Public Lecture by Malusi Gigaba, Minister of Public Enterprises, at Wits University on June 7 2011

"The role of State Owned Enterprises in the South African Economy"

It is indeed a great honour to have been invited this evening to present a lecture at such a prestigious University that has played such an important role in the struggle for the liberation of our country.

This University has contributed more than was asked of it - churning out the ideas that helped to propel our struggle, either through its academic work, or through its successive waves of students' activists, the young revolutionary intelligentsia of our freedom movement, and progressive academics.

When apartheid tightened its noose even around Universities, in its sterile attempt to stifle the ideas that would lead to its demise, this University was among the few that opened its doors to black students in defiance of the system.

Standing here this afternoon, I cannot but be honoured therefore at standing on a rostrum on which many distinguished freedom fighters and leaders of our people have stood articulating the ideas of freedom and what that freedom would entail.

In his book, Die Volkskapitalisme, Professor Dan O'Meara, said:

"Any analysis of the state and state policy must necessarily pose for itself the question of organisation and ideology - of the particular organisational and ideological forms of the collective harnessing of the forces of this or that class or alliance of classes."[1]

Further reflecting on the role of the colonial state that emerged in the 1930s, in the aftermath of the Great Depression, O'Meara says:

"Most notably this period saw the full development of the interventionist state to secure the necessary economic, political and ideological conditions for the dominance of monopoly capital and to ensure its profitable operation".[2]

Of course, such conditions were not unique to South Africa as noted by Dambisa Moyo that:

"Although it did not end the economic crisis of the 1930s, President Franklin Roosevelt's New Deal was an attempt to reconstruct American capitalism, and give the not so invisible hand of the government a new and more dynamic role. At its core America would remain a supporter of free enterprise, but the plan was for government to play a key role in orchestrating, supervising and directing the faltering economy, leading, not following, private enterprise and administering large-scale endeavours." [3]

The challenges facing the evolving South African developmental state do not present themselves in any manner different from these described above.

The fact of the matter is that, as Erik Reinert states it:

"History reveals how rich countries got rich by methods that by now had generally been outlawed by the ‘conditionalities' of the Washington Consensus."[4]

Earlier in his Introduction of his book, Reinert says:

"If you take anything from this book, let it be this: if you want to understand the causes of American and European prosperity, study the policies of those who created it, not the advice of their forgetful successors."[5]

Having raised all of the above, we must admit that in South Africa, the debate on the role of the state is far from concluded. For so long as there are still contending ideologies and social actors in our polity, so long will the question of the state and its role remain in contention.

Accordingly, the organisation and ideology of our own evolving state is a matter both of continuous evolution and analysis.

Without attempting here to enunciate an elaborate thesis of the democratic developmental state as espoused by the ANC as a ruling party, I think it would be apposite to say that 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 for it to do this, it 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.

In addition, in the context of a developmental state, SOEs should play their part in skills development, transformation, and other such imperatives.

From the outset, we need to state it that the agenda we are going to present here in this lecture is still evolving, and is far from conclusion. Among others we are still wrestling with other important complex areas such as balancing of the commercial and non-commercial interests of SOEs, issues which are not concluded even by Organisation for Economic Cooperation and Development (OECD) countries.

The critical matter is that the state does not exist for its own sake, but as a critical instrument in ensuring the realisation of the strategic objectives of the liberation movement to create a national democratic society that should, as the Strategy and Tactics document adopted at the 52nd National Conference of the ANC in December 2007 states, among others:

1. have a democratic and legitimate state based on the values of our Constitution;
2. promote unity in diversity among South Africans, recognising the common interests that bind them as a nation;
3. ensure a growing economy which benefits all, including through the creation of decent jobs;
4. be informed by a value system of mutual respect and human solidarity; and
5. be led by a state that is efficient in providing services and which gives leadership to the programme of national development.

In the South African case, the importance of the state in the lives of the South Africans is underlined by the observation made in the Government's Ten Year Review that greater progress had been made in areas of social endeavour where the state acts directly and is virtually in full control. This applies to subsidised housing, water electricity and so on. On the other hand, where the state relies on leadership by others, such as the bulk of job-creation, progress had not been optimal.

