How are South Africa's leading companies responding to momentous change? Dr Fauconnier, Deputy MD of Iscor Mining, gives a business leader's perspective on the new era.
As one of the largest companies to undergo privatisation in South Africa, can you tell us about the challenges faced by a company in transition from state corporation to a privatised business?
The first point is that privatisation of a large state corporation like Iscor can be done successfully. I personally believe Iscor set the trend in South Africa to show privatisation can and should be done.
As far as challenges go, the over-riding one is the management of change. Iscor is a large company, and when we privatised we had 60,000 employees. To take so many people with you into a new era is no small task. So the management of change is something you have to pay a lot of attention to.
Coupled with that is the aspect of skills development. Many of the state corporations in South Africa are not commercially inclined like companies in the private sector, so one needs a lot of skill development in the commercial field, because that's where one starts feeling the pinch very quickly after privatisation. It was one of the areas Iscor spent a tremendous amount of time and money on to make sure we got the necessary skills to take us through to the new era.
On top of that there is the need to be competitive. It's a competitive world out there and you no longer have a big daddy looking after you in terms of the Government, so you need to be competitive to survive.
As an indication of that, before privatisation we had almost 60,000 people on the payroll, whereas now we have only about 42,000 people, and that has happened over the past eight years. That's not the only way, we have also achieved some growth, but some rationalisation was imperative. The interesting thing is we've been able to do that without having lost a single shipment due to strike action. It's one of the big challenges you face, to pick up competitiveness and move people down that road with you.
What lessons have you learnt that other companies facing privatisation can benefit from?
We've learnt that the whole process of change is a huge one. In the case of Iscor we not only changed from state corporation to private sector company, but we did that when South Africa was undergoing major change and also internationally there was a lot of changes on the mining side as the industry opened up after the collapse of the Soviet Union. It's quite difficult to handle that without consciously paying attention to the change process. One of the lessons was to make use of change agents, including outside consultants, because you can't expect the old dispensation just to be able to handle all of that change just by itself.
The other thing is to eliminate unproductive segments through 'unbundling' - maybe someone else can make a lot more out of it than you can. Communication with the outside world throughout the process is also important.
You mentioned a major reduction in the workforce. Is that sort of 'sacrifice' inevitable in the privatisation of such a large state corporation?
Well it's difficult to generalise, but to a certain extent it is inevitable. The state and the private sector approach their business differently. The private sector has to be competitive, so as a general rule you'll find in state corporations some trimming is necessary. But in order to mitigate the final effect of that you can take two approaches. One is to expand the business to create more job opportunities, which is exactly what we're trying to do. But inevitably you find areas that are not performing up to the standard necessary to survive, so you have to look at trimming back.
In that case you have to use programmes that will minimise the effect on your people; use the natural turnover of retirement, leaving the corporation, and so on. But where there are occasions where that doesn't suffice, then obviously you have to negotiate a package with your people that will be beneficial to them while achieving the end results of the corporation.
Isn't that the best way to avoid industrial action as well?
Yes, I must say that I think the way Iscor has achieved it proves it can be done, but you need to take people along with you. Communication is very important; communication with your own people and communications with the outside world as to what you're trying to do. You also need to listen to advice from your own people and outside as well. We spent an enormous amount of time with the unions, and used various mechanisms to overcome what is normally a traumatic time in any organisation's life with the least amount of hiccups.
Why have you moved from your core business of steel production into mining, at a time when a lot of African mines are going bankrupt?
I think in the first place, you'll find that a lot of the mines that have gone down the drain in Africa are as a result of mismanagement, rather than not being inherently good mines to be involved with. But in Iscor's case, yes, we came in as a steel producer. Over the years we reached a very dominant position in that sector, so that we now provide about 75 per cent of the steel sold in South Africa. Now once you've got 75 per cent of the market in your home base, your prospects for growth in the future are not that great. So on the steel side we've moved away from a volume growth strategy to a value growth strategy.
Over the years we've also built up a very substantial mining capacity which not too many people knew about. Since privatisation we've got some of the biggest mines in Africa, and that coupled with all the new opportunities opening up over the world - particularly in the mines of the old Soviet Union and opportunities in Africa - that's created the view in our company that we need to expand our mining business.
How are you responding to environmental concerns about your mining and production activities?
We recognise that we're involved in activities that have potentially harmful effects on the environment, and we certainly go out of our way to limit them. On the other hand it's very important to strike a balance between the economic needs of the country and the protection of the environment - not only from a humane point of view, but also in the sense that the detrimental effects of poverty on the environment itself is something which people don't always take into account. If a person hasn't got food to eat or something to keep them warm with, they will take something from the environment that may have a damaging effect - for example, they may cut the trees and sell them off. If you look at that the detrimental effects of poverty compared to what a responsible industry would do to the environment, one has to weigh them up. That's the sort of balance we're trying to keep.
