October 22, 2023 In Consultancy

IMF – State Owned Enterprises – Engines of Economic Prosperity (Or not)?

The International Monetary Fund (IMF) recently released a report titled “State-Owned Enterprises in the Time of COVID-19”. The idea behind the report was to provide some feedback on this important institution, which I believe is relevant irrespective of covid-19. According to the report State-Owned Enterprises (SOE’s) have grown in size and number in recent years, driven by emerging markets and they have an asset base of $45 trillion which represents almost half of global GDP. To compare, this figure was at 6% in 2011 according to the World Economic Forum for listed SOE’s. “Governments create the enterprises to meet specific goals and mandates, such as the provision of water, electricity or transportation and even banks” according to the IMF. China’s global 500 companies are mostly state-owned and many more major conglomerates around the world are State-owned.

The challenges however are that governments struggle to effectively monitor SOE’s, most don’t have the capacity to do so. There is also poor transparency on the activities of the SOE’ which leads to a build-up of large and hidden debts, resulting in bail-outs sometimes costing taxpayers more than 10% of GDP. The report also states that SOE’s underperform relative to their private sector peers. The report further states that based on a sample of 1 million firms in 109 countries, SOE’s are average less productive than private firms by one-third. Furthermore, the weak performance is partially due to poor governance. Productivity of enterprise in countries with lower corruption is more than 3 times higher than those in countries where corruption is seen as severe, the report adds.

Return on Investment

Every business that exists must have some form of return on investment (RoI). I wrote in an article over 8 years ago that what lacks mainly in SOE’s is the “enterprising spirit” inherent in any business undertaking. The generic definition of enterprising is “having or showing initiative and resourcefulness”. It is very difficult to be “enterprising” when you have a shareholder who will bail you out each time you fail. On the other hand, highly enterprising SOE’s are oft frustrated by the lack of shareholder support, funding, business acumen, agility to respond to immediate business pressures and are also suffocated by necessary but excessive legal and regulatory compliance demands.

In addition to these constraints, South Africa also has an excessive number of unnecessary agencies, tribunals and quasi-judicial bodies that should not be classified as SOE’s. These bodies overburden the taxpayer as they all have Boards of Directors in cases where this is completely unnecessary. There is no need for a Regulatory Authority, for example, to have a Board of Directors. What happens is that there is a “compliance-junky” mentality where the only consideration for Boards of Directors is getting a clean audit at all cost, even where the business is in intensive care. No business can survive in such an environment.

How do we ensure ROI?

The general consensus around SOE performance improvement universally are that:

  • Regularly review the necessity and effectiveness of SOE’s e.g. Germany does biennial reviews;
  • The right performance incentives must be in place, encourage transparency and accountability. I’ve also long championed that Boards of Directors must also have Performance Reviews similar to that of Executives;
  • SOE mandates, funding and support must be in place to empower SOE’s to be enterprising;
  • Training, training and more training, not only for Boards, but also for officials entrusted with SOE Oversight in the various Shareholder departments. You cannot assess the performance of a business from a civil-servant lens. These are worlds apart and is evidenced by the many SOE failures we are currently seeing;
  • Appoint “horses for courses”. Period!
  • Board Appointment must be taken seriously and not left to departmental officials alone (which sadly is the case), add a mix of private executive recruiters to add value to the process;

The list is not exhaustive but will suffice for purposes of this discourse. SOE’s can be an engine for accelerating economic growth, however on the flipside, they can cripple a countries economy if left unchecked.

Ronny Mkhwanazi is Corporate & International Trade Lawyer and Director at Mkhwanazi Incorporated based in Johannesburg, South Africa. Email: ronny@mkhwanazi.com