Madam Chair ... I don't know if I should wait for more enthusiastic applause or not. [Laughter.] [Applause.] That's it! Madam Chair, on your behalf, can I thank everyone for such enthusiastic applause!
Madam Chair, state-owned enterprises, in their past and present form, have played an indispensable role in the development of our country and our economy by providing essential infrastructure, such as postage, rail, water, telephony, communications, fuel, energy and development financing, without which no economy or country could have functioned or survived.
As is the case elsewhere, they are creatures of their time, reflecting in their practices or founding mandates the sociopolitical objectives of their governments. In the case of South Africa in particular, this was most evident in the era of apartheid, when they were aggressively used to disempower blacks and drastically reduce white poverty by privileging the white working class, to insulate the apartheid economy from economic sanctions, and to "develop", euphemistically speaking, the homelands. Finally, they became the aggressive entry point for white Afrikaners into the economy, from beyond the traditional confines of agriculture - a form, in a sense, of white Afrikaner affirmative action.
What we inherited were institutions that, with some restructuring, were well placed to set the engines of our economy moving, and it was a task, then, of shifting the focus from the apartheid objectives to the objectives of a new developmental state.
With the advent of democracy in South Africa in 1994, government inherited a large and complex array of state-owned enterprises, with varying degrees of efficiency, efficacy and purpose. Its job, as a developmental state, both then and now, is to reorient the state-owned enterprises towards the twin goals of attaining our socioeconomic developmental goals and maximising operational efficiency and financial sustainability.
From the point of view of efficiency and sustainability, government has adopted a multifaceted approach to restructuring, which, whilst incorporating privatisation as an option, is not limited to that. Restructuring is officially defined as "the matrix of options that includes the redesign of business management principles within enterprises, the attraction of strategic equity partnerships, the divestment of equity either in whole or in part where appropriate, and the employment of various immediate turnaround initiatives".
Privatisation on its own is never a guarantee of either success or failure in attaining efficiencies and sustainability. Decisions have to be taken on a case-by-case basis, with careful consideration of the context and the environment, and of the value of the transaction to the state. For instance, the privatisation of Telkom had some negative consequences, for it did entrench some monopolistic practices and undermined accountability for service provision. The problems are compounded in a poor regulatory environment. On the other hand, the disposal of noncore assets in the Transnet stable has enabled the corporation to focus on its core business, and we look forward to seeing even more dramatic improvements in that regard.
The entities that fall under the Department of Public Enterprises stable are, in the main, all corporatised, with independent boards. Most of the state-owned enterprises in our portfolio operate in key network infrastructure areas - in the electricity, broadband, aviation, port, rail and pipeline sectors, as well as areas of advanced manufacturing, which have the potential to catalyse economic growth - this is extremely important - and to ensure that this growth is accompanied by the creation of much-needed jobs.
State-owned enterprises form the backbone of the economy and, if skilfully managed, they can be the engines and the levers of moving the economy forward, as we shall see. To be able to fulfil this role, these state-owned enterprises must be strong enterprises and must be institutionally responsive to the strategic intent of government as a shareholder. Being a strong enterprise means that there is an enabling external environment for the state-owned enterprises to operate in. A strong enterprise also means that they must have adequately capitalised balance sheets; adequate and predictable cash flows going forward, sufficient for the execution of their respective business plans; strong boards and management teams; solid strategic and business plans; alignment with labour; and responsiveness to government's strategic objectives. All of these characteristics are, of course, to varying degrees in place.
Our responsibility as the shareholder manager is to balance the commercial sustainability of the state-owned enterprise with the state's strategic intent in owning these enterprises. This creates a delicate balance in that, if the strategic purpose subverts commercial viability, the enterprise will collapse, but if commercial considerations override the strategic purpose, government objectives can be compromised. It is our challenge to provide shareholder oversight in a manner that builds financially robust, developmental enterprises, rather than to see these two aspects of state-owned enterprises as mutually exclusive.
