ALEX MALAPANE: A call to transform the PFMA to reshape SA’s SOEs

The Public Finance Management Act (PFMA), while essential for ensuring accountability and transparency in SA’s state-owned enterprises (SOEs), often creates bureaucratic delays and operational rigidity. These strict regulations limit SOEs’ ability to make rapid decisions and invest in necessary innovations, putting them at a competitive disadvantage compared with private companies with greater flexibility.

To overcome these challenges SOEs should streamline internal processes, empower decision-making at different levels, and leverage public-private partnerships to introduce efficiency while maintaining compliance with the PFMA. This balance would allow SOEs to remain competitive and agile in a rapidly evolving market. 

In particular, SOEs that are meant to make a profit must have a regulatory framework tailored to their unique operational needs. The current one-size-fits-all approach within the PFMA often stifles their potential. Profit-driven SOEs such as SAA and Eskom have been hindered by the PFMA’s stringent procurement rules, which elongate the supply chain process, lead to project delays, and prevent these entities from being agile in a competitive marketplace. These constraints have been linked to financial mismanagement and poor project outcomes, making it nearly impossible for SOEs to compete with private-sector companies that operate with far more flexibility and speed.

Other countries have found ways to strike a balance between regulation and flexibility for profitmaking SOEs. For example, Singapore Airlines operates under a model that allows it to operate independently of rigid government constraints while still fulfilling its national duties. Similarly, New Zealand’s state-owned electricity companies have been partially deregulated, allowing them to compete with private players, generate profits and expand operations. The SA government can learn from these models by creating a PFMA framework specifically designed to address the needs of profit-driven SOEs. This would provide the flexibility they need to make market-driven decisions while still adhering to the core principles of transparency and accountability. 

The stakes are even higher for entities such as Eskom, which are crucial for national energy security. Eskom’s financial troubles have led to regular government bailouts amounting to billions of rands, yet the structural issues within the organisation persist. Over the past three years alone the SA government has spent more than R70b on bailouts for struggling SOEs. This constant dependency on bailouts is unsustainable and detracts from investments in other key sectors like healthcare, education and infrastructure. A shift in policy is needed to reduce this dependence on bailouts and foster financial self-reliance in profit-driven SOEs. 

The key to reducing bailout dependency lies in a fundamental shift in how SOEs operate financially. First, a revamped financial model must be introduced for profit-driven SOEs that move away from government handouts towards market-based financing mechanisms. Encouraging SOEs to issue bonds or seek private investment, much like private corporations, could reduce their reliance on government funds. This will further encourage SOEs to diversify funding sources and reducing fiscal burden. By issuing bonds SOEs can access the financial markets for capital, easing the pressure on the government budget. In addition, allowing profitmaking SOEs to reinvest a portion of their profits into operational improvements would give them the ability to become self-sustaining over time. 

For SOEs tasked with providing essential services such as healthcare, emergency services and water supply, the focus should not be on profit but on ensuring efficient service delivery. These entities should be exempt from the requirement to generate income or seek external projects to survive. Their mandate should be solely to safeguard public welfare. the government should provide 100% funding to these essential service SOEs, ensuring they are adequately resourced to focus on their core mission of saving lives and supporting the public without the distractions of financial constraints. 

To achieve this, the government needs to revisit the application of the PFMA for these essential service entities as well as for profitmaking SOEs. Rather than applying stringent financial controls as a one-size-fits-all, the focus should be on ensuring operational efficiency and service delivery standards. This means exempting profitmaking SOEs from cumbersome procurement procedures and tailoring the PFMA to be suitable for them to compete in the market.  

The role of the National Treasury in implementing these reforms is critical. It should spearhead the process of tailoring the PFMA to fit the diverse needs of SA’s SOEs. This could be done through the introduction of two distinct frameworks: one for essential service SOEs and another for profit-driven ones. Essential SOEs would be freed from the pressure of generating revenue, while profit-driven SOEs would be provided with the agility needed to thrive in competitive markets. The finance minister, working closely with the president, could introduce these reforms as part of broader policy adjustments aimed at restructuring SA’s public sector for better efficiency and reduced financial burden on the state. 

By integrating these changes, the government would be creating a more sustainable model for SOEs, particularly those meant to generate profit. With a more streamlined and flexible regulatory environment, these entities could become self-reliant, minimising the need for bailouts. For SA to grow its economy and develop a stronger, more competitive public enterprise sector, these reforms are essential. 

• Dr Malapane is an executive, strategist, conference speaker and facilitator, multidisciplinary researcher and independent analyst.