ERWIN EMPHASIZES SOE ROLE IN ACHIEVING 6% GROWTH

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