Parastatals: looking backward and forward

In South Africa , as in most countries, we have moved from entities that were functional agencies of the state and that had to be understood within the logic of fiscal policy, to enterprises that had to be understood as corporate enterprises. So in the first years after 1994 we focussed on making the entities we had inherited into enterprises – usually referred to as corporatisation.

In the case of Transnet, the previous regime had moved to corporatise it in 1990 but had left a very cumbersome structure saddled with large debt in the pension funds. With Telkom and South African Airways (SAA), we needed partners that could take the enterprises out of being funded utilities into enterprises that could compete on the managerial and technology terrain increasingly characterising these sectors globally.

We had to develop new regulatory structures. We also found many enterprises where there was no economic logic to having them in the public sector and we moved to sell them to private interests.

So a state-owned enterprise (SOE) should have a clear public strategic purpose based on an economic and financial calculation in relation to the likely conduct of the private sector and the public needs our society and economy has. It needs to be capable of generating a revenue stream that can establish a viable balance sheet.

But in doing all of this the SOE cannot detrimentally affect the working of the rest of the economy – it cannot ‘cherry pick’. It is for these reasons that Eskom, Transnet and Denel will remain as SOEs.

We are entering a phase where we have to make SOEs work with the private sector to operate and finance components of the overall infrastructure systems we seek to build to world-class levels of efficiency and capacity. As we bring in the private sector we need to briefly look at the question of competition within a regulated system. Clearly some degree of competitive pressure is useful as it provides an inducement towards efficiency and acts as a check on rent-seeking behaviour.

Let me illustrate this by using the energy system as an example. The involvement of private independent power producers (IPP) can provide an internal form of competition within the system that can improve efficiency – that is if the IPP is efficient which is not an automatic consequence of being private.

Generally therefore, one would seek an IPP that has experience and a track record in another system. Even within a SOE such as Eskom, moves are made to ensure that the management of the generation plants manage their plant to its optimal efficiency. In Eskom this is now done by clustering generation plants and having a ‘trading system’ within their overall supply capacity. This is the use of competition to ensure the efficiency of a system, which is of a public/private nature. Having different terminal operators within our ports will also offer a degree of competition that should improve efficiency. The model is complex but can be implemented in many areas. It is an area that we will now be moving into.

It is important to understand that this is not some sell-off type privatisation and requires strong and effective SOEs as well as efficient private partners. The purpose of such a partnership is to achieve higher levels of investment; overall system efficiency for the economy; improved technological capacity; improved management (within public and private entities) of public assets; enhanced human resource capacity, sustainable non-recourse financing options and better customer service.

For the Department of Public Enterprise (DPE) in the next five years our objective is to locate Eskom, Transnet and Denel, as SOEs, within a system of public/private partnerships with the above characteristics in the energy, logistics and defence sectors where they play the pivotal and decisive role. In addition, we will deal in various ways with SOEs in the information and communication technology (ICT), forestry, recreational and mining industries that report into DPE. In these latter cases the SOE concerned does not occupy a central position in the sector and therefore the objectives will perforce be different. It is my intention to provide finality of intent in these latter cases by the end of the year.

In the cases of Eskom, Transnet and Denel, we will simultaneously ensure policy certainty with the responsible policy departments, finalise the appropriate corporate structure, establish a coherent and sustainable financing strategy and move to implement – as appropriate to the situation – concessions, joint ventures and (public-private partnerships) PPPs in various areas. We are not starting from scratch but completing work commenced by the previous administration. The September deadline for the financing strategy will require that we have clarity on the policy and corporate structures by then. In regard to the latter, there is work already in hand and announced such as the recent announcements by Spoornet.

On the Durban Container Terminal (DCT) terminal, I have commenced discussions with the Department of Transport and Transnet to reach agreement on certain technical aspects of the National Port Authority (NPA) Bill, which is basically sound and a very important development. We will table the Bill once again at the earliest opportunity and by the end of this year we should be well advanced in the bringing in of a private partner into the DCT.

Where appropriate we will consider initial public offerings (IPO) such as that successfully done with Telkom. Let me set out the logic of such IPOs. An IPO allows savings to be drawn from the private sector into the provision of infrastructure. Since it is a share issue, individual investors do not need large financial resources and this has the benefit of spreading the range of assets available as investments for our citizens. When done in the manner we did Telkom, it allows for new entrants into the investment markets and in particular our Johannesburg Securities Exchange (JSEX). For an economy of our size and sophistication. an active and large stock exchange is an important aid to capital accumulation and investment. Accordingly, it is an objective of government to ensure we have a vibrant corporate sector and an efficient stock exchange. An IPO would be considered when the corporate structure and balance sheet of the SOE is strong and where we see the opportunity of lowering the cost of capital through an IPO. However no IPOs are envisaged during this financial year. We will concentrate on concessions, joint ventures and PPP arrangements.

( Extract from the Budget Vote speech of Minister of Public Enterprises, Alec Erwin – June 14 2004 )