GREEN PAPER
TITLE: ROLE OF STATE-OWNED ENTITIES IN THE DEVELOPMENTAL STATE
1.
INTRODUCTION ................................................................................................................................................................ 2
1.1
1.2
1.3
1.4
1.5
2.
AS-IS ANALYSIS ................................................................................................................................................................. 5
2.1
2.2
2.3
3.
Developmental state ............................................................................................................. 28
Role of SOEs .......................................................................................................................... 31
CONCLUSION .................................................................................................................................................................. 33
5.1
5.2
6.
Definition of a developmental state ..................................................................................... 25
Characteristics of a developmental state ............................................................................. 26
INTERNATIONAL EXPERIENCE ........................................................................................................................................ 28
4.1
4.2
5.
The structure of the South African economy vs. developmental state .................................. 5
Developmental state ............................................................................................................. 11
The role of SOEs .................................................................................................................... 15
EXPERT VIEWS ................................................................................................................................................................ 24
3.1
3.2
4.
Background ............................................................................................................................. 2
Objective ................................................................................................................................. 3
Methodology........................................................................................................................... 4
Data used ................................................................................................................................ 4
Outline of the research/what is contained in this paper ........................................................ 5
Developmental State ............................................................................................................ 33
Role of SOEs .......................................................................................................................... 35
RECOMMENDATIONS ..................................................................................................................................................... 36
6.1
6.2
Developmental State ............................................................................................................ 36
Role of SOEs .......................................................................................................................... 38
REFERENCES............................................................................................................................................................................. 45
1.
INTRODUCTION
1.1
Background
In his January 8th statement, President Jacob Zuma endorsed the developmental state and the
expansion of state-owned enterprises when he stated that: “The developmental state should
maintain its strategic role in shaping the key sectors of the economy. This means that we need to…
strengthen the role of state owned enterprises and agencies in advancing our overarching industrial
policy and economic transformation objectives.” (Zuma, 2008). To this end the President appointed
the Presidential Review Committee (PRC) in 2010, to review and make recommendations, inter alias,
on the role of the state-owned entities in the developmental state.
The President echoed the same sentiments of a developmental state and the economy in his
inaugural State of the Nation Address in June 2009, when he stated: “It is my pleasure and honour to
highlight the key elements of our programme of action. The creation of decent work will be at the
centre of our economic policies and will influence our investment attraction and job creation
initiatives. In line with our undertakings, we have to forge ahead to promote a more inclusive
economy.” The programmes of action are now enshrined mainly in two government policy
programmes namely the Industrial Participation Action Plan (IPAP 2) and the New Growth Path
(NGP). The programmes are coordinated through the economic cluster of government consisting of
the National Treasury, Economic Development Department (EDD) and the Department of Trade and
Industry (DTI).
The review of this term of reference of the PRC is informed by this policy direction of Government
and the question we are teasing out is “to what extent can state-owned entities be leveraged to
contribute positively to the developmental state or the new economic policy direction”? This paper
attempts to answer this question in two parts, firstly by understanding what is meant by a
developmental state generally and in the South African context in particular. Secondly, to then figure
out what role can state-owned entities play in the developmental state environment?
1.1.1 Developmental State
The concept of a developmental state has a long history, dating back for example to the
protectionist measures of Germany and other now developed countries, including the US, in order to
promote infant industries with the potential ultimately to compete with British manufacturing
supremacy. Latin American import-substituting industrialisation is a more recent example of this
concept of a developmental state. But it has been superseded by the notion of the East Asian newly
industrialised countries (NICs) as developmental states, with Japan in the historical and intellectual
lead. These countries have all used commercial state-owned entities, to pursue some of the
objectives of the developmental state.
Typically the industrialization process starts with a country undergoing economic reforms. During
this period the country invests in building new and sustaining existing industrial production
capability. Naturally as more new industrial production capacity is built, new national knowledge and
Intellectual Property (IP) is created, bringing with it new innovative, often technology based knowhow. During this period the human capital is developed and with time it becomes sophisticated. At
the same time the lives of ordinary people are improved in terms of access to basic services like
water, electricity, health, etc. Infrastructure like roads, rail etc. also improves enabling the local
business to interact in economic activities competitively. The industrialization process will continue
until a certain point of maturity is achieved and the process of industrialisation slows. At this
maturity point, the country will have built enough industrial production capacity to sustain future
capacity requirements. The need to build new industrial capacity take a secondary role with the
main focus being to become technologically innovative and create design-based capacity that can
be exported to other parts of the world. (TIPS, 2009)
1.1.2 Role of SOEs
Many developing countries have used state-owned entities to address a number of developmental
issues. The developed world has also used commercial state-owned entities for further economic
development of their respective countries. There is a long held view, in particular within the private
sector that commercial state-owned entities are inherently inefficient and should be privatised. In
his article, “State owned Enterprise Reforms”, Ha Joon Chang observes that despite this popular
perception, and encouraged by the business media and contemporary conventional wisdom and
rhetoric, commercial state-owned entities can be efficient and well-run. He argues that this may
sound like a trivial statement, but it is very important, given the depth of prejudice against
commercial state-owned entities. Indeed, there have been very successful state-owned enterprises,
as observed by Chang as follows:
1. The Singapore Airlines, often voted the best airline in the world, is a state-owned entity, 57
per cent owned by the government holding company, Temasek Holdings, whose sole
shareholder is the Singapore Ministry of Finance.
2. The highly respected Bombay Transport Authority of India is also a state-owned entity.
3. World-class companies like the Brazilian regional jet manufacturer Empresa Brasileira de
Aeronáutica (EMBRAER), the French carmaker Renault, and the Korean steel-maker Pohang
Steel Company (POSCO), all initially succeeded as state-owned entities, with the state still
exercising critical influence in the case of EMBRAER and Renault.
In the special report, the state capitalism, The Economist (2012.01.21) observes the global move
away from the liberal capitalism towards a potent alternative, the state capitalism, especially after
the global financial crisis that started in 2008. State capitalism tries to meld the powers of the state
and that of capitalism. From the analysis of major global companies, The Economist observed the
following companies in the world that are either state owned or state backed:
1. Thirteen biggest oil firms, which between them they have a grip on more than three third of
the world’s oil reserves;
2. The world’s biggest natural gas company, Russia’s Gazprom;
3. China Mobile is a mobile phone company with six hundred million customers;
4. Saudi Basic Industries Corporation is one of the world’s most profitable chemical companies;
5. Russia’s Sberbank is Europe’s third largest bank by market capitalisation;
6. Dubai Ports is the world’s third largest port operator; and
7. The Airline Emirates is growing at 20% annually.
These are some of the many examples of state-owned or backed entities that have done
phenomenally well and the number seems to be increasing. This is contrary to the popular belief
within the liberal capitalism that state owned entities are inherently inefficient.
1.2
Objective
The objective of the study is to research the role that state-owned entities can play in the
developmental state. South Africa, as a developmental state, how can it use its state-owned entities
to further economic growth and development thereby creating significant number of jobs, reduce
poverty levels, reduce inequality, develop skills required by the South African economy, improve
health of the citizens, and reduce crime and corruption. In other words we are trying to understand
how SOEs can be run efficiently while also providing public good.
1.3
Methodology
The approach and methodology we have adopted in researching this term of reference (ToR) is
shown in figure 1 below and discussed in the next paragraph.
Figure 1 – Research approach and methodology for the ToR
The problem definition and work structuring phase comprises relevant questions that need to be
asked based on requirements of the terms of reference. Initial primary reading takes place during
this first part of phase 1 to understand more about the problem we are trying to solve. Based on the
primary research we are able to anticipate what the answers to our questions are and indeed the
solution to the overall problem. The primary research also identifies and structures the tools we will
require to gather and analyse information, in a logical sense, that will be relevant to answer the
questions.
In-depth research is then conducted using the information gathering and analysis tools. As the
research continues we are able to figure out whether our assertions are correct or not. If not, we will
have gathered enough information to formulate an emerging view, which is the alternative
hypothesis. With all this information we are able to finally make recommendations and the
implementation roadmap.
1.4
Data used
There are various methods that we used to gather data for the research and they include the
following:
1. Literature review – this includes any relevant literature referring to the ToR as well as
government policies and legislations, articles, newspapers, and benchmark material;
2. Surveys – were used to gather information from SOEs in particular relating to the terms of
reference of the review;
3. Seminars – a broad spectrum of stakeholders like policy makers, educationists, shareholder
ministries, experts, practitioners and other relevant groupings were invited to participate in
discussion of specific topics;
4. Round Table discussions – small groups of experts are invited to discuss specific specialist
topics;
5. Policy Dialogues – policy makers, analysts are invited to validate emerging recommendation
with the respective policy implications
1.5
Outline of the research/what is contained in this paper
The document contains the executive summary, the introduction, “AS-IS” analysis, International
Experience, Expert views, policy options, conclusion, and recommendations.
The rest of the paper will describe the current status of the role of SOEs in the development state,
understand what other countries have done in this area, make conclusion based on the findings,
explore various policy options, and finally make recommendations and define an implementation
roadmap.
2.
AS-IS ANALYSIS
This section of the paper reviews the current state of the country with regards to the term of
reference. What currently informs the developmental state in South Africa and what role are the
state-owned entities playing within this context. In the later sections of the paper the current status
about South Africa is benchmarked with other countries to determine what South Africa could
adopt, discard or change in order to achieve optimal developmental results.
2.1
The structure of the South African economy vs. developmental state
The South African economy is characterised by a very strong and established private sector. All
major commercial banks are owned by the private sector. Unlike in most of the East Asian
developmental states where banks played an important role in driving the developmental agenda,
the South African Government has no direct control over the commercial banks. The state has
however developed over time a strong development financial capacity as pointed out by Ha Joon
Chang when he observed that South Africa has built serious financial resources and analytical
capacities in the DBSA (Development Bank of Southern Africa) and the IDC (Industrial Development
Corporation) for which the state can have a direct influence to drive the developmental agenda.
(Chang, 2009). This mitigates the reliance of the state on the commercial banks to drive the
developmental agenda.
Because of its rich mineral deposits, South Africa has developed a strong mining sector which
spurned a whole range of other support industrial sectors. Most of the large mining companies in
the country are owned by big and often global mining conglomerates. Throughout the history of
South Africa the mining sector has been a pressure group in any attempt by the state to give
monopoly concessions (Fine and Rustomjee, 1996). It would seem that there would be resistance
from this sector to any process, including the creation of a developmental state, that is perceive not
to act in the best interest of it earning a good return.
The evolution of the country’s economy largely excluded participation of black people due to the
Apartheid system the result of which is that whites are by and large owners of capital. Many of the
social ills like poverty, joblessness and inequality are largely the results of this exclusion and remain
firmly in place even today. The case for a developmental state in South Africa is to create a rapidly
growing economy and development that ultimately reverses these social ills on a sustainable basis.
There is a big gap between the skills we have in the country and the skills that the economy needs
for it to grow. Technical skills like engineering, IT, artisan, etc. are in short supply. Some of the
problems associated with the lack of technical skills are the poor education system at foundation
phase. Although there are plans in place to tackle the problems, the status quo remains or is
improving ever so slightly. According to the Progress in International Reading Study (PIRLS)
conducted in 2006, 78% of grade 5 students in South Africa fall below that level of performance
described as “very low reading achievers” as shown in figure 2 below.
Figure 2 – SACMEQ Grade 6 reading scores by Country
Source: SACMEQ
The Trends in International Mathematics and Science Study (TIMSS) scores SA below the South and
Eastern Africa Consortium for Monitoring Education Quality (SACMEQ) average for both years 2000
and 2007 indicating poor pupil achievement in mathematics as shown in figure 3 below.
Average for year
2007
700
600
500
400
300
200
100
0
Average for year
2007
Year 2000
Year 2007
Botswana
Kenya
Lesotho
Malawi
Mauritius
Mozambique
Namibia
Seychelles
South Africa
Swaziland
Tanzania
Uganda
Zambia
Zanzibar
Pupil Mathematics Score
Figure 3 – Level and Trends in pupil mathematics achievement
Source: TIMMS
Source – TIMSS
The country will not be able to produce the technical skills required by the developmental state if
the country is unable to resolve the foundation phase problem as amplified in figures 2 and 3 above.
