Opinionista Mzukisi Qobo 27 February 2018

Governance of State-owned Enterprises: Reforming the unreformable?

In countries where State-owned Enterprises are not performing well, including South Africa, the problem is less to do with the fact that they are in public hands as opposed to private ownership. It is about how they are governed. If the quality of ministers that appoint boards of SoEs and who perform oversight role is poor, state entities will under-perform.

Reform of State-owned Enterprises is one of the major themes that President Cyril Ramaphosa underlined in his State of the Nation Address two weeks ago. It also featured in Finance Minister Malusi Gigaba’s Budget speech. The failure of various SoEs during the past 10 years has had a negative effect on public finances and economic growth. Developmental opportunities have been missed as a result of misdirection of resources away from creating value for the South African public to fattening the pockets of a few cronies linked to the governing party.

There are four illnesses that plague South African SoEs: Governance failures, lack of strategic perspective and weak developmental mandate, poor understanding of government’s oversight role and weak policy regulatory environment, and operational inefficiencies.

No doubt, many of the problems facing SoEs in South Africa today predate the Zuma era, but the condition of these entities has worsened in recent times. Earlier attempts at restructuring of SoEs by former Minister of Public Enterprises Jeff Radebe in the late 1990s did not yield much developmental dividend. That period was characterised by lengthy debates about whether privatisation is the appropriate route for many of these, and how to define what is core and non-core.

Similarly, Minister Alec Erwin – Radebe’s successor – failed to make any leap in setting a strategic direction that would turn many of these entities into world-class SoEs that create value for South Africans. Only Telkom has managed to turn the corner.

Malusi Gigaba and Lynne Browne’s tenure can be characterised as nothing short of disastrous: they presided over corporate governance failures at SoEs such as Eskom, South African Airways, and Transnet. Effectively they facilitated the capture of these entities by corrupt elements, and allowed financial mismanagement to flourish. As such, public resources have been used to prop up some of the failing SoEs.

Development Thrust of State-owned Enterprises

When SoEs first came into existence nearly a century ago, first with the establishment of the South African Railways, followed by Escom (now Eskom) and Iscor in 1922 and 1926 respectively, the overriding consideration was economic development of the Afrikaners who were regarded as economically marginalised in relation to their English counterparts.

They were a poor community that lacked the capital to develop their own industries. With the persistence of the poor white problem in the aftermath of the Anglo-Boer war, the major preoccupation of Louis Botha’s Union Government from 1910 onwards was to eliminate the scourge of poverty among this community, reduce reliance on the English-dominated mining sector by developing local capabilities in steel manufacturing succoured by cheap electricity, and develop a commercially viable white Afrikaans agricultural sector through providing complete support to farming co-operatives and injecting capital into these.

Thus, the Land and Agricultural Bank Act would be passed in 1912 to support commercialisation of White Afrikaner farmers and stem the tide of migration to the cities by poor whites. Market linkages and off-takes were guaranteed through various agricultural boards that were established in the 1920s and owned by the state. By the end of the Second World War, the poor white problem had become history.

Economic development of the Afrikaners was deliberate, with SoEs playing an instrumental role in stimulating labour, absorbing manufacturing capacities and supporting the development of skills among this section of the population.

Crucially, industrialisation diversified the revenue base of the state. With augmented public revenues, the state was now in a position to contribute immensely in the education of the Afrikaner population in South Africa in a way that would enhance their standards of living and solidify their cultural and social capital. Standing on the broad shoulders of state largesse, the confidence of Afrikaner entrepreneurs was bolstered. This was the concrete basis on which a social compact between an emerging Afrikaner political elite and the English economic elite was forged.

Fast-forward to 2018, more than two decades since democracy was achieved in South Africa, and the government on whose hopes the majority of black South Africans were pegged has become a monumental failure. Our politicians understand social compact to mean endless talks and rhetoric.

There has been systematic mismanagement of SoEs by the current political elite. Corporate governance and developmental value of these entities have been eroded beyond recognition. Even before the Guptas gained access to these resources, government demonstrated no grasp of the developmental imperatives of these institutions.

