Programme director,
Deputy Minister Ben Martins,
OECD Deputy Secretary-General, Mr Richard Boucher,
Chairperson of the PRC, Ms Riah Phiyega,
Members of the PRC present,
The leadership of the public service present,
Distinguished delegates
We wish to thank the Presidential Review Committee (PRC) and the Organisation for Economic Cooperation and Development (OECD) for inviting us to partake in and address this very important seminar.
The issues that are the subject of this seminar are vital, not just for the shareholder departments themselves, or even the government, but for the people of South Africa as a whole.
In 1993, the Reconstruction and Development Programme (RDP) identified attacking poverty and deprivation as the first priority of the democratic government.
This was important to immediately set the agenda of the new government established in 1994, and to focus it towards the immediate and urgent goals. This was crucial because, as a result of South Africa’s legacy of apartheid-colonialism, the new government could not merely take control of the state machinery and not use it to transform society in favour of those hither to oppressed.
Accordingly, for the RDP to integrate growth, development, reconstruction and redistribution into a unified programme was vital if liberation was to have any meaning at all for the vast majority that at the moment of freedom lived in poverty and deprivation. The RDP identified infrastructural programme as key to this link between growth, development, reconstruction and redistribution, to provide access to modern and effective services like electricity, water, telecommunications, transport, health, education and training for all our people.
It said that: “This programme will both meet basic needs and open up previously suppressed economic and human potential in urban and rural areas. In turn it will lead to an increased output in all sectors of the economy, and by modernising our infrastructure and human resource development, we will also enhance export capacity.”
The RDP had been designed as an integrated and sustainable programme aimed at bringing together “strategies to harness all our resources in a coherent and purposeful effort that can be sustained into the future”, strategies which would be implemented, inter alia, through the parastatals.
State-owned enterprises occupy an important niche in this pursuit of a developmental state, expected to lead in the provision of the modern infrastructure that will result in the provision of key support to the South African economy and simultaneously provide the jobs requisite for our country to eradicate poverty and inequality.
In this regard, all shareholder departments are mandated to ensure that State-Owned Enterprises are an effective vehicle for socio-economic development – indeed, for the pursuit of growth and development as an integrated effort.
We have made the conscious choice to establish a developmental state that will pursue these programmes that would address joblessness, poverty and inequality precisely because the market on its own cannot address them to the satisfaction of the overwhelming majority of the masses of our people.
In an article, Constructing the 21st century developmental state: potentialities and pitfalls, Peter Evans states that:
“History and development theory support the proposition ‘no development state, no development’. The idea of a developmental state puts robust, competent public institutions at the centre of the developmental matrix.” (In Omano Edigheji¸ 2010, Constructing the 21st century developmental state: potentialities and pitfalls, p. 37).
He proceeds to say that:
“Only a flexible, creative process of exploration and experimentation that pays careful attention to local institutional starting points will succeed”
Such exploration and experimentation is needed because, as Evans further says:
“There is no fixed, universal model of how to build a developmental state; … unreflective imports of ready-made models are likely to fail”.
Of course, much of the discourse around the world involving the developmental state has focused on the East-Asian experience.
Yet, Thandika Mkhandawire points out that in Africa, the state has been subjected to severe criticism ever since independence, being criticised for being ‘over-developed’, ‘dependent’, ‘neo-colonial’, ‘petty-bourgeois’ and so on, which left the already weak African state even more weakened.
He says that:
“After years of focus on stabilisation, it is now generally that economic growth and development should be placed squarely back on the policy agenda in Africa. This is partly because high growth rates and structural change are essential both to extricating Africa from the quagmire of its ‘lost decades’ and to meeting the aspirations of an increasingly vocal citizenry clamouring for a decent livelihood. Such a social agenda demands serious reconsideration of the role of the state in the development of Africa”. (In Edigheji, ibid., p.59)
This is precisely what informs the South African debate on both the notion of the unfolding developmental state as well as the role of the state-owned enterprises.
Indeed, just as Mkhandawire argues that “the developmental state is not an end in itself, but an instrument to achieve particular goals …”, SOEs are equally not an end in themselves, and do not exist just for the mere purpose that they exist, they are instruments to achieve particular goals.
