State-owned entities’ fatal flaw has not been sorted out
In a column in the Sunday Times public enterprises minister Pravin Gordhan said there are lessons to be learnt from the SAA experience: the government must be “more diligent” about governance; and state-owned enterprises (SOEs) need to manage the relationship between cost and revenue more carefully, because no business can survive if it is unable to meet its costs.
These are simple enough lessons and anyone who doesn’t learn them fast won’t run a business for long. But the lessons from the SAA saga are bigger and less generic. They go to the heart of whether the state has the right governance arrangements and incentives in place to successfully run businesses, particularly in a competitive commercial market.
When Gordhan says the government must be more diligent about governance, what he means is SOEs should appoint more suitable people, not that the governance arrangements are at fault. He says he has learnt that SOEs need capable and skilled leaders who are knowledgeable about the sectors in which they operate.
This is obvious and has been the biggest lesson of ANC governance, magnified horrendously during the nine wasted years but in evidence long before as unsuitable cadres took leadership all over the public sector. The truth of the matter is while some of the management has changed, they remain with the wrong people in the wrong jobs with the wrong skills at multiple levels. This is a fundamental efficiency issue that has not been sorted out.
Gordhan has begun to see that the same shortcomings apply to boards he and President Cyril Ramaphosa have chosen. Directors too need to be suitably equipped, and Gordhan has taken to grumbling about how the boards of SAA and Eskom need to be augmented.
This is irrefutably the case. SAA is thin on aviation expertise; Eskom lacks engineering experience. This is not the end of it, though. Governance arrangements are deeply problematic. Those who agreed to serve on the boards of Eskom and SAA, under the circumstances in which Ramaphosa was to effect a turnaround, did so out of a sense of duty. They have no doubt spent many more hours than they ever intended in late-night crisis meetings. The reward in board fees cannot possibly be worth it.
SOEs are governed by the Companies Act and their own specific legislation, which provide for the relationship with the shareholder through a memorandum of incorporation (MOI) placing fundamental constraints on the power of a director to act.
SAA’s MOI states, for instance, that the directors are unable to take a range of critical decisions without first obtaining shareholder consent, including business rescue. SAA traded recklessly for months, if not years, before hitting the wall. Yet directors could take the decision to act only once the government had given the go-ahead.
The same constraint hangs over major commercial decisions, such as cancelling routes or disposing of or acquiring assets. The good sense in this is that it puts a stop to the rogue adventurism witnessed in the Zuma era. Back then SAA chair Dudu Myeni did her utmost to swap SAA’s aircraft leases without the Treasury’s consent, a deal that would have been even more prejudicial than the arrangements it has now.
The Treasury’s checks on this sort of thing are crucial. But these constraints to doing business are not tenable in a commercial context. SAA’s directors were called on to take risk and personal liability but not given the powers to step in when the shareholder had run out of money.
LIKE SAA, ESKOM HAS THE WRONG PEOPLE RUNNING IT AND THE WRONG BOARD, AND NEVER THE SHAREHOLDER SUPPORT IT NEEDED
The shareholder behaviour was also bizarre. SAA’s turnaround plan was predicated on the need for R21.7bn in shareholder support. The shareholder endorsed this plan but it never came up with the money. Only now that SAA is in business rescue has the full amount been promised, and even then it is spread over the next three years.
The government’s response to failures was to intervene constantly and inappropriately. When Gordhan says more attention must be given to governance, what he also means is the government should have stepped in earlier, not with money but to run the show.
The same wildly unrealistic arrangements exist at Eskom. Like SAA, the company has the wrong people running it and the wrong board, and has never had the shareholder support it needed to build two huge power stations concurrently.
This is not an ideological issue but a practical one. There are clear and obvious reasons why these businesses are failing.