That South Africans have high expectations and demands of their state was underscored most emphatically by their participation in the local elections¸ and the levels of social mobilization that preceded those elections.

As a country, South Africa is facing significant economic challenges: we need to accelerate the growth rate to create wealth that enhances the standard of living for all South Africans; dramatically increase employment creation; develop industrial capabilities to decrease the country's dependence on commodity exports; and transform the ownership and management profile of the economy to reflect that of the broader South African population.

In that regard, State-Owned Enterprises are extremely strategic instruments.

Infrastructure-related SOEs like Transnet and Eskom are in a uniquely powerful position to drive growth in the economy.

Key sectors of the economy are completely dependent on the availability of infrastructure capacity for their existence and growth; for example:

1. a large scale export orientated iron ore mine located in the hinterland, cannot exist, let alone compete without a very efficient logistics link with the port:
2. a foundry or smelter cannot be established without secure and competitively priced electricity; and
3. a locomotive manufacturer on the southern tip of Africa cannot survive if the national rail company is not consistently buying locomotives.

Consequently, the SOEs either constrain growth or they act as a catalyst for additional investment in these sectors, and hence must always be seen in terms of the impact they have on their customers and suppliers and the broader economy.  

SOE investment can unleash a unique group of multipliers on the economy if managed correctly.  Given their strategic position, they can play a leadership role in both the customer and supplier community in driving programmes that catalyse socio-economic transformation in these sectors.

The NGP sets the target of five million new jobs by 2020 and the SOEs can contribute in at least five ways - through:

1. the expansion of their direct employment;
2. providing the infrastructure that can unlock jobs in the private sector and in rural areas;
3. expanding procurement of locally-manufactured components and consumer goods used by SOEs, thereby expanding employment in the SOE supply-chains;
4. providing skills to the wider economy through their mandate to produce more artisans and other key skills; and
5. keeping tariffs for services competitive and thus helping to reduce input costs in the economy

In this regard, it is important that the Department of Public Enterprises vigorously pursues its new vision to drive investment, efficiencies and transformation in its portfolio of SOEs, their customers and their suppliers to unlock growth, create jobs and develop skills.

We are embarking on numerous policy formulation processes that would ensure that our Vision is accomplished.

For that reason, it is clear that the shareholder management model based on the assumption that the SOE balance sheet lays an adequate foundation for the achievement of national growth and development goals is inadequate and hence there is a need for innovations in the governance of the SOEs if this new vision is to be achieved.

Governance capabilities must not be limited to those associated with limiting transaction costs and allowing the markets to operate efficiently.

Given our core industrial policy objective of redirecting our economic trajectory from a dependence on resource-based exports to a more diversified, value-adding industrial economy, I am going to draw on Mushtaq Khan's[6] notion of "growth-enhancing" governance.

This concept focuses on the governance capacities required to achieve and sustain high rates of investment, to implement policies that encourage the acquisition and learning of new technologies and to maintain political stability in the context of rapid social transformation.

I am also going to draw on the work of Nicolas Meisel[7] who argues for the need to develop governance capabilities that manage the inter-play of key actors in society, in a way which continuously allows for the emergence of common interests between them.

This requires the ability to modify the structure of incentives in order to align the pursuit of private interests with the national interest.  

In short, as our New Growth Path emphasises, we need to be facilitating the continuous emergence of concrete compacts between government and private interests to pursue specific projects that will take us closer to the achievement of our national goals.

It is easy to talk about theories of growth enhancing and consensus building governance, it is quite different to operationalise them in a society which is challenged by a relative shortage of highly skilled human resources and relatively inexperienced institutions.

We will develop these governance capabilities by focusing on relatively few areas, focusing on ensuring a high quality output in these areas and continuously improving through "learning by doing".

The five key areas of governance innovation that we will focus on relate to planning, funding, procurement, productivity improvement in the SOE and enhanced government coordination. 

Public investment in infrastructure has remained very low for many decades - and it was lowest, at about 5% of GDP, at the dawn of democracy in 1994, where it has more or less remained until Eskom and Transnet announced their build programs and, in 2005, when government also began a fixed asset investment program.  

