The Centre for Development and Enterprise (CDE) today called on President Ramaphosa to urgently appoint a high-level team led by business leaders to conduct a review of the financial position of all major state-owned enterprises (SOEs) and identify solutions to the most pressing challenges.

This is one of several recommendations contained in ACTION SIX: Solve the SOE challenge, a new report in CDE’s AGENDA 2024: Priorities for South Africa’s new government series.

Releasing the report, CDE’s executive director Ann Bernstein said that one of the key reasons for South Africa’s exceptionally low growth rate has been the ongoing operational and financial crises that have characterised large SOEs.

“The performance of the major SOEs since 2009 has been disastrous. Eskom and Transnet have wrought the most damage, but the others are failing just as badly. This applies to PRASA, Denel, SABC, the Post Office and SAA,” said Bernstein.

“The economy will never be able to grow quickly,” she said, “unless fundamental reforms ensure access to reliable and affordable energy, and logistics constraints – especially for freight rail and the ports – are eased so that exports can grow.”

CDE’s report finds that the SOEs are beset with five key challenges:
• Confusion over their role and mandate
• Commercial crises – caused by unfunded mandates, non-payment for services, over-spending on capital projects, increases in operational costs and the impact of crime
• Shareholder interference coupled with weak boards
• Corrupted procurement processes
• Weak regulators

The report argues that a focus on strengthening the competitive pressures on SOEs like Transnet and Eskom will drive a more coherent reform programme than what is currently in place. It says that policy-makers should aim to ensure that wherever competition is possible and/or desirable, it should be encouraged, because it is competitive pressure that constrains costs and maximises efficiency in service provision.

“It is not enough to say that the parlous state of our SOEs is the result of bad governance. What needs to be recognised is that bad governance is enabled by the SOEs’ status as protected monopolies – there are no consequences for poor performance since these firms do not have to compete for business,” said Bernstein.

CDE recommends a number of immediate actions that the President and the GNU should initiate:

1. The strategic and operational reviews of SOEs commissioned by the Presidential State-Owned Enterprises Council (PSEC), should be made public to inform debate about the future of the SOEs.

2. The President should appoint a high-level team led by business leaders to conduct a review of the financial position of all major SOEs (or to review the work already concluded by PSEC) in order to identify solutions (including asset sales and an explicit commitment to generate income from privatisation) to the most pressing challenges.

3. The recent decision to place the SOEs in their  “policy departments” is a mistake – as an interim measure they should be managed by the Treasury. The report argues that making the policy departments responsible for the relevant SOEs will make it harder for the policy-makers to focus on the national interest, rather than the interests of the SOEs for which they are responsible. This will slow reforms that the SOEs oppose.

4. In the medium term, the government should establish a small, new, highly skilled department, led by the right people who are committed to competition and effective regulation and appoint a board based on excellence and not patronage.  This, however, needs to be preceded by the adoption of a much more competition-oriented governing policy framework for the SOEs. (See nine  below)

5. Review SOE boards and management. Once housed under the Treasury, that Ministry must review the boards and management of all major SOEs. Where boards are relatively new and/or are making progress, they should not be changed; where deficiencies are identified, active steps must be taken to replace incumbents. A process for replacing unsuitable managers must be designed and implemented as quickly as possible. (See CDE ACTION TWO: Appoint the right people in mission critical jobs.)

6. Once in place, effective boards must commission skilled and independent public and private sector experts to review all large capital projects currently being executed. The goal will be to assess whether the capital projects are fit for purpose and the extent to which their delivery and cost are optimised. Where deficiencies are identified, these must be addressed through the renegotiation of contracts, and, where corruption is suspected, the law must be brought to bear quickly and effectively.

7. Strengthen the Public-Private Partnership framework. The PPP regulations need to be further amended to attract and execute PPPs. Making the regulations less complicated and cumbersome remains a challenge, but attention must be devoted to ensuring that the arrangements properly incentivise private partners to deliver on time and within budget.

8. Focus on regulatory institutions. Capacity and other weaknesses in key regulators must be addressed. Strong and independent regulators will become even more vital as competition is progressively introduced.

9. Develop an overarching competition policy for SOEs. To solidify and extend these measures, the government should develop an overarching competition policy that sets out the principles for the role of SOEs in the economy. This should be based on a thorough review of SOE-dominated sectors to identify where competition can be intensified. The policy should specify the conditions under which the state is to use SOEs to produce goods and services and why, and how competitive pressures will be used to ensure commercial discipline and focus. This should then guide a review of SOEs across all spheres of government – national, provincial and local.

10. Implement speedy additional reforms relating to individual SOEs, including:

• Accelerating Eskom’s transition to becoming a systems operator that purchases electricity generated by a large, diverse and decentralised producers’ market
• Facilitating competition between multiple providers of freight services by restructuring Transnet’s freight rail business along lines that attract long-term investment while strengthening competitive pressures
  • Taking the ownership and management of the ports out of Transnet to ensure arm’s-length management of service providers in the ports, with the Ports Authority mandated to maximise competition between providers
• Decentralising the ownership of PRASA’s operations. Relevant metropolitan governments should take control over passenger rail services
• Denying non-strategic SOEs operating in mature markets such as Denel, Safcol and SAA access to future bailouts. If they cannot sustain their operations, they should be sold

“Malfunctioning SOEs hold back growth. Detailed and specific recommendations for reform are required for each of the major SOEs. How the GNU manages and develops consistent, coherent policy for the large SOEs is a vital task which is currently confused and confusing,” said Bernstein.

“The National State Enterprises Bill under consideration in Parliament is not the answer. It is a partial solution to one problem, but does nothing to alleviate most of the crises SOEs face. It is a distraction. The cost and effort of setting up this complex new institution will far outweigh whatever marginal benefits such an approach to managing the SOEs might have,” she added.

“The general approach must be to increase the role of competition between service providers to discipline SOEs, so that they are incentivised to improve and develop their own sustainable solutions,” concluded Bernstein.

For media enquiries and interview requests, please contact Refiloe Benjamin: media@cde.org.za | 011 482 5140

ABOUT AGENDA 2024: PRIORITIES FOR SOUTH AFRICA’s NEW GOVERNMENT

AGENDA 2024, based on CDE’s extensive policy work and recent consultations with experts, business leaders, former public servants and academics, sets out to answer what is by far the most important question facing South Africa: what can a new government do to get the country back on track after 15 years of stagnation and decline?

CDE’S AGENDA 2024 identifies five urgent priority areas that the new government needs to focus on: fixing the state; driving growth and development by freeing up markets and competition; building a new approach to mass inclusion; tackling the fiscal crisis; and strengthening the rule of law.

Over the coming weeks and months, CDE will be releasing a series of reports on the priority areas set out above. Previous reports in the series can be accessed here.

ABOUT THE CENTRE FOR DEVELOPMENT AND ENTERPRISE

CDE is an independent policy research and advocacy organisation. It is South Africa’s leading development think tank, focusing on critical development issues and their relationship to economic growth and democratic consolidation. Through examining South African realities and international experience, coupled with high-level forums, workshops and roundtables, CDE formulates practical policy proposals outlining ways in which South Africa can tackle major social and economic challenges.