Address by Mr Malusi Gigaba, Mp, Minister of Public Enterprises, on the occasion of Budget Vote 10 in Cape Town

1 Jun 2011

Honourable Chairperson,
Deputy Minister Dikobe Ben Martins,
Honourable Ministers and Deputy Ministers,
Honourable Members,
The Leadership of our State-Owned Enterprises,
Ladies and gentlemen

Today is 1 June, the International Children's Day, a day that serves as a reminder to all of us gathered in these hallowed chambers that our actions today must speak to the future. We owe it to our children, the guardians and guarantors of our future, to conduct ourselves in ways that secure them a prosperous and stable future.

We are also mindful of the fact that this is National Youth Month, and we are hence duty-bound to focus on how our plans and actions will bear on the aspirations of our youth. The youth of 1976, and the generations of youth both before and after them, were correct to fight steadfastly for freedom, in pursuit of a South Africa in which all would share in the country's wealth - indeed, for a South Africa that belongs to all who live in it.

Chairperson,

We are mindful of the fact that South Africa is facing significant economic challenges; challenges already captured most eloquently in the Ministerial Performance Agreements, the New Growth Path (NGP) and the Industrial Policy Action Plan (IPAP) all of which provide a comprehensive strategic context for the development of the strategy of the Department of Public Enterprises.

The Budget presented before this House today is modest, but it provides the tools with which government as a shareholder ensures that the State-Owned Enterprises (SOEs) deliver to their public mandate. 

In this context, I wish to provide some highlights of progress made in the last year, my vision for the future role of State-Owned Enterprises (SOE) as instruments of the developmental state and finally I will provide a broad overview of strategic considerations relating to SOE in our portfolio.

Chairperson,

To start with, I have delegated South African Forestry Company Ltd (Safcol) and Alexkor, as well as the winding up of Aventura and the Pebble Bed Modular Reactor (PBMR), and our strategic interface with the provinces to Deputy Minister Martins. He will, in his presentation, expand on these themes.

During the previous financial year, the department used 98% of its R555.5 million budget; and SOEs made sterling progress in enhancing the State's developmental agenda. We also took steps to enhance the performance of the department by, among others: 

• Appointing the Director-General, Mr Tshediso Matona and tasked him to address critical vacancies and the future capacity requirements for the department;
• Government made the bold commitment to ensure the security of supply of electricity by approving a funding strategy for Eskom. Buoyed by this commitment, Eskom approached the international capital markets to raise debt funding of $1.75 billion. It was encouraging that the transaction was oversubscribed and generated interest in excess of US$4 billion, demonstrating the confidence of international investors in both Eskom and our country;
• We appointed the Board of Transnet followed by the Group Chief Executive, Mr Brian Molefe, as well as the Executive Managers of the Group and thereby restored leadership stability in the organisation;
• We commenced with the fleet renewal plan at South African Airways (SAA) with the acquisition of the Airbus A300-200 long-range aircraft. Between 2011 and 2015, we will acquire 25 additional aircrafts of varying ranges which we will use for long-range as well as domestic and regional hauls, further to enhance SAA's fleet capacity. These new fuel efficient aircraft will significantly improve the airline's service offering and will have a positive impact on the reputation of SAA as a leading airline on the continent; and
• Broadband Infraco invested in its national backbone fibre optic network which enabled the company to provide strategic international connectivity to operators in the Southern African Development Community (SADC) Region and in the West Coast of Africa.

During this financial year, we will continue to provide strategic leadership and vision to the department and our portfolio of SOEs as well as address the organisational needs of the Department of Public Enterprises (DPE), in order to have the capacity to more effectively fulfil our shareholder management function.

Chairperson,

The Department of Public Enterprises has the mandate to provide strategic shareholder oversight of a portfolio of key SOEs.

The developmental state needs the ability to plan for long term growth, drive investment in areas of the greatest impact and form strategic economic partnerships to develop capabilities in targeted areas of the economy.

Most importantly, the concept of the developmental state inspires us to be bold, to play an active and activist role in the management of the SOE, and not shy away from making tough decisions.

