Unabriged budget address: Minister of Public Enterprises


Budget Vote speech 2010/11 of Minister Barbara Hogan, Department of Public Enterprises

15 April 2010

Madam Speaker, never before has the role of SOEs in our economy enjoyed such attention and created such debate, and rightly so. We are all custodians of these entities, and it is in our own interest that they are viable and efficient engines of economic growth and development.

It is in the midst of this debate that we present our budget vote to Parliament. The tabling of the budget vote is an opportune time for us to come and account to members to reflect on what has been achieved and to indicate where it is we are headed.

However, Madam Speaker I will be the last person to say that ‘all is well’ with every SOE that reports to the DPE. There is much that is yet to be achieved governance-wise, operationally and financially – and that is why it is timely that government has initiated a Review of all SOEs, so that a cool and balanced assessment can be made of their contribution to the South African economy.

I obviously do not want to anticipate the findings of that Review, but it would be remiss of me if I were not to make some observations about the current tenor of the debate on the role of SOEs.

At the extreme end of the debate is a commentary richly peppered with opinions that all SOEs are “collapsing”, and in “a state of crisis” and that it is “the end of the road” for them.

A supposed symptom of that crisis is the alleged huge financial “bail outs” that the opposition claims that government is forced to make in order to breathe life back into them, thereby they say, creating a massive and unnecessary drain on the fiscus. A glib solution is then proffered: privatise the whole lot of them and all our problems will be wondrously and miraculously solved!

Nowhere is this kind of crass discourse better depicted than in the Alternative Budget of the Democratic Alliance (February 2010), wherein it is claimed that “Parastatals have received more than R243 billion in financial bail-outs over the past four years.”

Madam Speaker, this is really a startling claim to make. Besides the fact that it wrongly (and misleadingly) includes the ZAR 176 billion worth of guarantees destined for ESKOM to underwrite its borrowings for its massive build programme, (these are contingent liabilities, not cash payouts) it also includes other items such as investments government has made in infrastructure and in research and design capability. These items are certainly not “bail outs”.

A true financial bail out is universally defined and accepted to mean the ‘act of giving capital to an entity (country, company, individual) in danger of failing in an attempt to save it from bankruptcy, insolvency or total liquidation and ruin, (or to allow a failing entity to fail gracefully without spreading contagion)’ (Wikipedia).

From time to time, all governments have and will be constrained to “bail out” companies in the public and the private sector; there can be no doubt about that. One only has to note the trillions of dollars and billions of pounds that countries such as the United States and United Kingdom have had to fork out in recent months to rescue banks and other companies in one of the most spectacular private sector failures that this world has ever seen, in order to realise how deep a drain on governments resources real “bail-outs” can truly be.

The truth of the matter is that those who claim in the same vein that the South African government has had to bail out SOEs to the tune of a massive ZAR 243 billion in the past four years, not only mislead the public but they have muddled things up completely as well.

When the State makes strategic investments in infrastructure whether it be in energy or in telecommunications (Eskom and Infraco), they promptly call it a bail out. If the state makes a strategic investment in high end research and design capability, such as in PBMR, they call it a bail out. When the State makes land claim reparations, as ordered by a court of law (Alexkor), they call it a bail out.

I submit, Honourable chair that this bad habit of conveniently characterising every form of financial assistance and investment by the state in SOE’s as a “bail out”, detracts us from the fundamental debate that we ought to be having about the nature, scope advantages and disadvantages of state investment in SOE’s. It also serves to heighten false perceptions that most SOE’s are in a state of chaos and are making huge and unnecessary demands on the fiscus. So the reasoned debates that we should be having, for instance, on whether the state should be investing in telecommunications sector or not; or what kind of state support should be given to the renewable or nuclear energy sector gets completely waylaid by this shrill, muddled and alarmist thinking.

This is not to deny that there are instances in the DPE portfolio and in other portfolios where the State has indeed had to bail out certain SOE’s in the form of a recapitalisation. So when Denel was found to have a severe liquidity problem in 2005 the State provided ZAR 3.5 billion. Similarly, SAA received ZAR 744 million for a labour restructuring exercise, as well as ZAR1.5 billion rand equity injection in 2009/10. These matters are receiving careful attention from the State and the Boards of these SOE’s, and will be considered by the SOE Review Panel.

But the facts remain: of the ZAR 17.3 billion cash that was transferred to SOEs in DPE over a seven year period from 2004/05 to 2010/11, approximately ZAR 6 billion was for classic bail out purposes. The remainder was for research and infrastructural investment purposes. Total cash transfers by government to SOE’s from 2005/06 to 2008/09 other than those in the DPE stable amounts to ZAR 26 billion, and I am not able to say now how much of these transfers were indeed for classical bail outs and how much for other purposes. These amounts, large enough in themselves, nevertheless represent less than 1% of total government expenditure over that period and are a very, very far cry from the amount of ZAR 243 billion that is been bandied about as evidence of profligate financial bail outs by the State. Might I also add that, just for the record, that neither Eskom, nor Transnet have received cash transfers from the State during this period.

