Changing the state of enterprises

Ambitious proposals to centralise and rationalise the running of an estimated 715 state-owned entities were revealed this week when the presidential review committee on the entities released its long-awaited report in Parliament.

Recommendations include the creation of an overarching Act to govern all state-owned entities (SOEs), the centralisation of all commercial entities under one central authority; and the creation of a second central authority for state development financial institutions.

Also recommended is the adoption of a standardised framework for the appointment of board members and chief executives to head the entities. The report also recommended proposals to rationalise the plethora of entities that have sprung up in recent years, either by absorbing them into state departments or by listing some of them on the stock exchange to address the funding challenges they face.

The report has been cautiously received, with some observers welcoming the bid to overhaul ailing public sector entities that do not address a market failing or adequately provide a public service. But the proposal to further centralise commercial SOEs, many of which have a great deal of financial and economic clout, in one department has been questioned.

The Democratic Alliance spokesperson on public enterprises, Natasha Michael, warned that it risked creating "an empire" for Public Enterprises Minister Malusi Gigaba.

Gigaba's department already oversees major entities such as Eskom, Transnet and SAA. The report's recommendations could see other major parastatals such as PetrsoSA, the signal distributor Sentech, the government's shareholding of JSE-listed Telkom and even the South African National Roads Agency folded into Gigaba's stable. However, the committee stopped short of identifying where the entities should be moved or which should be wound down.

A centralised model
The committee advocated a centralised model, arguing that it provided a number of advantages, including the separation of ownership and policy functions; greater unity and consistency of the ownership policy, including unified guidelines on board nomination and executive remuneration; centralised and aggregate financial reporting; and centralising competencies and organising pools of experts in relevant matters.

An overarching law to govern all the entities must be enacted, according to the report, which should "supersede all current legislation government SOEs, reduce the current burden of compliance with multiple laws and regulations, and include all subsidiaries of SOEs". This was necessary "in the light of prevailing confusion in legislation governing SOEs, characterised by the duplication, conflicting provisions, different founding legislations and sometimes serious omissions", according to the committee.

Minister in the Presidency Collins Chabane said this week that the proposed changes should be seen as "a reform process" rather than a once-off event. An SOE interministerial committee would be set up to guide the implementation of the recommendations.

The report gave an implementation framework, which included the drafting of a white paper outlining the restructuring and rationalisation of the entities, as well as the new SOE structures and new legislation, within the next two years.

The report acknowledged that many of the entities face extensive challenges in staying funded, particularly in the light of the need for major infrastructure investments and the opportunity private sector partnerships offered in addressing this. Against this backdrop, the committee noted that, "under close scrutiny, significant infrastructure funding capacity reveals that DFIs [development finance institutions] substantially fall short of the required capital injection".

Given the "constraints of both the deployment of taxes, the balance sheets of the large SOEs and the user-pays approach" it was vital that the rationalisation of state holdings be considered, the committee said. This would include abandoning sectors that could be "adequately provided for by the private sector", divesting fully or partially from SOEs that were underperforming or competing unsuccessfully against private operators; or absorbing those entities whose functions could be cost-effectively carried out by government line departments.

"Astutely preserving government control"
To further address the issue of funding, the committee recommended listing selected entities on the JSE while "astutely preserving government control". A means to retain this kind of control could be "golden shares", which effectively give the government rights that other shareholders do not enjoy. According to the report, the JSE indicated it would be "willing to reinstate the golden share for a limited period for listings by SOEs".

It is unclear, however, what kind of market appetite there would be for listing parastatals, especially where the government retains preferential shareholders rights.

In developing a funding model for public infrastructure the committee emphasised the need to distinguish between economic infrastructure — which should be funded by the user-pays principle — and social infrastructure, such as schools, health facilities, public amenities and roads. This could not "justifiably and sustainably" be funded by the users in a country where most citizens had limited means.

The committee recommended that an expansionary gearing policy should be adopted and the government should "signal unambiguously to financial markets its implicit backing of this form of SOE debt".

The review singled out the mining sector as having to contribute more to developing the infrastructure it benefited from.

The mining sector should "contribute fairly to the development of infrastructure for economic use", not only through tariffs but also through other "policy tools", including "mandatory local beneficiation and ring-fencing of a portion of the proposed resources tax to develop infrastructure".

Privatisation could be on the cards
The special adviser to Business Unity South Africa (Busa), Raymond Parsons, said the organisation welcomed indications that privatisation could be on the cards for some entities as this would "contribute towards a more realistic approach to streamlining the parastatal constituency of over 700 entities". Parsons noted that the performance of key SOEs was "even more under the spotlight now" than it had been when the review began in 2010.

In its submissions made to the review committee two years ago, it was Busa's view that there was "considerable scope for rationalisation and consolidation of parastatals" and "the efficiency and effectiveness of SOEs was not only essential to the efficacy of the private sector but also to South Africa's global competitiveness", Parsons said.

Busa also emphasised that senior appointments to SOEs needed to be "depoliticised to attract and retain skills", he said.

The overarching test would be the consistency and co-ordination of the review with the country's national development plan, he said.

In this regard, deputy chairperson of the review committee, Glen Mashinini, said that the committee viewed the report as aligned with the national development plan.

Both emphasised the role of the development state, he said, and the work of both the committee and the national planning commission was viewed as a "continuum of processes".

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Lynley Donnelly
Lynley Donnelly
Lynley is a senior business reporter at the Mail & Guardian. But she has covered everything from social justice to general news to parliament - with the occasional segue into fashion and arts. She keeps coming to work because she loves stories, especially the kind that help people make sense of their world.

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