Edited Transcript of Address by the President of South Africa, Thabo Mbeki, to the Heads of Mission at the Presidential Guest House, Tshwane, 13 October 2005

Your Excellencies, welcome. This is a difficult occasion because I am sure that you know more about South Africa than I do. That is what makes it a bit difficult to talk to you about South Africa. But let me try to indicate some of the principal matters on which we are focusing and will continue to focus in the medium term, to give you a sense of where the government is going.

As you have seen, I think, in the media today, we, the Cabinet, yesterday spent quite a bit of time discussing a very important matter, which is: what is it that we need to do in order to increase the rate of growth of the South African economy. And that is one of the central principal matters to which we are paying a lot of attention.

Just before I came here I saw on one of the television channels a prediction by the IMF [International Monetary Fund] saying that the South African economy this year will grow by about 3,4% and 3,9% next year. I think the IMF is wrong.

I think they are underestimating what is happening in this economy. They are maybe being cautious, so that if they are proved wrong, they are proved wrong in a happy way. They will say, we are very happy we underestimated it, rather than be disappointed by having overestimated it.

Our own view is that the economy indeed is growing more vigorously than is indicated by those figures. I am sure that you would have seen the figures published by Statistics South Africa, of growth during the 2nd Quarter of this year, which was just under 5%.

There is a discussion about that also as to whether, in fact, that is a correct and accurate reflection of what is happening to the economy. If I may read you an article which appeared earlier this month, in fact a week ago, in Moneyweb, about this thing that I am talking about. It is entitled, "South Africa's Missing Millions". It says:

"It is more than just a gut feeling that convinces analysts that the size, and even the growth rate, of the South African economy is being underestimated. Concrete statistical evidence suggests that there could be more to this market than the official statistics suggests".

And the Chief Economist of the Old Mutual Asset Managers says he has two reasons for suspecting there is some undercounting that is going on. He says the first is that the VAT receipts, Treasury's VAT receipts, a fairly concrete and broad-based indicator of spending levels in the economy, are growing faster than nominal Gross Domestic Product (GDP). And they say, while the latest figures from Treasury show that VAT receipts grew by 14% year-on-year between April and August, nominal GDP grew by 9%.

He says the second piece of evidence is the growing gap between the two official estimates of the size of the economy, one of which measures activity from the production side and one of which looks from the expenditure side. And then says, if you look at those figures, if you take, for instance, the Second Quarter that I have just mentioned of 2005, if you took the production side, growth was reported to be 4,8%. But if you look at the expenditure side, growth was 6,1%.

There is an argument here as to why the expenditure figures would probably reflect a more accurate picture of what is happening to the South African economy.

Now, I am mentioning this matter about the missing millions and the undercounting, the underestimation, to give Your Excellencies a sense of the confidence in government, that indeed these targets we are setting ourselves with regard to the possibility of raising the levels of growth of the South African economy, are realistic. As a vote of confidence in government, this is not a pipedream.

With the economy performing as it is, as robustly as it is, there is still a possibility of the underestimation of both the rate of growth and the size of the economy. We believe that the various interventions that we are talking about would result in these higher levels of growth that have to be attained. Of course, all of us know that basic to this matter, it is just not a matter of pretty figures. It is questions of generating the resources to address issues of poverty, expanding the economy so that you create larger numbers of jobs and so on. These are matters that are very directly related to the issue of improving the conditions of life of the people.

And among the positive things that gives the government the kind of confidence that we have is the way the public finances have been managed.

The worry that we have now and this will be reflected by the Finance Minister when he presents the Medium Term Budget Statement later this month, is the problem of underspending. We had planned for a budget deficit this financial year of something like 3,2%, in order to generate these additional funds to put into the development processes, but it is clear that that deficit is going to come out lower than that, as a result of, partly public spending, partly very significant overruns with regard to revenue collection.

And those overruns with regard to revenue collection again reflect the fact that when we made the estimates of how fast the economy was growing, how big it was, when we said what revenue was, would be at such-and-such a point, that too was underestimated; because the economy is producing more revenues. Sure, there is better collection.

But, we are seeing a combination largely of the larger revenues and the underspending, is going to result in a budget deficit much lower than we had planned it to be. What that means is that there are funds in the Fiscus which can be committed to this objective of attaining this higher growth rate that I am talking about. I will come back to that matter as to where the problem lies.