The plans are in place from the Department of Basic Education to begin to deal directly with some of
these problems and this will take a while before fully realised.
The income gap between rich and poor in the country is increasingly widening and is racially based
as indicated in figure 4 below. This trend cannot be left to continue unabated because of the
potential negative effect it would have not only in the economy of the country but also in
threatening the legitimacy of our young democracy.
Figure 4 – Inequality in race income
20000
18000
Mean monthly per capita income
16000
14000
12000
2005
10000
2000
8000
1995
6000
4000
2000
0
African
Coloured
Asian
White
Source - Stats SA Income & Expenditure Survey (IES): South African Development Indicators 2008
According to the National Planning Commission (NPC) diagnostic report on the analysis of the health
sector in South Africa the following health statistics are prevalent in the sector:
1. HIV/AIDS rate is significantly higher in SA than most places in the world, and worsening
2. Reported TB rates are increasing (which may be linked to improved screening)
3. Infant mortality rates are high and deteriorating
4. Life Expectancy has deteriorated since 1995
A developmental state is characterised by a long term knowledge capacity that is built over many
years and passed from one generation to the next. South Africa’s short life expectancy inhibits this
knowledge to grow and manifest.
The problems of health and primary education mentioned above are further confirmed by the 2010
World Economic Forum’s (WEF) Global Competitive Index (GCI) which rated South Africa below
average in both primary education and health as shown in figure 5 below. Good primary education
and health are important in driving the developmental agenda.
Figure 5 – Health and Primary Education Index
8
7
6.006
5
4
4.06
3
2
1
Singapore
Japan
France
Taiwan
UK
S. Korea
Slovania
Norway
Malysia
Germany
China
Portugal
USA
Chile
Argentina
Venezuela
India
Brazil
SA
0
Sources: 2010 World Economic Forum ‘s (WEF) Global Competitive Index
We have noted that the GCI has rated South Africa significantly high in the area of Financial Markets
as shown in figure 6 below. Global competitiveness is important to determine the strategic
economic sectors from which to focus the developmental effort. This is a strength that South Africa
has and should be fully exploited in determining areas of strategic importance.
Figure 6 – Financial Market Index
7
6
5.30
5
4
3
2
1
Norway
Singapore
SA
Malysia
France
India
UK
USA
Taiwan
Japan
Germany
Portugal
China
Brazil
Chile
S. Korea
Slovania
Argentina
Venezuela
0
Sources: 2010 World Economic Forum ‘s (WEF) Global Competitive Index
Economic sectors
The Department of Trade and Industry (DTI) differentiates between production and consumption
economic sectors. Production sector largely comprises the economic activities that produce goods
while the consumption sector comprises economic activities that consume goods and services. The
production and consumption sector classification is described in figure 5 below:
Figure 5 – Description of Production and Consumption Sector Classification
Between year 2000 and 2010 there has been a marked decline in the economic outputs of the
production sector and a marginal increase in the consumption sector as showed in the ten year
industrial sector trend analysis in figure 6 below:
Figure 6 – Relative sector performance trend
Source – SARB (2010 Q1)
Key findings from figure 6 are as follows:
1. Significant growth from 2000 to 2010 in the Finance, Insurance and Real Estate and Business
Services;
2. Over the same period Mining, Quarrying sector declined;
3. Manufacturing sector grew only marginally from 2000 to 2008, and fell significantly in 2009,
mainly because of the financial crises that started in 2008;
4. The transport, storage and communications as well as the personal service sectors grew
steady over the entire period; and
5. Key sectors like agriculture and forestry, electricity, gas and water had an insignificant
growth.
According to IPAP 2 (2011) “Economic growth leading up to the financial crisis of 2008 was driven
increasingly by unsustainable increase in private credit extension and consumption not sufficiently
underpinned by growth of the production driven sectors of the economy. Thus the consumptiondriven sectors grew by 114% between 1994 and 2010, reflecting a 7.1% annual growth. By contrast,
the production-driven sectors grew only by 38.3% (2.4% annually)”.
These findings confirm Business Unity of South Africa’s (Busa’s) concerns about the structural
construct of the South African industrial growth path when they observed that it will require
significant structural change and they state “…the South African economy is service driven as in the
case of Brazil, Chile and Poland and would require major structural overhaul in order to follow a
manufacturing growth path as in the case of Malysia. This would be very difficult given the current
labour productivity and low levels of socio-economic development which underpins the quality of
the labour force. It would also require unprecedented focus on seizing opportunities in the global
manufacturing value chain in which countries in the East Asia have massive competitive advantage”.
(Busa, 2011)
Next we discuss some of the challenges that are faced by some major SOEs in critical sectors of the
economy:
Specific SOE challenges
The (ANC, 2010.10.17) has identified some key challenges in different sectors of the economy as
follows:
1. Electricity
 Need to ensure long term security of supply at lowest cost
 Completing build programme at lowest cost in time is critical
 Ensuring adequate funding at lowest cost a challenge
 Changing incentives to operate in a more dynamic and competitive environment
 Urgent need to resolve distribution impasse
 REDS idea has introduced considerable uncertainty
2. Communications
 No clear strategy, policy makers ‘caught in the headlights’
 Need for more private players to lower the cost of services
 State capacity needs to be directed at state facilities and underserved areas
3. Transport
 Freight logistics
 Capacity is critical to support economic growth in mining, manufacturing
 Need for huge investments, including opportunities for public private
partnerships
 Leadership vacuum and policy uncertainty is hampering investment
programme
 Passenger rail
 No viable business model and poor leadership
 Focus on BEE as opposed to transporting people
 Poor institutional linkages with urban transport systems
4.
Water sector
 This sector is complex and fragmented
 Key problem is poor regulation of water services
 The law gives this function to the national department
 Serious lack of skills throughout the system
 Many municipalities are shirking from their responsibility to maintain good water
quality
 Bulk and raw water pricing not sustainable
 Attempts to create a viable financing arm stillborn
In this section we have discussed a number of factors that impact directly on the implementation of
a development state as well as the role that SOEs should play in that environment. We have
discussed the lack of technical skills; inequality by race that continue to grow; HIV/AIDS and TB
infection rate that has stabilized but remain high; Economy that has grown for a protracted period of
time from 1998 until about 2008, but failed to produce meaningful number of jobs; decline of the
production driven sector which is important for sustainable industrial growth; concerns about the
quality of labour and low productivity levels; the differing views between state and private capital
with regards to the feasibility of the developmental state; strength of the development financial
institutions; strong business capabilities and technologies of major SOEs.
There have been a number of policies and plans that have been developed to address the challenges
and some of these are discussed in the next chapter under the developmental state.
2.2
Developmental state
There are a number of policies that were developed post 1994 that have a bearing to the economic
growth and have implications for the SOEs. These are discussed in figure 7 below:
Figure 7 – Summary of post 1994 key policies impacting
In addition to the policies in figure 7, the government developed a Medium Term Strategic
Framework (MTSF, 2009 – 2014) which aligns South Africa’s national development planning to the
Millennium Development Goals (MDGs) and has the following strategic priorities to address
economic development:
1. Speeding up growth and transforming the economy to create decent work and sustainable
livelihood;
2. Massive programme to build economic and social infrastructure;
3. Comprehensive rural development strategy linked to land and agrarian reform and food
security;
4. Strengthen the skills and human resource base;
5. Improve the health profile of all South Africans;
6. Intensify the fight against crime and corruption;
7. Build cohesive, caring and sustainable communities;
8. Pursuing African advancement and enhanced international cooperation;
9. Sustainable resource management and use; and
10. Building a developmental state, including improvement of public services and strengthening
democratic institutions.
The MTSF is supported by the following government’s twelve point plan objectives:
1. Improve quality of basic education;
2. A long and healthy life for all South Africans;
3. All people in South Africa are and feel safe;
4. Decent employment through inclusive economic growth;
5. A skilled and capable workforce to support an inclusive growth path;
6. An efficient, competitive and responsive economic infrastructure network;
7. Vibrant, equitable and sustainable rural communities with food security for all;
8. Sustainable human settlements and improved quality of household life;
9. A responsive, accountable, effective and efficient local government system;
10. Environmental assets and natural resources that are well protected and continually
enhanced;
11. Create a better South Africa and contribute to a better and safer Africa and the world; and
12. An efficient, effective and development oriented public service and an empowered, fair and
inclusive citizenship.
The South African developmental state is referred, directly or indirectly, to in a number of strategic
policy documents including, among others, the MTSF 2009 - 2014, the New Economic Growth Path
(NGP), the Industrial Policy Action Plan (IPAP 2), Government’s ten year review, as well as the
National Development Plan (NDP). The NGP coordinates various developmental initiatives by other
government departments and policies and in particular the Industrial Policy Acton Plan (IPAP) 2 in
the DTI as well as policies and programmes in rural development, agriculture, science and
technology, education and skills development, labour, mining and beneficiation, tourism, social
development.
It is important to note that there seems to be no common understanding of the developmental state
in the country as a key philosophy in driving economic growth and development. While there has
been extensive deliberations on the subject, it would seem that the concept has not been
adequately defined and communicated by government as reflected in the comments made in the
star newspaper “While government has been reluctant to formally define what it means when
referring to a developmental state, its historical context points to a state which intervenes directly in
the economy to influence both the direction and pace of development. Rather than leaving the
allocation of resources to market forces, the state sets key social and economic objectives as well as
the relevant policy tools to ensure that these objectives are met by the private sector”. (Sparks,
2008) It follows then that a common understanding of such an important tool of government whose
success is attributable to a vision commonly shared by all, should be fostered.
Some elements of inclusive economic growth, as part of a developmental state, are echoed in key
policy documents of the ruling party. For example, the Polokwane Resolution on industrial policy of
the ANC calls for the structures of production and ownership to be transformed, including through:
“Active and well‐resourced industrial and trade policy aimed at creating decent work through
expansion of labour absorbing sectors, diversifying our industrial and services base, pursuing an
active beneficiation strategy, building sustainable export industries, and expanding production for
domestic and regional consumption. In general, industrial policy should lead our overall approach to
sector development, whilst trade policy should play a supporting role and be sensitive to
employment outcomes.” (ANC, 2007)
The Polokwane resolutions also refer to a need for cohesion, job creation and efficient service
delivery in order to advance the course of a developmental state by creating a national democratic
society that:
1. has a democratic and legitimate state based on the values of our Constitution;
2. promotes unity in diversity among South Africans, recognising the common interests that
bind them as a nation;
3. ensures a growing economy which benefits all, including through the creation of decent
jobs;
4. is informed by a value system of mutual respect and human solidarity; and
5. is led by a state that is efficient in providing services and which gives leadership to the
programme of national development.
The other important policy document of government that articulates developmental aspiration of
government is the NGP. The objective of the NGP is to restructure the South African economy to
improve its performance in terms of labour absorption as well as the composition and rate of growth
(EDD, 2010). The NGP framework, which was developed by the economic cluster of government,
refers to a number of salient points that support the goals of a developmental state and include the
following:
1. Must provide bold, imaginative and effective strategies to create the millions of new jobs
South Africa needs;
2. Develop a dynamic vision for how we can collectively achieve a more developed,
democratic, cohesive and equitable economy and society over the medium term, in the
context of sustained growth;
3. Macroeconomic and microeconomic interventions;
4. Collective efforts of all sections of South African society;
5. Develop a collective national will and embark on joint action to change the character of the
South African economy and ensure that the benefits are shared more equitably by all our
people, particularly the poor;
6. Business must take on the challenge of investing in new areas;
7. Business and labour together must work with government to address inefficiencies and
constraints across the economy and partner to create new decent work opportunities;
8. Government must steadily and consistently pursue key policies and programmes that
promotes changes in the structure of savings, investment and production;
9. Facilitates social dialogue that helps establish a broad consensus on long-run policy goals
and a vision for the country;
10. More active pursuit of exports to, and investment from, the emerging centres of economic
power and encourage trade agreements that is balanced between exports and imports;
11. Prioritise domestic and regional markets for long-term economic growth. For regional
economy focus on logistics infrastructure, market institutions, regulatory framework and
productive capacity in the continent;
12. The connection between economic and social measures needs to be further strengthened;
13. Lead a stakeholder commitment for a national consensus on wages, prices and savings in
order to ensure a significant increase in the number of jobs in the economy while addressing
the concerns of vulnerable workers and reducing income inequality;
14. Improvements in education and skill levels are a fundamental prerequisite for achieving any
of the goals in this growth path;
15. The New Growth Path will strengthen and consolidate initiatives to support small and micro
enterprise;
16. There needs to be a major re-think of the BEE framework and policy to achieve South
Africa’s developmental and growth goals.