This has created a significant back-log in infrastructure investment, and as economists would argue, this could have crowded out private sector investment in infrastructure which it itself has remains relatively weak.

However, it is not only infrastructure investment that became a casualty of this disinvestment; skills also became a casualty, both of disinvestment as well as a narrow bottom-line approach.

The very rationale for SOEs is the developmental mandate they have which relates to services provided in poorer parts of the country, skills development, industrial opportunities they create for local suppliers and many more.

As commercial enterprises, the SOEs plan based on the capacity of their not-particularly -strong balance sheets, which then tends to screen the required investment to unlock growth in customers out of the planning process.

This will make it technically impossible for us to achieve our growth targets.

By definition, balance sheet planning will not invest adequately in the positive externalities associated with network industries, such as moving marginal cargo from road to rail.

Consequently, there is a need to develop a new growth-based planning paradigm that will involve both a process of understanding investment requirements based on high levels of customer growth as well as entering into a structured dialogue with customers around their investment opportunities based on providing additional infrastructure capacity.

The point I wish to emphasise is that this process will require joint projects between the shareholder and the SOEs as the SOEs' instinct is to fall back onto its balance sheet.

Turning to the funding challenge, it is one thing to plan for growth and it is another thing to fund it. Latest available calculations indicate that had we been consistently investing at 10% of GDP in infrastructure between 1994 and 2009, South Africa would have invested a further R1,5 trillion rand by 2009.

No single institution, including the fiscus, is going to full this gap. There is a need for new thinking, such as, for example,

1. in France, the electricity utility raised significant amounts of capital through their top thirty industrial companies buying 25 years of power up front;
2. in Finland, key energy customers provided all the investment capital whilst entering into an operating agreement with the utility; and
3. in Australia, Anglo American is investing around $4 billion in port infrastructure associated with an iron ore mining development.

The South African economy is characterised by very large mining, industrial and financial services companies that have the most to gain through an accelerated infrastructure program.

Together with our extremely strong development finance institutions, such as the Development Bank of SA and the Industrial Development Corporation, we need to unlock their balance sheets and actively build funding partnerships with these stakeholders to speed up the rate of investment in infrastructure.

It is important to understand these co-investment partnerships in the context of a broader compact between government, SOEs and these key private players if we are to achieve our goal of decreasing our dependence on commodity exports.

In other words, to diversify our economy, we also need systematically to leverage on the opportunities created by these exports. Consequently, these compacts could include commitments around beneficiation off-takes, skills development, focused industrialisation support funds and supplier development processes.

That is why in our Budget Vote last week we called for the need to begin this dialogue that aligns private players with our national economic objectives through concrete investment processes as a matter of urgency.

A further area of focus is that of leveraging the demand platform created by the investment programme to promote investment in industrial and manufacturing capabilities in supply chains relevant to the programme.

We also said at the Budget Vote that it is the quantity, quality and predictability of the demand signal, combined with supplier perceptions of risk and the broader market opportunity, that will ultimately determine the investment response to opportunities presented in the national market.

Piece-meal transactional based procurement planning and execution will not create a platform for investment along the supply chain. Consequently, we have implemented the Competitive Supplier Development Programme that requires the SOEs to integrate supplier development considerations into the heart of the procurement planning and execution process.

This has been complemented by the fleet procurement approach, as defined in our industrial policy, that aims to provide a ten to fifteen year consistent demand platform for the building of advanced industrial capabilities in relevant supply chains.

Both programmes have the objective of moving from a transactional relationship between the SOEs and their national and international suppliers to longer term developmental partnerships.

The Chair of the Development Studies Committee and Director of the Chinese Big Business Programme in the University of Cambridge, Professor Peter Nolan convincingly argues that over the three decades of globalisation, alongside a huge increase in global output, the number of leading firms in most industrial sectors and their supply chains has shrunk resulting in unprecedented levels of global industrial concentration.

This has been driven by the competitive advantages created by economies of scale in both production and technology development.

These companies both dominate global markets and have become the key drivers of technology development - for example, the top one hundred firms invested $330bn in research and development in 2007.