I think you also have seen that the public sector companies have themselves announced major plans in terms of investment in the economy. It is particularly important because of the role they play. If you take the transport sector, the railways, harbours and airways and so on, Transnet is of course a dominant company in these areas. And I think I had mentioned this thing last time we met, that part of the problem is that because of underspending in the infrastructure with regard to that logistics system over many years, the growth of the economy has caught up with the logistics system, so that it becomes a block in terms of further growth.

I was told earlier this week that, for instance, regarding one of the steel producers here, at any particular time, we have in our harbours something like double the amount of steel, double the amount of steel that they have in the steel mill. It shows the blockages in the harbours in terms of moving these products out.

So, I am saying that we are in particular concentrating therefore on this matter of investment by the public sector companies, Transnet, Escom and so on. That also, of course, includes the public sector financing institutions, Development Bank of Southern Africa, the Industrial Development Corporation and the Land Bank, so that the public sector must make this contribution to raising the rates of investment in the economy.

I think what you would see happening, therefore, is these larger volumes of investment by the public sector, both coming out of the Fiscus and coming out of the public sector companies in all sorts of things. Infrastructure, whether it is economic infrastructure or social infrastructure, will be one of the principal elements with regard to driving that higher growth rate, the larger volumes of investment into the economy. So, we are focusing on this particular matter quite closely to see what it is that needs to be done.

Of course in this process we are interacting very strongly with the private sector, again focusing on the matter of private sector investment, increasing that. And, in part, it means looking at some of the companies that are cash flush, because we think you still have a certain level of hesitation, of caution, amongst some of the companies, who maintain large cash balances.

Maybe they are uncertain about what is going to happen to the currency or some other reason, but certainly have the capital to put into the economy. So, part of the discussion that we are having with them, with the private sector, with regard to addressing this matter of higher growth rates, deals with this: what should happen with regard to them investing such capital as they have and therefore, playing their own role in terms of raising levels of investment in the economy.

It is in that context that you might have seen reference now and again to an issue, for instance, like import parity pricing. And steel has been mentioned in this case and chemicals, because the steel, for instance, that people buy here is priced as though you are, for instance, buying it at the London Metal Exchange. And never mind that it is produced here.

So there is discussion going on about this question, steel is very important with regard to all sorts of areas. The automobile industry, which is growing very rapidly, requires steel at competitive prices. There is a lot of infrastructure development that is going on in the country. There is more infrastructure development that is going to go on in the country that requires steel. So there is a big demand for steel and the issue to address is availability of that steel, both the quantities of the steel and the pricing of the steel.

And we believe that we will reach an agreement with the steel producers, chemical producers and so on, to impact on the downstream with regard to this, so that people who use steel, so that somebody who produces nails, nails that you need in order to nail down a roof, are able to buy that steel at competitive prices. So, I am indicating that just as an area, an indication of the kind of detail that we are getting into in order to move towards these higher rates of growth. I know that many of you pay for telephone calls. So, because of telecommunications, it would be a matter of concern to all of us in this room.

And that, again, is a matter that we are looking at, because it is quite clear talking to, for instance, our International Advisory Council on information and communications technology (ICT). Members of the Advisory Council raised this matter very sharply, of the costs of telecommunications here and say that, for instance, relative to Europe, South Africa could attract a lot of jobs with regard to outsourcing of various services, which now are outsourced to India and all sorts of other places. But because of the time difference or no time difference, some advantages are to have here. What blocks an expansion in that sector are the costs of telecommunications. So that again is a matter that we have to attend to. It impacts on the possibility of the growth of various sectors of the economy.

Early next month, in November, we would be commissioning the Southern African Large Telescope (SALT), out there in the Northern Cape. It is the largest in the Southern Hemisphere. The equivalent size is a telescope, which is in Texas. It is a bit older. And therefore, this one has some capabilities that the Texas one does not have, just because of the years. An interesting thing that has arisen with regard to that is the same matter of telecommunications. To exploit fully the capacity of this extraordinary scientific centre, you need the necessary broadband, connected to broadband that SALT would do lots of things. But it would not if it did not have access to the broadband. So, we are attending to that.

Again, I am giving that as an example of the things that we have to do, which really, in reality, address the matter of the cost of doing business, whether it is by way of these inputs like steel or telecommunications or other costs, which I will mention just now. Therefore, while we attend to the problem, as we say, let us increase the rate of investment by the public sector, let us increase the rate of investment by the private sector, identify the particular sectors of the economy on which we should concentrate and address the immediate urgent problem that arises, which is a problem of skills.