The NGP salient points above are supported by the following characteristics of a developmental
state identified by the DPE discussion paper on the subject (DPE, 2008/09/30):
1. the state intervenes in the economy to direct investment at a pace and scale in targeted
areas which would not take place if left to the market;
2. the state needs to be able to design a long term growth strategy to support the state’s
vision for the economy. The developmental state uses this growth vision to form a social
compact with the key economic stakeholders including national capital and labour;
3. the developmental state that is in constant dialogue with different market players around
opportunities and constraints associated with the plan and the achievement of short and
medium term objectives;
4. the ability of the state to drive investment in priority areas, often associated with high
levels of positive economic externalities;
5. state implements its strategy in partnership with the private sector. This partnership
consists of defining clear roles and responsibilities at a macro level of the economy (and
providing incentives and sanctions for the delivery of these by relevant agents) as well as
entering into direct institutional based partnerships with specific players to drive
prioritized objectives;
We will show in the paper later that most of the salient points identified from the NGP and DPE
above characterise the attributes of the developmental state as experienced in other countries. It is
important to note that the NGP is a plan and therefore seeks to meet certain goals within a
determined period, until 2014 in the case of NGP. If the salient points are characteristic of the
developmental state, and since NGP is a plan whose objectives have not yet been achieved, one
could argue that South Africa is aspiring to be a developmental state. This is true only if the
developmental state is an end and not the means to an end. On the other hand if the developmental
state is a process towards an end of achieving certain objectives, then South Africa can be defined as
a developmental state (Gumede, (2011).
Both the NGP and (DPE, 2008/06/07) refer to other stakeholders that are critical to the achievement
of the development trajectory and they include business and worker organisations. For example, to
create and achieve the goal of five million jobs or increase economic growth will require the
participation of business and labour. Unlike the relatively good relationship that government has
with labour, it would seem that there has not been a good working relation between business and
government with regards to the developmental state, as observed in (Gigaba, 2009) “…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”. This
statement seems to suggest that it will take some considerable effort to bring business on the one
hand and government on the other, into a compromised position with regards to achieving the
objectives of a developmental state.
Development of a country vision on economic growth and development that is truly shared by all the
important stakeholders, as suggested in the NGP and (DPE, 2008/09/30, p16), is the first step
towards stakeholder cohesion. It will however be a difficult task to achieve given the opposition to
the economic policy of government by the opposition parties. For example (DA, 2008.06.26) states
“…such policies have no place in a modern enterprise driven economy which subscribes to the
precepts advocated by some opposition parties, namely price stability, fiscal responsibility, lower
taxation, a deregulated labour market and privatisation”. Perhaps the importance of cohesion is
better articulated in the statement by the NPC’s National Development Plan (NDP) on transforming
society and uniting the country when it notes that “The success of this NDP will be judged on its
ability to change relationships between people, between people and the state, and within the state
itself by drawing attention to the way in which decisions are arrived, seeking justice in each decision.
The plan is about physical change, brought about by focusing attention on policy and
implementation, but it is equally about relationships…These relationships will bind us together in
moving towards a shared future”. (NPC, 2011)
2.3
The role of SOEs
In this section we discuss the role that is currently played by the SOEs in general and in the context
of the plans of government embodied in the NGP, IPAP 2 and the NDP in particular. Although we are
discussing the role of the SOEs within a developmental state perspective, we are not addressing SOE
issues relating to their efficiencies, governance and funding. These separate but related issues are
discussed extensively in the position papers of other relevant PRC work streams.
The democratic government inherited a number of state-owned entities and created a significant
number of them after 1994. It is important to note that between 1948 and 1994 the Apartheid
government effectively used the SOEs to empower the Afrikaner group through transformative
programmes of the state then. According to (Who owns whom, 2010) the South Africa’s Apartheid
government’s SOE sector produced the highest proportion of GDP outside of the Marxist Socialist
block between 1946 to the late 80’s. This situation was a direct result of the historical events which
led the National Party Government to have little trust in the private sector to provide the country
with key products and services.
The current role of SOEs cannot be understood without looking at their founding mandates wherein
the primary role of SOEs is enshrined. The following table below describes the mandates of some of
the SOEs in the mining, power, oil & gas, telecommunications, defence, and transportation sectors:
Table1: Large Commercial SOEs
No
Entity
Founding Mandate
Motivation
Comments
1
Eskom
Operations
focussed
on
electrical power production
and distribution
To ensure security of power
supply to industries and
households
Eskom has become a major generator,
transmitter and distributor of electricity.
Still owned 100% by government
2
Iscor
Secure
Iron
production
To secure production of iron
and steel which were key in
building infrastructure like
roads, rail and bridges
Iscor has since been privatised with the
steel sold to AcelorMittal and the iron
business to Kumba
3
Foskor
Mine and process phosphate
minerals for use in fertilizers
and other applications
4
SASOL
Produce coal for use in
company’s
operation
of
producing synthetic fuels
5
SOEKOR
Locate crude oil in South Africa
Merged with MOSSGAS in 2001 to form
PetroSA. PetroSA owns, operates and
manages South Africa's petroleum industry
commercial assets. PetroSA’s mandate is to
commercialize all the state-owned assets in
the Petroleum sector and to manage them
as a profitable business for the benefit of
all South Africans. It is 100% owned by
Government
6
Post Office
Provide postal services
Distributes information, goods, financial
and government services; leveraging broad
reach and embracing change, technology
and innovation. 100% state owned
7
Telkom
Provide
Telkom
local
and
steel
telephone
International producer of phosphates and
phosphoric acid. Through IDC the state
owns 59% of Foskor
Petroleum embargo imposed
on South Africa during
Apartheid
International integrated energy and
chemical company with sophisticated fuel
technologies. Sasol is listed on the JSE and
NYSE
is
Africa's
largest
integrated
No
Entity
Founding Mandate
Motivation
Comments
services
communications
company,
providing
integrated communications solutions to an
entire range of customers. State own about
34% (verify). Listed in the JSE and NYSE
8
SABC
To allow for programming to
be broadcast
To be mouth piece of
government in distributing
government’s content
The SABC’s core business is to deliver a
variety of high quality programmes and
services through television and radio that
informs, educates, entertains and supports
the public at large. State owns 100% of
SABC
9
Armscor
Management of all research
and development of arms,
ammunition, military vehicles
and military machines
To provide warfare capability
to the defence force to protect
the Apartheid state
Programme managers and procurement
company for the South African National
Defence Force (SANDF). 100% state owned
10
SAA
To fly mails between the major
cities in South Africa
Quicker mode of transport
from one point to another
National carrier and flies internationally
11
Transnet
To
provide
infrastructure to
industries
12
Alexcor
Mining diamonds
13
Broadband
Infraco
Sell high capacity, long
distance transmission services
to fixed and mobile network
operators, internet service
providers and other value
added
network
service
providers
limited
competition
and
relative barriers to entry
because of rights of way, and
high
capital
expenditure
considerations
Relatively new SOE. Wholly owned by the
state. Two main areas of focus - National
Long Distance fibre optic network and
International Marine Cable network
comprising a marine cable
14
Denel
Manufacture
defence
equipment in areas such as
military
aerospace
and
landward environments
To
support
DoD
manufacturing
maintenance areas
The core business is to provide strategic
defence technology, product and service
solutions to the South African Defence and
Security communities and international
customers. Wholly owned by the state.
15
PBMR
To develop and market smallscale,
high
temperature
reactors
to
local
and
international markets
16
SAX
Domestic
and
regional,
passenger and cargo carrier
17
Sentech
Signal distributor for all
transmissions related to the
SABC
In 1995 was separated from the SABC.
Wholly owned by the state
18
ACSA
To handle and manage aircraft
landing and departing
In April 1998, Aeroporti di Roma, an Italian
airports-management
firm,
won
a
competitive bid to become ACSA's strategic
equity partner and paid R819 million for
20% of the company's shares. Other
shareholders include five empowerment
consortia:
G10
Investments,
Telle
Investments, Pybus Thirty-34, Up-Front
Investments 64 and Lexshell 342
logistics
relevant
Transnet is the largest and most crucial
part of the freight logistics chain that
delivers goods to each and every South
African. 100% state owned
The core business of Alexkor is the mining
of diamonds on land, along rivers, on
beaches and in the sea along the northwest coast of South Africa. These activities
are complemented by geology, exploration,
ore reserve planning, rehabilitation and
environmental management. 100% state
owned
in
and
Joint venture including Westinghouse
Electric Company LLC, Eskom Holdings
Limited and the Industrial Development
Corporation (IDC). Project has since been
stopped
Investments Holdings. Together they own
4.2%. The rest is owned by the state
DFIs
According to (ANC, 2012.10.17), the DFIs in South Africa were created for the following reasons:
1. To act as policy based institutions whose roles and mandates are linked to national
development objectives and act as conduits for economic stimulation
2. To operate in key strategic sectors of the economy where there is high risk, market failure,
characterised by long investment and payback periods, inadequate collateral and low profits
3. To enhance service delivery on the provision of public goods such as health services,
education, water, sanitation, housing, roads, energy, etc
4. To provide social and economic infrastructure, industrial development, SMME development,
micro finance, agriculture, etc.
5. To embark on capacity building programmes, poverty relief, job creation and crowding-in
private sector participation
According to figure 8 below: as at the end of 2009, the total DFI capital is R94bn, the total debt
amount is R74bn and the total DFI assets is R142bn.
Figure 8 - Total DFI’s financial position as at 31 March 2009
Total DFI's Financial Position as at 31 Mar 2009
160,000,000
140,000,000
120,000,000
100,000,000
80,000,000
60,000,000
40,000,000
20,000,000
-
Total assets
Equity
Developmental loans
Investments
Total debt
2008
151,722,947
101,189,262
45,503,504
80,277,842
50,533,685
2009
141,838,422
94,094,008
52,094,869
63,066,839
47,744,414
2008
2009
Figure 9 – Selected DFIs financial position as at 31 March 2009
Selected DFI's Financial Position as at 31 Mar 2009
80,000,000
70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
-
DBSA
IDC
Land Bank
NHFC
Khula
Total assets
40,381,638
73,377,000
17,543,755
2,758,780
1,315,203
Equity
17,235,503
65,045,000
2,605,434
2,158,810
1,124,875
Developmental loans
29,448,757
8,820,000
11,872,465
632,110
349,743
Investments
6,464,622
53,110,000
868,617
48,904
366,899
Total assets
Equity
Developmental loans
Investments
According to figure 9 above, 95% (R135bn) of the DFI sector balance sheet is concentrated in five
main DFIs namely IDC, DBSA, the Landbank, NHFC and Khula. 44% (R63bn) of DFI’s total assets is in
the investments of which 91% (R53bn) is held by the IDC in equity investments.
Strategic findings of the Strauss Commission were as follows:
1. Mandates are overly broad and lack focus
2. There is considerable overlap and duplication of mandates which is leading to wastage of
resources
3. DFIs are not well coordinated at central government level
4. No prescribed legal form for establishing DFIs exists
5. Monitoring and Evaluation frameworks are weak or absent and lead to difficulties in
measuring and evaluating development impact
6. DFIs total asset base is approximately R151 billion, yet only 30% of these assets are
dedicated to developmental lending
Constitutional entities
The general mandate of the constitutional entities is to support and strengthen South Africa’s
democracy. According to the Ad Hoc Committee appointed by the Speaker of Parliament in 2006, to
review Chapter 9 Institutions, main findings were in the following areas:
1. concerns revolve around the different procedures used to appoint commissioners/members,
2.
unsatisfactory relationship between the institutions and Parliament,
3. unsatisfactory institutional governance approach, financial management and budget
allocation and accessibility of these institutions to the public.
4. concern on the overlap of mandates of the human rights institutions.
Regulatory entities
Regulator’s role is to exercise autonomous authority over some area of relevance in a supervisory
capacity. Areas of relevance include, inter alias, consumer protection; nuclear safety; bank
regulations; cyber-security regulation; telecommunications; minerals, etc.
