Hard to let go
Erwin firmly believes that the state and the companies it owns have a critical role to play in the economy, because they are state-owned.
Since taking over as minister after the 2004 elections, Erwin has moved his department back to the forefront of economic policy. It is a marked departure from the style of his predecessor, Jeff Radebe, who was best described as inert.
In the chequered history of privatisation – or restructuring of state-owned enterprises (SOEs) – the past few years have seen a hive of activity. But this time it is completely different from the mid-1990s, when government sold stakes in a number of key assets, including Telkom, SA Airways (SAA) and the Airports Company of SA (the latter two subsequently bought back by government).
Erwin has remodelled the SOEs into economic engines, providing the infrastructure to support the whole economy. Privatisation of all but non core assets is off the table.
The policy has its critics. They focus on Erwin’s reluctance to shed companies that they believe are not crucial to provide economic infrastructure. A ssets such as SAA and Denel cannot be seen as strategic assets because they operate in a market where private-sector companies already operate efficiently. T-Sec economist Mike Schussler says government should ask: "Is it fair to continue protecting SAA and disadvantage private carriers?"
In a response that typifies Erwin’s belief that it is better to retain a measure of control over state assets, he says: "From our point of view, with SAA under our wings, we have control over pricing policy, more so than if overseas carriers were in control."
Erwin’s success, however, has been in strengthening SOE management and boards of directors, recapitalising them and giving them an unequivocal mandate to play a strategic economic role. "A key role that we see for the SOEs is to be drivers of growth and development, working closely with the private sector," he said in his 2005 budget address.
Transport utility Transnet and energy group Eskom in particular have moved to the forefront of government’s current R400bn, five-year, infrastructure drive, accounting for almost half of the proposed capex plan.
At Transnet, Erwin moved swiftly to back new management under former national treasury director-general Maria Ramos, appointing a new board to oversee the restructuring. Ramos had been dispatched by Mbeki to sort out the troubled parastatal; Erwin got the ministry shortly thereafter as Mbeki moved to reprioritise SOEs.
After five years of indecision under Radebe, Erwin gave Eskom the go-ahead to invest in new power generation capacity, a programme that is now finally starting to take off, though SA is paying the cost for the delay in the form of regular blackouts.
But along with the go-ahead for new investment came the decision to halt the proposed sale of 30% of Eskom’s generation division. Other sell-off plans have been put on the back burner and Erwin has extended the definition of core operations so that many subsidiaries of SOEs, previously on the sales block, are now being retained.
For Erwin the stronger role for SOEs is not one that has any ideological roots, though he does insist "there is no reason state companies cannot be as effectively run as private-sector enterprises. Analysis and pragmatism have always been the hallmark of the ANC government, and we have shifted the emphasis of the role SOEs need to play.
"Anyone who has a theory and does not, on the basis of analysis, discussion and consideration of the facts, change, is an ideologue," he says, cynically, when asked whether his former trade union roots are still influencing his policies. "I’m not an ideologue and we have shifted in emphasis when we needed to."
In his 2004 budget address, Erwin provided a detailed reasoning for his policy. "The private sector is inexorably impelled toward appropriating value for itself – that is why it is imbued with a feverish and oft-times self-consuming dynamism. This has a number of effects when the private sector gets onto the terrain of public goods. They will tend to cherry pick’ the most profitable opportunities, maximise the rate of return and seek to shorten the payback period – all sensible practice for a private corporation.
"However, this can create many public problems. It can mean that the overall infrastructure or delivery system can be weak and badly integrated or that important communities are underserviced or poorer people are impoverished further because the cost of necessities is rising," he says.
Democratic Alliance public enterprises spokesman Manie van Wyk says Erwin has been unfairly discredited because of his handling of the recent electricity crisis. " The restructuring process, though, is growing rapidly in complexity and his department is showing strain," Van Wyk adds.
Erwin is almost dogmatic in his view that SOEs should remain in state hands and only strictly non core businesses be discarded – Transnet’s V&A Waterfront was sold last year to foreign investors for just over R7bn, and defence group Denel has shed R500m in assets.
"We’ve identified key economic sectors as strategic and the companies operating in them require a stable, strategic shareholder that cannot be found in the private sector," says Erwin.
The norm has become for assets to be retained or transferred between state departments and SOEs.
Heading that list is SAA, which was carved out of Transnet to become a standalone company reporting to the DPE. Similarly, Transnet and Eskom’s telecom interests have been grouped into a new SOE, InfraCo, to provide cheap and widely accessible broadband services. The Pebble Bed Modular Reactor (PBMR) nuclear company has been transformed into a stand alone entity under the DPE, after being passed between government departments and development finance institutions.
And Erwin has pumped billions in tax money into funding the SOEs. SAA alone received about R6bn to recapitalise after hedging losses in 2004. A further R4bn could follow this year. Other large recipients of tax money include Denel ( R3,6bn) and InfraCo (about R1,4bn in start-up funding).
Erwin believes that the "SOE restructuring processes are largely finalised" and that the SOEs now have clearly defined strategic roles in five key strategic sectors: energy (Eskom and PBMR); defence (Denel); broadband services (InfraCo); freight and logistics (Transnet); and air traffic (SA Airways).
The DPE also oversees the remains of state forestry company Safcol and diamond mine Alexkor (see page 78), but both are undergoing restructuring processes that could see them sold out of the department in the near future.
But SOEs are economic engines, not vehicles for government’s social transformation agenda. In response to charges by trade unions that he is not doing enough for development, Erwin says: "They have longer-term economic and socioeconomic objectives."
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