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The albatross around South Africa’s neck: why SOEs aren’t working

Xolisa Phillip
By Xolisa Phillip

Posted on Tuesday, 3 December 2019 12:15

Early optimism over Cyril Ramaphosa's presidency has faded. REUTERS/Siphiwe Sibeko

Poorly managed state-owned entities (SOEs) are depleting South Africa’s budget. The government continues to offer them an expensive lifeline in the form of multi-billion rand bailouts.

When Cyril Ramaphosa became South Africa’s president in February 2018, many were hoping that his administration would usher in a glorious new era of clean governance. The president called it a “new dawn”.

Ramaphosa gave a rousing speech during his inaugural State of the Nation Address which raised expectations and created excitement that things would change for the better. To say that speech “ignited the nation” would be an understatement. It was presidential, and it represented a new kind of leadership style that was severely lacking during the previous administration under former president Jacob Zuma.

The hope was for Ramaphosa to reverse the trend

Ramaphosa’s predecessor misused his presidential powers to deploy allies to key government ministries in order to exert influence on how the portfolios were run. The hope was for Ramaphosa to reverse this trend.

Presidential appointments

It is estimated that South Africa runs more than 200 SOEs, ranging from municipal water boards and provincial gambling boards to the heavyweights like the national power utility, Eskom; railway operator, Transnet; arms manufacturer, Denel; the national carrier, South African Airways (SAA); and many others, according to data from the University of the Western Cape’s Dullah Omar Institute.

The institute is working with civil society organisations to conduct a series of studies on SOEs. They are analysing the country’s legal framework for SOEs, hoping to identify the contradictions that have enabled a culture of misgovernance to flourish.

One of the areas under the microscope is the capture of SOEs under the Zuma administration, which was facilitated through the appointment of pliable ministers and boards. Zuma appointed his most loyal supporters to senior positions, and they performed their duties in line with his whims. This was especially true at Denel, SAA, Eskom and Transnet, which were run down under Zuma. When Ramaphosa appointed a host of new boards at several SOEs, there was renewed hope that things would turn around.

Bleeding the nation dry

Instead, Denel, SAA and Eskom were handed multi-billion-rand financial bailouts by finance minister Tito Mboweni during his medium-term budget policy statement in October. That’s in stark contrast to government’s call for fiscal discipline at a time when the country is running huge deficits and has developed an over-reliance on borrowing.

It is for those reasons, among others, that the initial optimism that greeted Ramaphosa has given way to heightened scrutiny about the quality of the boards and executive teams appointed in the aftermath of Zuma’s departure.

The boards lack an essential ingredient to run SOEs: they do not possess technical expertise

An overriding sentiment which is starting to gain traction is that, much like the boards appointed during Zuma’s time, the boards hired in the current administration lack an essential ingredient to run SOEs: they do not possess technical expertise.

The bulk of the government’s contingent liabilities consist of SOE debt. However, SOEs are not making money, they are bleeding it.

Score card

Two weeks ago, the office of the auditor-general released its audit outcomes for SOEs. The outcomes were described as the “worst ever”, and the country’s auditor-general, Kimi Makwetu, called for greater accountability.

One wonders what horrors lurk in SAA’s numbers. We will only know once they are made public

Denel made the cut for the worst-performing SOEs. SAA did not make the list, but not because it has a clean bill of financial health: the national carrier was not on the list because it has not filed its financial statements for two consecutive financial years. One wonders what horrors lurk in SAA’s numbers. We will only know once they are made public.

Hence the new SOE boards are now being subjected to growing scrutiny. There is a realisation that the current institutional architecture – the legal framework, how appointments are made and who is accountable to whom – might lie at the heart of the dysfunction.

It’s not all bad news.

The Companies and Intellectual Property Commission’s (CIPC’s) case against former SAA chairwoman and Zuma deployee Dudu Myeni should serve as a warning shot of what’s to come to SOE board directors who insist on errant conduct.

In November 2016, the CIPC issued a compliance notice against Myeni pertaining to her conduct in the national carrier’s botched Airbus deal.

Regulators found she misled the finance minister about crucial details of the prospective agreement.

She complied with the notice, but failed to have it overturned by the Companies Tribunal. Furthermore, Outa (the Organisation Undoing Tax Abuse) and the SAA Pilots’s Association are gunning for a delinquency declaration against Myeni in the high court on the basis of the business decisions she took at SAA while she was at the helm of its board.

She is, of course, fighting hard in the high court matter. But Outa and the SAA Pilots’ Association drew first blood on 2 December when the high court judge presiding over the case turned down Myeni’s application to amend her plea.

Bottom line:

As the cost of maladministration in SOEs becomes apparent, expect more of these types of cases against those who oversaw the decline of parastatals.

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