When the state has to bail out failing SoEs, such actions are bound to have negative welfare effect, as resources are diverted away from critical public services such as education, health, and housing towards incentivising inefficiencies and wastage.

During 2017, South African Airways was bailed out to the tune of R5-billion, including a portion of R3-billion that was meant to settle SAA’s debt with Citibank. Another R5-billion payment to SAA is due at the end of March 2018, a month after Gigaba announced VAT increase.

The reason for these costly failures in SoEs is poor corporate governance, whose seeds sprouted when Minister Gigaba was at the helm of the Department of Public Enterprises. Poor understanding of government’s oversight role as a shareholder, lack of strategic perspective, and absence of a developmental mindset are other factors that undermine effective governance of SoEs.

Proposals for Reform

There have been various proposals on reforming SoEs. Some have suggested that we follow the Chinese model, a perspective that has strong currency within the ruling party and the Economic Freedom Fighters. It is understandable why the Chinese model is attractive: China has four decades of experience in reforming SoEs since the first phase of reforms were introduced in 1978 by Deng Xiaoping.

China began experimenting with professional managers and modern corporate governance between 1993 and 1998. At the turn of the millennium, government went aggressively reforming SoEs, exiting those that were non-core. It instilled a dual mandate of pursuit of commercial purpose and national interests. The state does not hold 100% ownership or a controlling stake in all SoEs. In some instances, it holds a minority stake. China still experiences challenges in the supervision of SoEs, with a great deal of involvement of party cadres. Nonetheless, it holds some important lessons for South Africa.

There is also a Norwegian model where 11 government departments exercise shareholder oversight on more than 70 companies that are in diverse sectors, and in which government has shareholding ranging from 30% to 100%. Apart from the government pension fund of Norway and the well-known Statoil in the gas and oil sector, Norway commands 70 other SoEs that are under the oversight of 11 government ministries.

These SoEs span aerospace, the health sector, local government banking, arts and culture, genetic seed breeding, construction and civil engineering services, coal mining, property development, fibre optics and mobile telephony, among others. Many of these are 100% owned by the state, and this is over and above the shareholding interest that the state has in various private sector companies. This generates public value that sustains the high quality of life that Norwegians enjoy. Debates on the role of SoEs and the precise terms of their pursuit of commercial vis-à-vis developmental role are ongoing in Norway.

In countries where state-owned enterprises are not performing well, including South Africa, the problem is less to do with the fact that they are in public hands as opposed to private ownership. It is about how they are governed. If the quality of ministers that appoint boards of SoEs and that perform oversight role is poor, state entities will under-perform.

A road map for reforming SoEs should take into account the following imperatives:

First, a clear ownership policy that defines the overall rationale for state ownership, the state role in corporate governance of SoEs, and how the government will implement its ownership policy, needs to be in place. Second, there should be constant monitoring and evaluation of these entities, with focus on both the manner of their operations, how they deploy capital, and their development effectiveness.

Third, SoEs should justify themselves before the rationale of value-creation for the public, and with clear development impact. Where there is no clear competitive advantage or potential to develop it, and where there is no developmental value yielded, such enterprises should be allowed to die rather than be on expensive life support.

Fourth, at the minimum, these entities should abide by existing corporate governance norms, including the Companies Act, Public Finance Management Act, and King IV Codes of Good Governance. For this to be possible, boards should be selected on a merit-based system and made up of individuals known for their integrity and grasp of ethics.

Finally, as the OECD Guidelines on Corporate Governance of SoEs suggest, these entities should have a disclosure policy that identifies what information should be publicly disclosed, and clear processes on obtaining such information. Accountability and transparency should be proactive.

There is still a long way to go to reform SoEs. Government needs to move with speed in reforming these entities. Much damage has already been done on public finance and economic growth. SoEs are a crucial part of the puzzle in achieving economic recovery and promoting sustained economic development. They can play an important role in generating resources to solve the challenges of black youth unemployment and intractable multidimensional poverty. DM

Gallery

The 2016 Rio Olympic medals are already showing defects including rusting and chipping.

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