Rationalisation of state-owned enterprises has become inevitable
The SOEs date back to the apartheid era and many are no longer relevant to SA's economic trajectory
While we are consumed by the goings-on at the Zondo inquiry into state capture and the rising electioneering temperature, SAA gets another guarantee and Eskom’s debt challenge mounts even as it struggles to keep the lights on. Rationalisation (not privatisation) of state-owned enterprises (SOEs) has become inevitable.
As the downside risks mount, South Africans should be demanding more than the usual rhetoric and promises from their leaders. One area of leadership that is required is the boldness to implement urgent SOE reforms. The executive is being forced to deal with the three monsters that are burning the fiscus and plunging our economy into a cul-de-sac: SAA, Eskom and Transnet.
It is not only corruption that put these SOEs into their current state; in fact the real problem is the shareholder and governance models that enabled that corruption. They are no longer relevant to SA’s development trajectory, since market conditions have changed from the original “apartheid reasons” for their existence, in many instances rendering their business models unsustainable.
As most of the SOEs were formed during apartheid, it should not be a surprise that they need urgent reform, including rationalisation. Rationalisation is different from wholesale privatisation, a mistake made by former Soviet and communist nations when they embraced market reforms and willy-nilly sold assets that would have assisted with the transformation. Realising the mistakes that were made in selling key assets early in our democracy, and understanding the mixed nature of the SA economy, the ANC adopted an important view of the state at its Polokwane conference, emphasising its developmental role in the economy and locating the SOEs as instrumental in that context.
Several reviews of the SOEs have been instituted in the past by the Treasury, including a review of development finance institutions in 2008 as well as by a presidential committee in 2012. The national development plan of 2011 also envisages SOE reforms to improve their performance and role in development. The recommendations of almost all such reviews have identified similar areas of concern around mandate, governance, viability and performance. What is needed now is bold leadership and the political will to move the process forward.
These processes need to be set in motion urgently, with full transparency. It will not help if the government throws up surprises along the way, as these issues are politically sensitive. What could be helpful to the government is to look beyond political ideologies and debate the desired outcome of SOE reforms. It was China’s communist chairman Mao Zedong who once said: “No matter if it is a white cat or a black cat; as long as it can catch mice, it is a good cat”. In the context of the next phase of the Chinese revolution after the wars of independence, he was making the point that ideology could no longer be the sole yardstick of strategy; what was needed was practical strategies that would take China to prosperity. This was the beginning of the market-oriented economic policies that worked for China in its specific circumstances.
SA’s leadership will also need to look beyond the traditional nationalisation versus privatisation dead-end when rationalising the SOEs. This message must be sensitively and clearly communicated to key stakeholders on the left and the right of the political divide.
Also important to alleviate political fears during the debate is to declare and gazette strategic SOEs, through the Public Finance Management Act and ultimately through an SOE Act. The Public Finance Management Act covers all SOEs on the basis of their existence. But those that are strategic to the country’s development must be periodically and substantively identified and declared so. The motive for the mandate of the strategic SOE must be proven on a clear and acceptable basis, such as security of supply, correcting a development failure, state security or natural monopoly.
An SOE remaining strategic is a function of factors that may be affected by changes in the operating environment, such as markets, technological advancements and political evolution. The evaluation of the strategic SOEs should be repeated periodically to ensure they remain so. Nonstrategic SOEs should account for their continued existence through a rigorous parliamentary process based on their relevance to the country’s strategic plans. Clear criteria and a framework for rationalisation would need to be adopted and serve as a basis for the evaluation and final decision on each SOE. Some city metros, as well as the provinces, have already embarked on this process; it would be helpful to learn from them and standardise the rationalisation process.
SOEs exist to address development failures and close gaps where markets or the private sector cannot. Where crowding-in the business sector is more efficient and could create more or better jobs, it is important to create an environment that allows businesses, especially small ones, to participate. Carefully designing viable concessions in state-dominated sectors that have evolved over the years, such as transport logistics and ports, is overdue for a modern economy such as SA. Crowding-in the private sector in such spaces will allow costs to be reduced and improve the quality of services rendered due to increased competition.
Regarding rationalisation, it is the principle that counts rather than the names of the SOEs to be rationalised. For example, should parliament decide that the aviation space is a fully competitive market that is crowding out a state airline, the decision on a rationalisation model would take into account how the business of the airline can be released without sacrificing the brand, cutting jobs or having a negative effect on tourism.
The government will need to make a budget available for the rationalisation of the SOEs. Technical teams responsible for rationalisation will have to account to the Treasury, and the proposed SOE committee or council should be chaired by the president of the republic. A planned, negotiated rationalisation process will help avoid a less considered fire-sale of state assets. Such a formal transparent process will also inspire confidence in all stakeholders.
• Dr Mfeka, a former economic adviser in the presidency, is director at SE Advisory.