First and foremost, I would like to join President Zuma in conveying to the families of the deceased Lonmin miners and members of the South African Police our nation’s sincerest condolences and in wishing all of them comfort and peace during these painful times that they and the nation as a whole are going through.
I join fellow South Africans who have bewailed this incident and argued that it was unnecessary and could have been avoided by all involved. We pray that God grants the deceased eternal peace and their families, comfort and healing.
I would like to thank our President for his prompt, decisive and caring response to this incident in cutting his Mozambique trip short, returning to the scene of the incident, visiting the injured and declaring a week of national mourning. In this way, he has captured the hearts of the nation and articulated our collective grief.
I wish to join those that have urged that we desist from finger-pointing and opportunistic point-scoring as a result of this tragedy and all political leaders must join forces in calling for peace and calm, as well as for a speedy return to normality in Marikana.
The mining sector in our country must do a deep introspection of the role it is playing in creating conducive conditions for such tragic incidents as the one we experienced last week and will suffer for the rest of our lives. No amount of self-defensiveness and trickery will do.
This is a moment for all of us to reflect on the role we are playing to create a South Africa of our collective dreams, and none should be satisfied that they only draw the pleasures and benefits of this new South Africa whilst the rest are condemned still to poverty, inequality and unemployment. We must act together, decisively to speed up the realisation of the Freedom Charter clause that “The People Shall Share in the Country’s Wealth”.
This time calls for sincere leadership, not only among politicians, but also among union and business leaders, as well as the clergy, the youth and women leadership and all other sectors of our society, acting together in the realisation, as Martin Luther King Jnr. once said it, that: the choice we have is either to swim together or sink together as fools.
The stark message of Marikana is that a lot is wrong with our mining sector in South Africa today. The sector still suffers a great deal from the colonial legacy, from whence it emerged, where the mineral wealth of our country, our natural resources, were owned for the monopoly benefit of the disgustingly few, often outside our country, while the majority were condemned to poverty wages, living in unhygienic compounds and hostels.
The mineral wealth of this country has brought to our people a lot of tragedies:
- The South African War of 1899 1902, as a result of which the British emerged victors and established in a treacherous pact with the Afrikaners the Union of South Africa in 1910, where the black majority were maliciously excluded;
- The 1946 mineworkers’ Strike led by the Mineworkers Union of South Africa, the predecessor of the National Union of Mineworkers (NUM);
- The 1987 mineworkers strike the biggest workers strike in the history of our country led by the NUM; and
- Now this, the Marikana Tragedy!
What have we, South Africa the owners of this mineral wealth been left with as a result of this ownership of these, some among the largest mineral deposits in the world!
For centuries, as a result of this colonial plunder of Africa’s mineral wealth, our continent – and this is also true of our own country has maintained an unequal relationship with the world, where we are the providers not only of cheap labour the proletarian of the world but we produce and supply the world with cheap primary commodities while they sell back to us manufactured, value-added, products.
That is both the sharp reminder of Marikana as well as the reason for the massive infrastructure rollout programme announced by President Zuma in the State of the Nation Address on 10 February 2012. It is this unequal relationship that we seek to change through our infrastructure rollout programme, the beneficiation policies as well as the mining policies we are currently exploring. Whilst these are no magic wands and will not solve the problems of the mining sector at a stroke, they will however contribute towards ensuring that we can begin for once to implement policies and programmes that will make our minerals work for us, their owners!
It was for this reason that the ANC National Policy Conference articulated a vision of strong state involvement in the economy.
The difficult reality we face is that we have to pursue all these programmes in a world context not of our own choosing, when because of the protracted global economic slowdown, there is a high level of uncertainty surrounding the immediate prospects for the global economy. Presently, there is no convincing policy response from European political or monetary authorities to the on-going European financial crisis. Rather the region seems to be set in a pattern of stumbling from one crisis to the next.
No one really knows how long we are going to go through this crisis or how much capital is required to stabilise sovereign and financial institution balance sheets in distressed European economies what is of little doubt is that the numbers are extra-ordinarily large. The imposition of austerity measures seems to be only exacerbating the situation. In the USA, the failure of the political process to come to a consensus around the implementation of additional stimuli packages is also delaying their economic recovery, and this is exacerbated by the impending Presidential elections in November.