They exist because the democratic South Africa has ever since its advent placed economic growth and development squarely on its policy agenda, in order to address the urgent challenge of poverty, inequality and massive joblessness.
In this regard, we chose to have an active and activist state that is able to intervene in the economy in order to pursue certain goals that the market was would not pursue and could not achieve.
However, even with these big goals in mind, the fact remains that between 1976 and 1994, public investment in infrastructure dropped from 16% of Gross Domestic Product (GDP) to around four percent to five percent where it remained until 2004 when Eskom and Transnet announced their investment plans.
This was because prior to 1994, the government had earmarked a vast number of SOEs for privatisation, and consequently had no need to invest in their growth and stability. However, public investment in SOEs has since climbed to around nine percent of gross domestic product (GDP).
It is important to appreciate that the drop in investment in infrastructure imposed many serious constraints on the economy which inhibited the performance of the manufacturing sector and the industrial supplier communities such as locomotive manufacturers also declined.
This also had a negative impact on the production and availability of artisans, technicians and other relevant skills. Ultimately, overall, economic growth was constrained as there was insufficient energy and logistics capacity to allow mining and industrial companies to make new investments.
Consequently, through driving investment in infrastructure we have the opportunity to unleash a range of multipliers increasing investment in infrastructure users and in infrastructure equipment suppliers as well as achieving key positive externalities such as moving goods from road to rail.
Modern infrastructure should also enable higher levels of productivity within the SOEs and in their customers which would further stimulate growth. Indeed, an ambitious infrastructure investment programme is a powerful instrument at government’s disposal to stimulate growth and job creation than.
However, the funding gap is significant: had we consistently been investing in infrastructure at about 10% of GDP between 1994 and 2010, we would have invested approximately an additional one and a half trillion rand in today’s currency, which would have had a measure impact on job creation!
We would have rescued millions of South Africans from the tyranny and humiliation of poverty and reliance on social grants when most of them simply want to work for themselves and their families. In this way, we would have unleashed South Africa’s human capability to continue to expand the economic base through work.
In addition, a key challenge in the South African economy is to accelerate the industrialisation process and decrease our reliance on resource exports. This involves developing intermediate and advanced manufacturing capabilities. SOEs have a role to play in this process, both through procuring in a manner that promotes industrial investment and through making direct targeted investments in these capabilities.
A final role for the SOEs is to correct market failures, such as we experienced in the provision of broadband capacity which resulted in the creation of Broadband Infraco. In addition to making direct investments, the SOEs can support the dti’s strategies through making investments in capacity that rewards corporate behaviour that is responsive to industrial policy objectives.
We have been requested to share with you our views on the envisaged reform of public enterprises. In addition, we have been requested to reflect on our governance model, our practical experience, the identified areas of reform and the way ahead.
This seminar is important because it allows us to draw on the existing body of experience and knowledge in the world so that in what we are doing, we do not re-invent the wheel.
At the same time, it enables us to benchmark our own modest experiences against others in the world, particularly in developing countries and in Africa, with whom we share so much in common.
Accordingly, we regard this collaboration with the OECD on issues such as benchmarking studies as essential to assist us in gearing our entities to meet the demands of the future.
There seems to be a scope for cooperation on, amongst others, the following:
- international trends on SOE boards and executive remuneration
- performance management tools for SOE boards and executives
- studies and data on SOE financial and operational sustainability
- studies on the optimal capital structure and dividends policies of SOEs
- how developing countries have successfully used SOEs to drive economic growth and development
- collaboration on growing the OECD Southern African Network, particularly on SOE governance or reform.
This is important because government has shifted from the previous idea of privatising the SOEs, pursuant to a strategic rethink, and accordingly a decision has been taken to strengthen and align them to the government’s delivery mandate.
In line with the latter approach, a shift of emphasis or direction in the economic policy cascades to the mandates of the SOEs.
In his inaugural and state of the nation addresses, President Zuma directed that we should work harder to usher the agenda of a developmental state. The President’s address meant that the SOEs should refashion their affairs and ready themselves to implement the new mandate.
