October 22, 2023 In Consultancy

REINVENTING STATE OWNED ENTITIES

Status Quo

The current higgledy-piggledy surrounding State Owned Companies / Entities (“SOC’s or SOE’s”) provide an opportunity for re-positioning these important resources. The major challenge with most SOC’s, save for those in the public utilities and transport sectors, appears to be a lack of foundational definitions regarding their raison d’être. One should also be mindful of the fact that most government “agencies” were created haphazardly as a mechanism to overcome the “sunset clause”, which guaranteed job security for white civil servants during SA’s negotiated political settlement. This created a serious challenge for the State, as it meant the State had to rely on antagonistic and bitter civil servants to implement the transformation agenda. The agencies were then created to “accelerate” transformation in the public sector by moving “friendly” civil servants into these agencies.

The fortunate part of our current discourse is that all the mishaps are happening at a time in history where SA has already embarked on a review of its SOC framework. The Presidential Review Commission(“PRC”) on SOE’s  submitted its final report on 30 April 2013 and had the following conclusions regarding challenges facing SOC’s

Challenges facing SOC’s

According to the PRC report, SA SOE’s faced the following challenges:

  1. Proliferation of SOEs, including commercial and non-commercial entities and their subsidiaries. On my last count there were more than 700 SOE’s in SA including Provincial entities.
  3. Whether SOEs were responding to the State’s developmental agenda. The challenge here is that the State itself does not seem to have a clear  and universal definition of what the “developmental agenda” means insofar as SOEs are concerned.
  5. South Africa has no common agenda for and understanding of SOEs.
  7. There are no commonly agreed strategic sectors and priorities.
  9. Balancing the trade-offs between commercial and non-commercial objectives of SOEs. A major concern since SOEs also have to achieve socio-economic objectives.
  11. The legislative framework for SOEs was found to be inadequate. My view is that any legislative review must start with the PFMA. Perhaps some form of “Supplements”, along the lines of King IV should be developed to remove bottlenecks that hamper SOC agility and effectiveness. SOCs which are mainly businesses cannot operate under the same “compliance junky” mentality that government departments are expected to have.
  13. Governance, ownership policy, and oversight systems were found to be inadequate.
  15. Quality of the board and executives’ recruitment was found to be inadequate. This is notwithstanding the diverse skills we have as a nation. “Cadre deployment” should be replaced with industry expertise and the right “horses for courses”. If the cadre has all that, then even better.
  17. No clarity on the role of the executive authority, boards, and the Chief Executive in the governance and operational management of SOEs. The appointment of CEO’s must remain the responsibility of the board, with proper oversight from the shareholder. The Shareholder appointing CEO’s is a recipe for disaster as recent history has shown. It creates a culture of “super-CEO’s” and disaster from an  accountability perspective.
  19. The remuneration frameworks and practices are inconsistent. A uniform remuneration system must be adopted, taking into account risk and responsibilities of an entity.
  21. Funding models for social and economic development mandates of SOEs are blurred and confusing, leading in some instances to under-capitalization. This is also exacerbated by Ministers who places extra burdens on entities with last minute requests to fund projects not budgeted for.
  23. Service delivery performance of SOEs was found to be mixed. Obviously because of a lack of clearly defined “performance indicators”
  25. Despite the importance of these shareholder compacts, they are often not signed on time and make insufficient provision for objectives beyond the narrow goal of profitability.
  27. Lack robust leadership and initiative on crucial transformation imperatives. Useally a consequence of not having the right skills on boards. It results on “decision-paralysis” due to lack of appropriate skills and therefore fear of “rocking the boat”.
  29. Collaboration and coordination among SOEs and their oversight is poor. Imagine Transnet and Prasa having a dispute over services but are unable to resolve their differences? This is common among SOEs to operate in silos resulting in wastage and loss of time whilst arguing past each other.

Conclusion

Overall the PRC made 31 recommendations to the Government concerning the future of SOEs along with a timetable for the short-medium-and long term phases with identifiable outcomes that should be achieved within the respective time frames. Inter alia the recommendations made were that the Government should develop a long-term strategy for SOEs including the promulgation of a single ‘SOE Act’ that would be applicable to all SOEs nationally. Standardization of appointment and remuneration processes for all SOEs as well as standardizing development and delivery goals.

  • Commercial Institutions
  • Development Finance Institutions
  • Statutory Corporations
  • Non-commercial SOEs

The above recommendations place significance on Government to enhance its capacity and be sufficiently capacitated with appropriate and specialized skills and expertise to successfully manage the State’s SOE portfolio.With the above recommendations already available. The State has an opportunity to move swiftly and rescue the reputation of SOEs.

Ronny is the MD of Mkhwanazi Inc, a law practice specializing in Commercial Law, Corporate Governance and International Trade Law.