To ensure that it does fulfill its role, a regulatory agency uses mechanisms such as the following:
(htty://en.wikipedia.org/wiki/regulatory_agency)
transparency of information and decision-making
procedures of consultation and participation
requirement that administrators give reasons explaining their actions
requirement that administrators follow principles that promote non-arbitrary and
responsive decisions
5. arrangements for review of administrative decisions by courts or other bodies
1.
2.
3.
4.
Research entities
The primary role of research entities is to perform a search for knowledge, or any systematic
investigation, with an open mind, to establish novel facts, solve new or existing problems, prove new
ideas,
or
develop
new
theories.
(http://en.wikipedia.org/wiki/National_Research_Foundation_of_South_Africa)
We have discussed above the primary role of a limited number of commercial SOEs, DFIs,
Constitutional entities, Regulatory agencies, Research entities, and Service Delivery and Department
Agencies. Some of the secondary roles of SOEs are defined in a number of Acts of Parliament
including, Employment Equity Act [No. 55 of 1988] (EEA), Broad Based Black Economic
Empowerment Act [No. 53 of 2003] (BBBEE), Preferential Procurement Policy Framework Act [No. 5
of 2000] (PPPFA). The EEA promotes equal opportunity and fair treatment in employment through
the elimination of unfair discrimination; and implements affirmative action measures to redress the
disadvantages in employment experienced by designated groups, to ensure their equitable
representation in all occupational categories and levels in the workforce. The BBBEE promotes the
implementation of affirmative action measures; achieve a substantial change in the racial
composition of ownership and management structures and in the skilled occupations of existing and
new Enterprises; and increase the extent to which communities, workers, co-operatives and other
collective enterprises own and manage existing and new enterprises and increasing their access to
economic activities, infrastructure and skills training. The PPPFA on the other hand is intended to
promote procurement of product and services by state organs from organisations owned and
managed by previously disadvantaged persons. Whereas the BBBEE and PPPFA apply mainly and
directly to state owned entities, they apply indirectly to private sector companies especially those
that sell products and services to the government. The EEA affects all companies both in the public
and private sectors.
Departmental and service delivery agencies
The departmental and service delivery agencies are largely extensions of Government departments
and they are created to execute certain functions of the department. The mandates of such entities
are short to medium terms others are long term.
Should SOEs take on additional roles in a developmental state? It is important to note that the role
of state owned entities within the developmental state context was endorsed by the President, J.
Zuma when he stated that: “The developmental state should maintain its strategic role in shaping
the key sectors of the economy. This means that we need to… strengthen the role of state-owned
enterprises and agencies in advancing our overarching industrial policy and economic
transformation objectives.” (Zuma, 2008)
The NGP responded to the President’s call for the developmental state and the strengthening of the
SOEs role by setting a target of creating five million new jobs by 2020 and stating clearly the
contribution that SOEs can make in at least five ways as follows:
1. the expansion of the SOEs 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
state-owned commercial entities, thereby expanding employment in the state-owned
entities’ supply-chains;
4. providing skills to the wider economy through their mandate to produce more artisans,
technical and other key skills; and
5. keeping tariffs for services competitive and thus helping to reduce input costs in the
economy
Although the NDP has dedicated a sub-chapter on the role that the SOEs should play with respect to
economic growth and development, the chapter spends a great deal of time on related issues like
SOE performance improvement; clarity of mandates; ability to enforce mandates; accountability;
and coordination among SOEs. We have summarised the roles of SOEs that were identified by the
NDP as follows: (NPC, 2011, p405)
1. Advancing national objectives, particularly through providing economic and social
infrastructure;
2. Address country’s developmental objectives in areas where neither the executive arms of
government nor private enterprises are able to do so effectively;
3. Deliver a quality and reliable service at a cost that enable South Africa to be globally
competitive; and
4. Focus on their main policy priorities as determined by their respective mandates and
overseen by the policy ministry.
In the 2010-2013 strategic plan documents the DPE differentiates between the primary and
secondary roles played by the SOEs under its supervision. The primary roles are listed as follows:
(DPE, 2010)
1. Ensuring the security of supply and the efficient and competitive provision of key economic
infrastructure;
2. Facilitating the development of advanced manufacturing capability through:
a. direct investment via current or new SOE
b. SOE investment and procurement programmes
c. strategic partnership engagements with global enterprises; and
3. SOE can be used by the State to sort out economically stifling market or regulatory failures
especially in the area of network infrastructure.
The secondary roles of the SOEs are accordingly listed as follows: (DPE, 2010)
1. Align skills development programmes within the SOE with the programmes and objectives of
the responsible National Government departments.
2. Align investments in and by SOE with the national innovation development programmes of
the responsible National Government departments.
3. Supporting government strategies focused on labour absorption and rural development by
providing infrastructure investments and SOE- services with marginal commercial viability.
In addition to the strategic and secondary roles that SOEs can play identified in the DPE strategic
document, related advantages of SOEs acting as a vehicle for government investment in strategic
infrastructure and manufacturing were identified as follows: DPE (2008.09.30)
1. Capital formation through infrastructure investments;
2. Consistency of strategic intent: Through ownership, the state is effectively the project
champion and in a position to ensure stability and consistency of strategic intent – even
when the scale and risk profile of the project goes beyond the appetite or capabilities of the
private sector;
3. Capital raising: Enterprises have the ability to raise capital on the capital markets utilizing a
far greater range of instruments than that available to the national fiscus, depending on
their existing assets and their business outlook. This can free up significant amounts of
money from the fiscus to fund objectives that require direct government funding;
4. Partnership: Enterprises have the ability to partner with global companies that cannot only
provide additional capital but also rapidly introduce new technologies, business processes
and markets to the country allowing development to proceed at a far greater pace than
what can be achieved in isolation;
5. Established Institutional Legal Framework: The Companies Act provides a well-established
legal framework within which SOEs can operate although certain minimal adaptation is
required. This adaption will involve clauses relating to the funding and capitalization of SOE,
the ability to define specific governance systems for SOE, including the definition of a
strategic mandate in the articles of association and how subsidized activities will be dealt
with; and
6. Drive Skills and Technology Development for Industry Upgrading: Enterprises are the key
drivers of industrial skills and technology development initiatives as the skills and
technologies that are produced need to ultimately be relevant to the workplace context.
SOEs are thus well positioned to set objectives and coordinate these initiatives within their
respective supply chains to ensure active participation by all key industry players (minimal
free-riding). These programs can build relationships between both public and private
enterprises and unions within an industry as a whole around a vision of increased capability
and productivity.
Although the developmental state is well documented in these policies there is no evidence that the
goals of the developmental state are reflected in the SOE performance scorecards or shareholder
compact. Some of these goals, like the number of jobs to be created and key skills to be developed
are reflected in the performance scorecards of some of the major commercial state-owned entities
and not in other state-owned entities.
The degree to which state-owned entities play a role in the country’s economic growth and
development varies from one state-owned entity to another. Generally the non-commercial stateowned entities play a limited role in contributing to the country’s economic growth and
development compared to the commercial state-owned entities, simply because of the relatively
many levers in their disposal to drive development. For example most non-commercial entities rely
on fiscus for funding whereas commercial entities have various funding instruments in their disposal.
By the same logic, the bigger (by size in number of people, value of assets, and operations)
commercial state-owned entities in turn play a more critical role in the developmental state than the
smaller commercial state-owned entities. Infrastructure-related SOEs like Transnet and Eskom,
although require huge capital outlay to improve their efficiencies, still provide critical infrastructure
for key sectors of the economy like mining, smelters and manufacturing in general. Partly due to the
backlog in infrastructure upgrade of most of the state-owned commercial entities, they have been
largely inefficient. This is also indicative of the number of various “bail-out” funding that some of
these entities have received in the recent past e.g. SABC, SAA, Denel, etc. as illustrates in the section
of the “Who owns whom” report below.
The state-owned entities are owned by different ministries, MECs and municipality departments
depending on the sphere of government where the entity is located. Detail information on the
ownership of the SOEs by the three spheres of government and various departments extracted from
the (PRC Survey, 2011a) is listed below:
1. The entities operate at a national (67 per cent), provincial (18 per cent), local (11 per cent)
or multiple levels (4 per cent)
2. 12 per cent of state-owned entities report to municipalities; 10 per cent to Economic
Development or Tourism; 9 per cent to Public Enterprises; 9 per cent to Transport and 8 per
cent to Department of Higher Education and Training. Others report to Arts & Culture (6 per
cent); Energy (5 per cent); Finance or Treasury (5 per cent); Human Settlements (4 per cent);
Agriculture or Rural Development (4 per cent); Communications (4 per cent); Labour (4 per
cent); Water Affairs (3 per cent); Trade & Industry (2 per cent); or Science & Technology (2
per cent).
Based on this information about ownership of the SOEs, it is clear that for them to optimally achieve
the common development state objectives they will require extensive coordination with sufficient
resources and time. It might also mean that coordination activities are executed from a single
centralised unit. It is also important to note that the local SOEs on the one hand and national and
provincial SOEs on the other are governed by different legal regimes i.e. MFMA and PFMA
respectively. This might render the coordination effort even more complex. The Governance and
Ownership (G&O) work stream of the PRC will confirm or otherwise the impact on the coordination
effort.
In the next section we highlight some of the relevant findings from the PRC/PWC subjective survey
on SOEs. It is important to note that although some of the findings of the survey do not talk directly
to the topics on developmental state and/or the role of the SOEs, they refer to critical issues that are
related to either topic or both. The key findings from the PWC’s subjective survey report on the
state-owned entities were as follows: (PRC, 2011)
1. The outcome of the subjective review indicated that SOEs are aligned to their mandate and
there is a degree of uncertainty as to whether their mandate is regularly reviewed to comply
with the changing needs as contained in the Developmental State Agenda and the New
Growth Path.
2. The SOEs indicated that a need exists for restructuring interventions linked to the principles
of the Developmental State to ensure alignment of their strategic objectives to the
Developmental State Agenda and New Growth Path. In some instances, SOEs had translated
the Developmental State Agenda and New Growth Path principles themselves and refocused
their strategies; in other instances, SOEs were looking to the departments they report into,
to provide additional guidance and strategic direction.
3. SOEs indicate that they do contribute to building both internal and external social cohesion;
however, the extent of the impact has not been measured. Often, SOEs were focused on
social issues such as HIV/AIDS, youth, women and people living with disabilities. However,
these initiatives often do not improve their quality of life and participation in the economy.
SOEs did acknowledge that their purpose extends beyond the profit motive and that it is also
their responsibility to build social cohesion.
4. The lack of appropriate skills is the most frequently mentioned operating problem for the
SOEs. In direct contrast, however, the SOEs also rank themselves highly in terms of skills
development as a component of the New Growth Path. This inconsistency suggests that a
review of skills development programmes may be required to determine their effectiveness.
5. A need exists to forge meaningful partnerships and collaborative efforts to be able to serve
rural communities and to deliver on the imperatives of the Developmental State Agenda and
the New Growth Path.
6. It is an imperative that a monitoring and evaluation mechanism comprising of Government,
stakeholders and social partners be established to measure, in concrete terms, the manner
in which these SOEs are positioned in achieving their political, social and economic
mandates. Other possibilities include collaboration and public private partnerships in
providing the required services on a competitive basis which would enhance market
performance.
7. Learning and growth should be promoted through collaborative efforts aimed at steering
investments in programmes which add value and create the necessary capacity for social
cohesion and, more importantly, would create meaningful jobs. Although the SOEs claim to
be making a significant contribution in this regard, this needs to be assessed in terms of the
high unemployment rate and poor uptake of school leavers and graduates. The real impact
can only be determined by a scientific study of the actual numbers of people recruited
within this category by SOEs.
8. The focus of the majority of SOEs on delivering on the Developmental State Agenda has
been predominantly on skills development and procurement reform.
9. SOEs are also unsure as to their degree of agility and innovation in delivering the services
aligned to the Developmental State Agenda.
10. The majority of the SOEs believe that some of the Developmental State principles are not
applicable to their entities and that some of these principles are still to be aligned to their
strategic objectives. Clearly the need for alignment to the imperatives of the State have not
fully been understood and incorporated into the structuring and delivery considerations of
all the SOEs.