It is perfectly obvious that there are many skills which we do not have in this economy, which are in great demand and that demand will increase as this programme escalates. So, one of the decisions that we took in terms of the current budget, the budget of the current financial year, was that we needed to sharply increase the spending on colleges of further education, the vocational colleges, to train the artisans.

In terms of the division of tasks, these colleges actually fall under the provincial governments. But when we looked at the matter, it became clear that the national government had to play a bigger role with regard to this. So, that is why we allocated larger funds to these colleges, so that you produce these artisans that the economy clearly needs.

But there is demand also at the upper levels, for instance even the big companies, if you take the state companies, even they have had to look at the matter of the training of project managers, partly because for many years they did not undertake large investment expansion programs. Some of that capacity to manage big projects of course gets lost. You can imagine what happens at other levels of government in terms of availability of that kind of skill.

So the matter of addressing the skills shortages becomes one of the critical factors on which we have got to act and to act together with government. Our German partners have been raising this matter with us actually for quite a long time. That, if you look at the German system of training of people, what we are doing here, would not meet the demands of the economy.

We are trying to correct this and therefore, it means marrying better your formal education like your schools with industry; that means a better integration in terms of that. So you produce the kind of person, the person who is actually needed by the economy. So that skills matter is an important one.

We have been looking at what else needs to be done with regard to the development of small and medium enterprises. I am quite sure that if you woke up any Member of the Cabinet in the middle of the night, even the Foreign Minister and said, what are the problems, what are the obstacles to the development of small and medium enterprises, she would tell you, because of the regularity with which we have looked at this matter, what is it that we need to do. Access to capital is an important problem as well as capacity to manage, to run and manage a successful business. That is a problem which requires incubating people, mentoring them, giving them the necessary support, even if they have the capital, to make sure that they succeed.

So, there is a lot of work that is going on to change the manner in which we would be handling this aspect of our work. And part of what we have found is that the people who need, people who are most disadvantaged, are people who would need capital ranging from R10 000, R20 000 to about a quarter of a million. There is nobody servicing this particular group. So we are focusing on that.

And I must say, with respect to that, there are some very interesting experiences from the private sector, some of which some of the larger companies have been involved in. Where they would, for instance, whereas before they fenced their own properties using in-house capacity, they decide we are going to access that service from somebody else. And so they would then say, you are going to fence our properties and we will help you to build a company which will fence our properties. Incubate them, assist with capital and all that, I am talking about the specific example, for instance where that particular company now has become a general fencer. They do all sorts of fencing, fences types and security types and so on. But they started off like that, with a guaranteed market, with capital, with incubation and have managed very successfully.

So, even the government is therefore looking at questions like, what are the ten most frequently bought goods and services by the government. And then we will say, with regard to those ten most bought goods and services, why then don't we encourage development of small and medium business to supply those goods and services, which is then going to require the necessary incubation and support and so on. But you start off by guaranteeing them this market, which is established within government and then you do the rest. And that of course, will also include the matter of Black Economic Empowerment (BEE).

The government is very firmly of the view that when we talk about BEE we should talk about such empowerment as helps the economy to grow. There is empowerment that people engage in, but that is private sector people getting into their own deals and so on which have nothing to do with government, where they might buy existing equity, existing assets and then do whatever. But from the government's side, we are saying that our interventions with regard to this matter of BEE ought to focus on development of the business sector that adds to the growth of the economy, rather than just be acquiring existing wealth.

I am mentioning all of these various elements to say these are some of these things that we are doing, targeted at this higher growth rate. And, given the availability of the resources, certainly the capital resources, we think that the capital resources are there in the South African economy to address this. There will be these other resources that are not there, as mentioned, like skills, like business experience and all of that and there will be the constraints, costs of doing business and so on.

I think that what you really see, certainly what you will hear, is all of us talking very much about this. It is necessary and it is possible to raise the rate of growth of the South African economy to significantly higher levels than we have reached so far. It can be done. It must be done. That is the principal matter of focus of government activity.

The second question that we are paying a lot of attention to is related to what I have just said "the matter of the capacity of the state. It is quite clear that we need to do a lot of work in this area, in part because of what I have just said. The public sector has a very important role to play with regard to achieving these higher rates of growth that I have been talking about. But does the capacity exist?

