Informed people live longer
20 January 2018 22:42 (South Africa)

Op-Ed: A happier marriage between government and business?

  • Dirk de Vos
    Dirk de Vos

    Dirk runs a corporate finance and advisory firm, QED Solutions ( out of Cape Town.

  • Business
Photo: Pylons carry electricity from South African power utility Eskom's Koeberg nuclear plant near Cape Town November 28, 2015. REUTERS/Mike Hutchings

An important feature of Finance Minister Pravin Gordhan’s 2016 Budget speech was the call to develop partnerships with business and the private sector. Prior to the speech itself, Mr Gordhan and President Zuma held high level meetings with so-called business leaders in an effort to kick-start economic growth. Is it time to revisit the relationship? By DIRK DE VOS.

The budget speech itself contained numerous references to business and the private sector and the need for a “wider base of spending” (i.e. private sector spending) on a range of projects, including infrastructure. Even in respect of State Owned Enterprises, the Finance Minister spoke of the requirement of effective co-funding arrangements between them and other investors” - the privatization that dare not speak its name? On the face of it, private sector investment levels are exceedingly low so there might well be scope for a lot more of it.

The speech specifically mentioned where this partnership had already successfully happened: the renewable energy procurement programme and that this provided a platform for further developments. To get this underway, we are told, national government is confronting a thicket of uncertain policy uncertainty, contradictory legislation and regulations that create multiple bottlenecks in the system. Importantly, the Finance Minister wants to be firm on widespread corruption to address declining confidence and the retreat of capital and to “combat emerging patterns of predatory behavior.”

It is hard to overstate how poorly South Africa has performed in implementing previous government policies. And since very little in the way of policy and legislation gets implemented, we produce very poor outcomes. The poor outcomes then demand additional attention of the government which responds with more policy (there are 3 main strategy documents relating to the economy, including the NDP), new specialized ministries (there are 3 separate ministries in addition to Treasury that deal specifically with the private economy; 2 dealing with telecommunications and broadcasting) and evermore legislation. At the same time, important legislation like that which governs our most important sector, mining doesn’t get passed for years on end. As we go on, compliance costs grow without end.

Much has been said about the December “raid” on Treasury starting with the firing of Nhlanhla Nene which ended up with Pravin Gordhan being re-installed as finance minister. Exactly what happened is still not clear but the best analysis must be the one done by former Business Day editor Songezo Zibi because he provided us a context in which all this occurred. He reminds us too that the problems that cabinet and others have with Treasury are not new. The complaint is that Treasury operates like a state within a state. Mr Zibi quotes a senior official thus: “They appear to decide on their own what the rest of the government should do; they are also not willing to submit to the Cabinet collective”.

There appears to be consensus that the failed raid on Treasury and its aftermath has increased its standing and that Minister Gordhan is unfire-able and very much in charge. While most welcome this turn of events, it might not be the best outcome if Treasury does not look within itself and examine how it too is also part of the problem.

While Minister in the Presidency, Jeff Radebe, might be making progress with his job of slashing red tape (there is just so much to do), important legislation over which Treasury has oversight, makes collaboration between all spheres of government and business very difficult. It may be time to have a look at the Public Finance Management Act (PFMA) and its equivalent for our municipalities, the Municipal Finance Management Act (MFMA).

A review of the PFMA and MFMA is different from other legislation because these Acts are required by the constitution. The constitution’s Chapter 13 (sections 213 – 230A) is where all the action is. It deals in some detail on taxing powers, the financial management of the whole state and distribution of funds across the different spheres of government. If the complaint is that Treasury operates as “a state within the state” it is because the constitution, in section 216, mandates that it is so.

Similarly, the PFMA and MFMA is legislation mandated by several sections in Chapter 13 of the Constitution. However, both these Acts, which give expression to the basic constitutional mandates are very detailed and dense pieces of legislation. As rising levels of corruption pervade our state, one is inclined to respond with more detailed legislation protecting the public purse that makes this type of predatory conduct or other forms of state capture harder. Paradoxically, it may do just the opposite. The PFMA has been with us, largely in its present form, since 2000 and the MFMA since 2003. Despite that, corrupt practices are now a pervasive problem.

The extremely high levels of compliance and exhaustive procedures put in place by the PFMA and MFMA legislation stymie even legitimate but non-compliant expenditure. Over time, government officials work out where the various loopholes are that permitted departures and so on. The legislation in question also requires highly competent and skilled oversight. In many parts of government, this monitoring function simply does not exist and combined with the pervasive politics of patronage, the inevitable feeding frenzy goes on unchecked.