The survey’s findings highlight key issues about the role of SOEs in a developmental state as
perceived by the SOEs themselves and include the following:
Uncertainty with regards to the regular reviews of mandates suggests that SOE mandates, where
primary role of SOEs is defined, might not have changed for a while and therefore cannot determine
whether or not the existence of the SOE is still relevant or should be aligned to mandates of other
SOEs or new ones.
Some SOEs claim to have translated objectives of the Developmental State (DS) and NGP and aligned
their strategy accordingly. There are many facets of the DS and depending on circumstances; one
instant might be important and critical than the others at any point in time. Interpretation as
claimed has a chance of missing the mark and focus on non-strategic threads, sometimes with
unintended negative consequences. This also suggests that DS imperatives have not been fully and
clearly communicated to individual SOEs let alone how they will be enforced and monitored. For the
role of SOEs to be effective in achieving the DS objectives, it is important that every single SOE’s
mandate is reviewed and aligned to agreed and clearly communicated DS objectives. As conditions
change in the country, further reviews will be necessary to ensure that alignment to DS objectives is
achieved at all times. Monitoring and evaluation is critical to ensure that SOEs do what is expected
of them in a transparent and open manner.
The regional and continental economic growth is an important consideration for the South African
developmental state. In our research we have not found a comprehensive strategy for the role that
South African state-owned entities should play in the region and in the continent in general. We are
aware that there have been failures in the past where SOEs ventured in other parts of the continent
for example Telkom in Nigeria, Transnet in the DRC. Currently Transnet is venturing into Swaziland
and Maputo.
3.
EXPERT VIEWS
In this section we review expert views on the concept of the DS and the role that they suggest SOEs
should play in that environment. We give literature context of the reasons given for the
establishment or otherwise of SOEs. Then we review first the different definitions of a DS and make
an assessment whether or not they are consistent and commonly understood. Secondly we review
the characteristics associated with the DS. Thirdly we review industrialisation and assess how it has
contributed to the DS and what were the lessons learned. Lastly we review some of the key success
factors for a DS.
Responding to a continuing debate whether or not there is a need for the establishment of SOEs in a
country, Ha-Joon Chang posits that “there are respectable theoretical justifications for the existence
of SOEs” and are listed below as follows: (Chang, 2007, p11)
1. Natural Monopoly: In industries where technological conditions dictate that there can be
only one supplier, the monopoly supplier may produce at less than socially optimal level and
appropriate monopoly rents. Examples: railways, water, and electricity. Under such
circumstances, there is a strong case for an SOE to be set up and regulated to prevent abuse
of such a natural monopoly;
2. Capital Market Failure: Private sector investors may refuse to invest in industries that have
high risk and/or long gestation period. Examples: capital-intensive, high technology
industries in developing countries, such as aircraft in Brazil or steel in the Republic of Korea;
3. Externalities: Private sector investors do not have the incentive to invest in industries which
benefit other industries without being paid for the service. Examples: basic inputs industries
such as steel and chemicals;
4. Equity: Profit-seeking firms in industries that provide basic goods and services may refuse to
serve less profitable customers, such as poor people or people living in remote areas.
Examples: water, postal services, public transport, and basic education;
5. Security of Supply: Ensuring constant and reliable supply of commodities that are critical to
the functioning of the country and its people; and
6. Infrastructure: The need to build and maintain infrastructure that promotes economic
activities.
Despite the theoretical justifications for establishment of SOEs and the many examples of well
performing SOEs, many SOEs are not well run and are inefficient. The most recognised arguments
against the establishment of state-owned entities include, inter alias, the following: (Chang, 2007)
1. The Principal-Agent Problem: This principle recognises that SOEs are not run by their
owners like in private companies. Given the self-seeking nature of humans, the argument
goes; no SOE manager will run the firm as efficiently as an owner-manager would run his
own firm. It is inherently difficult to verify (although managers know) whether poor
enterprise performance is due to shirking by the managers or circumstances beyond their
control, monitoring by principals will always remain imperfect, resulting in inefficient
management.
2. The Free-Rider Problem: SOEs have numerous owners (all citizens). No individual owner
(citizen) has the incentive to monitor the SOE managers as the benefits from monitoring will
accrue to all owners while the costs are borne by the individuals who do the monitoring.
3. The Soft Budget Constraint: Being part of the government, SOEs are able to secure
additional financial assistance if their performance lags. This leeway makes the SOE
managers lax in their management.
3.1
Definition of a developmental state
There are many definitions that are given to a developmental state by different authors and this
section explores some of the common and varying elements of these definitions.
A development state is a state where government is intimately involved in the macro and microeconomic planning and implementation in order to grow the economy in a steady but rapid manner
(Onis, 1991). It has generally been observed that successful developmental states are able to
advance their economies much faster than regulatory states (states that use regulations to manage
the economy). As an example, it took the USA approximately 50 years to double its economy while it
took China, which is largely recognised as a developmental state, approximately 10 years to double
its economy (Marawa, 2006).
Another two examples of faster growth are that of production of steel and cars in Japan and the USA
as well as that of manufacturing in Korea, India and Mexico. In 1955 Japan produced 5m tons of steel
compared to 90m tons produced in the USA. In the same year Japan produced 3000 cars versus 7m
that were produced in the USA. By 1970, Japanese steel production had caught up with the USA. By
1975 Japan overtook West Germany as the largest exporter of cars in the world. By 1980 Japan
overtook the USA as the largest producer of cars. (Singh, 2011)
In 1955, Korea’s, India’s, and Mexico’s per capita manufacturing production in US dollars were $8, $7
and $60 respectively. By 1990 Korea was the largest producer of micro-chips in the world. By 2000
Korea was expected to be the fourth largest car producer in the world. (Singh, 2011)
Abe defines a developmental state as a state in which the political elites aim at rapid economic
development and give power and authority to the bureaucracy to plan and implement efficient
policies. A high rate of economic growth legitimises the centralised state apparatus. (Abe, 2006)
According to Johnson, the developmental state aims at rational and deliberate development and
implements state-driven industrial policies, with co-operation between the government and private
enterprises. The developmental state contrasts with the “regulatory state” such as the United States
(Johnson, 1982, p. 10).
Castells’s definition of the developmental state is that; “a state is developmental when it establishes
as its principle of legitimacy, its ability to promote and sustain development. Development in this
instant is a combination of steady high rates of economic growth and structural change in the
productive system, both domestically and in its relationship to the international economy.” (Castells,
1992)
Bolesta identifies five broad areas that make up the definition of a developmental state. Firstly, a
developmental state is a state in which the authorities’ objectives are to achieve fast socioeconomic development. Secondly, these objectives are achieved via the process of industrialisation.
Thirdly, although the strategy and goals might be drafted by the ruling elite, the state
transformation is facilitated by competent bureaucracy, a state administration, which is a structure
largely independent from possible democratic choices of the society, unlike in Mexico and Brazil.
Fourthly, the process takes place in the institutional environment in which it is the state which
dictates not only the norms and the rules of the social, political and economic existence, but also the
directions of development. Hence it is an interventionist state in nature. Fifthly, although it is indeed
an interventionist state, the economic environment is capitalist, where the private sector plays a
crucial role in the development of the country. (Bolesta, 2007)
Bolesta further argues that the development cycle of a developmental state starts with development
mostly being sustained by export-led growth, which then, in theory, will create means for combating
poverty, generate new work places, etc. Hence, a developmental state becomes an exporter of its
own products. In time, the volume of exports remains high, its nature changes, but the development
is more and more fuelled by domestic consumption. Eventually, once the society reaches a certain
standard of living, it will be the domestic consumption which will generate the economic growth.
Probably at that stage a developmental state becomes a developed state. (Bolesta, 2007)
Although the definitions given above on developmental state read differently, there is a common
theme and keywords that are consistently used by the different authors. Based on our analysis of
the keywords it would seem that the definition of a developmental state must have a theme that “it
is led by the state or government in pursuit of a rapid and deliberate economic growth and
development”. Two other salient points from the definitions is the active intervention of the state in
the economy in a developmental state. This intervention is contrasted to the regulatory state where
the economy is largely left to the markets but regulated to facilitate fair transactional activities.
3.2
Characteristics of a developmental state
This section of the report seeks to identify those attributes by various developmental state authors
that characterise a developmental state. These are the attributes that if a state is developmental can
be easily identifiable and measured.
Skills development
Developmental states generally put strong emphasis on technical education and the development of
numeracy and computer skills within the population. This technically oriented education is
strategically used to capacitate government structures particularly the bureaucracy. What emerges
out of this strategy is that the political and bureaucratic layers are populated by extremely educated
people who have sufficient tools of analysis to be able to take leadership initiatives, based on sound
scientific basis, at every level of decision making nodes within the government structure (Marawa,
2006).
According to Marawa, a state will be developmental if, among other things, the technical skills like
engineering are developed and put into good use to advance the economy of the country. Many
authors agree that a solid numeracy and computer skills foundation is necessary to enable the
development of such technical skills.
The importance of education and training is further amplified by Ashton et al. (1999) by identifying
four characteristic features on the East Asian developmental states namely: the politico-economic
strategy; the mechanisms to link trade and industry policy to education and training policy; the
centralised control over the education and training system; and the ability to maintain the links
through time. First and foremost was the commitment on the part of the ruling elites to develop the
economy in a specific direction. This commitment may have meant taking actions which conflict with
the immediate interests of either capital or labour. A normal basic precondition for such actions is
the establishment of a strongly, relatively insulated state. Second, the political leadership
established mechanisms to ensure that the requirements of the economy played a central part in
determining the output of the education and training systems. Third, so that governments could
deliver the appropriate skills to the workplace, they had to establish strong controls over the
institutions responsible for education and training. Fourth, governments had to constantly steer the
system by adjusting the outputs from the education and training system to meet the existing and
future demands. (Ashton et al., 1999, p. 141)
Investment
Developmental states have been observed for their protection of their so called embryonic domestic
industries as well as focus on aggressive acquisition of foreign technology. They achieve this by
deploying their most talented students to overseas universities located in strategic and major
centres of the innovation world and also by effectively utilizing their foreign missions (Marawa,
2005c; 2006). Furthermore, they encourage and reward foreign companies that invest in building
productive capacity such as manufacturing plants. The long term aim is to develop local
manufacturing capacity that is globally competitive. Developmental states strike a strategic alliance
between the state, labour and industry in order to increase critical measures such as productivity,
job security and industrial expansion.
A culture of investment is an important attribute of a developmental state. A country could be
investing in knowledge or infrastructure or even encouraging foreign direct investment (FDI) with
the intended results of growing the economy thereby reducing unemployment and poverty.
Leadership, focus and partnership with private sector
Referring to the success of the Japanese developmental state, Johnson points out four key success
factors. Firstly, Japan assigned the tasks of planning, constructing, and supervising industry to the
bureaucracy. Secondly, Japan established the political system to support the bureaucracy. Thirdly,
when the government needed to intervene in the market, it allowed plenty of scope for activities of
private enterprises. Fourthly, political direction by the Ministry of International Trade and Industry
(MITI) had effective control functions. (Johnson, 1982)
Another important characteristic of a developmental state as observed by Desta (2009) is that the
“political leaders of the developmental state need to be committed to national development goals
that are supported by a strong vision”. This view of a common developmental state vision is shared
by most authors on developmental state. There is agreement among them that without a strong
vision and a visible leadership to drive the vision, a developmental state is an illusion.
The developmental state advocates for strengthening existing manufacturing capabilities while
building new ones. Since manufacturing is highly dependent on the productivity and the efficiency
of the workers, it is vital that government, labour and industry reach a strategic pact that is focused
on long term strategic goals rather than short term goals (Marawa, 2006). Mkandawire concurs with
this characteristic when he observes that “developmental means sacrifices should be made by all
involved in the economy in the best interest of the nation’s economic growth. It is about finding a
balance between the aspirations of the investors of capital, owners of production means, and
labour. In Finland a joint compact was developed between capital and labour on production, job
creation and wage levels to drive their developmental agenda”. (Mkandawire, 2011)
Key success factors
In the development and transformation seminar series organised by the PRC, one of the experts,
Prof. Buthelezi identified the developmental state’s key success factors to include, inter alias, the
following:
1. History – of the country is important to contextualise the present. The South African
Industrialisation process starts with the mineral revolution in Kimberley. This revolution
marks the integration of the colonial and the British imperialistic economy. This period is
also the origin of the inequalities inherent in our society today;
2. Political legitimacy – is common in most countries that underwent a successful
developmental state. Where there are coalitions, eruptions against the state, then the state
3.