The last municipality I went to was in Kimberley, I was telling the Ministers the story the other day, Frances Baart District Municipality, with five local municipalities. And in one of these municipalities because of population growth the sewage works has become too small for the population that has grown in this area. So five years ago a decision was taken to build a bigger sewage works five kilometres away. So the site was identified, money allocated to do this, and five years later, not done.

And in the meantime what had been happening is that both the Department of Health and the Department of Water Affairs are complaining because it is spilling into the water system. And so when we were discussing this matter with the mayors there, to say "but why haven't you done this, because the money is there, the site is identified and so on", the problem was that the District Municipality did not have the capacity to do an environmental impact assessment. So, it had not been done and indeed, could not be done.

We had to take a decision there that the matter had to be dealt with by the provincial government and discovered in the course of that that the provincial government itself had very little capacity to do that environmental impact assessment and that is all that had stopped the removal of the sewage works from where is was to another place.

I am giving that as an example of this issue I am talking about, about the capacity of the state, the capacity of government. It is clear therefore that the weakest area with regard to this is local government. And so we are indeed paying a lot of attention to this issue. And I think, in essence, the problems are basically the same. I am not talking now about the big metropolitan municipalities like here or Johannesburg or Cape Town, but the rest. You do not have sufficient supply of the skills that you need, whether it is engineers or project managers or financial managers, these sorts of people.

And therefore, with all of the load of work that even our Constitution puts on the shoulders of local government, the capacity of local government to do the things that they are supposed to do is not there and impacts, therefore, very negatively on addressing all of these challenges that we are addressing, whether they are matters of growth or matters of improving the living conditions of the people.

We are looking at the same matter with regard to national government too. One of the departments that we had looked at already is Housing. We find that you have something like 70% understaffing of the Housing Department nationally with regard to various skills, the professional skills, the technical skills. So it is clear that in order to improve the capacity of government, so that government makes this necessary impact with regard to changing the lives of the people for the better, this issue of skills, even in the public sector, as is the case with regard to the economy, this is a critical matter.

We have changed the immigration law and the regulations and so on and indeed therefore, one of the things that we are hoping for is that it should be possible to attract skills from other parts of the world, even as we are trying to build up our own capacity here.

But there is another big area of work that the government is going to be concentrating on " this matter of improving the effectiveness, the efficiency, the capacity of the public sector to be able to do the things that it must do. I think I can mention this, one of our provinces did an audit of the management echelon at local government right throughout the province just to assess competence, capacity to manage of that management echelon and got one of these companies that do this kind of work to do this assessment. And on a scale of one to five, with one being the worst and five being the best, they came out that echelon of municipal management in the province 1,6. That is the levels of capacity out of five. But it told that story about what needs to be done with regard to this matter of the capacity of the state.

Therefore, to attend to all of these matters of local development, when we say that you need to build houses, you need to build homes so that you close down the shacks, you need roads, you need to move a sewage works from here to there, and all of this requires that we improve this capacity of the state. And of course that also includes coordination between the different spheres of government. That is a major area of work in which the government would be focusing, as I was saying, in the medium term. Not only local government, but also provincial and national.

There is an issue that we have to come back to all the time, which is the issue of corruption. The government is concerned about this, because it seems that in society, generally, many people are driven by a value system which says a successful person is a person who has a very nice Porsche, an expensive car, a very nice big house, dresses better than the President and so on.

So, this drive, this focus which leads people to want to get access to wealth as quickly as they can, can have very serious consequences in terms of society in general but government in particular. So this is a matter that we want to come back to quite regularly to test whether the structures and processes and procedures in government are adequate to deal with this ,Äî what is that we need to do to improve? What is that needs to be communicated regularly, publicly, to form the public mind with regard to this? All of these questions.

It is an issue that I am sure you will hear many of us talking about quite regularly and hopefully doing something about it quite regularly, so that you do not allow this kind of perspective to take root in society, that I occupy a particular place in structures of power and the fact that I occupy that place must mean that I have therefore access to resources.

As of course you would know the other area that we would continue to pay a lot of attention to is the African Continent. There is as you know something called the African Partnership Forum, which is the New Partnership for Africa's Development (NEPAD) steering committee and our development partners. They just had a meeting in London last week which was intended to follow up on the Gleneagles G8 Summit to focus specifically on practically what do we do in the aftermath of that Summit. So the decision that was taken was to establish a six-member task team to do this detailed work. On the developed side it is the current Chair of the G8, the United Kingdom and the next Chair of the G8 which is Russia and the Netherlands and on our side of course it would be the Chair of the Steering Committee.

