Unabriged budget address: Deputy Minister of Public Enterprises

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Address by the Deputy Minister of Public Enterprises, Enoch Godongwana, MP, National Assembly

15 April 2010

Honourable Chairperson

Honourable members of the National Assembly

Molweni, good afternoon, dumelang

Introduction

In one of Aesop’s fables, “The Lion and the Statue,” there is a story of an argument between a man and a lion over which species is the stronger one. Clarifying his point, the man takes the lion to the public gardens and points to a statue of Hercules strangling a lion. “This proves,” the man exclaims,” that humans are the stronger species!” “No” the lion replies, “it proves nothing, since a man made the statue. If lions could make statues, Hercules would be lying under the lion’s paw.”

Minister in your address you alluded to the statues that some have erected in public gardens. We have not been able to erect our own but now is the time for the hammer and the chisel to be given to the lions.

The overriding challenge facing South Africa’s network industries particularly in transportation and power generation is to implement large infrastructure investment programmes that are required to enable the country to achieve its ambitious growth and development objectives and to be more globally competitive.

The current constraints are as follows:
* For most of our infrastructure projects, demand for energy far exceeds available capacity
* At 14.7 percent of Gross Domestic Product, the cost of logistics is higher than the average of around 10 percent found in developed countries
* Transport costs account for more than 50 percent of total logistics costs which compares poorly against an international average of 39 percent
* There is a significant imbalance in the freight transport system between road and rail. Road transport comprises 90 percent of transport costs, with the fuel price being the single biggest cost driver for road freight.

The net effect is that any changes in the fuel price have a significant impact on total commodity costs, highlighting our vulnerability to an external uncontrollable variable. Additional challenges include:
* The significant infrastructure backlog across all areas of the freight system and the high cost of container shipping in the region
* Due to forecasted freight demand increase in the economy over the next two decades there will be a need for sustained high levels of investment over an extended period.

Transnet, an SOE entrusted to be custodian of critical port, rail and pipeline network infrastructure and operations, plays a leading role in addressing these critical freight challenges. Members of the House, this is why we need fully functional and effectively run public enterprises, because they play a catalytic role in the development and growth of our economy.

Capex

Some of us in this House and outside are quick to pronounce on the financial drain of the SOEs to the fiscus. This is of course selective truth
* Over the past financial year Transnet was able to improve its profits from operations by 12.8 percent year on year in spite of the negative impacts of the global economic crisis
* Over the same period Transnet invested R18.3 billion bringing total investment over the past five years to R72 billion. This has contributed to a significant eradication of the infrastructure backlog in the port, rail and pipeline network
* Major projects completed in 2009/10 include the widening and deepening of the entrance channel at the Port of Durban, and the expansion in capacity of the iron ore channel from 32 million tons to 47 million tons.
* Transnet plans to invest R93.4 billion over the next five years
* A recent study conducted by our department found that Transnet’s 2009/10 plan to invest R80 billion in infrastructure over five years would contribute R113 billion to GDP
* Eskom has committed to a 100MW solar concentrating plant. I am told that this is a massive project, given that the other one of its kind in Spain produces 20MW and the planned one in China produces 30MW.
* Eskom plans to double its generation capacity to 80 000 MW by 2025.
* Currently 90 percent of electricity is generated by coal, however it is envisaged that by 2025 only 70 percent generation will be coal-based

The renewable and nuclear energy sources will be critical to fill that gap, consistent with our low carbon strategy
* The global aviation sector experienced huge losses in the past two years, however our domestic aviation industry, particularly the SOE’s, have remained profitable both in domestic and international lines. For instance, the largest airline in the Middle East, reported a fall in profits of 72 percent for the 2008/09 fiscal year, yet in the same period South African Airways (SAA) and South African Express (SAX) recorded modest profits.

Broad Based Black Economic Empowerment (BBBEE)

Our SOE’s are scaling up their BBBEE procurement year by year. For example, Transnet has scaled up its BBBEE spending rapidly from 37 percent of total procurement spend in 2007 to 65 percent in the past financial year. This translates to an absolute figure of R13.5 billion spent on BBBEE accredited organisations during 2009/10.
* Of this amount, R2.7 billion is spent on Qualifying Small Enterprises (QSE) with turnover between R5 million and 35 million
* R1.9 billion is spent on Exempted Micro Enterprises (EME) with turnover below R5 million and R837 million was spent on black women owned companies.

Eskom’s procurement process for the New Build Programme aligns government’s industry development objectives with empowerment
* Over 50 percent local content has been sought for the supply of turbines, water treatment and electrical work
* We have entered into supplier agreements which specify targets for SME’s and women empowerment

The competitive supplier development programme

South Africa is emerging from an extremely limited investment period in fixed infrastructure particularly between 1984 and 2004. Supplier industries to infrastructure, in particular the manufacturing sector, were negatively affected.

