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Joint Sitting of Parliament State of the Nation Address Debat, Speech by Hon. M. Gungubele ANC (MP) Member of Study Group on Public Enterprises, 2018 19 February 2018

"Strategic role, governance, management and financing of State Owned Enterprises within the framework of the Democratic Developmental State"

Honourable Speaker of the National Assembly
Honourable Chairperson of the National Council of Provinces
Your Excellency, President of the Republic of South Africa
Honourable members

SOE's are usually major employers and providers of services. They also procure a large quantity of goods and services in the economy. SOE's in telecommunications, energy and transport sectors have historically provided a solid foundation for economic development across all sectors.

Specifically, households and businesses depend on a reliable supply of electricity to function optimally. Workers and businesses rely on relatively inexpensive public transport, road, rail and other infrastructure to function efficiently. Businesses and the public sector need fast and reliable telecommunications systems to function in the digital age and to render quality services to their clients.

Historically, the largest SOE's that exist today were created by the apartheid government in order to promote an industrialisation strategy premised on the export of raw materials and import-substitution. The SOE sector was effectively used by the regime to empower Afrikaner enterprises in mining, agriculture, finance, manufacturing and commerce.
More than half of the existing SOE's in all spheres of government were established after 1994. Today South Africa has almost 600 SOE's, including their subsidiaries.

Our SOE's have created a massive number of jobs directly and indirectly through their large procurement budgets. The 30% spend of procurement budgets to black-owned companies is important to fulfil government's policy of broad-based BEE. Between Eskom and Transnet, almost 100 000 people are employed in relatively secure and well-paying jobs. According to Statistics SA, this is almost 10% of workers in the formal non-agricultural sector.

International experience has taught us that, even in the most liberalized economies SOE's continue to thrive and support the development of other sectors of the economy.
Historically, in the developed countries in North America, Europe and the far East, SOE's and public investment have led the Innovation, Research and Development that have facilitated the establishment of most of the well-known global brands.
Let me give some examples:
a. Apple is a perfect example that supports my argument. Every technology that gives the iPhone its smartphone capabilities owes its vision and funding to the State. These include: the Internet, GPS, touch-screen displays, and even the voice-activated smartphone assistant Siri.
The US Defense Advanced Research Projects Agency bankrolled the development of the Internet, while the CIA and the military funded GPS.
b. It is a little known fact that the 9th biggest auto manufacturer by volume globally, Renault is an SOE owned by the French government. The company was expropriated without compensation by the government of Charles de Gaulle from the suspected Nazi-aligned Renault family in 1945. Today it owns large stakes in and manufactures parts for other global brands such as Nissan, Mitsubishi, Daimler, Volvo, etc. It was partially privatized in 1996, but the French government still owns the largest share in the company.

c. The 10th largest bank in the world, with total assets worth over 2 trillion US dollars, is the Post Bank of Japan, a country considered to be a bastion of liberalization.

d. Four of the Top 5 largest banks globally are from the communist governed People's Republic of China and are part owned by the State.

e. Chinese oil and gas companies are now number One and Two in terms of assets. They have displaced their well-known North American and European competitors as the largest energy firms in the world.

In spite of the challenges it is facing currently, Eskom remains in the Top 10 of largest electricity public utilities in the world in terms of generation capacity and sales. The decay in our large SOE's such as PRASA is alarming.
A typical example of this is the decision taken by Metrorail-Western Cape in December last year to suspend all trains running on the central line in Cape Town, which services the areas where millions of working class and poor people live such as Khayelitsha, Philippi, Mitchells Plain, Bishop Lavis and Langa. This has obviously had a devastating impact on our people and the economy of the Western Cape. Government must act urgently to resolve this issue.

We are confident that the Judicial Inquiry into corporate capture will answer some of these questions.

Former President Thabo Mbeki captured this challenge our government must deal with if we want to attract larger volumes of investment:

"The world investor community has understandably asked that as Africans we must establish the conditions to enable them to take rational business decisions to make long-term investments in Africa."
This implies in a nutshell that in the eyes of investors, the credibility of our country depends on the sense they get of the clarity, stability and predictability of our legal system; democratic government principles, policies and processes; and the governance systems of our large SOE's.

This is particularly relevant to South Africa as a developing economy, considering that for the past few decades, global growth has been driven by the robust levels of demand from emerging economies. This is evinced by the portfolio and flow of Foreign Direct Investment (FDI).

The Honourable President, in his Address to this joint sitting of Parliament said that government will intervene decisively to stabilize and revitalize our state owned enterprises. The performance of some of these SOE's has placed tremendous pressure on the fiscus. Indeed, we are encouraged by some of the changes we have witnessed at Eskom, and Parliament must take some credit for the action we have taken through more enhanced oversight over State-owned entities, including Eskom.
Eskom's interim financial statements released last month by the new board and management make for some depressing reading. The deep crisis includes the drop in sales, overdue debt owed to the utility by municipalities running into billions of rand as well as Eskom's staggering government guaranteed debt of R367 billion, a R34 billion increase from a year ago. This situation is clearly unsustainable.
SOE's must be strategically positioned to generate the revenues sufficient to cover the costs associated with executing their mandates. They cannot be allowed to become a permanent drain on the fiscus.

Honorable Speaker/Chairperson, I would like to make some concrete proposals to contribute to the ongoing debate on the call by the President that we need to stabilize and revitalize our SOE's:

a. Audit of all SOE's

Government needs to undertake a thorough and systematic audit of all the SOE's we have in all spheres of government. This should be done in order to establish their purpose and rationale of their existence and whether there is a case to sustain all of them, based on evidence.

The success of an M & E framework depends on the clarification of the roles of the Shareholder, Boards and Management. The powers and responsibilities of these important role players must be clarified. The lack of effective M & E systems is what has opened the door to corporate capture and massive corruption, for the example the R1.6 billion transferred from Eskom to MacKinsey and Trillian without even proper contracts; and Metrorail services collapsing on our watch.

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