4.
5.
6.
7.
has no political legitimacy e.g. South Korea. On the other hand, countries like Malaysia and
Singapore have real solid legitimacy;
Leadership of the state – there has to be a clear, bold and cohesive leadership to drive the
developmental agenda. A government with substantial autonomy, capacity and credibility is
required for successful long term economic growth. This is a government that is perceived as
acting in the public interest with credibility gained through successful economic and political
leadership;
A capable state – is a state with financial reserves. To the extent that, in a capable state,
there is a social contract defining clearly social upliftments in areas of health, education,
welfare, a country cannot be a developmental state;
Societal cohesion, social solidarity and legitimacy of social institutions as critical elements of
a developmental state;
A state that fosters a culture of savings and investments in all levels; and
State’s commitment to long-term economic development.
4.
INTERNATIONAL EXPERIENCE
4.1
Developmental state
Most of the work below describing the international experiences of a developmental state concept
over a period of time and is taken from the work done by Ha Joon Chang. Different countries
experienced the developmental state differently and the experiences of Korea (South), Taiwan,
Japan, Singapore, China, France, Scandinavian countries and the United States of America (USA) are
discussed next:
Korea
1. Dictatorial in nature;
2. The Korean state intervened forcefully in the industrial sectors where the private sector was
involved mainly because there were few large private sector firms;
3. Between 1960 and 1980, the Korean state pursued some of the most market defying
selective industrial policies using extremely powerful pilot agency called the Economic
Planning Board (EPB). The EPB not only oversaw the developmental state planning of the
country but also controlled the budget for these activities. The Ministry of finance collected
taxes but had no control over their usage. In addition the EPB coordinated the activities of
the Ministry of Commerce and Industry, the banks (all state controlled between 1961 and
1983) as well as the State-owned enterprises.
Taiwan
1. Dictatorial in nature;
2. Intervened less forcefully (compared to Korea) in the markets where private sector had a
role to play;
3. State-owned enterprises and state-financed Research and Development (R&D) played a
major role in the Taiwanese developmental state even more than in Korea and Japan;
4. Taiwan had few large scale private sector firms and this gave the state enormous clout and
power;
5. Taiwanese pilot agency, the Industrial Development Bureau (IDB), although constraint from
a budget control perspective, it controlled all the powerful banking sector and state-owned
enterprises from which it derived the power to drive economic development.
Japan
1. Democratic in nature;
2. Intervention in the private sector markets was aggressive but targeted;
3. The planning agency, the Economic Planning Agency (EPA), was small and did not control
budget for developmental programmes;
4. The pilot agency, the Ministry of International Trade and Industry (MITI) was given an
explicit developmental role to play in the economic development of the country. The MITI
was always constrained by the Ministry of Finance in securing necessary funding for
developmental programmes except for programmes in the selective industrial policy which
the MITI used effectively to drive the transformation of the country;
5. Japan had a lesser degree of control of the Banking sector compared to Korea and Taiwan.
Singapore
1. Dictatorial in nature;
2. Albeit carefully targeted, Singaporean state encouraged free trade, a welcoming approach to
foreign direct investment;
3. Singapore had a significantly large SOE sector, in fact one of the biggest outside of the oilproducing countries with a GDP contribution of 22%.
France
1. Democratic in nature;
2. The French state used a strategy of economic development, involving the planning
commission and sectoral industrial policy, led by elite bureaucrats as well as aggressive
usage of state-owned enterprises;
3. Had a certain degree of control over the Banking sector;
4. Most of the key firms until the mid 1990s were state-owned enterprises and some still are,
including Renault (automobile), Alcatec (telecommunications), St. Gobain (glass and building
material), Usinor (Steel), Thomson (electronic), Thales (defence electronics), Elf Aquitains
(oils), Rhone-Poulenc (pharmaceutical);
5. The French planning agency, CGP had a tight control over the state-owned enterprise. Today
the Government Shareholder Agency (APE) manages a portfolio of nation-wide state-owned
enterprises.
Scandinavian Countries
1. Democratic in nature;
2. They derived legitimacy from the welfare state and full employment, rather than rapid
economic growth;
3. Engaged in selective industrial policies and we give the following country specific examples:
a. The Swedish state developed some strategic sectors through public private partnerships
(PPPs) from early on including iron and steel in the mid 18th century; railways in the
1850s; telegraph and telephone in the 1880s; and hydroelectric power in the 1890s.
b. From the 1930s, the Danish state was deeply involved in the management of the
international marketing of agriculture exports, which were then the engine of growth.
c. Finland and Norway also practised a strong sectoral industrial policy.
4. They have strongly promoted R&D mostly in intensive technology intensive industries by
establishing a series of research institutions e.g. Sweden established the Stockholm Institute
of technology, the Chalmers Institute of technology, the school of Mining, the Stockholm
College of Forestry, and Falum School of Mines. In the last few decades, the Scandinavian
countries have been top in the world in R&D spending (as a percentage of GDP), with public
agencies playing a key role e.g. Finland’s SITRA;
5. Welfare policies were closely integrated with the strategies to promote structural change
towards high-productivity sectors. The policy forced the low-productivity sectors to upgrade
or fold, while allowing high-productivity sectors to strive;
6. Although there were no pilot agencies in the Scandinavian countries, upgrading of economic
policies were largely influenced by the labour-market and welfare policies.
China
1. Dictatorial in nature;
2. The structure that plan and deploy the economic policies is designed to fulfil the aspirations
of the ruling elite;
3. The Chinese state intervenes aggressively in the economy of the country and control the
direction of development with rapid economic growth;
4. For a long time the wages were kept relatively low and productively very high which enable
China to be a destination of choice for manufacturing. This has allowed the Chinese state to
import technological know-how as well as building competitive operational and
technological capacity;
5. Leveraged their savings and investment culture to build huge capital reserves and this lever
has been used to take equity positions in other parts of the world;
6. The state controlled virtually the whole of the banking sector to leverage for development;
7. Current growth is export-driven. An increasing share of Chinese production is, however,
consumed domestically, as a richer society can afford to purchase more goods.
USA
1. Democratic in nature;
2. Post war II period the USA has been regarded as a “regulatory state”;
3. From the 1830s, the USA remained the most protectionist country in the world until world
war II;
4. Between mid 19th century and mid 20th century, the USA government invested extensively in
infrastructure, high education, and R&D significantly in agriculture;
5. During post world war II period, the USA had what is referred to as “developmental network
state” (as opposed to the “developmental bureaucratic state” of the East Asian model),
which is focused on translating cutting-edge technological research into commercial use
through collaboration among a network of highly skilled technological expertise residing in
individual people, state agencies, industries, universities, and other research institutions;
6. Most of the development projects were pursued under the guise of “defence” policy
through agencies like Advanced Projects Research Agency (APRA) of the Pentagon or “health
policy” through the National Institute of Health e.g. the semiconductors were first
developed through USA defence research funding. The USA Defence Department intervened
when two main players in the sector got locked in a costly patent suit and gave the industry
a further boost by establishing SEMATECH, a joint venture of 12 firms, with government
funding.
4.2
Role of SOEs
In France, the Government Shareholder Agency (APE) manages a portfolio of strategic SOEs in
various industries including Defence, Transport infrastructure, Energy, Transport, Real Estate, and
Financial Services. The primary role of these SOEs is to drive a long-range industrial economic growth
strategy of government. The portfolio of SOEs is reviewed on a periodic basis to ensure that they are
aligned to the long term industrial economic growth. The SOEs are also used to create gender parity
on corporate boards thereby making a direct and concerted effort to empower women. SPPE, one of
the financial intermediaries, wholly owned by the state provide exceptional financing for the banking
institutions. With this funding the banks are able to increase their lending to households,
professionals and business. SPPE has also made loans available to bail out struggling industrial
sectors like the Transport sector as well as contributing to economic recovery from any crisis from
time to time. (APE, 2010)
In Singapore, the state-owned enterprises are owned by Temasek Holding, which reports to the
department of Finance. The role of state-owned enterprises in Singapore is outlined in the
Temasek’s general investment strategy and centres on the following five themes:
1. Transforming economies;
2. Growing middle class;
3. Pioneering innovative products and/or businesses;
4. Deepening comparative advantage; and
5. Focus on emerging champions.
In China there seems to be three broad roles of state-owned-enterprises namely, social role,
economic role and internalisation role: (OECD, 2009)
1. Social role of state-owned-enterprises include reforms on the following:
− Social welfare system;
− Financial institutions – to be flexible and empower state-owned-enterprises as well as
local private small companies;
− Labour markets;
− State-owned-enterprises functioning as a stabiliser that help to alleviate potential
adverse impacts on the economy and social reforms.
2. Economic role
− State-owned assets are divided into local and central;
− There are three types of central state-owned entities: 1. Large scale and strategic type
whose supervisory authority is SASAC. In 2008, SASAC managed about 149 central SOEs
excluding subsidiaries and holding companies. The total including subsidiaries and
holding companies the number was estimated at 10, 000 SOEs; 2. State owned financial
institutions and their supervisory authorities are in the following: 1. China Banking
Regulatory Commission (CBRC); 2. China Insurance Regulatory Commission (CIRC); 3.
China Security Regulatory Commission (CSRC); 3. Central SOEs whose supervisory
authorities are individual central government ministries, e.g. commerce, education,
Science and technology, and others
− State-owned-enterprise contribution to the GDP is tightly monitored and so is the
proportion of labour absorption.
− Central and local state-owned-enterprise weights are monitored on a continuous basis,
e.g. in 2006 the central state-owned-enterprise’s proportion (100 per cent = all stateowned entities): count =18.1 per cent; assets = 51.7 per cent; revenue = 51.2 per cent;
profits = 64.0 per cent.
3. Internationalisation role
− Going global strategy – was proposed at the 5th plenary session of the 15th Central
Committee of the Communist Party in 2000. The strategy implied that government
supports the globalisation of enterprises, government policy takes into account
international issues like trade agreements, and natural resource development projects
abroad, collaboration to support start-up funds for overseas investments
− Major goals of internationalisation - Enlarging global markets; exploiting natural
resources abroad; attaining higher technology; and enhancing the corporate brand
values of Chinese enterprises
− State-owned enterprises in outward Foreign Direct Investment (FDI) - Strengthened
overseas investments since 2000; Supporting resource based goal: China Petroleum and
Chemical Corporation (CNPC) acquired an Angolan Oil well in 2006 for $692m; China
National Petroleum Corporation (CNPC) acquired Petro Kazakhstan; China National
Offshore Oil Corporation (CNOOC) acquired 45% of shares in Nigerian ACPO oil well for
$299m
− Supporting technology attainment based goal: Acquisition of the PC business of IBM by
LENOVO for $175m in 2004; Large scale enterprise (TLC) in 2002 acquired a German
company, Schneider Electronics and in 2003 acquired the largest TV producer in the
world, the French company, Thomson
− Support Chinese non-SOE companies to participate in overseas investments
Apart from the role of economic growth and development, the SOEs in India have also played a role
of developing small and medium enterprises by ensuring, among other things, funding of
entrepreneurship. Recently the role has focused on internationalisation of SOEs by granting
autonomy to them to make investments abroad and form joint ventures, for example Bharat Heavey
Electricals Limited (BEHL) expanded its international operation through entering new markets and
building up on existing ones. Another example is Oil and Natural Gas Corporation Limited (ONGC)
which is currently engaged in overseas exploration and production in countries like China, Columbia,
Brazil, Nigeria, Cuba and Vietnam. (OECD, 2009a)
According to the study by Forfas on the role of state-owned enterprises in Ireland, the following
roles were identified: (Forfas, 2010)
1. Provision of essential infrastructure and services that are critical to the country’s economic
development e.g. SOEs are dominant energy suppliers for small businesses and households
while large electricity users can access private providers. Infrastructure services are provided
for sectors such as Energy, water and waste water, transport services (road, rail, air and sea),
Broadband, and Next Generation Networks;
2. Early SOEs played a key role in enhancing skills (including technical and management skills)
and entrepreneurship;
3. SOEs are used to address broader national economic and social well-being objectives of
government;
4. They have traditionally played a key role in setting salary levels for certain professionals
across the economy;
5. The commercial SOEs are key investors in infrastructure provision and are responsible for
delivering a significant part of Ireland’s National Development Plan;
6. The establishment of SOEs was driven by a desire to initiate strategically important
economic activities which private enterprise had either failed to initiate or to operate on a
sufficiently extensive scale;
7. The establishment of SOEs in the 1980s was attributable to the corporatisation of functions
which had previously been fulfilled by Government Departments. SOEs were formed in
response to a growing demand for specialised services which Government departments
traditionally provided. For example, Telecom Éireann (telecommunications) and An Post
(postal service) were established in 1984, and Coillte (forestry) formed in 1989 on the
grounds that activities previously performed by departments were better suited to a
commercial environment;
8. More recently, State ownership in the financial sector has increased as the State has taken;
and
9. Large equity positions in a range of distressed banks. This is a direct response to market
failure.
