In about 12 months time, South Africa shall erupt in the celebrations of the 20th Anniversary of our freedom. The question, on that occasion will be, how far have we come to deliver on the promise of total emancipation?
This is precisely the reason why the issue a developmental state has continued to occupy pre-eminence in national developmental discourse in our country.
The developmental state in South Africa has the objective of actively intervening in the economy to drive investment in targeted areas to achieve a long-term vision of a higher value added, labour absorptive and racially integrated economy.
In order to do this, the 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.
That is why in 2011 we revised the Department of Public Enterprises (DPE) vision to align it with the strategic developmental role that State-Owned Companies (SOC) need to play in the economy over and beyond a business-as-usual approach, placing jobs, skills, industrialisation and the unlocking of economic growth at the centre of the mandate of our SOC.
The purpose of the Chairperson’s Forum is to allow for strategic reflection and feedback around how we are performing in relation to this vision.
It is not our intention for the forum to get bogged down in operational issues.
Rather, this is an opportunity for us to step outside of daily operational concerns, and as a community, to think outside the box around how the DPE and our portfolio of SOC can enhance our impact.
We need both to reflect on the practical lessons we have learnt in trying to turn our vision into a reality and how we can build on our successes and, furthermore, we need to identify the key constraints that are limiting our impact and brainstorm how we can remove these obstacles. We have designed the day to support this process of reflection and idea generation.
As enterprises with both a commercial and a strategic developmental mandate, SOC are extremely complex organisations.
This creates a delicate balance in that if the strategic purpose subverts commercial discipline the enterprise will collapse; but, on the other hand, if commercial considerations over-ride the strategic purpose, government objectives will be compromised.
In the worst-case scenario, the presence of a strategic purpose is used by management to rationalise bad decision-making and inefficiency resulting in the financial failure of the enterprise and the subversion of the government’s strategic objectives.
In practice, SOC need to be efficiently run and financially sustainable whilst implementing strategic programmes that may not be driven by a narrow commercial logic. A classical commercial enterprise is managed and its plans are based on what its balance sheet can afford.
As a rule, for commercial enterprises to be sustainable, they need to invest and operate in tandem with the business cycle.
In contrast, SOC have to turn this logic on its head in that they need to plan to unlock growth amongst their customers and in the broader economy and hence need to be investing aggressively to maintain aggregate demand precisely when there is a downturn and the private sector is too timid to invest.
If we expect SOCS to plan beyond their balance sheet capacity and to invest counter-cyclically, we cannot have an arm’s length shareholder – enterprise relationship.
Almost by definition, the enterprise cannot achieve these goals without systematic shareholder support.
In other words, the Shareholder – SOC governance relationship needs to be a partnership of a special type and the Shareholder must find the right balance of oversight and support.
The department has recently established a Funding Capability in the Strategic Partnerships Programme to work in partnership with our SOC to design innovative funding solutions that will enhance the capacity of their balance sheets.
At the end of the day, it is ultimately the strength of SOC' balance sheets that will inspire confidence that we will deliver on our plans.
In achieving this vision of counter-cyclical investment that crowds in the private sector, we face a fundamental challenge.
It is a reality that when the ANC assumed power in 1994, the Department of Public Enterprises was called the “Office for Privatisation” whose over-whelming mandate was to sell its portfolio of State-Owned Enterprises.
Intrinsic to this position was the notion that government has no active role to play in the economy.
SOCs, including key infrastructure providers, were prevented from investing in new capacity as such investment was considered inappropriate in the context of immanent privatisation.
It was only in 2004 that a firm decision was taken that government was to retain ownership of key SOC which meant that, from this point on, the Shareholder-manager department focused on providing the SOC with strategic economic mandates to align their strategies, business plans and processes with the government’s sectoral and overall economic objectives. SOC were instructed to establish aggressive investment programmes to support the growing economy.
We then took the role of the SOC to the next level in requiring that they focus their planning on unlocking growth, rather than limit their thinking to what might be deemed prudent in relation to each enterprise's balance sheet capacity.
The challenge that we face is that the Government’s strategic motivations in owning SOC are still not explicitly recognised in policy.
Consequently, the Executive Authority’s more detailed strategic mandate and intent statements to SOC does not have formal policy status.
In addition, in a number of cases, sector policies are not aligned with the strategic mandates provided to SOC by the Executive Authority and these sector policies can be disabling if not fundamentally antagonistic to the achievement of these mandates.
In other words, it does not help if the policy departments are still fundamentally prioritising private sector investment at the expense of enabling the achievement of the core strategic mandates of SOC.
The Presidential Review Committee (PRC) on State-Owned Enterprises was established to provide greater policy certainty regarding the role and governance of SOC and to provide for the reconfiguration of their governance architecture.
Having adopted the PRC Report, Cabinet is soon to outline the process to implement the Report's recommendations.
We need to make sure that we optimise this process and put in place a rigorous mechanism to align policy in general, but sector policy in particular, with the strategic mandates that are given to SOC.
Until this is achieved, we will effectively be swimming against the current.
Over the last few years the department has put considerable effort into constructing a shareholder management model that aims to enable us to find the right balance between ensuring the financial sustainability of the SOC whilst optimising their developmental impact.
In the first session, we will be given an overview of the model, how we see the model evolving as well as a sense of how the SOC have been performing over the last period against the targets that have been agreed upon in the compacts.
We need to ask if the model in practice is supporting the building of the right kind of partnerships between the department and the SOC.
Does the model enable the right combination of oversight and support that is required between the department and the SOC?
I hope in the discussion that follows we will be able to come up with ideas around both how the model can be enhanced as well as how the Shareholder can more effectively intervene to support the SOC performance.
