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South Africa: Decision time for the Parastatals

By Hilary Joffe in Johannesburg
Posted on Monday, 1 February 2010 00:00

Interim CEOs are heading up most of South Africa’s state-run utilities

while party politicians fight it out over patronage opportunities and

the public policy choices that have divided Zuma’s cabinet.

A cartoon by leading South African cartoonist Zapiro late last year depicted South Africa’s Public Enterprises Minister Barbara Hogan looking somewhat distraught as she chased a flock of headless chickens. The chickens bore the names of state-owned enterprises such as power utility Eskom, transport and logistics group Transnet, South African Airways (SAA), the South African Broadcasting Corporation (SABC) and Armscor. All, one way or another, are leaderless and the largest of them have seen fierce and highly politicised boardroom battles. The confusion has raised important ?questions not only about corporate governance but also about the role of the parastatals in the economy, their relationship to government and the ability of either national or corporate executives to define public policy. Added to the debate are important questions about equity, profitablity and deregulation. “The tension between the liberal ANC and the Communists is pushing the country into indecisiveness”, says Lumkile Mondi, chief economist at South Africa’s Industrial Development Corporation.

Transnet has been without a permanent chief executive since the departure of Maria Ramos late in 2008, with an acting CEO, Chris Wells, acting chairman Geoff Everingham and acting finance director, Anoj Singh. Transet has experienced a nasty and racially-charged battle over the CEO post, with Transnet executive Siyabonga Gama – who was suspended last year on allegations of corruption and fraud – claiming he was denied the CEO job on racial grounds. Gama had never been the board’s preferred candidate for the job but gained support from some high-ranking African National Congress officials and a couple of cabinet ministers who had nothing to do with transport. That raised questions about Hogan’s authority, as well as about how seriously the government and the ruling party took the independence of the board.

At Eskom too, a political battle with racial overtones ensued late last year after former CEO Jacob Maroga resigned over strategic differences with chairman Bobby Godsell. When the ANC Youth League came out in support of Maroga and President Jacob Zuma intervened, Godsell also resigned. So Eskom is now led by an ?acting chairman, Mpho Makwana, who is also acting as CEO. Likewise, although SAA has a new chairman (Cheryl Carolus), it has had an interim CEO, Chris Smyth, for the past year after its former CEO resigned in response to allegations of mismanagement. The CEO of arms procurement agency Armscor was forced out. And the public broadcaster, the SABC, has been the site of one controversy after another with its board ousted and its CEO replaced by Solly Mokoetle late last year, following evidence of severe mismanagement.

Groping around in the dark

A lack of policy clarity was a major contributor to the January 2008 power crisis and continues to complicate efforts to ensure that South Africa can build the power generating capacity it needs. Though the government recognised in 2004 that the country urgently needed new power stations and gave Eskom the go-ahead to build these, it did not follow up with changes to Eskom’s mandate to ensure that it gave priority to keeping the lights on. As a shareholder, the government continued to expect Eskom to be profitable and efficient, and to pay dividends, as well as deliver on targets for black economic empowerment. For example, in a bid to cut its working capital and make its balance sheet look good during 2007, Eskom ran down coal stocks to such low levels that it did not have enough dry coal to keep stations up and running in the rainy summer of early 2008. “They have learnt nothing from telecoms, where they allowed a public monopoly to become a private monopoly. The sensible decision would have been to deregulate the market and allow co-generation,”IDC’s Mondi told The Africa Report.

Although Eskom was given the green light to build the new power infrastructure South Africa needed in 2004, neither the government nor the electricity regulator gave much thought to how this R400bn ($53.8bn) expansion would be funded. Eskom is now asking the electricity regulator to raise tariffs sharply to pay Eskom’s ever-higher costs and to meet its cash shortfall. The government has already injected R60bn of equity into Eskom and can hardly afford much more, while one Cosatu official suggested the programme be funded by a “solidarity tax” on the wealthy.

There could hardly be a worse time to have headless parastatals, particularly in key industries such as electricity and transportation. Eskom’s woes over the last couple of years have illustrated just how wrong things can go and how costly it can be for the economy, especially when inadequate management combines with inadequate infrastructure. In the power crisis of January 2008, South Africa’s mining industry was shut down for five days and the entire country experienced rolling blackouts for more than three months. Eskom’s capacity to supply power had fallen to a dangerously low level because no new power stations had been built for many years while demand had soared. Poor management decisions at Eskom precipitated the crisis: amost all of South Africa’s electricity is generated from coal, but stocks had run down and the aging power stations were poorly maintained.