It is therefore critical that South Africa learns how to partner with these global organizations to access technologies, skills and markets based on our vision for national industry. Hence, our procurement leverage programme needs to provide the OEMs with access to our markets in exchange for a developmental partnership that achieves our strategic vision for relevant industries.

Mushtaq Khan compares a garment factory in India with a factory in the USA using identical machinery.

The output of the USA factory is four times that of the Indian factory because of the "tacit" knowledge that the USA has developed about putting the machinery to work.

He argues that countries that have implemented successful industrial policies have given their companies the opportunity to learn this tacit knowledge whilst ensuring high levels of effort by these companies to overcome this productivity gap that separates developed from developing countries.

Failure to ensure high levels of effort will simply result in a situation where suppliers stop learning before they are globally competitive, resulting in a waste of time and resources.

Hence our procurement leverage programme needs to balance providing national industry with a platform to learn with clear penalties and incentives to ensure high levels of supplier effort both on the part of the global original equipment manufacturers  (who need to teach) and national suppliers (who need to learn).

The Transnet locomotive fleet renewal process is very illustrative of our procurement leverage approach. We have procured a few hundred diesel and electric locomotives which include technology transfer, quality management and skills development programs to get our existing industry capabilities to a world class level.

National production accounts for approximately a third of the value of the locomotive.

The next step of the process will be to implement a fleet procurement to structure a strategic partnership with a global Original Equipment Manufacturer with the objective of building a global locomotive manufacturing hub in South Africa.

This will involve investment in Greenfield plant as well as the development of new advanced manufacturing capabilities in South Africa. This is made possible by the long term nature of the relationship and the sheer scale of our demand - we will be the most significant market for heavy haul electrical locomotives outside of China.

Designing and implementing a procurement leverage programme is not easy as the SOEs will need to build world class procurement capabilities.

It is recognised, however, that we are a long way away from having world class procurement capabilities in our SOEs.

There is a significant gap between our aspiration and the institutional capability of the SOEs to procure complex requirements developmentally. Hence, we are implementing a number of governance innovations to manage this gap.

These include the development of a comprehensive policy and process to quality control the output from each stage of large, complex capital procurements whilst respecting the integrity of the underlying commercial process.

This policy is based on a combination of the Gateway Procurement Process developed in the UK by the Office for Government Commerce and the highly successful use of a panel of experts by the United Arab Emirates in its recent nuclear procurements.

We are not the only country that recognises the gap between our skills and what is required to optimise complex procurements - this is recognised as a challenge in both emerging and developed economies.

It is further recognised that it is critical that demand side initiatives are coordinated with appropriate forms of supplier support to compliment any penalties we impose for inadequate supplier effort. We need to create an environment where national businesses are supported and incentivised to become globally competitive and appropriately sanctioned for inefficient or rent-seeking practices.

Consequently, Ministers Davies, Patel and I will jointly provide direct ministerial oversight of the roll-out of the procurement leverage programme to ensure that it gets both appropriate focus and support.

We are aware that the productivity of our ports and rail business is well below acceptable levels in key areas.

Rather than constantly investing in additional assets, improvements in productivity, which is a cornerstone of economic growth, simply mean that we are using our assets more efficiently.

Furthermore, we have to be very vigilant that we do not have a repetition of electricity shortages because of problems with Eskom's maintenance practices.

These operational shortcomings can have strategic consequences for the economy. Consequently, we have implemented a program of monthly meetings with the Chair and CEOs of the key SOE.

These meetings will systematically identify areas requiring productivity improvements and define interventions in these areas.

If SOEs are to provide reliable and efficient support to the economy, we need to move beyond arms-length shareholder management.

Critical on the agenda of these forums will also be the jobs, skills development and localisation agenda as stipulated in the NGP.

Everybody has suddenly woken up to the fact raised by the Statistics South Africa (SSA) in its Census 96 Report that more than two-thirds of all the unemployed in our country are youth below the ages of 35 years of age.

For over 15 years, the ANC Youth League has been alerting South Africa to this crisis, and even suggested that even though youth unemployment is a result of aggregate unemployment in the economy, however the response should be that we should wait until aggregate employment was raised before addressing the specific situation of the youth.

