US embassy cable - 05PRETORIA4012

UNCLAS SECTION 01 OF 02 PRETORIA 004012 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, ENRG, EAIR, ELTN, EFIN, ETRD, SF 
SUBJECT:  ERWIN EMPHASIZES SOE ROLE IN ACHIEVING 6% GROWTH 
 
 
 REF:  PRETORIA 2161 
 
 (U) This cable is Sensitive But Unclassified.  Not for 
 Internet Distribution. 
 
 1. (SBU) Summary.  During a September 28th American 
 Chamber of Commerce luncheon address, Minister of the 
 Department of Public Enterprises Alec Erwin focused on the 
 state-owned enterprises' (SOE) role in boosting the GDP 
 growth rate to 6% and the SAG's rationale for not 
 privatizing large SOEs.  The SAG's desire to control the 
 SOE's agenda was the primary reason to forego 
 privatization, as private owners would have little 
 incentive to address South Africa's development 
 priorities.  While SOEs are working to improve their 
 efficiency, they already have access to low-cost capital 
 markets to finance their infrastructure projects thanks to 
 South Africa's fiscal policies.  He expects the SOEs to 
 serve a vital role in improving infrastructure, adding 
 employment, offering skills development, and providing new 
 technology so that 6% long-term economic growth is 
 possible.  Erwin also mentioned the SOE's importance in 
 implementing Black Economic Empowerment (BEE) policies. 
 End Summary. 
 
 To Privatize or Not 
 ------------------- 
 
 2. (SBU) At a September 28th American Chamber of Commerce 
 luncheon, Minister of Public Enterprises Alec Erwin spoke 
 on "State-Owned Enterprises - Dealing With Infrastructure 
 Bottlenecks."  Erwin reviewed the South African 
 Government's (SAG) infrastructure investment plans 
 detailed in reftel, but also elaborated on certain areas 
 such as privatization.  He acknowledged calls for 
 privatizing large state-owned enterprises (SOEs), however, 
 argued that selling South Africa's large SOEs would not 
 serve its best long-term development goals.  Only large 
 corporations would be able to afford the purchase of a 
 Transnet or Eskom, and if they were sold in portions to 
 multiple shareholders, the new private owners would have 
 little incentive to coordinate projects with South African 
 development goals.  As a result, the SAG has decided to 
 hold on to core assets and drive their agenda in line with 
 its priorities.  South African Airways will remain 
 government-owned, although separate from Transnet, 
 primarily because of the "volatile nature of the airline 
 industry."  Erwin also noted that Johannesburg airport was 
 building a new international terminal, King Shaka airport 
 in Durban would be built sooner rather than later, and 
 additional airport infrastructure plans would be announced 
 early next year. 
 
 3. (U) Further supporting the SAG-driven infrastructure 
 investment is that SOE projects are financed through 
 capital markets and retained earnings, using none of the 
 SAG's budget.  The SOEs already have low-cost access to 
 capital markets, primarily due to the success of South 
 African fiscal policies over the last 10 years.  South 
 Africa's recent upgrade in credit ratings will assist in 
 accessing capital at lower costs and will allow the SAG's 
 funding to focus on socio-economic programs.  Erwin also 
 viewed efficiency as being paramount to the SOEs accessing 
 affordable capital.  He asserted that Eskom already 
 benefits as an efficient producer of electricity, and that 
 Transnet is reorganizing in order to improve its 
 efficiency.  Transnet is currently in the process of 
 selling about 20 non-core companies and should complete 
 this process in 18 months.  Total sale of SOE non-core 
 assets should be about R7 to R8 billion ($1.1 to 1.3 
 billion). 
 
 SOE's Role in Fostering South African Objectives 
 --------------------------------------------- --- 
 
 4. (U) Erwin emphasized the SOE's role in fostering new 
 technology, creating jobs, training the workforce, 
 improving transportation infrastructure, and implementing 
 Black Economic Empowerment (BEE) objectives.  He viewed 
 Eskom as the anchor for SOEs, since it already accesses 
 capital markets efficiently, is addressing improved 
 training by fostering mentoring groups that are managing 
 the construction of new power generators, and is providing 
 new Pebble Bed Modular Reactor (PBMR) technology to the 
 international market.  The last power station built in 
 South Africa was finished in the mid-80s, with many of its 
 engineers since moved abroad or retired.  The SAG sought 
 out those engineers and brought them back to lead 
 mentoring teams that match young graduates with more 
 experienced engineers.  As a result of the success of 
 these teams, Erwin expressed the view that the skills 
 shortage was not as big a problem as he thought it was 
 going to be eight months ago. 
 5. (U) He also viewed SOEs as being crucial in developing 
 BEE and small business development, acknowledging the 
 difficulty of meeting BEE goals in capital-intensive 
 sectors.  He viewed the major challenge as designing a 
 tender and procurement process that would allow small 
 business and BEE firms to participate, without sacrificing 
 efficiency and competitive pricing. 
 
 6. (U) SOE's increased spending on infrastructure will 
 jumpstart South African economic growth plans to 
 significantly cut unemployment and reach 6% long-run 
 growth, according to Erwin.  Each meeting of the SAG's 
 core team for economic growth (including the Ministers of 
 the Department of Trade and Industry, Finance, Public 
 Enterprises, and the Deputy President) discusses policies 
 to shift growth and infrastructure improvement as 
 recurring themes.  Erwin views this era in South Africa as 
 "very exciting" and an opportunity to enjoy the fruits of 
 10 years' labor in correcting South Africa's fiscal and 
 monetary imbalances. 
 
 TEITELBAUM