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The SOE crisis: Finding our way out - Mills Soko


 

Since the Presidential Review Committee released its findings on the condition of State- Owned Enterprises in 2013, significant developments have occurred in this area – many of them not good. What’s the solution? 

The landscape for State-Owned Enterprises (SOEs) has changed significantly in recent decades. They continue to be most common in emerging markets in order to spur on economic growth. If the process is managed efficiently, this does occur. But, argues Forbes, the formerly polarised view of private vs. public companies is changing. SOEs come in many shapes and forms, and their potential often adjusts accordingly. 

In China, for example, the Global 500 countries are mostly state-owned, and have been growing rapidly. By 2015, China was second only to the US, despite Forbes writer Scott Cendrowski’s concern that the giant state-owned organisations were insulated from competition and battled to expand their business “outside the protected borders of their home country”. “Size is no substitute for strength,” he argued. 

Potential
Despite these reservations, it cannot be denied that well-run SOEs can deliver outstanding results. In Norway, for example, it’s been argued that comprehensive government ownership has spurred on success not only because of a strong economy overall. Former head of Statoil and Chairman of Telenor Harald Norvik – who co-authored the book The Government as Capitalist – points out that Norwegian companies with government co-ownership show better performance on the stock market than similar companies in Europe. 

Norvik argues that the success of Norway’s SOEs can be put down to several factors: the fact that it chooses to involve limited private owners and instead uses the stock market; it differentiates between ownership and being a regulating authority; it treats all shareholders as equals; it follows the rules for good company management. 

Norvik’s argument echoes the case of Singaporean sovereign wealth fund and SOE Temasek. Temasek is a holding company owned entirely by the government, and manages the state’s investment multiple sectors including utilities, banking, telecommunications, media and real estate.The company’s portfolio grew significantly from $154 billion in 2004 to $215 billion in 2013 and during the same period, it recorded an average net profit of $10 billion. It has managed to expand its success beyond Singapore’s borders. 

Much like the SOEs Norvik describes, Temasek functions largely independently on a business level, although the government still functions as regulating authority. Its board is independent and its functions abroad mean it is to a certain extent beholden to international laws. Transparency is paramount. 

South Africa has its own unique context, and there is a fair amount of pessimism surrounding the state of public enterprises. Journalist and radio personality
Stephen Grootes previously put it thus: “South African Airways (SAA) - chaos. The Post Office - disaster.

Eskom - load-shedding. Passenger Rail Agency of South Africa (Prasa) - open warfare. SABC - Hlaudi Motsoeneng. We could go on.” But Grootes, despite this dismal beginning, also framed his analysis around circumstantial issues which can be changed. 

It starts with governance
In essence, much of the difference between a thriving and failing SOE boils down to poor or competent governance. In South Africa, governance of SOEs has faced its share of speed bumps and has cost Treasury a significant portion in bailouts. The Auditor General’s reports highlight concerning levels of misspending. It is in better governance that the biggest difference can be made if we are to move towards a more successful public sector. 

The Presidential Review Committee on State-Owned Enterprises made a number of key recommendations in 2013. As reported at the time by the Parliamentary Monitoring Group, these included developing an overarching long-term strategy for SOEs; enacting a single overarching law (State-Owned Entities Act) governing all state-owned entities; the appointment of the Chief Executive Officer (CEO) by the Minister in consultation with Cabinet, upon the board’s recommendation; developing a mandatory framework for collaboration between SOEs; establishing a Central Remuneration Authority (CRA); and
developing strategic intent and corporate performance plans. In addition, it was recommended that all government entities and SOEs must develop transformation plans and that there should be a degree of financial reform within SOEs, including a consolidated funding model for commercial SOEs and Foreign Direct Investments (FDIs) as well as a combination of debt finance and equity finance. 

These recommendations have been slow to come to fruition. The 2015 State of the Nation Address detailed a nine-point plan for boosting economic growth, which included expanding the growth of SOEs. The 2016 State of the Nation address referenced coming interventions based on the Review Committee’s report. The 2017 address primarily focused on other areas. Yet the Review Committee’s recommendations echo the lessons learnt from Singapore, Norway and other successful regions, and there is simply no way around it: the civil service must be professionalised. If we are to build more successful, more globally competitive, more lucrative and efficient State-Owned Enterprises, the essential principles of well-managed organisations will have to apply. 

Obstacle course
In some ways, the reform of SOEs has read like an obstacle course. Factional battles, high staff and management turnover, graft, cronyism and other forms of corruption result in a pervasive failure to deliver the most basic public services. There has been improvement, but we can be doing so much more. Moreover, there is the question of reputational damage: public faith in the civil service has been damaged to an unacceptable degree by skills deficiencies that can be remedied. 

Rather than spending excessive amounts on consulting fees, we should aim to get governance right from the start. Business educators have a key role to play here, firstly in terms of thought leadership and secondly in terms of raising a new generation of strong, competent leaders in the public sphere. How constructive if, prior to protests by angry community members, or more expenditure through lengthy court battles with errant municipalities, we raise our voices at all levels and offer solutions. How much more constructive if our managers within SOEs are given the skills and mandate to perform at their best from the word go? Issues such as accountability, transparency, avoiding wasteful expenditure and other matters of competent management must be tackled pre-emptively wherever possible.

Who’s the boss?
It is this area – of combining both the skills and mandate – that the starting point lies. To date, challenges plaguing SOEs in South Africa have included unclear mandates, inconsistent regulation, inadequate legislatory frameworks, inconsistent remuneration and poor financial management. Much of this can be avoidedif, as in the cases of Norway and Singapore, the roles of governments and other stakeholders are not conflated. A clear separation of roles is essential. In the case of Temasek, for example, the company is largely self-regulating and has a large degree of operational autonomy. Politicians have very limited constitutional power to intervene in its management. One can refer, too, to Norvik’s argument: the most successful SOEs differentiate between
ownership and being a regulating authority. This principle has yet to be applied successfully to South Africa’s embattled SOEs. 

One social media user, during the controversy surroundingthe SABC, argued: “There is a difference between statebroadcaster and public broadcaster”. This argument can be extrapolated to all SOEs. State ownership – whether entire or partial – should not be confused with state management. If faith is to be restored in South Africa’s SOEs among the public, the business sector and investors alike, this distinction, as well as the better governance that will likely follow, must be observed.


 

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