The European economy in recession and a slow USA economy both have a negative impact on the demand for exports from emerging economies. It is not surprising that China’s export growth is also slowing and it is becoming increasingly common for commentators to warn that extrapolations of past trends can be dangerously misleading. Accordingly, business globally is taking a conservative outlook towards investment as they seek to manage the dual risks of limited liquidity and a global market down-turn.
In the midst of this crisis there is a global review around the regulation of the banking sector alongside the implementation of Basel Three requirements. Basically, the risks associated with the provision of debt and derivative instruments are being re-priced upwards. Banks will need to hold higher levels of liquidity and the maturity profile of their reserve requirement will need to more closely match their liabilities, which will increase their cost of capital and consequently the cost of debt.
Similarly, the regulations require that the Banks take a far more conservative approach in managing the risks associated with currency hedges, which will then both increase the cost of raising debt from international sources and of international trade, assuming that such transactions are prudently hedged.
It is in this context, that the investment programmes of State-Owned Companies (SOCs) are playing a critical role in both bolstering demand to stimulate economic activity and investment in a highly uncertain context as well as in driving programmes that will put in place the infrastructure, skills and the industrial and technological capacity to drive the future growth of the economy.
Consequently, the SOC spending framework is deliberately designed to support growth such as is evidenced by the Transnet Market Demand Strategy that has expanded its capital expenditure budget from R110 billion over five years to R300 billion over seven years, with 55% of the Capex earmarked for investments in new logistics capacity, which goes beyond the predominantly maintenance expenditure typical of previous Capex plans. Over the seven years, excluding electricity and fuel, Transnet will also be procuring an additional R62 billion on operational expenditure.
Our energy investment planning is performed through the Integrated Resource Planning process driven by the Department of Energy. However, we are acutely aware that Eskom de facto is the supplier of last resort, so we need to be extremely alert to ensuring that adequate capacity is on hand, should there be problems in the broader energy roll-out. We have the daunting spectre of needing to fund our planned nuclear programme, which will require a quantum of capital unprecedented in our country’s history.
In addition to the above, our SOCs need to play a more proactive role in providing infrastructure and related services in Africa which will create an additional funding challenge. In contrast to the outlook for much of the developed world, Sub-Sahara Africa is projected to grow at an average of 5.4% per annum over the next five years, while its market size will grow by 30% to $1.7 trillion. The SADC already accounts for 22% of SA manufactured exports, just behind the EU. Regional economic integration is an immediate strategic necessity, a core element of not just securing our growth for the future, but managing the economic turbulence of the present.
What is clear is that we cannot afford to allow this, our investment programme to be impacted by an economic slowdown. Indeed, we need to be looking for ways to increase the scale of the programme, should the global economy show signs of decelerating further. Of paramount importance is that we find ways of strengthening the SOC balance sheets.
A strong balance sheet will decrease the price of debt for SOCs and create a resource buffer to sustain the investment programme and, more fundamentally, a strong balance sheet should create a high level of business confidence that the investment programmes will be rolled-out regardless of a broader economic slowdown. It is this confidence that is core to reigniting the private sector investment required to drive our economy both now and into the future.
At the Department of Public Enterprises, we have established a new division which will be focused on developing innovative funding models to support the momentum of, and where possible expand, the investment programmes. At the end of the day, there is no substitute to different forms of equity to strengthen the SOC balance sheets.
Our first port of call in the equity funding process is going to be building “Public-Public Partnerships” with our Development Finance Institutions, particularly the Industrial Development Corporation and the Development Bank of South Africa, which have the ability and the appetite to take equity type risk that will add to the balance sheets of the SOCs, which will enable us to move into some long-term programmes with a high level of confidence.
That is, in fact, the developmental objective of setting up the DFIs it should be cheaper for SOCs to access finance to invest in economic infrastructure. I think there is an extremely high level of political alignment around mobilising the DFIs to play this role to support the national economic development plan.