We need to forge partnerships with the private sector and all stakeholders to mobilise skills and capital in pursuing our national objectives without giving up strategic control of key national economic assets.

As the New Growth Path (NGP) urges us, we need to align all our key stakeholders behind ambitious social compacts so that we move forward together as a unified nation.

Chairperson,

The NGP sets the target of five million new jobs by 2020. The SOEs can contribute in at least five ways - through:

• the expansion of their direct employment
• providing the infrastructure that can unlock jobs in the private sector and in rural areas
• expanding procurement of locally-manufactured components and consumer goods used by SOEs, thereby expanding employment in the SOE supply-chains
• providing skills to the wider economy through their mandate to produce more artisans and other key skills and
• keeping tariffs for services competitive and thus helping to reduce input costs in the economy.

Accordingly, our new vision for the department is to drive investment, efficiencies and transformation in our portfolio of SOEs, their customers and their suppliers to unlock growth, create jobs and develop skills.

The department has historically put considerable effort into the development of a shareholder management model. Whilst this model undoubtedly lays a firm foundation for our management of the SOE, it has its limitations.

Initially, the evolution of our SOE was premised purely on legalistic principles not cognisant of practical management of SOE activities. The department is embarking on a paradigm shift to ensure proper alignment between SOE performance and executive or directors remuneration.

This paradigm shift requires patience and careful consideration to ensure ultimate successful implementation. Remuneration of SOE executives and Board members is an important and complex area for governance of SOEs which requires careful consideration in consultation with Cabinet which the department is currently ceased with and I intend to take it forward with the necessary speed in order to support stability in the governance of SOE.

The very rationale for SOEs is the developmental mandate they have which relates to services provided in poorer parts of the country, skills development, industrial opportunities they create for local suppliers and many more.

There is a need for innovations in the governance of the SOEs if our new vision is to be achieved. These innovations will be focused on five key areas that relate to planning, funding, procurement, productivity improvement in the SOEs and integrating SOE developmental initiatives more effectively with overarching government programs.

Chairperson,

The sharp decline in public investment in infrastructure in our country between 1976 and 2004 has created a significant backlog in infrastructure investment which creates a significant constraint to investment and growth in key SOE customer sectors.

Had we been consistently investing at 10% of Gross Domestic Product (GDP) in infrastructure between 1994 and 2009, we would have invested a further R1.5 trillion in today's currency.

As commercial enterprises, the SOE plans are based on the funds they can raise off their balance sheets. Clearly there is a funding gap between the required investment to unlock growth in customers and these existing investment plans. 

Secondly, a narrow approach by SOEs would ignore what economists refer to as positive externalities. For example, the societal benefits to the environment of moving more passengers and cargo from road to rail; the foreign exchange benefits of reducing the nation's fuel-bill and improvement to commuter safety.

Consequently, the department will continue to put considerable effort into the formulation of a new development-focused planning paradigm. No single institution, including the fiscus, is going to fill the funding gap. We need to start engaging creatively with key stakeholders in the private sector to see how we can qualitatively increase the rate of investment to fill this gap.

Our economy is characterised by very large mining, industrial and financial services companies that have the most to gain from an accelerated infrastructure programme, and with whom we need to forge social compacts to unlock their balance sheets and actively build funding partnerships to speed up the rate of investment in infrastructure and in our strategic customer sectors.

We need to begin this dialogue that aligns private sector players with our national economic objectives through concrete investment processes.

Chairperson,

Another area of focus pertains to leveraging our capital and operational procurements to promote investment in relevant industrial capabilities. Consequently, we have implemented the Competitive Supplier Development Programme that requires the SOEs to integrate supplier development considerations into the heart of the procurement planning and execution processes.

This has been complemented by the fleet procurement approach that aims to provide a ten to fifteen year consistent demand platform for the building of advanced industrial capabilities in relevant supply chains.

Both programmes have the objective of moving from a transactional relationship between the SOEs and their local and international suppliers to longer term developmental partnerships based on the continuous building of national industrial capabilities.

It is critical that demand-side initiatives are coordinated with appropriate forms of supplier support. Consequently, Minister Davies and I will jointly provide direct ministerial oversight to the roll-out of the procurement leverage programme to ensure that it gets appropriate focus and support.