The recent financial assistance given to Eskom in the form of the ZAR 176 billion guarantee and the ZAR 60 billion loan agreement represent a conscious strategic investment by government in the energy infrastructure of this country that will have multiple counter-cyclical economic spin-offs such as job creation and economic growth as well as securing our supply of energy for 20 years going forward in the future. Had it not been for these financial support measures from government, the full financial burden of the Eskom build would have had to be carried by a much higher electricity tariff than the present 25% tariff hike. We regard these initiatives as essential for the well being of consumers and the economy. I therefore appeal that we have no more reckless talk of bail-outs.

Honourable chair, in tabling the Strategic Plan and Budget Vote of the Department Of Public Enterprises for 2010/11, we are extremely mindful of our responsibilities as Shareholder, particularly in periods of economic downturns such as the one we have currently experienced.

We have had to make some painful decisions one of which is the cutting off virtually all cash injections to SOE’s in the DPE Portfolio. This is reflected in the small amount of transfers for SOEs under the DPE for this financial year, amounting to ZAR 174.6 million.

The fact that the PBMR has not yet been able to secure either an investor or a customer has meant that the programme had to effect a drastic staff reduction. The intention however is still to retain critical skills, capabilities and intellectual property. There is no uncertainty about the soundness of the technology; in fact the PBMR has been nominated by the American government as a partner in its New Generation Nuclear Programme (NGNP) programme.

However, alternative funding mechanisms are been sought for this programme as government no longer has pockets deep enough to fund it on the scale and length of time required. An Inter-Ministerial Committee will be making proposals to Cabinet in this regard in the coming months. The PBMR has played an indispensable role in shoring up and expanding our nuclear research and design capabilities which can only stand us in good stead as we decide on our energy options going forward.

Now, two of the largest SOE’s in our country, and in our portfolio, namely Transnet and Eskom. It is obvious that their operational performance is essential to the underlying well being of the economy. Both are undertaking massive build programmes to ensure the security of supply of energy going forward and to dramatically enhance our port and freight rail capacities. Both will give much needed impetus to local manufacturing capacity in terms of our Competitive Supplier Development Programme (CSDP). My colleague, the deputy minister will speak in depth about Transnet as well as the CSDP.

On Energy, the recent NERSA ruling on the 25% tariff hike in electricity has profound implications for ESKOM. Not only does the tariff hike not cover the full operating and interest costs of ESKOM in the initial years going forward but it also means that the Kusile build will be delayed due to some serious funding gaps. This has the potential to endanger the security of supply of energy in the future if appropriate steps are not taken by government.

The IMC convened by Cabinet is engaged as never before on matters relating to energy. Some of the matters receiving active attention are mitigation for the poor as a result of the tariff increase; and the funding model for Eskom’s build programme with at least 46 options under consideration. Conscious of the severe energy security constraints in the next few years, specific focus is being given to demand side management and efficiency measures such as the aggressive roll out of solar water geysers.

Both the tariff increase and the World Bank Loan have engendered heated discussion and debate about energy in our country. After all the heat and dust has settled, we as South Africans must reach an informed consensus about all matters relating to energy because it affects each one of us in our daily lives.

For those concerned that government is not committed sufficiently to renewable energy, let me assure you that this is not the case. In fact, I am very excited that ESKOM through the World Bank loan will lead the largest pilot project on CSP and wind in Africa. So as a government, we are serious about our long term low carbon trajectory as well as the commitments we have made on climate change internationally.

It is also very encouraging that ESKOM is quite advanced in renegotiating its special pricing agreements.

Government is very serious about wanting to engage with South Africans about energy, and the stakeholder consultation process on the IRP is due to take place shortly.

A lot has been said about Chancellor House and its involvement in Hitachi. The ANC Polokwane Resolution called for legislation to regulate the manner in which ALL political parties are funded. In terms of Section 236, the Constitution requires that legislation be enacted in this regard.

However the legislation that was enacted only dealt with election funding of political parties. In the IDASA case seeking that all political parties reveal their sources of funding the ANC is on record saying that they would welcome such legislation.

Let it be noted that in this application, the DA, IFP and NNP were also cited. The judgement states that all the parties were ‘vociferously’ opposed to revealing their sources of funding.

These matters of transparency regarding political funding and the resolution of conflicts of interests, even perceived conflicts, can only be addressed and regulated in terms of the legislation envisaged in the Constitution. I trust that Parliament will move swiftly to give effect to such legislation. Regarding the Hitachi deal I associate myself with the comments made by the Finance Minister yesterday that the shareholders of Chancellor House must do the right thing if there is any conflict of interest.

The vacancies at senior management level especially the positions of CEO’s (at SAA, Eskom and Transnet) have been a matter of concern for some time now.

Thankfully the CEO position at SAA has now been resolved, and the Board at Eskom will shortly make recommendations regarding their preferred candidate/s.