In addition, we need to look to our major SOC customers to provide balance sheet support for big projects, particularly when a few companies make up the dominant users of the infrastructure. At a minimum, we would expect these companies to enter into long-term take or pay arrangements which will enable a project finance type approach to these projects.
In addition, we need to learn from innovations that have been pioneered in other countries. For example, over thirty of the major industrial companies in France purchased twenty years of electricity supply up-front from EDF, which gave the utility a significant start in funding its infrastructure programme. This could be done with rail as well. The long-term planning horizon gave the industrial companies a high level of long term electricity supply security as well as a predictable price for their energy supply.
I am optimistic that we can identify some quick-wins in this area over the coming year, initially on a small scale, which I hope will signal a new epoch in the relationship between SOCs and their customers.
At another level, we need to unlock pension savings to fund the investment programme. Pension funds make excellent equity investors as, alongside government, they tend to be overwhelmingly concerned with the long-term growth of the economy. We need to start a dialogue around pension funds as key investor partners to the infrastructure programmes. Over time, I am sure that we will create structures which will enable pension funds to participate in SOC infrastructure projects at an equity level.
In the short-term, we are concerned to see that institutional investors play their role in supporting the SOC programmes on the bond markets. Investments on the stock market by institutional investors will benefit from the capacity created by the build programme. The more of the debt requirements of the programme that we can fund locally at a reasonable cost of capital, the greater the potential for private company growth.
There’s a school of thought that says what we cannot fund locally, we can fund on the international debt markets, which is based on the argument that South Africa’s financial system is relatively stable and our interest rates are relatively high, particularly when compared to much of the developed world. Indeed investor sentiment in developed economies at the moment is so poor that investors are accepting negative returns on low risk dollar denominated bond issues. Yet, a recent Transnet bond issue was over-subscribed by more than 15 times.
While we clearly need to take advantage of this situation, a number of additional factors need to be taken into consideration:
·Firstly, the international capital markets are extremely unstable, particularly in the context of the Euro-crisis. This needs to be combined with a fickleness on the part of international investors regarding emerging markets history has shown that a problem in Latin America or Asia that has nothing to do with our country, can negatively impact sentiment towards South Africa;
·Secondly, international funding tends to be more expensive that national funding, given the need to include prudent currency-related hedges; and
·Thirdly, there is an emerging literature in development economics that argues persuasively that developing countries that have funded their own development have grown their economies consistently more effectively than those that have overly depended on foreign debt.
In the context of the global financial crisis and the progressive implementation of more stringent banking regulations, it would be short-sighted to believe that we can plan a sustained national investment programme around consistent access to reasonably priced foreign capital. Emerging markets in 2011 as a whole saw an overall withdrawal of equity capital by established economies as these countries sought to repair their own precarious balance sheets.
In 2011, purchases of South African assets by foreigners dropped by over 60% from 2010. We need to access medium to long term international capital while we can, but we cannot abdicate our national duty to raise local resources to support our own infrastructure programme.
This introduces our most significant challenge. Over the last five years, our rate of investment has outstripped our savings rate by around an average of 4% to 5% of GDP. We are already dependent on the international markets to fund our existing current account deficit. With an expanded and accelerated investment programme, unless we do something to increase savings, this gap can only increase and the programme will be at risk.
Our clarion call is that we need to start a national dialogue on domestic resource mobilisation strategies for the funding of the national economic infrastructure and where sensible, introduce appropriate incentives to increase the national rate of saving. South African business is not in a liquidity crisis like the global financial markets are; we are seating with cash reserves of R500 billion, which is equivalent to 20% of our GDP. The private sector is paying their debt off and not deploying the capital back into the productive sectors of the economy.
This also means that the private sector is de-leveraging with short-term planning horizon. This behaviour will not stimulate our economy and it will shrink the availability of capital and make it expensive to access capital.
As government, we implore the private sector to be partners in the implementation of our growth strategies so that we eradicate social inequality in South Africa. In these globally turbulent times, the SOCs have a critical role to play in sustaining national investment, private sector development and competitiveness. It is my belief that we will be up to this challenge.
I thank you.