I am also working with Minister Patel to ensure alignment between the procurement programme of SOEs and the Industrial Development Corporation (IDC's) new focus on building industrial capabilities in South Africa, to identify opportunities for small businesses and enterprises in the social economy and to integrate SOEs within the delivery mechanisms of the NGP.

Chairperson, 

We realise that the quality of service delivery of some SOEs is below acceptable levels in key areas. We need to ensure that SOE operational efficiency is continuously improving, even as we roll out our investment programs. Improvements in productivity simply means that we are using our assets more efficiently - producing more with less.

Consequently, I am implementing a programme of bi-monthly meetings with the Chairpersons and CEOs of the SOEs in our Portfolio. These meetings will systematically identify areas requiring productivity improvements and define interventions in these areas. 

The design and implementation of these interventions will be closely monitored by the department. This forum will also focus on concrete targets for the developmental mandate of the SOEs.

Chairperson,

Turning to skills development, it is critical that we enhance the level of inter-departmental coordination. There are currently over 9 000 learners enrolled in training processes in the SOEs, the bulk of which training is related to scarce and critical skills - 2242 engineering, 1064 technicians and 4273 artisan students.

A number of our SOEs have specialised and proven training infrastructure and associated capabilities that are being used to meet the SOEs' internal needs but are not being used to their full capacity because of funding constraints.

I am consequently working closely with Minister Nzimande to enhance the output from these facilities to produce skills for the economy as a whole by accessing additional resources from the National Skills Fund.

Our plan is to increase the output of artisans from SOE training facilities by 60% to 6780 students for the coming year. For example, we aim to increase output from Transnet from the present enrolment of 500 artisans to 1 500 artisans.

In addition, Eskom intends providing apprenticeship to 10 000 young people in its pipeline - up from 4 500 - and implementing a youth programme to support about 5 000 young people to find their way into employment - up from 200 - by 2015.

Furthermore, the SOEs will directly, and through partnerships with suppliers and commercial customers, provide support to Further Education and Training Colleges and provide on-the-job training to graduates from these organisations.

We will also be leveraging the SOEs in an integrated manner to advance youth development through our skills development, enterprise development and corporate social responsibility processes.

Chairperson,

We will work with our colleagues to ensure that our country's SOEs play their role in the expansion of infrastructure on the continent as part of the vision of creating an African common market.

We welcome the Presidential Review Commission on SOEs and we are in a continuous dialogue with the Commission around the department's experience in shareholder management. We look forward to their report.

Chairperson,

SOEs in our Portfolio will be investing over one hundred and five billion rand (R105bn) during 2011/12, comprised mostly of infrastructure:

• Eskom will be investing over R76 billion,
• Transnet, R25.8 billion, R15.1 billion (58.6%) of which will be spent on rail; and
• Broadband Infraco, over half a billion rand in new broadband infrastructure. 

With the expansion of operations associated with this investment, the SOEs will target growth in their direct operations of at least 13 000 new jobs; and expect to help the growth in their South African supply-chains by a further 40 414 jobs. 

Chairperson, 

Eskom's core responsibility is to ensure the security of electricity supply, particularly as reserve margins get tight until new capacity is built. This will require close monitoring of the extent and effectiveness of Eskom's maintenance practices and the company's technical plan as a whole.

Eskom's rolling capital investment program has climbed from R92 billion in 2005 to R549 billion to date. We are working hard to ensure that the funding of the capital investment programme is in place whilst ensuring that the roll-out of the programme takes place timeously and efficiently. 

Eskom is also working on their next generation supplier development plan to ensure that the impact of this expenditure on our industrial capabilities is optimised. 

Eskom has launched the "49 million" campaign to create a culture of energy efficiency and saving to mitigate the risks posed by our constrained power system; the impact of rising energy prices on competitiveness and household budgets and the respond to the need to reduce our carbon footprint. We will carefully monitor the roll-out of the campaign and provide concrete support whenever necessary.

We are also monitoring Eskom's role in future energy provision as per the Integrated Resource Plan (IRP) which may require us to find new and innovative sources of finance. 

