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Lack of SOE governance is a drain on South Africa’s economy, warns OECD

By Xolisa Phillip, in Johannesburg
Posted on Monday, 10 August 2020 16:01

People walk past Eskom's electricity pylons as they return from work in Orlando, Soweto township, South Africa, July 20, 2020. REUTERS/Siphiwe Sibeko

To turn around its economy, South Africa needs to sort out the governance framework for its many state-owned enterprises (SOEs), advises the Organisation for Economic Co-operation and Development (OECD) in its latest economic survey of the country.  

The outcomes of the survey were recently presented by OECD director of country studies Alvaro Pereira, senior economist Falilou Fall and National Treasury director-general Dondo Mogajane.

Such a framework would set “clear company-specific objectives in terms of profitability expectations, capital structure and non-financial objectives SOEs are expected to deliver,” according to the OECD.

This is needed because SOEs not only pose a risk to the government’s finances, but also represent an important part of the South African economy.

READ MORE South Africa: A sophisticated failing state

In the past few years, SOEs have become synonymous with the corrupt activities of ‘state capture’. Their administrative and financial troubles are symptomatic of the endemic corruption that has taken hold in the public sector – with actors in the private sector as willing participants.

Some of the more prominent examples include Eskom, the Public Investment Corporation (PIC) and South African Airways (SAA).

Last week, Eskom and the Special Investigating Unit initiated a court process through which the entities want to recover an estimated R3.8bn ($214m) suspected to have been misappropriated by former executives and board members of the power utility linked to the notorious Gupta family.

On 1 August 2020, the PIC welcomed new CEO Abel Sithole, whose key task includes implementing the recommendations of an inquiry that was set up to uncover the extent of the rot at the organisation.

“We believe he will assist the board in ensuring that the PIC’s integrity and credibility are restored. […] We trust Sithole will play an important role and work with the board to fill vacant executive positions to ensure stability in the organisation,” said interim board chairperson Reuel Khoza.

READ MORE Will Mboweni loosen purse strings to rescue South African Airways?

SAA is currently in business rescue. Although its creditors voted overwhelmingly in favour of its business rescue plan, no funding announcement has been forthcoming from the government for the national carrier.

Hidden costs of SOEs on economy

That in part explains the OECD’s observation about SOEs requiring a clear governance framework. In addition, South Africa “has one of the highest public ownership of firms with an extended scope in the economy among OECD and emerging economies,” notes the OECD.

  • “Such a prevalence of public entities has effects on the competitiveness of the economy through the cost of intermediate goods and competition in these sectors. In the case of South Africa, where most public firms are underperforming, it has detrimental effects on the cost of doing business.”
  • “Transparency and accountability of SOEs can increase confidence and predictability, which are key factors for attracting much needed investment and private participation in areas traditionally dominated by the state. OECD Guidelines on Corporate Governance of State-Owned Enterprises provide key principles that could help in setting up a contractual framework between SOEs and the state,” states the OECD.

Sort out the boards

One of the areas where governance could be improved is ensuring that appointments to SOE boards are done in a professional manner. Furthermore, SOEs require competent independent members. Adhering to these principles would help foster transparency and engender proper monitoring.

“A clear distinction between the roles and powers of the board and the executive management is necessary, along with the assurance of operational independence of the executive management and the limited temporary governmental intervention,” cautions the OECD.

Moreover, the state should act as an informed and active owner to guarantee the governance of SOEs is carried out in a transparent and accountable manner, as well as to ensure SOEs are subject to high-quality accounting, disclosure, compliance and auditing standards, notes the OECD.

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