and the experience gained over the last three years with Public Private Partnerships (PPP), particularly using the experience gained with the National Treasury's unit on PPPs, would allow the Department to introduce these on a wider scale.

The thrust therefore of the focus of the Department over the next five years would be to urgently spell out a detailed statement on the infrastructure the Department wanted to bring into play, as was spelt out in the President's State of the Nation Address, how this would be financed and to bring out a more coherent logistical policy and strategy for everyone. The first drafts of this have already been completed. This would allow the Department, in the transportation and logistics sector, to increase the levels of investment, to open more opportunities for investment and to reduce the backlogs with some of its infrastructure both for exports as well as the improvement of the internal flows of transportation in the South African economy.

As far as energy was concerned the Department was entering a very interesting new phase. The projections made by government in 1994 as to when it would have to introduce new capacity have proved to be too far out and government now has to move more quickly to strengthen its energy capacity. As the President mentioned in his address the Department of Minerals and Energy will start to put out tenders at the end of 2004 for new energy capacity construction, in which Eskom would also be able to play a role. This was an important big step as government had large projects to complete. In the case of Eskom, it aimed to bring into play the Inga Project (Congo River) and the Western power pool and also to consolidate the Memorandum of Understanding on energy systems in the Zambezi Valley with Mozambique.

The intention to open 30% of the generating capacity to the private sector remained the Department's intention. The Minister said that he needed to state again, as he has stated in his previous briefings yet there was a persistent refusal to hear his words, that opening 30% of the generating capacity to the private sector did not mean that government would automatically sell 30% of Eskom. This was not the case at all. The Department would instead look at possible packages that Eskom could assist the private sector on, but it was really looking for the entrance of new capacity with regard to the private sector. He said that this must be stressed. Government was thus not going back on anything nor had it suddenly changed its mind as to whether it still wanted to sell 30% of Eskom, as government never said it would, but it would proceed and expedite the process as the President has already given the new timelines by which new capacity must be introduced.

With regard to DENEL, the Department aimed to strengthen it which required some further degrees of reorganization within DENEL. This also required the Department to consider a more effective way to capitalise DENEL's activities, and the Minister had immediately started to engage DENEL on this matter to find means to take its very valuable capacity, both technological, scientific and with regard to military equipment, which needed to be maintained and strengthened in the South African economy.

There were many other smaller projects which were not unimportant to the communities they affected which the Department would continue to deal with. Conclusion must be reached on the negotiations with the Richtersveld community around Alexkor. Important decisions had been made by the South African courts which government would have to accommodate. The Department needed to engage with that community to find a mutually beneficial solution to that matter. Of prime concern to the Department was the fact that whatever the Department does for the community must be sustainable, viable and in the best interests of that community.

The Department has largely completed the sale of forests in SAFCOL. These deals were now operational in the main, although the Department did have some cleaning up to do as far as the legal work was concerned. The Department would shortly make a decision on the role to be played by SAFCOL in the forestry industry. The Minister stated that he has asked the board of SAFCOL to advise him on this, and he will consider the matter further.

There were many smaller companies within Eskom, Transnet and DENEL that the Department would be moving into the private sector. The Minister would be engaging very soon with Arivia, which was also owned by the State in the ICT sector, in order to arrive at a more coherent approach on how to deal with Arivia's future as it was an important enterprise.

The Department's commitment to working with the trade unions remained absolute, as it had high respect for the function of a trade union which was to protect the interests of its members. This meant that government must at all times enter discussion and negotiations with the trade unions, and the joint task would be to find solutions which benefited the country as a whole. The Minister stated that he did not place much store in the attempts to create a large difference or debate between the union movement and government, as he believed that there was very little difference between the approaches of each on these matters. Government would continue to engage with the trade unions and talk these matters through. The Minister reiterated that government's policy has been consistent in this regard for ten years now.

The Department would be meeting with the union movement in the same way as he has been meeting with many other stakeholders in this sector, in order to clarify the direction to be taken. The most futile exercise for any serious endeavour would be to negotiate one's intentions through the media, and government would thus most certainly engage directly with the stakeholder concerned. The Minister stated that his view was very strong on this matter and emphasised that nothing would amount to policy unless it came from his pen, and not from any second hand account, any news report or media report. It must come from official documentation either from the Minister himself or from Cabinet. These guidelines would ensure a very healthy relationship between all parties in this process.

There were some exciting projects that the Department could contribute to very strongly. During 2003 the Department began to co-ordinate all the roleplayers in the Department of Trade and Industry that were involved in the Nelson Mandela metropole, which would allow government to really increase the movement of the manganese and ferromanganese dumps to the new port of Koega. This port area could then be redesigned and this would do a great deal for the city of Port Elizabeth. The Department would then do the same for all other major South African port cities to work with other departments and ministries to speed up the utilisation of state assets, so as to encourage investment in those areas. The Minister stated that the new Shaka's Island development in Durban was an extremely exciting development and was, in his opinion, one of the greatest aquariums in the world. This was the kind of project that the Department could begin driving by careful co-ordinated and efficient use of state lands around South African ports and harbour cities.

The Minister concluded by assuring the Committee that the Department would make much more comprehensive written documentation on these matters available to Members during the budget discussions.

Discussion
Mr I Davidson (DA) stated that there have been indications that the source of funding for the recapitalisation of Spoornet has not yet been resolved. He requested the Minister to shed some light on the progress made thus far.