However, Eskom's programme alone will not guarantee security of supply and the country will need additional investment in new electricity generating capacity which must be secured from the private sector over the next few years up to the delivery of the first unit of the Medupi Power Station.

Through its Medium-Term Power Purchase Programme (MTPPP), Eskom signed contracts with five Independent Power Producers (IPPs) since April 2010, totalling some 373 Mega Watts (MW) of capacity. They also signed up about 200 MW of municipal generation just for this winter.

In order to address South Africa's commitment to carbon reduction and clean energy and in line with the Integrated Resource Plan (IRP), Eskom has incorporated renewable energy projects into its build programme.

Having received firm government support, work is ongoing to find sources of funding to further strengthen Eskom's balance sheet without placing undue pressure on the fiscus. I am happy to inform this august sitting that the African Development Bank approved a US$ 365m loan to Eskom for the 100 MW Concentrated Solar Power Plant and the 100 MW Wind Power Plant.

Eskom has submitted a US$ 250 million loan application to the World Bank for funding from the Clean Technology Fund (CTF), the final outcome of which is expected later this year.

Chairperson,

Transnet's rolling five-year investment programme will be R110.6 billion. We are undertaking a comprehensive assessment of the level of investment required to unlock growth and to move goods from road to rail. In this regard, we intend to embark on a systematic process of engaging with both development and mainstream finance institutions and key customers to develop funding mechanisms for this programme. 

I am confident that we will significantly enhance our export capacity on key logistics corridors over the next few years to ensure that we take advantage of global commodity booms.

We are making considerable progress in building a firm foundation for our locomotive manufacturing cluster through comprehensive developmental programmes involving specialised skills-development processes, production process re-design and a range of technology transfers. In addition, direct investments are also being explored.

As the next step of this process, we are designing a fleet procurement programme to renew the Transnet's locomotives fleet, to provide capacity to support growth and fundamentally localise the relevant supply chain.

Given the scale of our national demand over the next fifteen years, we will be a significant market globally for locomotives and we will use this as an opportunity to ensure that South Africa becomes a global manufacturing hub for electrical and diesel locomotives, in partnership with leading Original Equipment Manufacturers (OEMs) and their home countries. 

We are also cooperating with the Department of Transport to explore how we can extract synergies from the Transnet and the planned Passenger Rail Agency of South African (PRASA) fleet renewal programme.

In addition, we are engaging with the Industrial Development Corporation (IDC) to seek funding solutions for the procurement and to accelerate investment in the supply chain.

In order to secure the supply of liquid fuels to the hinterland, the New Multi-Product Pipeline (NMPP) connecting Durban with Johannesburg will be commissioned in the third quarter of this financial year and should be fully operational by the end of December 2013.

Arising out of concern for the time delays and cost escalations associated with this project, the department earlier this year commissioned a team of experts to analyse this and we are presently reviewing their report. Furthermore, we are focussing on improving the efficiency and reliability of both rail and port services. Decisive steps will be taken in this regard, including through investing in new equipment especially in the port facilities.

Chairperson,

Although Denel has made some progress since the company embarked on a turnaround strategy in 2005, its solvency position continues to pose serious challenges, with Denel Saab Aerostructures (DSA) being the major contributor to the entity's losses.

A framework for the resolution of DSA has been developed and is underway. Whilst the trading losses in the other entities have been brought down, the majority of Denel's business entities remain loss-making. 

Clearly, the business is not sustainable in its current model. A more robust turnaround plan that pursues financial recovery and stability through improvements in its operational and financial performance needs to be developed to secure the company's long term viability.

A structured mechanism is required in order to effect the necessary alignment of Denel's business plan with the requirements of the Department of Defence.

Shrinking defence budgets have resulted in scaling back of certain procurement programmes, with lower economies of scale and increasing unit costs.

There is a need to re-think Denel's strategic direction going forward to ensure its financial sustainability. Denel will be expected to accelerate its efforts towards skills development and transformation. The company must generate skills across the full spectrum, ranging from artisan level to engineers and high-tech technologists.