In essence, SOEs are now viewed explicitly as vehicles for socio-economic development through which we aim to contribute in efforts towards doubling the size of the South African economy, thereby sustainably redressing the social ills that still haunt our democracy.
A mandate of the DPE insofar as the agenda of a developmental state is concerned is to identify and commit to a long term growth strategy, identify the key technologies that will underpin the growth strategy, determine the key SOEs for driving the different elements of the new growth path, and identify the quantum of investment required in public goods to support the growth plan such as skills, energy, transport, telecommunications and others.
In the developmental agenda, a core role of the SOE is to provide strategic network infrastructure to ensure security of supply and develop key industrial capabilities to drive economic growth. To effectively contribute to the efforts of strengthening the unfolding South African developmental state, we have so far identified three types of critical priorities that we believe should be our main focus in the next couple of months, namely:
- Life and death priorities; where there are immediate and critical risks that threaten SOEs viability and consequently the department’s ability to deliver on its mandate.
- Strategic catalytic priorities; where there is a high level of stakeholder interest and where, with leadership, significant progress can be made in the next couple of months in moving a strategic process forward which will have a substantive impact.
- Quick-win priorities; where an intervention can be made extremely quickly and will have an immediate positive impact.
Part of the challenge of the SOE landscape in South Africa involves that:
- There are more than 400 SOEs straddling across departments and tiers of government, and only nine of those falls under the Department of Public Enterprises.
- As a result of this, and further complicating it, is that there is no common shareholder governance model or framework that guides this, as a result of which there is reliance on ad-hoc instruments that may not be suitable for an SOE environment where there is a single shareholder, Government.
This notwithstanding, and in view of the above, we have decided to exercise a hands-on and robust approach in order to ensure that the SOEs under our control do meet the policy targets I have referred to earlier.
We will require strict compliance with the current governance framework, namely the strategic intent statements, the shareholder compacts and the corporate plans.
The contents of these documents will mirror my performance agreement with the President and the delivery agreement of the economic cluster. The content will also be unambiguous on the deliverables and time periods.
We will ensure that insofar as is practicable, these oversight documents – the strategic intent statements, shareholder compacts – are made public so that the populace is informed of what is expected of particular SOE and when, and so that our SOEs are publicly accountable and responsible.
We will further be meeting with the Chairpersons and CEOs of the individual SOEs regularly, and we will also meet them quarterly as a collective to assess compliance with the oversight instruments.
We will continue to assess the performance of the SOEs through our current electronic dashboard aimed at tracking the performance of the SOEs and their progress. Our feedback will be in a form of regular briefs to SOEs after each assessment which will contain our analysis and the required remedial action.
We will further engage the SOEs rigorously at the Annual General Meetings.
We need to ensure that the SOEs have stable Boards and management, and that they are financially-viable. In this regard, we have to ensure that there is alignment between their national interest and commercial interest mandates.
As we go forward, we shall revive the efforts to provide a holistic approach to SOE governance through a dialogue on Government Shareholder Management.
From a governance and oversight perspective, we will interrogate and provide guidance, on amongst other things, the following the:
- optimal funding structures for projects to be undertaken by SOEs
- optimal governance structure for the SOEs under our care
- guidance for the recruitment and appointment of board members
- performance management of boards
- tools to manage the relationship between the board and the shareholder representative
- remuneration guidelines for boards and SOE executives
- accounting and general reporting framework for SOEs
- relationship between our SOEs and those under the direction of policy
- departments in areas where they share mandates or mandates are
- complementary
- dividends policy
- whether the SOEs need to be governed by a different statute other than the Companies Act?
It is our considered view that the contemplated investments that must be made in an effort to double the rate of economic growth, and the economic and social needs of our people require us to play a proactive role in oversight.
We envisage that the investments will require significant direct investment, loans and guarantees from the government. The government will rely on the sacrifices and savings of the nation to give such undertakings and investment.
In conclusion, we must remember that we do not wish to inspire economic growth for its sake; but in order to meet the demands of our people for a better life.
I wish you well on the deliberations.
I thank you.