Intractable as the Transnet problem has indeed become, and as equally regrettable, at least appointments will be made in the immediate foreseeable future.

But we must all reflect on what corporate governance failures have led to such undesirable situations. For as long as CEO’s of parastatals see themselves as above and even more powerful than the Boards that they are accountable to, then these problems will persist.

For as long as CEO’s resort to mounting the equivalent of publicly campaigns to secure their positions, then a company will suffer. For as long as the position of CEO becomes a hotly contested matter in the public domain, other candidates who are perfectly qualified and competent to do the job, will not make themselves available for such positions.

From now on the message must go out very clearly that potential and incumbent CEOs cannot act as though they are above its Board. Just as a municipal manager is accountable to a Council, so is a CEO accountable to a Board. In equal measure, Boards must exercise their prerogatives to hold CEO’s accountable. If these two prescripts are adhered to then we will be on the road to restoring good corporate governance in our parastatals.

Another factor giving rise to much public dissatisfaction is the Remuneration framework and model used to compensate and reward Executive and Non-Executive Directors, and where applicable, Senior Management too.

In this respect, I have established a Remuneration Advisory Panel that has been tasked with making recommendations on for a rational, fair and consistent remuneration model for SOEs that report to the DPE. Ms Barbara Masekela will chair the panel. Along with eight highly regarded individuals, she will commence their work shortly. I wish them every success and look forward to their recommendations.

Denel is another SOE that is still facing major challenges. Whilst most of its business units are managing to break even, the poor financial performance of two of its units, viz Denel Dynamics and Denel Saab Aerostructures continue to affect the overall performance of the company. A major problem confronting Denel is the continuing poor alignment with the Department of Defence requirements. This matter has, and will continue to receive particular focus from Government in the months to come. In the meantime, the Board will be constrained to make several serious business decisions going forward.

SAA achieved a modest profit in the past financial year which was a good achievement given the difficult times that most airlines are going through as a result of the economic downturn. SAA’s compliance with competition law will be a key focus of the new CEO and will be further enhanced by the appointment of a leading and renowned competition law specialist on the Board.

SAX continues to perform well and is profitable. Its Board is fast-tracking the replacement of its CEO, Ms Mzimela. SAX is really one of the success stories of the SOE world. It has also focused on the provision of regional air services despite the economic downturn and also recently launched a joint venture in the DRC.

Although SAFCOL’s financial performance has been affected by the current economic climate, particularly, in regard to the decline in domestic property construction market, its operation have been directed towards stability of its own operations and the well–being of communities in the areas of their plantations. Given this economic climate, the 2009/10 financial year will be a loss-making year for Safcol and this will result in Safcol incurring bank loans during the coming financial year 2010/11.

As at December 2009, Broadband Infraco deployed an additional 6 700 km of fibre optic cable in the current financial year to make the total cable deployed and commissioned to 11700 km since inception, providing nationwide coverage of broadband services. To date, the National Long Distance fibre optic network is operational and in Infraco’s short period of existence, it has managed to slash national connection costs by about 73%!

Its Individual Electronic Communications Network Services (‘I-ECNS’) license will enable it to sell wholesale capacity too all electronic communications licensees and not just Neotel. Infraco will also establish PoPs in a large number of underdeveloped areas over the next seven years to help bring affordable communications to under serviced communities.

The launch of the West Coast (off Africa) sub-marine cable scheduled for 2011 will further induce a reduction on pricing and improvement in the availability and speed of broadband. Analysts have indicated that we can then expect a 38% or even greater reduction in the costs of international connectivity.

Aventura is in the final process of being wound up with all outstanding matters being attended to urgently.

Cost cutting measures at Alexkor along with improvements in the diamond price enabled Alexkor to mitigate the impact of operational constraints in plant and equipment as well as limited safe marine mining conditions. Regarding the implementation of the Richtersveld Settlement, the last phase of hand over to the community and township establishment will be executed during this financial year. The township has been proclaimed and infrastructure upgrades will be commencing soon.

Let me end by saying that today, I could only give a small taste of where our challenges in SOEs lie at present.

Let me thank all the staff at the DPE for their endless commitment and energy. Thank you to the former Director-General (DG), Ms Portia Molefe for steering the ship in challenging times and to the Acting DG, Adv Sandra Coetzee for leading the Deputy Director-Generals and their teams and for their excellent work during a difficult and challenging year. Thank you to the Chairs, CEOs and Board members, some of whom are here with us today. You are constantly in the line of fire, but you have remained committed to the task at hand – my sincere thanks to you. Also, I must thank all the staff that works at our SOEs that serve our country so well.

Last but not least, the Deputy Minister, Enoch Godongwana, I couldn’t have asked for a better partner for this job. Thank you for the guidance and leadership you continue to provide.

I hereby present the Budget Vote for the Department of Public Enterprises.

Issued by: Department Public Enterprises
15 April 2010