This created a reliance on imports, which is not sustainable given South Africa’s balance of payments constraint. It has also created a security of supply threat, particularly when global markets are over heating.

Together with our department, SOE’s launched the competitive supplier development programme in 2007, which has the objective of leveraging SOE procurement to promote investment in plant, skills and technologies in the SOE supplier base.

This is achieved through providing medium to long term procurement plans in order to give the supplier community visibility of SOE requirements so that they can be positioned to meet them.

Global and national suppliers partner to make the best propositions to SOE around the development of the relevant supply chain to meet SOE requirements

This is in line with the Department of Trade and Industry (DTIs) industrial policy action plan two objectives and has the impact of increasing employment, increasing the value delivered by national industry and increasing the skill’s profile of the supplier base. It also increases the security of supply and the competitiveness of the national supplier community to meet the needs of the SOE.

In respect of Eskom, they have taken long-term supply contracts that will allow the utility to boost manufacturing through local content requirements. The procurement practices are aligned with government’s localisation and industrial development policies.

Regional dimension

The work of some of the SOE also goes beyond South Africa’s borders:
* For example, Eskom is involved in the Southern African Power Pool, along with the other Southern African Development Community (SADC) country utilities, trading energy on a bilateral basis with both utilities and industry as well as mining customers in neighbouring countries
* Transmission infrastructure projects which enable the flow of power across the region and the evacuation of power from new power stations are also being pursued
* The region can play a significant role in assisting South Africa in reaching its carbon reduction requirements
* According to a recent World Bank publication, Africa’s share of world exports has dropped by nearly two-thirds in three decades from 2.9 percent in 1976 to 0.9 percent in 2006
* The weak regional transport network has been a significant contributory factor to the Sub-Saharan region’s poor trade performance
* Transnet plans to establish the Port of Ngqura as a regional and global transhipment hub in order to improve maritime connectivity and lower the cost of container shipping in the region. This will provide an important boost to export competitiveness
* Enhancing the capacity and efficiency of the Maputo corridor and deepening cooperation with the Port of Maputo
* Improving the efficiency of cross border rail services and growing volumes on existing SADC rail corridors
* South African Express has consolidated its domestic network and has increased its African network by launching the Congo Express in the DRC

Skills development

Skills shortage is one handicap that is continuously and simultaneously being addressed by the SOE’s. For instance, Transnet will invest between three to four percent of its personnel costs in skills development with an increased focus on the development of technical staff.

The Denel Group is providing effective training of technical personnel for the Aerospace, Engineering, and the Defence industries with a focus on 210 trainees (including unemployed youth) in various apprenticeship disciplines to assist them in becoming artisans.

Through Denel we have established a Youth Foundation Development Programme and a Schools Outreach Programme in collaboration with other key stakeholders focused on maths and science.

Over 2700 Artisans will receive training as part of Eskom’s new build program as part of the 5 200 individuals receiving in-service training in the New Build Program. The emphasis on local content will also support skills development.

Looking forward

Plans for future investments by our major enterprises are confirming our belief that they are incubators of progress and economic growth. Transnet will continue to roll out its growth strategy, aiming to change the trajectory of performance improvement to a significantly higher level.

The strategy calls for:
* Volume growth greater than 10 percent in the short term and an annual growth rate that exceeds GDP by more than three percent over the next five years
* A 20 percent improvement in efficiencies in all areas of the business and to align operational indicators with international benchmarks.
* A 33 percent reduction in both the number and cost of safety related incidents in the 2010/11 financial year and thereafter a R100 million per annum continuous reduction in the cost of safety incidents
* Regular environmental compliance reviews and proactive action at all places of business.
* Maximising complementarities between different infrastructure projects with the domestic manufacturing sector is going to strengthen our industrial policy objectives
* Together with relevant departments, our Department will continue to define the role and institutional form of Safcol, post land claims and implementation plan thereof
* We will continue to assist Denel to strengthen its alignment with the strategic thrust of the Department of Defence.
* The expanded build programme of Eskom will deliver an additional 22 000MW by 2017. It also, has to meet pressing needs and create opportunities for low carbon renewable projects. The new power plants are designed to use super-critical/superior technology to allow for lower emissions.
* Good governance underlies all these endeavors. And good governance begins the right vision and dreams for our country. SOE’s are faced with serious challenges but they are not insurmountable. As President Nelson Mandela once said, “It always seems impossible until it’s done”.

Conclusion

Feyeraband in his ‘Against the methods’ writes: “Experts” frequently do not know what they are talking about and “scholarly opinion”, more often than not, is but uninformed gossip general acceptance does not decide a case – arguments do.



Issued by: Department of Public Enterprises
15 April 2010