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South Africa’s department of public entreprises should be planning its own demise

Andrew McGregor
By Andrew McGregor
Managing Director, Who Owns Whom

Andrew McGregor is the Managing Director of Who Owns Whom, an independent research organisation

Posted on Tuesday, 2 July 2019 12:41

Windmills generating electricity for South Africa's electric company Eskom near Brackenfell on the outskirts of Cape Town (AP Photo/Schalk van Zuydam)

Problems at Eskom, Transnet, Denel, SAA and all the other parastatals can be traced to their oversight body; a department ripe for reform.

The ANC had laudable intentions when it created the Department of Public Enterprises (DPE) in 1999, giving a single minister control of the largest state-owned entities (SOEs) with the mandate of inclusive growth and poverty alleviation.

  • But there were unintended consequences as these critical entities became more easily accessible to outside interests with their own agenda, and the DPE’s structure was not sufficiently robust to effectively manage the inherently diverse demands of the various SOEs.

According to the Who Owns Whom report on State-Owned Corporations, the operations of Alexkor, Broadband Infraco, Eskom, SAA, Safcol, Denel and Transnet are collectively impacted by no fewer than 38 Acts. Each enterprise operates in a different industry with very different drivers. Placing the responsibility to manage this diverse portfolio on a single minister has been impractical.

Cracks began to show in 2010 when Eskom’s capital-raising efforts were met with market resistance, Transnet experienced a crippling strike just before the World Cup and Denel reported substantial losses which led to then Public Enterprises minister Barbara Hogan and then Finance minister Pravin Gordhan appointing an internal review.

  • This was stopped by former president Jacob Zuma in favour of a presidential panel review which made the key recommendation that government should enact a single over-arching law, the State-Owned Entities Act which would arguably have entrenched the structural weakness further.

Estimates are that guarantees by government to SOEs could exceed R500bn ($35bn) or around 10% of GDP by 2020, which is a material sovereign risk. Inclusive economic growth is dependent on the infrastructure provided by the likes of Broadband Infraco, Eskom and Transnet – but their ability to implement their strategies over the last ten years has been hampered by managerial crises.

Their failure to upgrade and expand infrastructure has, in effect, impeded growth. A simple example is Prasa’s failure to implement the planned line/station upgrades and replacement of rolling stock at Metrorail, resulting in rail commuters being repeatedly unable to reach their places of work.

  • In contrast, in 2017, Kenya completed its largest infrastructure project since independence with the new railway link between Mombasa and Nairobi (see the Who Owns Whom report on The Construction Industry in Kenya) while Ethiopia opened the first fully electrified railway linking the interior with the port of Tadjourah in Djibouti earlier this year.

While South African SOEs have drawn the ire of taxpayers due to corruption and inefficiency, they remain key providers of services, jobs and training. The DPE’s stated vision is “to drive investment, productivity and transformation in the department’s portfolio of state owned companies, their customers and suppliers so as to unlock growth, drive industrialisation, create jobs and develop skills.”

If they had clear mandates of service delivery and job and skills creation which they achieved with effective, dedicated management who adhered to good governance principles, the public may be more forgiving about the funding required to sustain them.

  • The current image of the SOEs as ATMs for unscrupulous crooks can be transformed to one of large, successful public works programmes mandated to soak up our very high rates of unemployment.

SOEs are admittedly already overstaffed, but we need to ask if we want our unemployed youth hanging around street corners or want them to have the dignity of a job and training, providing their families (and the economy) the benefit of their incomes.

Some cleaning up needs to be done. Denmark, the Netherlands, New Zealand, and Norway prohibit public servants, including standing and former politicians, from sitting on SOE boards. The Norwegian government explains this is to “avoid problems of partiality and conflicts of interest, which could arise when the interests of the shareholder are not fully in harmony with the interests of the state”.

  • Bertrand Badré, co-chair of the Global Future Council on International Governance and Public-Private Cooperation which is tasked with bringing governments and business together to achieve the UN’s 2030 Sustainable Development Goals, commented that in most countries, “public authorities think that the private sector is willing to reap the reward without taking any risk” while “the private sector believes that the public sector is, in the worst case, corrupt; or is too bureaucratic, too slow, or not reactive enough.”

The DPE vision for our SOEs cannot be achieved without the private sector coming to the table of its own accord and not through prescriptive legislation. The state needs the private sector to put the SOEs back on a sustainable footing and the private sector needs the SOEs to be sustainable.

In exchange for funding, agreement needs to be reached between the state and the private sector on the mandate, board make-up, board appointments and powers of each SOE.

Bottom line: The DPE should be given a medium term mandate to implement its own demise and move oversight of SOEs from the DPE to the ministry governing the industry in which they operate once they have been stabilised.

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