The reality is that there are specific and unique challenges facing the South African youth, including that they lack skills, general capacity and economic opportunities in order to participate in the economy.

This means that there is a need to move beyond mere talk and embark on specific youth-targeted interventions that can and will make a real dent on the situation of youth and reverse their lack of skills, joblessness and lack of broader economic opportunities.

SOEs can and must play a major role in this regard, particularly in relation to skills development and this where we need to enhance government coordination and integrate SOE developmental initiatives with broader government programmes to achieve our transformation goals.

Nationally, if we are to accelerate growth, we need to leverage SOE training capabilities to increase the production of artisans and specialised skills.

Our plan is to increase the output of artisans from SOE training facilities by 60% to 6780 students for the coming year.

For example, we aim to increase output from Transnet from the present enrolment of 500 artisans to 1 500 artisans.

In addition, Eskom intends providing apprenticeship to 10 000 young people in its pipeline (up from 4 500) and implementing a youth programme to support about 5 000 young people to find their way into employment (up from 200) by 2015.

We are working closely with Minister Nzimande to access additional resources from the National Skills Fund to address resource constraints in the SOEs.

Furthermore, the SOEs will directly, and through partnerships with suppliers and commercial customers, provide support to FET Colleges and provide on-the-job training to graduates from these organisations.

We will also be leveraging the SOEs in an integrated manner to advance youth development through our skills development, enterprise development and corporate social responsibility processes.

Recently, the Department had a seminar with the distinguished development economist, Alice Amsden, who spoke about a range of global examples about how developing countries are creatively leveraging their SOE to achieve strategic national economic objectives.

But the key message she gave us was to stop being so meek. The money for our capital investment programmes is our money and we have the right to leverage it to achieve what we want to achieve.

We need to recognise that in a new global environment, South Africa has considerable leverage by virtue of our role in Africa and the competition between global super-powers and their companies to get a secure foot-hold on our continent.

Walmart, she argued, needed Massmart a lot more than Massmart needed Walmart. She argued that we need to get bold and do business with our global partners not just on their terms, but on our terms as well.

I would like to say in this regard that I agree with Alice!!

It is critical that South African SOEs begin strategically to establish an African foot-prints strategy with the aim in future to play big on the continent. There are great opportunities to be seized on the transport-logistics, energy, defence, ICT, aviation and other sectors so that there are African players in this space on the continent.

SAA and SA Express are already planning big moves in this regard, with the acquisition of new aircraft capabilities that will enable them to exploit the African skies. Likewise, Transnet Rail Engineering, SA Technical and Denel Aviation can provide further opportunities as continental hubs for aircraft, rail and locomotive manufacturing, repair, maintenance and service, as well as skills development.

At the present moment, all reports indicate that South Africa is seriously lagging behind all its BRICS partners in this regard and this needs to change.

An essential part of building a developmental state is to build a state of mind within government, a state of pragmatic boldness.

This takes us back to the views we opened this lecture with, articulated by O'Meara, Moyo and Reinert that South Africa is at a stage in its evolution where it cannot afford to dither on the question of creating a developmental state that can help our country attain the levels of development attained elsewhere.

And in pursuit of this, the state has a critical role to play.

Like Professor Amsden stated it, the question is whether we have the courage to do business on our terms!

Thank you very much.

[1] O'Meara, D (1983): "Volkskapitalisme: Class, Capital and Ideology in the development of Afrikaner Nationalism 1934 - 1948", Ravan Press, Johannesburg, p. 3

[2] Ibid, p. 22

[3] Moyo, D (2011): "How the West was lost: Fifty years of economic folly - and the stark choices ahead", Penguin Group, London, p. 3

[4] Reinert, E (2007): "How Rich Countries Got Rich ... and Why Poor Countries Stay Poor", Constable and Robinson Ltd, London, p. 11

[5] Ibid., p. xxix

[6] Mushtaq Khan  is Professor of Economics at the School of Oriental and African Studies(SOAS), University of London

[7]Nicolas Meisel is from the Groupe Agence Française de Développement

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