Now this task team of six has the job to look at what the NEPAD Steering Committee has done, to elaborate specific programs and projects, because the framework, even of Gleneagles, is a framework that had been agreed to, for some time already. It was a framework that was agreed in 2002 in Canada. Now we got specific sums of money mentioned, about growth and aid and all of that. So, in that context specifically, what do we do about this totality of matters?

I am mentioning this to say that must be part of our focus on the African Continent, which is to take the NEPAD process forward to the implementation stage and hopefully that task team of the African Partnership Forum will produce that kind of practical result with actual resources committed to specific projects. I must mention in that context that we are hoping that before the end of the year we ourselves, as the African Continent, would have established our own development fund.

We discovered, maybe this is the right word to use, that for instance, the South African Government Employees Pension Fund, the South African Government Employees Pension Fund, is worth over $60 billion, that is a big fund. And you would find other similar funds around the continent which are smaller, but significant and of course, part of the pressure that then arises is that for some of those funds, which include the local one, the domestic markets become too small. And you have some African funds that I know, for instance, that have got money invested in Europe because their own countries cannot cope with those volumes of capital. So they are talking among themselves, the African pension funds, to say but there are a number of projects out of the NEPAD process on the African continent, why are we taking this capital out of the continent whereas it could be invested in Africa in terms of the pursuit of NEPAD programs.

We are hoping that it will be possible to launch that African Development Fund using the African pension funds before the end of this year. I should indicate that fortunately a number of other pension funds around the world, particularly the United States, have indicated their readiness and willingness to partner and to put resources into such a development fund here. The focus therefore on these NEPAD programs would be one of the matters that we will have to attend to as would be the continued focus on the issues of peace and stability on the continent, issues of the strengthening of the institutions of the African Union, so that the continent has the capacity to do the things that it has to do.

One of the matters that the task team of six, decided by the African Partnership Forum, will be to look at the peace question, the peace and security question, because, again, as Your Excellencies would have seen the communiqué of the G8, they spent a lot of time, gave a lot of space to this issue of peace and stability on the African continent. This is because we had been discussing, interacting with them, for a long time on this issue and you would see that that communiqué has actually got a lot of detail of what needs to be done to increase the capacity of the continent to deal with matters of peace and stability. And therefore this task force of six would help in terms of ensuring that there is allocation of the necessary resources so that that work is actually done.

Maybe the last thing I should mention which is an area of importance is of course the reform of the United Nations, including the Security Council. Again, Your Excellencies are aware of the expectation that has been at the Summit last month in New York. We did not quite get to where we thought we would get to with regard to this matter of the reform of the United Nations which we believe remains an urgent matter. The Prime Minister of Sweden has taken an initiative to put together a number of countries, the Foreign Minister, Dr Nkosazana Dlamini Zuma, is better at arithmetic than I am, how many countries was it? Eighteen.

Eighteen countries joined from all continents, that would, as a task team, really look at this matter again, to try and give some impetus to assist the General Assembly. And so, we will be participating in that work and we thought it was an important initiative on the part of the Swedish Prime Minister and hope that that will, as I was saying, add some impetus to this matter.

And lastly of course, there is an issue that is outstanding and pressing, of the World Trade Organisation (WTO), the Ministerial Meeting in Hong Kong in December, which we hope will produce some results. And I think that everybody would say we cannot afford another failure. We discussed this matter I think, again, the Ambassadors and High Commissioners would remember that one of the meetings at Gleneagles was the G8 Plus 5 Meeting, which was the G8 plus Brazil, India, China, Mexico and South Africa. Of course at that meeting, also the Secretary-General of the UN was there, the Managing Director of the IMF, the Director-General of the WTO, the President of the World Bank, were all there.

So this matter did arise and again, everybody was of the view that it would be a disaster for the Ministerial Meeting in Hong Kong to fail. And therefore something needed to be done in regard to all of the matters, the principal outstanding matters, agricultural subsidies and so on. So I am sure that there would be some continuing interaction among that Group of 13 countries to see what they could do collectively to make sure that we do not have that failure. That is a matter that we will continue to engage because obviously it is of critical importance with regard to the larger development challenges of the developing countries and of the African Continent.

These are some of the principal directions of the work of the South African government in the medium term, well, in the immediate and the medium term. And hopefully we will be able to make advances in all of these areas.

Thank you very much.

Issued by: The Presidency
13 October 2005