It is only in South Africa that government bodies are subject to something called a “clean audit”. The rest of the world uses the unqualified audit as the top measure of compliance. In a very interesting piece, Western Cape Premier Helen Zille, describes the unintended consequences of this additional requirement on service delivery and innovation in government. It is interesting beyond the fact that it might be one of the few things that Premier Zille has written of late with which many ANC politicians might agree. In it Premier Zille points out that when World Cup stadiums had to be built on time, all levels of compliance and oversight had to go.

If one looks at the Auditor-General’s most recent report for bodies falling under the PFMA less than 30% received a clean audit although just under half got an unqualified audit. For MFMA clean audits represent less than 20% of all auditees (mostly municipalities) but just fewer than 60% got unqualified audits. Failing to achieve clean audit is the general picture. But if clean audits don’t measure how effectively money was spent (audits don’t do that), then surely limited resources ought to focus on getting auditees with qualified, adverse, disclaimed reports, or those who don’t even produce accounts, up to standard. One can be sure that it is there that widespread looting is on the go.

Consider then South Africa’s renewables programme. It has an outstanding record of success in unlocking private sector investment and is now presented as a model for public private partnering. Since 2012, more than 92 renewable energy projects have been awarded in five bidding rounds representing a total investment of over R190 billions, of which over R50 billion is in the form of direct foreign investment. The only limit to further growth is the ability of Eskom to connect more of them.

The elements that combined to make South Africa’s renewable power programme (REI4P) a success and in particular, its ability to unlock private capital and its lessons is very capably described in a World Bank-sponsored report co-authored by UCT’s Professor Anton Eberhard. Of course, there are several factors that all played a part but one of them is interesting. None of the procurement processes happened in terms of the PFMA’s applicable provisions on these types of investments. Instead, as the paper states, a regulatory review determined that the REI4P would not proceed in terms of the MFMA dealing with Public Private Partnerships (PPP), the regulations for which are set out in gazetted “Regulation 16”. Regulation 16 sets out best practice but also require a complicated, time-consuming and expensive process reviewed by a series of expert consultants using specialized analytical techniques to confirm value-for-money. These PPP regulations include 24 elaborate preparation steps, as well as requiring four “opinions” at different stages irrespective of the size of the project.

The REI4P sidestepped this overly cumbersome process via a legal fiction that held that because Eskom signs the power purchase agreements with private operators, it is a state-owned enterprise and not a government agency, so not subject to National Treasury’s PPP regulations.

The problem with all this is that the whole programme exists via informal ad hoc arrangements. Perhaps the programme can be extended to base-load power stations as Minister Gordhan said they would but what about other sectors? The collaboration we say we need confront precisely the same hurdle that the REI4P had to avoid for it to have worked as it has done.

It is not just at the national level. One feature of the 2016 budget is the expenditure cut backs to provincial and local government. This means that municipalities will have to look where they can save money. Low hanging fruit for local government is the amount they spend on energy. Research shows that savings of 15% is easily achievable. One way to achieve these savings is to contract specialised Energy Services Companies (ESCo’s) who come in, make (and sometimes pay for) the energy savings. Some of these contracts can be structured so that there is no financial commitment from the municipality. The municipality and ESCo simply share in the savings.

However, big savings, beyond light bulb and other obvious steps might require reconfiguring buildings or putting in new equipment and so require contracts that last for as long as a decade. But any contract that last longer than 3 years needs to go through an arduous process prescribed by section 33 of the MFMA. Treasury realised this and produced a guide for municipal managers to get these types of projects approved. It’s a good document but it is 117 pages long. The result of this is that despite huge concerted efforts to promote energy savings via ESCo contracting, not much has come of it even after a decade of trying.

Nothing suggests that Treasury should drop its standards or undertake a wholesale revision of that legislation for which it is responsible. The constitution does not allow for it in any event. Further, we can be sure that the debates about the proper place of the private sector in any collaboration with government or state owned enterprises will be fiercely contested. Those debates must be had. But if business is to be invited in as a partner, the least we can expect from Treasury is that it plays its part in making government a partner with which the private sector can do business.

Of course, Treasury must also strongly resist a further decent into corruption and state capture by ensuring that those tasked with spending public funds do so effectively in a country with so many competing needs. But in doing so, Treasury might also heed one enduring criticism of the IMF’s structural adjustment programmes: that they are too rigid, rule bound and do not take sufficient cognisance of actual conditions on the ground. DM

Photo: Pylons carry electricity from South African power utility Eskom's Koeberg nuclear plant near Cape Town November 28, 2015. REUTERS/Mike Hutchings.

  • Dirk de Vos
    Dirk de Vos

    Dirk runs a corporate finance and advisory firm, QED Solutions ( out of Cape Town.

  • Business

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