The next session will involve a presentation from the National Planning Commission on our long-term National Development Plan, which should provide us with a high level perspective of where government hopes to take both the economy and society.
The plan focuses on 13 key areas ranging from environmental sustainability to fighting corruption, with proposals starting from a point of: what is already happening; what gaps exist, what are the weaknesses or disabling factors; and then proposes realistic ways forward.
It identifies six pillars that will need to underpin efforts to eliminate poverty and reduce inequality, that is,
- uniting South Africans of all races and classes around a common programme to eliminate poverty and reduce inequality;
- citizens active in their own development, in strengthening democracy and in holding their government accountable;
- raising economic growth, promoting exports and making the economy more labour absorbing;
- focusing on key capabilities of both people and the country, which include skills, infrastructure, social security, strong institutions and partnerships both within the country and with key international partners;
- building a capable and developmental state; and
- strong leadership throughout society to work together to solve our problems.
These pillars guide the specific proposals made in each of the 13 policy areas covered in the plan.
We need to interrogate how the SOC can play a more central and effective role in realising the objectives of the plan.
We will also focus on the infrastructure build programmes of our SOCS, focusing on systematically implementing game changing mega projects on an almost unprecedented scale. The translation of objectives into projects makes the development process tangible and manageable.
The potential of the Strategic Integrated Projects should be viewed in this light.
Consequently, the development of our SOC capability to design, fund and efficiently manage the implementation of multi-dimensional mega projects must become a key attribute of our developmental state.
However, we must be cognisant that as projects increase in scale and complexity, their risk profile increases exponentially and hence we need to find the right balance between stretching what we are capable of achieving without over-extending ourselves.
Hence, it is critical that the Shareholder develops the capability systematically to oversee and support the process of designing and implementing mega-projects.
The department has recently established a specialised Capital Projects capability as part of the Strategic Partnerships Programme to operationalise this aspiration and this programme is now looking systematically at how we can establish a dedicated Projects Office.
What is critical is that the initiatives that we put in place both intelligently monitor and add value to the project implementation process.
We need your input as to the kind of concrete initiatives we should establish to achieve this value-adding oversight role.
I hope in the discussion that follows the presentation we can frankly discuss the challenges we face in building a systematic mega project capability as well as how we can overcome these challenges.
The leveraging of SOC procurement to develop industrial capabilities is not a nice to have, but a core reason as to why the state owns its SOC.
The last session will explore how we are trying to systematically develop the capabilities of SOC suppliers to the build programme, and in doing so, drive our industrialisation and transformation process.
It is the scale, quality and consistency of demand that creates a platform that either encourages our suppliers to invest in new capabilities or hinders such investment.
Hence, we need to ensure that the duration of our planning cycles and the way we define our enterprise requirements enable the development of our supplier communities.
This includes the need to ensure that we master “local to site” development initiatives in rural areas in the process of constructing and operating large projects.
We need to systematically communicate our procurement and supplier development and transformation plans and establish a dialogue with suppliers around where and how we can localise most effectively.
The Competitor Supplier Development Programme was established four years ago to put these conditions in place.
We now need to start aggressively identifying those areas where we can implement programmatic procurements that will enable the fundamental development of new industrial capabilities across an entire SOC supply chain.
The Transnet locomotive fleet procurement and the Eskom filter bag procurement is an example of implementing a strategic industrialisation process through a well thought-through programmatic procurement.
However, it is clear that the SOC' demand alone is inadequate to achieve a critical mass to support industrialisation – we need to leverage our relationships with big customers in the mining and processing industries to build a collaborative relationship around supplier development and localisation.
Recently, we hosted a two day supplier development summit where these issues were comprehensively explored with a range of relevant stakeholders.
I look forward to your feedback as to how we can accelerate and enhance this programme. The collaborative initiative with the mining sector around supplier development raises the question around how we leverage our SOC relationships with strategic customer sectors to align these companies behind government’s objectives.
We already have initiatives in place to support the Industrial Policy Action Plan though a forum for customer engagement in the Automotive Sector and through developing a comprehensive investment promotion strategy for port dependent industries.
However, we need to recognise that the Minerals Energy Complex (MEC) remains a fundamental component of the South African economy.
In 2009, the MEC produced around 20% of GDP, accounted for 17% of employment, produced over 50% of our exports and made up around 30% of fixed investment.
It is almost unthinkable that South Africa’s development challenges will be successfully overcome without a coherent partnership between the state and key players in the MEC.
At the moment, alignment between the state and the key stakeholders in the MEC is probably at an historic low.
The key strategic challenge is to get alignment amongst key players in the MEC around focal areas and concrete programmes for achieving government’s industrialisation, regional integration and transformation objectives.
I believe that the DPE, through the portfolio of SOC is in a unique position to foster this programmatic alignment through implementing tangible collaborative initiatives that will build trust and effective working relationships.
I would welcome creative suggestions from you around the areas in which you think we can implement these initiatives.
Finally, I would like you to creatively reflect on how we can more effectively leverage our portfolio as a portfolio.
For example, we need to ask ourselves if we can more coherently leverage the capabilities in Denel, Transnet Engineering and Rotek to support the localisation of strategic and complex industrial components.
We need more aggressively to interrogate whether a merger of SAA Technical, SAX Technical and Denel Aviation in the maintenance, repair and overhaul space may not create an organisation with greater scale, critical mass and global market credibility to capture the growing air-traffic through South Africa.
We need to explore if there are additional areas of collaboration between our SOC in the green space, such as that between Eskom and SAFCOL in the establishment of a Torre faction plant in Mpumalanga.
I look forward with much anticipation to our deliberations today.
I thank you.
