Private-sector guidelines can assist the government
SA has more than 700 state-owned companies. Only 22 of them are of significant size and influence, but together, they make the government an important player in the economy.
The track records of these companies are decidedly underwhelming. South African Airways (SAA) is functionally bankrupt, Eskom and Transnet have become known for their role in alleged state capture rather than for delivering services and infrastructure, and the Post Office has been unable to reliably perform its most basic function for years.
As Peter Major of Cadiz Corporate Solutions points out, if a country is going to have state-owned enterprises (SOEs), they should be role models in the economy.
They should be managed by the best people available and set standards for others to follow. In SA, however, this is not the case.
Corporate governance at many public companies is poor, wasteful expenditure is high and executives are often political appointees rather than people with skill and acumen. Given the cost of these failures to taxpayers, it is understandable why South Africans are asking hard questions about the SOEs. Are they really needed? Wouldn’t it be better to privatise them?
And if not, how do we sort them out?
Under the ANC government, SA has pursued a mixed economy. The government believes it needs to play a meaningful role in the economy to reduce unemployment, poverty and inequality. This necessitates SOEs, it argues, because these issues are not prioritised by the private sector.
The government also argues that there are infrastructure needs that don’t make economic sense as projects for private investors. Electricity transmission is often raised as an example, particularly to remote areas where the costs of building power lines are unlikely to be recovered.
These may be noble ambitions, but how successful have SOEs been in achieving them? In some instances, they have done well. SA has been extremely successful in extending electrification to almost the entire country, for example. However, it is debatable whether SOEs have had any meaningful effect in reducing unemployment or inequality. If anything, the corruption at institutions such as Eskom has further entrenched inequality.
The fundamental problem for SOEs in SA is that ideology has confused their purpose.
Take Denel, for example. What is the rationale for the government owning an arms manufacturer? It’s not a major employer. It can play no direct role in tackling poverty or inequality. Is Denel then a purely commercial enterprise? Or does it provide some benefit to SA’s national defence?
The confusion at Eskom is slightly different but no less significant. It is a major employer and can play a direct role in improving living conditions and supporting the economy. But in the past decade, Eskom has moved from being one of the world’s cheapest electricity suppliers to one of the most expensive. What is its purpose? And how is it measured? If Eskom had a clear mandate that its sole ambition should be to provide the country with the cheapest electricity possible, that would focus its activities and allow the government and the public to hold it accountable for delivering that.
Prof Mark Ellyne of the faculty of commerce at the University of Cape Town notes that companies in the private sector are motivated by profit and can be measured on that. SOEs have no profit motive, but they must still be able to demonstrate measurable value.
As the head of public sector at the Absa Group, Stephen Seaka, notes, there has to be a change in approach to how SOEs are run.
They must have managerial autonomy. It is untenable to have a situation as at SAA, where chairwoman Dudu Myeni’s term expired but she insisted that she was not going anywhere as long as Jacob Zuma remained president.
There are also instances where CEOs don’t listen to their own boards and instead take instruction and receive protection directly from senior people in government.
For SOEs to be successful, management must be able to perform its duties without political interference.
There must be effective performance management at SOEs. Executive management must be aware of what it needs to achieve and must be assessed on those goals.
As the major shareholder, the government must be prepared to act when executives fail to achieve the objectives set for them or when there is maladministration.
If SOEs are operating as commercial enterprises in a competitive market, there must be competitive neutrality. They should not receive subsidies or preferential treatment not afforded to private companies in the same sectors.
SAA, for instance, has consumed close to R20bn in government guarantees, but to what end? If it is unable to compete effectively as a commercial enterprise, then it should either be allowed to fail or be sold. As Ellyne contends, SOEs should have to behave more like private companies. Even if their objective is not profit, they should insist on the same efficiencies, and meet the same standards of accountability.
Seaka says that in most countries in the developed world there is a “crosspollination” between the public and private sectors. It is common to find skilled people with extensive private industry experience taking positions in the public service.
In SA, there is a big divide. While people may move from the public to the private sector, it is very unusual for anyone to move the other way. There have been some recent, highprofile examples, such as Kevin Wakeford at Denel and Mark Barnes at the Post Office, but these are exceptions. Having greater access to business skills developed in the private sector could go a long way to improving the way SOEs are run.
Together with reforms that better define their purpose, give them autonomy and insist on measurable outcomes, this is what SA needs to save its SOEs.
Kiri and De Wet are MBA students at the UCT Graduate School of Business.