5.
CONCLUSION
This paper covered the current status of the developmental state in South Africa and the role that
the SOEs are playing in this environment, highlighting some key problem areas. We then explored
the literature on developmental state by various authors focusing primarily on the characteristics of
a developmental state. We further explored experiences of a number of countries firstly in their
developmental journey and secondly on the role played by their respective SOEs. In the next
paragraph we summarise some of the key observations on the developmental state and the role of
SOEs in that environment.
5.1
Developmental State
In our research on the developmental state across the world we found that it is not a one-fit-all
concept with respect to the various countries. It is about the economic growth and prosperity of
nations. There have been successes and failures in pursuit of a developmental state. Generally the
following diverse country experiences on developmental state were noted:
1. Developmental state is about defying the linear patterns of an economy. It is about jumping
certain steps in the economic growth and also catching-up with other more advanced
countries. The developmental state in the East Asian countries was characterised by rapid
economic growth often growing faster than most of the developed countries. In South
Africa, between late 1990s and late mid 2000s there was a steady growth in the economy.
However this growth did not create commensurate number of jobs;
2. Developmental state is often ideologically or politically influenced. The developmental state
in the Eastern Asian country was ;
3. In many countries a Developmental state was influenced, inter alias, by:
 Addressing issues of market failures e.g. states intervening to subvert pressure of the
market failures e.g. France, Ireland, and the USA buying back financial institutions
after the 2008 financial crises;
 States becoming stronger and legitimate e.g. China;
 State Intervention to rescue ailing SOEs e.g. Brazil, the Government instructed BNDES
(Brazil’s development finance intermediary owned by Government) to fund the ailing
Embraer, a strategic state-owned-company;
 National crises and major changes e.g. the strong states in the East Asian societies
were born of the need for survival and grew on the basis of a nationalist project
affirming cultural and political identity in the world system, Castells (2000, p. 284): For
example, after World War II, due to the United States occupation, Japan was largely
reformed. As an impoverished and defenceless state without natural resources, postwar Japan mobilised its whole capital collectively in order to survive. South Korea had
been liberated from the Japanese colonial administration and endured an attack from
North Korea. South Korea was reconstructed by the United States as a front line on
the North Asian frontier between the communist world and the democratic world. In
1949, Taiwan was protected by the United States, as a defensive line against
communist mainland China. Singapore was unstable after its independence in 1965. It
was expelled from the Federation of Malaysia, and a multi-racial society consisting of a
Chinese majority, which had a link with communism and several minority groups like
the Malays and the Tamils (Abe, 2006);
 Recovering from disasters e.g. state intervention after the civil war in Finland.
4. Most of the East Asia countries were successful with their developmental state but were
largely autocratic;
5. In Africa, Mauritius and Botswana, have been developmental and were able to survive the
recent financial meltdown. Both of them are democratic states.
6. Developmental means sacrifices that should be made all involved in the economy in the
best interest of the nation’s economic growth;
7. It is driven by the vision and capacity of the state to convince its citizens about the big
projects to be undertaken in the best interest of the country;
8. It is about finding a balance between the aspirations of the investors of capital, owners of
production means, and labour. In Finland a joint compact was developed between capital
and labour on production, job creation and wage levels to drive their developmental
agenda;
9. Developmental states are characterised by huge nation-wide savings and investments
(infrastructure in particular);
10. In “The East Asian Miracle”, the World Bank (1993) regards investment in education as a
crucial factor used to explain rapid economic development of the East Asian states, which
are called the High Performing Asian Economies;
11. Addressing issues of market failures
Resources are limited to deploy to all facets of the developmental state and there is a requirement
to prioritise areas of high impact in achieving the objectives of a developmental state. To this end,
the governance and monitoring of the state-owned entities should be streamlined and coordinated
better, to take full opportunity of contributing optimally to the cause of a developmental state. The
contribution by each state-owned entity to the developmental state objectives will differ from entity
to entity. The state-owned entities that contribute more with significant impact on the
developmental state should be prioritised for resources and performance monitoring.
A number of state-owned entities are owned, at all three spheres of government, by different state
departments. There is a need to coordinate planning and monitoring the role that all these entities
should play in achieving the objectives of a developmental state.
There is evidence, locally and internationally that relative contribution to the developmental state
can be greatly enhanced if the state-owned entities are efficient. This fact is also highlighted in the
vision of the Department of Public Enterprises “to drive investment, efficiencies and transformation
in its portfolio of state-owned-enterprises, their customers and their suppliers to unlock growth,
create jobs and develop skills”.
5.2
Role of SOEs
We have looked at the role of SOEs in various countries in driving economic growth and
development. These countries are in the different stages of the development curve and they use
SOEs differently to pursue development and economic growth. In most of the countries we studied
economic growth is central to their developmental agenda, be it rapid economic growth from the
East Asian countries or slow sustainable growth from France and Ireland or economic growth
deriving legitimacy from the welfare state and full employment.
In the early stages of the development a number of the country’s SOEs prioritised skills development
particularly technical and management skills. In many countries at different stages of development
tended to create SOEs or acquire strategic private sector companies during crisis or disaster. The
Asian crisis of 1998 and the financial meltdown that started in 2008 are examples of the role that
SOEs have played. In the later stages of development most countries have used their SOEs to
internationalise and increase exports for example India, China, France, Brazil.
We have discussed both the primary and secondary roles that SOEs play in South Africa. The primary
being the role stipulated in the founding mandate. The secondary role is in addition to the primary
role to promote a range of state objectives and these differ from country to country. Common to
most countries would be considerations like infrastructure development, economic growth and skills
development as secondary roles that SOEs play.
In conclusion, the increasing levels of inequality, unabated high levels of unemployment and
poverty, rural underdevelopment, lack of requisite skills, etc. point to critical problems in South
Africa that current markets fail to address. In addition, the country requires huge funding to deal
with backlog in infrastructure development which so far a large portion has come from government.
Such infrastructure development ideally requires participation of both government and private
sector. The traditional cold relationship between government and the private sector suggests a
difficult partnership that might not realise the intended goals. Like the National Party government
who lost faith in the markets to resolve the problems of that era, we firmly believe that government
should intervene to address these failures.
When the state intervenes, instruments like the SOEs become powerful levers that government
should pull to drive development and economic growth. The strategic SOEs, Transnet, Eskom, Prasa,
IDC, DBSA as suggested in (PRC, 2011a), should be in the forefront. Such intervention will require
coordination and focus of resources in particular from relevant SOEs including those that
government has an indirect partial ownership, like Telkom, Sasol and AcellorMittal. Internationally,
governments have intervened directly like in the East Asia, Norway and Brazil to pursue economic
development. These and other countries, as shown in the body of this report, have built strong and
successful SOEs that compete globally and bring back required returns for further local
development.
6.
RECOMMENDATIONS
Our recommendation are in four broad areas namely: characteristics of a developmental state for
South Africa based on the economic construct of the country as well as the benchmarks from other
countries; Based on the characteristics of the developmental state, we have defined the
developmental state for South Africa; Described and recommended the structure that is required to
drive the developmental state agenda; Described and recommended the role that the SOE should
play in the developmental state and this role should support the expected outcomes of the
characteristics of a developmental state; Lastly described the key success factors for SOEs to play a
meaning role in the developmental state.
6.1
Developmental State
Characteristics
We recommend the characteristics of the developmental state shown in figure 10 below:
Figure 10 – PRC characteristics of a developmental state
We envisage that the SA developmental state is characterised by eight attributes as shown in figure
7 above.
1. A shared vision of developmental programmes of national importance by all the
stakeholders consisting of the state, SOE sector, private sector, labour and civil society is
necessary. We have shown that this will be difficult task to undertake given the country’s
divided past. It is necessary for to provide developmental leadership and promote cohesion.
2. Develop skills and innovate – in figure 5 we have shown that there is a big gap between the
skills we have in the country and the skills that the economy need for it to grow. Technical
skills like engineering, Information Technology (IT), artisan, etc. are in short supply. Some of
the problems associated with the lack of technical skills are the poor education system at
foundation phase. According to the Progress in International Reading Study (PIRLS) as shown
in figure 6 78% of grade 5 students in South Africa fall below that level of performance
described as “very low reading achievers”. As showed in the work of Marawa, technical
education is one of the key levers of a successful developmental state. (Marawa, 2006)
3. Partnership with Private sector is a key characteristic of a developmental state. Literature
and benchmark from other countries has shown that a number of countries have used Public
Private Partnerships (PPP) to drive a number of development initiatives especially in
infrastructure development. The importance of private sector partnership Sources: 2010
World Economic Forum ‘s (WEF) Global Competitive Index
4. especially in infrastructure development cannot be overstated as shown in the analysis of
annual finance sources for Infrastructure in Africa, figure 6 below:
Figure 6 – Annual Finance Sources for Infrastructure in Africa
Public
sector
ODA
Non-OECD*
Private
Sector
Total
ICT
0.4
0.06
0.34
5.72
6.52
Power
0.8
0.69
1.08
0.46
3.03
Transport
4.4
1.8
10.6
1.05
8.31
Water/sanitation &
irrigation
3.9
1.23
0.16
.001
5.291
9.5
3.78
2.64
7.231
23.15
Source - Adapted from Africa Infrastructure Country Diagnostic 2010
Figure 6 shows the importance of private sector in driving infrastructure development,
about 31% of the total fund. A number of PPPs have not been a success in South Africa. A
specialised skill is required to negotiate good PPP agreements. South African government
seem not to have adequate skills in this area compared to their private sector counterparts.
This might be the reason for so many failures of PPPs.
5. Improve infrastructure is another key characteristic of a developmental state. Developing
new and maintaining existing infrastructure improves service delivery and facilitates
economic activities which are required for economic growth.
6. Developmental state is primarily about economic growth and development. The East Asian
countries’ developmental state was characterised by rapid economic growth. The high level
of unemployment rate in South Africa requires a growing economy. Countries have used
their comparative advantage to create industries that can growth on a sustainable basis over
a long period of time.
7. Improve service delivery
8. Improve quality of life in terms of reducing inequalities, reduce poverty levels, eradicate
corruption, reduce carbon emissions, and improve health
9. As a relatively new democracy it will be ideal if the country’s developmental state seeks to
strengthen its legitimacy.
Definition
Based on the characteristics discussed in the previous paragraph we recommend the following
definition of the developmental state: a state that leads and work with private sector, state-owned
entity sector, labour and society to achieve economic growth and development through savings and
investments (infrastructure and other assets) thereby creating sustainable jobs, improves service
delivery, reduce poverty and inequality, promote transformation, improve environment, improve
health, develops skills and promotes innovation, and reduce crime and corruption.
Structure
The country needs to establish a Developmental State Council, chaired by the President of the
country that will develop and pursue the developmental vision and ensure state capacity to pursue
this vision. The Council should consolidate the work of all the initiatives that are currently underway
and promoting development including, inter alias, the Planning Commission, the National Growth
Plan, IPAP 2, related health, education and environmental improvement initiatives. The Council
should have sub-committees, inter alias, to plan and monitor achievement of developmental state
goals. A key sub-committee should comprise of government, labour, and private sector to develop a
joint compact on job creation, wages and production levels. It should comprise of the stakeholders
of the developmental state as shown in figure 2 above which include, inter alias, the National
Planning Commission, EDD, DTI, DPE; private sector; state-owned entity sector; labour; and civil
society. In addition to defining the vision and strategy the Council should also be responsible for
communicating in clear terms all the strategic programmes that will be undertaken under the
guidance of the Council. The Council should foster cohesion among South Africans and act in the
best interest of the country first then their individual constituency. The Council should provide bold
leadership and unwavering patriotism in driving the goals of a developmental state agenda and
champion national culture change towards development.