The government recognised some years ago that the ailing state of South Africa’s economic infrastructure was a major constraint on growth. It embarked on a drive to increase the economy’s competitiveness with an infrastructure programme that has increased fixed investment by public corporations to more than 5% of GDP, a level not seen since the late 1970s. Eskom, Transnet and the National Roads Agency are due to spend a total of about R441bn ($59.3bn) to upgrade and expand power, rail, road, port and pipeline infrastructure over the next three years. That is more than half of the R872bn of investment in social and economic infrastructure included in the public sector’s plans. The programme provides a fiscal stimulus that is helping to keep the national economy afloat in the short to medium term. It is also crucial to improving the economy’s sustainable growth potential in the long term.

Political appointments?

Theoretically, the parastatals are enterprises, not government departments, and they should have independent boards with unfettered power to hire and fire CEOs. In practice, legislation puts the minister of public enterprises in charge of hiring the CEO, albeit on the recommendation of the board, while it is not entirely clear who has the power to fire. There has been some tension over whether it is up to the minister or the cabinet to make parastatal appointments. All of which has tended to create space for political jockeying, a situation that is made worse by President Zuma’s preference for conciliation rather than firm decisions.

The corporate governance battles have also been a product of ambivalence within the ruling party about the purpose of those top parastatal posts: should they provide great jobs and lots of power for the well-connected, those the party seeks to reward? Or should the incumbents, black or white, be chosen simply on the basis that they are the best people to do jobs that are vital for the economy? Though the Zuma government claims to be committed to efficiency and better services, there is a tendency to cronyism that surfaces in all sorts of areas of South African public life, and the tension may be bedevilling attempts to do right by the parastatals.

Cosatu spokesperson Patrick Craven told The Africa Report: “A lot of the problems we believe arise from precisely trying to run them as if they were private companies, and so you get all the corruption and the greed which is characteristic of capitalist ?private enterprise.”?

Policy muddle?

More profoundly, however, the governance troubles at the parastatals have been a symptom of a more generalised policy muddle about what the South African government wants parastatals to do and how to get them to do it. Are they primarily money-making enterprises, in which case, why are they state-owned? Or do they have a developmental role? If so, how can the state mandate and incentivise them to pursue that role in ways that do not end up costing taxpayers a fortune? As long as the government is not clear on just what kind of enterprises it wants, it is difficult to decide what kind of people should take leadership roles and how they should be selected.

Privatisation, or even private sector participation in public infrastructure, was almost entirely off the agenda during former President Thabo Mbeki’s administration and there was fairly broad acceptance of the notion that the public sector should drive the infrastructure investment programme. In January, Zuma’s spokesman Themba Maseko said the government was “open to all options, including selling off some assets”. So far, Eskom has proposed to sell a stake in one of its planned coal-fired power stations to help it raise the funds it needs.

At the same time, increasingly vocal lobbies within the ruling alliance are calling for parastatals to be like government departments responsible for development, rather than commercial enterprises. The South African Communist Party has emphasised the need for parastatals to pursue clear developmental or ‘strategic’ mandates, rather than being simply subject to market discipline – one of the issues that split the Eskom boardroom between CEO Maroga and the board, led by Godsell.

There is an additional dimension to the debate which is much more explicitly about race. One faction led by Communications Minister Siphiwe Nyanda and Justice Minister Jeffrey Radebe came out in support of Eskom’s Maroga and Transnet’s Gama and opposes Hogan. A more left-wing faction that includes Finance Minister Pravin Gordhan and leading trade unionists supports Hogan and her adherence to principles of governance and the Public Finance Management Act. Their differences have divided the Cabinet and ruling party.

In effect, the debate is about the meaning of ‘transformation’ and whether the parastatals should be seen as the implementing agencies for a broader and non-racialist developmental agenda, versus those who understand transformation to mean black empowerment.

Part of the confusion arises from the interpretation of a resolution adopted by the ANC at its 2007 Polokwane conference asserting that state enterprises “act according to our overarching industrial policy and economic transformation objectives”. The qualifier was that the enterprises should “remain financially viable”.

Whether the battle is about politics or about patronage is perhaps the more interesting, and disturbing, question. To what extent are some of the tensions over race and succession really about who gains the power to decide, who benefits from the billion-rand contracts that the parastatals are signing? President Zuma initially came out in support of Hogan, standing behind her efforts to ensure sound corporate governance. But powerful factions are pushing their own agenda and, for the meantime, most of the chickens remain headless.

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