Minister Erwin responded that Transnet borrowed from the capital market and the Department's intention was not to alter this arrangement of Transnet's finances. The Department would however be refining the manner in which that was done across the whole Transnet organisation, as this would have a large impact on the overall capital market. It was for this reason that the financing strategy would have to be devised in close collaboration with Treasury as well. The Department would be considering the financing of a significant portion of the operations through partnerships with the private sector, to bring in new infrastructure, rolling stock and equipment.

It was thus not the case that the Department did not know how it would go about financing the entrance into the capital markets, but it did still have to decide on the precise form that entry would take.

Mr Davidson stated that there were a number of "mothballed" Eskom stations that were currently being refurbished and brought on line. He asked the Minister to explain whether he considered this too to constitute selling off of 30% of Eskom to BEE units.

The Minister replied that he wished to stress again that government has decided to open up 30% of Eskom's generating capacity to what are known as Independent Power Producers (IPPs). There were various options the Department could explore here, including the introduction of totally new power operators. Eskom would be bringing some of the mothballed stations into play and this must be done quite soon. The target would be to provide greater clarity on government's plans in this regard as soon as possible.

The Department also set itself the target that at least 10% of that 30% would be allocated to BEE companies, and there was quite a bit of work that needed to be done on this.

Mr Davidson stated that, despite the indication by the Minister during his briefing today, an article by the Secretary General of COSATU had appeared in the newspaper that morning which called for a meeting with the Minister because there was a difference of viewpoints. He asked the Minister to clarify this.

The Minister responded that he did not have any disagreements with the Secretary General's article at all, and agreed with the article that government focused on investment, growth and upgrading of skills and this was in line with the Minister's briefing to the Committee. He stated that if there was any misunderstanding between them it would be resolved face to face. He had already requested meetings with the trade unions and it was imperative to meet soon with them to clarify the position. He would be very surprised if there were no areas at all in which government and the unions disagreed on, otherwise there would be no need for unions. He did however welcome a healthy exchange with the unions.

Ms Mpaka (ANC) stated that the Minister mentioned that those with "old skills" were in process of being pushed away into the second economy. She asked the Minister to explain whether the Department had devised any plans to develop those skills, or whether any funds have been allocated to skills development.

The Minister replied that the Department stressed the fact that it sought to help with training in the Expanded Public Works Programme (EPWP), and thus the labour-based construction methods that would be utilised in the EPWP placed heavy stress on training. This would enable skills to be retained by the communities in which the Department carried out those activities. The Minister stated that he had not yet familiarised himself with all the training activities of the State-owned enterprises which were significant, as were the social responsibilities of Eskom, Transnet and others. He would like to get more information on this to leverage off this base and achieve a great deal more. The Department would report back to the Committee on the progress made here.

Mr Frolick (ANC) asked the Minister to elaborate on the role to be played by the Department in providing the linkages for ultimate mobility from the second economy into the first economy.

The Minister responded that there were many areas in which the Department could become involved here. This included methods to utilise the rail links that run through small towns which have now fallen out of use to open up economic opportunities. This was a very exciting challenge. There were a number of these lines that the Department would introduce partners to, and it was a matter that the Minister and the Minister of Transport felt strongly about and they would be working closely together on this. This was a way of opening up to the second economy by opening up transport routes, and the Department would work closely with the Departments of Agriculture and Trade and Industry on this. The provision of electricity and linking the schools in rural areas were examples of the contribution to be made by the Department in pulling the second economy closer to the first.

The President stated that this was a systematic process and thus all government departments would now have to systematically spell out what they would be doing to bridge this gap. The Department would not be fully ready with this breakdown before the budget vote, but it would be able to provide Members with a more comprehensive briefing later in the year.

Mr Davidson stated that if one added the financing requirement of Spoornet which was in region of R15bn and of South African Airways which stood at R6bn, one arrived at a huge figure. If this was the case, was equity financing not an option? This was a vague area which needed clarity, because it did seem that greater emphasis needed to be placed on some sort of equity financing which could involve Public Private Partnerships.

The Minister replied that Mr Davidson appeared to be making a complex issue out of a matter which was rather simple in principle, but complex in the final detail. The Member was referring to capital expenditure requirements which could be financed in a range of ways in Transnet. If Transet required an amount of R15 billion in capital expenditure over four years, this was not a massive amount in the capital market. This was not a massive amount if one considered the fact that a recent single state issue amassed R7 billion. This would thus not have a dramatic and sudden impact on the capital market as suggested by Mr Davidson. The Department would however be looking at the most effective means of financing.

It was far more difficult to spell out equity because those deals were just much more complex to negotiate. A sensible and pragmatic approach must therefore be followed here. The Department would enter the deals, negotiate and would release more reliable information as it was received. The Department will provide certainty in September 2004 but, because of the very manner in which the market operated, it was not possible to provide precise detail with regard to equity financing.

The Budget Review document emphasised the fact that the Department continually tried to improve the information it provided on the markets, and it would be much better if the Department could give accurate and indicative numbers around its capital-raising activities in the public sector. This was the Department's aim by the end of 2004.

The Chairperson thanked the Minister for his input and stated that the Committee looked forward to many more vibrant interactions.

The meeting was adjourned.


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