6.2
Role of SOEs
In addition to the roles derived from their founding mandates discussed in the “AS IS Analysis”
paragraph, SOEs should further play the following generic roles:
1. Natural Monopoly: In industries where technological conditions dictate that there can be
only one supplier, the monopoly supplier may produce at less than socially optimal level and
appropriate monopoly rents. Examples: railways, water, and electricity. Under such
circumstances, there is a strong case for an SOE to be set up and regulated to prevent abuse
of such a natural monopoly; In South Africa natural monopolies still exists and SOEs like
2.
3.
4.
5.
6.
Eskom especially in operational areas such as generation and transmission is an example of a
natural monopoly. Access to basic rights like electricity is enshrined in the country’s
constitution and there enforce government to provide such services. It is not in the interest
of a private company to provide power to households. In Ireland the power SOE supplies
small and medium companies and the households, and the rest of the private is supplied by
private power suppliers. Because of high rate of unemployment and poverty, it is in the
government’s interest to ensure that prices to offer such services are kept at socially optimal
level.
Capital Market Failure: Private sector investors may refuse to invest in industries that have
high risk and/or long gestation period. Examples: capital-intensive, high technology
industries in developing countries, such as aircraft in Brazil or steel in the Republic of Korea;
Unemployment has been rising in South Africa for the last three decades, leading to official
unemployment rates of 26.4% (37% if the broad definition is used). This implies a jobless
total of 7 million, with more than 40% of the rural population unemployed, and the
development of a growing pool of workers who are excluded from the labour market. The
South African economy is facing labour market failure, with labour supply increasingly
outstripping demand. (McCord, Wilkinson, 2009). The South African government has
intervened, among other, through public works programmes to soften the scourge of
poverty. We recommend that the government intervene to alleviate other social ills like
unemployment, inequality and use the SOEs as lever for such intervention.
Externalities: Private sector investors do not have the incentive to invest in industries which
benefit other industries without being paid for the service. Examples: basic inputs industries
such as steel and chemicals;
Equity: Profit-seeking firms in industries that provide basic goods and services may refuse to
serve less profitable customers, such as poor people or people living in remote areas.
Examples: water, postal services, public transport, and basic education; Most of the people
living in remote rural areas are poor and private sector does not have the appetite to invest
in such areas because of profit motives. The South African telecommunication licenses that
were issued to suppliers obligations were enforced to provide access to neighbouring rural
often poor communities at a minimal charge.
Security of Supply: Ensuring constant and reliable supply of commodities that are critical to
the functioning of the country and its people; The citizens of South Africa have a
constitutional right to access clean water. The government has created and own water
boards to ensure that access to water is provided at all times.
Infrastructure: The need to build and maintain infrastructure that promotes economic
activities. In 2008, government announced a nationwide infrastructure budget of R802bn
over a period of 3 years from 2011 (Treasury, 2011). It is hoped that this initiative will
facilitate economic transactions and hopefully grow the economy.
In addition to the above roles, we recommend that the role of SOEs in the developmental state
should respond directly to the characteristics that we have defined in figure 3 above. The tables
below show how SOEs can respond to the developmental state characteristics:
DS Characteristics
Shared developmental
vision
Skills development
and Innovation
Private sector
partnership
DFI
Commercial
 Take leadership in fostering achievement of
developmental policy objectives, for
example not a single major undertaking in
Brazil involving private Brazilian capital has
come about without BNDES support
 Align DFI more tightly with the national
economic policies
 Act as a catalyst for skills development
 Special financing instruments for small and
risky businesses at the start of the supply
chain
 Offer online support services to SMME e.g.
use receivables of the SMME as guarantee in
exchange of working capital
 Partner with commercial SOEs to strengthen
certain industries or creating new industries
 Play a role in funding focused and strategic
research and development
 Encourage entrepreneurship by identifying
unique and strategic products from
entrepreneurs, fund them (quickly and at
lower rates) and work in partnership with
other SOEs to procure the products and
restrict imports to protect the local product
 Take a lead in developing economic hubs like
the IDZs
 Undertake targeted skills development
especially sectors or areas where DFIs are
spending significant amount of funding e.g.
project finance skills, corporate finance skills,
etc.
 Counter cyclical lending (provide loans much
quicker and cheaper) to private sector and
SMMEs in order to develop further the
private sector which in turn can accelerate
economic growth and development
 Provide long term investments and
 Align tightly SOEs with the national growth
economic policies
 Develop skills that are required by the operations
and where there is extra capacity additional skills
should be built in accordance with the need of the
broader economy. Artisans and other technical
skills are in dire need and these should be
prioritized
 Work with Research Institutions to build strong
and focus research and development capability in
the relevant industrial sectors
 Build business and operational capability of
international standard so that these could be
leveraged to compete against similar organizations
across the globe. This knowledge vault can also be
used for advisory purposes anywhere in the world
in general and the African continent in particular
e.g. recently ACSA is part of the consortium that
won the bid to upgrade and operate the Brazilian
Airports in a 20 year concession.
 Pioneer innovative products and service bundles in
the sectors that the SOEs are involved or along the
total value chain. SOEs could work with
entrepreneurs to broaden the innovation capacity
 Partner with private sector in areas that have
potential to improve the overall standing of the
industrial sector
Regulators
 Invest in developing regulatory and related skills as
well as industry specific skills. Regulation is specific
to a particular industry and therefore knowledge of
industry is a critical success factor
DS Characteristics
Infrastructure
improvement
DFI
infrastructure related loans, at reasonable
rates to both private and public enterprises
 Provide development finance to address
market failures and to improve the country’s
infrastructure
 Explore infrastructure funding in the South
African region
 Facilitating the integration of infrastructure
development into the broader economic
development
Commercial




Increased economic
growth
 Act as catalyst for economic growth and
industrialization by financing economic
activities that result in economic
development
 Together with other financial institutions,
DFIs must lead in financing developmental
policy objectives
 Act in an advisory capacity where
development financing knowledge is a
requirement. This knowledge bank can also
be used for advisory purpose in the
continent of Africa. DFIs can play a role in
identifying potential future strategic
economic sectors.
 Ensure selection of companies or projects to
be funded is based on strategic sectors and
development policy objectives
 Enable increase of exports to the African
region by funding projects that have





Investment in infrastructure in the SOEs relative
sectors of their respective operations
Use profits and balance sheet strength to access
funds in the capital market that can be used for
infrastructure upgrades and new infrastructure
development
Ensure that all SOEs’ infrastructure development
plans are in line and support the Presidential
Infrastructure Commission’s plan
For example Transnet – investment in ports, rail
network, and pipeline infrastructure; Eskom –
long term investment in renewable energy,
medium term build enough of the current energy
types to sustain and ensure security of supply;
Randwater and the waterboards to improve the
water supply infrastructure
Align the objectives of the SOEs with the
economic growth policies and plans e.g. NGP,
IPAP 2, NDP
Identify strategic sectors within the industry and
where new manufacturing capacity could be built
Drive long-range economic growth in their
respective industrial sectors
Drive a long term internationalisation strategy.
This assumes that operational capacity of
international standards has been developed. It
entails identifying opportunities in the sector
internationally and be involved in joint ventures
at both operational and advisory capacity
Enhance the corporate brands of South African
companies around the world
Regulators

Be independent and fair in regulatory function
DS Characteristics
DFI
Commercial
Regulators
potential to achieve this objective
 Encourage FDI into African continent
 Promote regional integration

Improved service
delivery

Improve quality of
life

Strengthen
democracy

Work with customer or product and service
consumers to improve service delivery.
 Counter cyclical lending aimed at:
− Protecting the existing jobs
− Creating new jobs
 DFIs can promote and encourage
procurement of goods and services from
PDIs and SMMEs organisations.
 Promote gender equality by employing more
women in critical positions
 Must run an operation free from corruption
and extortion
 Utilise Corporate Social Investment (CSI) to
more critical themes like education and
health. The themes should be aligned with
other SOEs so that the impact is great.
 Promote good health for employees first,
and then their next of kin, and the
communities around which they operate.

Actively participate and support activities that
have a potential of unlocking a number of new
jobs
Create gender parity on boards and executive
management levels
Promote and comply to all interventions, be it
acts, policies of programmes, meant to enable
Previously Disadvantaged Individuals (PDIs) to
participate meaningfully in the country’s
economic mainstream
Promote good health at the work place
Use CSI spend to promote key areas of need like
education and
 Ensure that good governance is practiced
and adhered to at all times





Ensure that good governance is practiced and
adhered to at all times
 Ensure that all stakeholders in the industrial sector
are fully equipped and informed about the
regulatory plans and issues from time to time
 Comply with all the transformation legislations and
policies e.g. BBBEE, Employment Equity, PFMA, etc.
 Deal decisively with corruption
 Participate in programmes that promote job
creation
 Ensure that good governance is practiced and
adhered to at all times
Shared developmental
vision
Skills development
and Innovation
Research Entities
Service Delivery and Departmental Agencies
 Align to the research requirement of a
developmental vision
 Align tightly SOEs with the national growth
economic policies
 Develop research based skills
 Work with other SOEs to provide research
capacity in relevant areas of economic
growth policy
 Develop specific skills for which the service
delivery or departmental agency was set-up
Constitutional and Stewardship Entities
 Invest in developing regulatory and related skills as
well as industry specific skills. Regulation is specific
to a particular industry and therefore knowledge of
industry is a critical success factor
Private sector
partnership
Infrastructure
improvement
Increased economic
growth



Improved service
delivery
Improve quality of
life
Strengthen
democracy
 Act as catalyst for economic growth and
industrialization capacity by providing
research capacity other SOEs
 Monitor against Key Performance Indicators
(KPIs) in the founding mandate
 Comply with all the transformation
legislations and policies e.g. BBBEE,
Employment Equity, PFMA, etc.
 Deal decisively with corruption
 Participate in programmes that promote job
creation
 Ensure that good governance is practiced
and adhered to at all times





Develop KPIs against which the entity is
monitored for service delivery
Comply with all the transformation legislations
and policies e.g. BBBEE, Employment Equity,
PFMA, etc.
Deal decisively with corruption
Participate in programmes that promote job
creation
Ensure that good governance is practiced and
adhered to at all times
 Monitor against the KPI in the founding mandates
 Comply with all the transformation legislations and
policies e.g. BBBEE, Employment Equity, PFMA, etc.
 Deal decisively with corruption
 Participate in programmes that promote job
creation
 Ensure that good governance is practiced and
adhered to at all times
Both the commercial and non-commercial state owned entities should:
1. Lead in the transformation objectives of government. Implement the recommendations of
the BBBEECom. Ensure that the transformation divisions are represented in the highest
levels of the organisations. Every board should have a transformation committee to ensure
that transformation is addressed at the highest level of the organization
2. Take lead in developing requisite skills, firstly for their own organisations and where there is
extra capacity for the country as a whole
In addition we recommend that the commercial state-owned entities play the following roles in
South Africa: to
1. focus on their mandates (e.g. as defined in the founding acts) while supporting the strategic
objectives of the developmental state. The mandates and shareholder compacts should be
reviewed and aligned to the developmental state objectives. These should be reviewed
together with the inputs from the Developmental State Council;
2. enhance economic efficiency or transform economic structures (production, spatial,
concentration, etc.). A clear performance scorecard should be developed to track the
economic efficiencies and developmental state objectives. (SMOE to input);
3. generate financial ROI to the government while creating strategic value through the right
investments creating a long term sustainable and competitive advantage for South Africa.
The state owned entities should ensure that they are efficient in order to generate financial
return on investment to government;
4. be a stronger strategic player linked to the ambition of creating new jobs, growth and
innovation in existing and emerging industries in South Africa;
5. be key player in the development and maintenance of infrastructure that facilitates
economic activities. They should be able to raise funds not only from their respective
balance sheets but through other creative means e.g. DFIs, capital markets, bonds (BC to
input); and
6. take lead in stimulating latent or new strategic markets for the country and the African
region.
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5. APPENDIX