With regard to Aviation, the focus of SAA and SA Express is on expansion in Africa which will contribute significantly to economic integration on the continent. SAA's primary focus on the African continent is to establish itself as a leading network carrier from OR Tambo International Airport (ORTIA) to other primary airports across the continent. SAA plans to introduce additional routes and frequencies to broaden operations and improve its African footprint.

This strategic focus is also fundamental to SAA's strategy to strengthen its balance sheet as the African market boasts good demand and better profit margins. SAA has two long term financial challenges: the first is to capitalise itself through the accumulation of strong retained earnings, and second, to ensure that adequate cash is available to fund the Airbus transaction without Government financial support.

On the other hand, SA Express (SAX) has a route network covering five African countries and it acts as a strategic feeder connecting secondary airports with each other and also with large hub airports.

Most significantly SAX plays an important role in providing safe and reliable air services in African States where safety and reliability is challenging.

In 2010 SAX launched Congo Express as a joint venture airline with Biz Afrika based at Lubumbashi in the Democratic Republic of Congo. However, other commercial risk factors have resulted in SAX withdrawing operations from this route.

With commodity led economic growth in Africa, SAX is optimistic about its expansion plans in the continent and has identified the under-utilised cargo business as a core focus area. The new operating model for the cargo business will be finalised this year which may include the conversion of current aircraft into dedicated freighters.

In 2010/11, SAX embarked on a fleet renewal plan with the objective of meeting demand over the next 10 years aimed at delivering improvements in reliability, introducing cleaner technology to reduce green house emissions and offering greater customer comfort while remaining cost efficient.

The acquisition of new aircraft will commence in the first half of this year and result in the average capacity growth of 8.6% per annum over the next four years. 

Chairperson,

We will continue to monitor the roll-out of the Infraco broadband network whilst working on a strategy to secure the long term viability of the business. In particular, we are exploring strategic synergies between Infraco and Sentech in order to optimise our capacity. 

The network having established 13,600 kilometres of long distance fibre and five (5) open access points of presence in key metropolitan areas, a further seven (7) open access points of presence are to follow. Work if further continuing to facilitate the roll-out of broadband access in remote rural areas and to facilities such as hospitals, clinics and schools. 

Wholesale long distance connectivity prices have come down by more than 75% over the past two years, partly as a consequence of the establishment of Broadband Infraco, further unlocking economic value by reducing the cost of connectivity.

A Deputy Director-General from the department was seconded as CEO of Infraco on a caretaking basis. Chairperson, the delivery of this vision implicitly involves an expansion of the scope of the shareholder management process and the development of new capabilities in the department.

Our SOE shareholder management teams in the department have the critical job of developing compacts, engaging with the policy formulation process and monitoring the sustainability and impact of the SOEs based on their corporate plans and quarterly reports.

These teams will need to expand their capabilities to include growth planning and the monitoring of specific operational enhancement initiatives. We will also have significantly to strengthen our capabilities in the areas of project design and finance and the development of co-investment arrangements and associated compacts.

In addition, we will also be focusing on strengthening our capabilities in a range of specialised cross-cutting areas such as economic impact modelling, procurement leverage, skills development, youth development, climate change and broad-based black economic empowerment, Broad Based Black Economic Empowerment (B-BBEE).

We are in the process of reviewing the Organogram to reflect our new vision.

Chairperson,

I wish to thank Deputy Minister Ben Martins, for excellent, critical but loyal support, the Director-General, Mr Matona, for his seasoned stewardship of our administration, the Boards and Chairpersons of SOEs and their CEO and their entire DPE Team for a great commitment to the goals of our nation as spelled out by our government.

Profound gratitude is also due to the Portfolio Committee and, particularly the Chairperson, for the spirit of camaraderie in the discharge of their oversight responsibilities.

I want to thank my beautiful daughter, Qhakazile, even though she is absent today for the first time ever, for her unfailing support even when I neglect her in pursuit of national service, and for always smiling and giving me unqualified love.

I accordingly request this house to support the DPEs budget of R230 231 000 million.

I thank you.

Issued by the Department of Public Enterprises, June 1 2011

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