This is in line with the ruling party's Polokwane resolution that calls for "strengthening the role of state-owned enterprises and ensuring that whilst remaining financially viable, state-owned enterprises, agencies and utilities - as well as companies in which the state has a significant shareholding - respond to a clearly defined public mandate and act in terms of our overarching industrial policy and economic transformation objectives".
Shortly put, in this era with an economic recession and a deficit in infrastructure spending, the strategic mandate of government is to confront the shortfalls in our infrastructure, to assist in turning around the negative consequences of the recession, and also to look forward, even 30 years, to what the economy will require in terms of advanced manufacturing capability. Those three are, in short, what the strategic intent of the state is at the moment with state-owned enterprises. Of course, the particulars will differ with each state-owned enterprise. In the present worldwide economic recession, and in light of the huge backlog in infrastructural investment, the state-owned enterprises must massively expand the roll-out of their infrastructure programmes. This will help to counteract the economic downturn by accelerating jobs and investment. Comprising an investment of R787 billion, this is the world's third-largest infrastructural investment programme. It is massive, and it is meant to achieve results. Both Eskom and Transnet are critical to this programme.
These infrastructural investment programmes can be used systematically to develop the manufacturers that supply the state-owned enterprises with the components necessary for the infrastructure roll-out. We cannot have investment that simply buys in resources, materials and components from abroad. We have to have the further-downstream impact, enabling industry to engage competitively with this massive infrastructural roll-out.
This leverage is optimised when there is long-term infrastructural planning - we can no longer think short term; we have to be thinking 30, 40 years ahead of what we need - combined with a high level of standardisation of requirements and the building of strategic relationships with national suppliers. This gives industry a firm basis to invest, and allows them to achieve economies of scale and high levels of efficiency as a result of the learning curve.
In the light of this, our department has established the Competitive Supplier Development Programme, which embeds the supplier development process into the heart of the investment programmes. However, in order to achieve these objectives, sophisticated procurement abilities are required - a further reason to emphasise the building of procurement capacity. In addition, it is critical that we build our capacity to co-ordinate a range of government incentives with the procurement process to ensure investment in advanced manufacturing capabilities. We believe effective procurement leverage can result in sustained job creation and, ultimately, in exports.
In speaking to our chairpersons and CEOs of the state-owned enterprises that are charged with the task of rolling out this really historic, massive infrastructural programme, one of the matters that they highlight is the procurement ability, to really procure with the sophistication required to roll out these programmes. For instance, I think we have learnt enormously from the initial programme to procure a nuclear power station, and I believe that we are now on the tip of a learning curve, which can only assist South Africa going forward.
The current regulatory system was established during a period of minimal investment, and has not been adequately revised. This regulatory system was not developed with a build programme in mind. The consequence is that tariffs, particularly in electricity, are not designed to provide the enterprises with the cash flows to fund an aggressive build programme. Given the scale of the investment programmes, it is unlikely that the fiscus will be able to fund the costs of the capital build. This is a major threat to the investment programmes and needs to be given considerable focus. And this is what we will be focusing on, particularly with the funding model for Eskom going forward.
Given the accumulated backlog of investment in infrastructure, it is critical that we create an environment where the private sector can participate in the system alongside state-owned enterprises, rather than as an alternative to them. A further problem with the low tariff regime is that it hinders the ability to introduce private operators and funding into the system, as the returns offered to these players will not be sufficient to justify the investment. These investors do not only bring the much- needed financial capital, but can also introduce a competitive dynamic to the system that will increase efficiencies, and in certain instances will give consumers greater choice.
Finally, it is absolutely critical that our funding models for our enterprises be finalised as soon as possible. Enterprises can be funded from equity, from retained earnings and from borrowings. Our enterprises need to know with certainty how that combination is going to be effected in the months and years going forward. With Eskom, again I say, that is a critical component. We will be addressing this before September. Many of our state-owned enterprises are unable adequately to generate their funding requirements from their own operations and are reliant on borrowings that are often guaranteed by the state. It is absolutely clear that additional sources of funding must be sought. The state as a 100% shareholder is a potential source of equity funding, but, as is well known, the fiscus is simply not in a position to provide that scale of funding.