Is your industry in general adopting a similar approach?
I think the industry in general, certainly in South Africa, is looking at the problem along similar lines. We've done a tremendous amount in South Africa to upgrade our approach from the mining industry side towards the environment. There is legislation that was sorted out by the industry working with the Government; the coal mining industry is a good example because the rules and regulations there were developed in this way.
The other point is that South African companies working beyond our own borders encounter developing countries where there is no environmental legislation. Our company's approach is that where there is no legislation, we will apply the same standards outside our borders that we apply in South Africa.
Does this commitment to a responsible approach to the environment push costs up, and make it harder to compete?
It's possible, but we try and persuade the authorities of whatever country we're working in that the approach we're taking is the right one, rather than allowing people to come in and take from the land what they can and leaving behind an environmental mess.
We've also been seeing a lot more of that in terms of funding, where people are looking to some of the multi-lateral agencies to provide some of the funding for projects, and unless you have an environmentally responsible programme you won't secure it. That's a good thing, because it will prevent people from doing too much harm in countries where the legislation is not up to internationally acceptable standards. I think in the long-term it's the responsible way, and also people will eventually put a premium on dealing with companies that adhere to these standards.
How does the Government's GEAR policies affect a company like Iscor? And are you happy with the effects GEAR is having on industry?
Any sensible programme aimed at achieving a six per cent growth rate and of creating 400,000 new jobs by the end of the century deserves support from all South Africans. From our point of view, GEAR, if successful, provides the sort of impetus that companies in general need. The business community supports GEAR because we believe it sets up the right macroeconomic environment for business to prosper but also to attract direct investment.
But what concerns us at the moment is the speed at which the GEAR policies are being implemented. And there is also some evidence that it is not always being implemented in a fully co-ordinated way, so you sometimes have contradictory policy measures. For example the DTI is taking measures to improve the competitiveness of our business, while on the other side the Department of Labour is coming up with policies and laws that may have the opposite effect. At the moment, there is quite a scrap going on between the unions and Business South Africa around the basic conditions of the Employment Act, which is in a draft form at the moment. If you are not careful, what you build into your labour laws may work against some of the aspirations you have via your Department of Trade and Industry. We just feel the Government should ensure that all these new laws and initiatives are pointing in one direction.
What are you worried about specifically in the proposed labour laws?
I think if you get tied too tightly into some very specific things on the basic conditions of the Employment Act, you may find it reduces the flexibility of the labour market. Minimum wages, for example, is one of the things the unions are going flat out for, and the number of working hours per week. One should be consious that your labour laws ultimately affect the aspirations of the country to grow and to be able to provide jobs for the people.
Why are you and other leading South African companies crying out for greater direct foreign investment?
Direct foreign investment is the type of investment South Africa requires, because it contributes to job creation and it will help to raise the global competitiveness of our products and services. As opposed to portfolio investments, where when things are going right the money flows in and when its going wrong it flows the other way around. What we're really looking for is those investments that tend to be around despite what the state of the economy is.
The chief argument for direct foreign investment is that it provides more stable financing. Also direct foreign investment creates spin-offs, like new technology coming into the country, new managerial skills, and generally it provides a platform to expand capacity to support growth. That's why South Africa is working quite hard at it, and should work even harder.
Do you mean the Government could do more to encourage it?
Well obviously the Government lays the foundation, and I think the GEAR programme creates a sensible platform. Business has a role of course, but unless the enabling environment is there it's not easy to convince the investor that they can invest their dollars in this country and they will be able to take some of the fruits of his investment out of the country to justify it.
So the Government has to ensure we have investor-friendly policies and procedures in place. We think GEAR will provide for it, but it's been a bit slow getting going. We'd like to see it being stepped up a gear or two.
Returning to the issue of industrial relations, do you think foreign companies or investors need to worry about this issue in South Africa any more?
Generally the industrial relations situation in South Africa is not that bad. We have a new Labour Relations Act that came in last year after protracted negotiations between business, the unions and the Government. The Act is fairly accepted across the country as a result. So generally it's moving in the right direction.
From your experience, did you find that the unions are pragmatic even in a situation where jobs are going to be lost?
Given the sort of difficult time we've been through one would have anticipated more difficulty than we had. But I put that down to the process of lengthy discussions, to our policy of laying our cards on the table in lengthy discussions, explaining what you're trying to achieve and why you're trying to achieve it. If you deal with the problem like that you can win the support of the people, despite the difficult decisions you have to contend with.