We are living in harsh economic times, when even yesterday's newspapers were reporting on the imminent collapse of a number of welfare organisations, when only a few months ago a province ran out of antiretroviral medication, and when pressures on the Unemployment Insurance Fund are undoubtedly going to accelerate. These sobering reminders of the desperate need out there must galvanise the department urgently to address the finalisation of appropriate funding models for our state-owned enterprises. This is an absolute priority.
While we deal more intensively with each of the state-owned enterprises in accompanying notes which we have released and which members will be given, it is prudent that we speak here directly to the issue of Eskom.
Despite significant funding challenges, the implementation of Eskom's capacity expansion programme must continue, with particular emphasis on bringing the two new coal-fired power stations, Medupi and Kusile, into service as soon as is humanly possible.
Eskom's planned capacity expansion programme will spend R385 billion in nominal terms over the next five years, and this began in the last financial year. The programme in its entirety plans to double Eskom's generating capacity to 80 000 megawatts by 2026, with a projected spend in excess of R1 trillion.
The funding of Eskom's capital expenditure programme remains a challenge, especially in these times of reduced debt access in the global markets, and in the context of an electricity price that does not accurately reflect the cost of production. The price of electricity, for instance, has not been reflective of the true cost of production, especially in light of the new build programme. Since 1990 Eskom has foregone over R148 billion in revenue in nominal terms - that is R257, 8 billion in 2009 money - due to the provision of electricity below its affordable cost. This has led to falling financial reserves, to the point where Eskom is no longer able to meet its expansion requirements without significant borrowings, or a financial injection from the state.
The Electricity Pricing Policy approved by Cabinet in December states, and I quote:
Revenue from tariffs should reflect the full cost (including a reasonable risk adjusted margin of return) to supply electricity and ensure that the industry is economically viable, stable and fundable in the short, medium and long term.
The principles behind the Electricity Pricing Policy are based on a sustainable electricity supply industry, where a prudent operator can recover the full prudent costs of production and earn a reasonable return on their assets, and energy efficiency is promoted through a cost- reflective tariff.
To ensure efficiency in consumption, revenue generated from tariffs should at the very least cover operational expenditure. This cost is borne by the consumer through a progressive tariff which provides protection for poor households. Let me emphasise: This is a progressive tariff. The intention is to protect poorer households.
The current 34% price increase is based purely on the increases in operational expenditure and excludes the cash-flow requirements for the capital expansion programme. It is absolutely paramount that the Eskom capital expenditure programme continues unabated, as it will also serve to support South Africa's economic growth and provide jobs in these difficult times.
There is some concern over Eskom's ability to access the debt markets to the extent necessary to fully fund its capital expenditure programme in the current economic climate. Any shortfall in funding that is not provided for either by additional government support or through its electricity tariffs will result in a certain curtailment or rephasing of the build programme projects. That is why building a sustainable funding model is so important.
In addition to the capital expenditure, Eskom's cost of operations is on the increase. One of the fastest rising costs is that of primary energy, which is comprised of coal, diesel and water.
It is imperative that Eskom's operational costs are fully funded through its tariff, which is regulated by the National Energy Regulator of South Africa, Nersa.
The lack of clarity regarding the funding of Eskom's capital expenditure programme and the approximate mix of government support, access to debt and tariff support has necessitated that Eskom apply to Nersa for an interim increase for this year to enable it to cover its operational costs only. Failure to obtain the 34% increase will result in a severe cash-flow shortfall for Eskom and it will have to take the necessary steps to curtail its business operations to remain financially stable.
Finally, in reflecting on the role of the Department of Public Enterprises, we have to say that one of our most important objectives now is to improve our shareholder oversight. Until 2004 official government policy focused simply on privatising state-owned enterprises, rather than leveraging the enterprises to achieve strategic national goals.
THE HOUSE CHAIRPERSON (Ms M N Oliphant): Hon Minister, I am afraid your time has expired.