/ 5 November 2015

State loses patience with parastatals

State Loses Patience With Parastatals

Last week PetroSA said it was offering its staff voluntary severance packages in a bid to right its dangerously listing ship.

It is almost unheard of for a parastatal to begin the painful process of cutting jobs. But the decision by the state oil company illustrates the extent of the crisis it finds itself in. It racked up losses of about R14.5-billion, the worst ever for a state-owned enterprise, and has become the latest in a queue of government-owned and -run firms in dire straits.

Against the backdrop Finance Minister Nhlanhla Nene announced during the recent medium-term budget review that the state will introduce legislation to give it greater power to intervene when parastatals hit the rocks.

The government has acknowledged that something needs to be done, but Ralph Mathekga, the head of political economy at the Mapungubwe Institute of Strategic Reflection, said the state had misdiagnosed the problem and any new laws giving it more room to intervene were unlikely to address the real difficulties facing these entities.

Guarantees extended to major state-owned companies, including Eskom, SAA, the South African National Roads Agency and the South African Post Office, have reached more than R460-billion, according to this year’s budget review. It has contributed to state debt levels rising to about 58% of gross domestic product when contingent liabilities such as the guarantees and loans to these agencies are included.

Deputy Finance Minister Mcebisi Jonas said the lack of enabling legislation to allow the government to step in and take control of a state-owned company needed to be addressed, given the serious governance failures seen at parastatals. The government has already begun drafting legislation that, for example, would allow the state to put a parastatal under administration if required.

“If there is major failure and collapse within a particular SOE [state-owned enterprise], at the moment, the only instrument you have is the board and that’s not what you need,” he said.

At a broad strategic level, these companies have both commercial and developmental imperatives, Jonas said. It was important to balance the two, despite the perceptions that the developmental objectives of state-owned companies undermined their commercial imperatives.

But, Mathekga said, there was a “misdiagnosis under way”. “The reason why they went astray is because of their politicisation; it is because they have been identified as channels of patronage by the political elite,” he said.

Too often the management of state-owned companies cited their relative independence from the state to engage “in malfeasance and maladministration” rather than to demonstrate their ability to perform well, he said.

In several cases, the leadership of parastatals had exploited political divisions and factionalism as a way to avoid censure. “What is required is the political will on the part of the governing party to actually intervene with the aim to sort them out, instead of intervening to serve patronage in the interest of the dominant few,” Mathekga said.

The details of the proposed legislation have yet to be revealed but they are in line with long-running plans to overhaul how state-owned entities are managed.

In 2013, the Cabinet announced the findings of the presidential review committee on state-owned entities. The review was tasked with finding ways to overhaul the more than 700 entities that reported to the state. It made a number of far-reaching re-commendations, including reducing their number and streamlining their functions where necessary.

It called on the government to “delineate the separate roles of government as owner, policymaker, regulator and implementer”, and to introduce mandatory reviews of these institutions. It proposed that the government should consolidate them into four clusters, namely commercial entities, development finance institutions, statutory corporations and noncommercial state-owned entities.

Importantly, it recommended an overarching SOE Act to supersede all legislation governing them; to standardise their corporate governance framework; to ­outline a centralised ownership model for commercial and development finance institutions; and a decentralised model for statutory bodies and noncommercial entities. The spokesperson of the treasury, Phumza Macanda, said the proposed legislation was in line with the committee’s recommendations.

“There is a lot of supporting work that is currently underway that will be important in defining the content of the Act,” she said. “At this stage, no decision has been taken on which [state-owned companies] will be included in the ambit of the Act.”

She added that the factors that had contributed to difficulties at state-owned entities included unclear mandates or misalignments, inefficient operations, failure to keep pace with changes in an industry, governance failings, weak balance sheets and poor financial performance.

The work being done in a review of the entities would inform legislative amendments required “to better mitigate these risks”, she said.

Other departments are also involved in the process. In her budget vote, Minister of Public Enterprises Lynne Brown told the Cabinet at its February lekgotla, undertook to implement key aspects of the review.

Her department was tasked with establishing a conceptual framework, which would inform the proposed Government Shareholder Management Bill, a single overarching piece of legislation, particularly for schedule 2 and 3b entities, she said at the time.

These are listed in the Public Finance Management Act under schedules 2 and 3. Schedule 2 refers to entities such as the SABC and Eskom, and schedule 3b to national government business enterprises (water boards, for example) and institutions such as the Council for Scientific and Industrial Research.

Brown told the Mail & Guardian that her department was developing the concept paper, which, once it had been finalised, would be put to Cabinet before being published for public comment.

“I am confident that this process will be finished by the end of this financial year,” said Brown.

Government entities are one big headache    

Several leadership and financial crises have rocked some of the state-owned enterprises.

SAA has seen the collapse of more than one board while struggling to keep itself in business, forcing the department of public enterprises to hand it over to the national treasury towards the end of last year. The airline’s current board is headed by the controversial Dudu Myeni, who is understood to be close to President Jacob Zuma.

Its acting chief executive officer, Nico Bezuidenhout, returned to its low-cost subsidiary, Mango, in July after holding the fort following the exit of suspended chief Monwabisi Kalawe. The airline is currently being run by its head of human resources, Thuli Mpshe, in a caretaker role.

In the recent medium-term budget, the treasury said SAA had successfully executed a 90-day action plan, which included closing unprofitable routes and reviewing onerous agreements and procurement contracts. But it warned that the airline was expected to generate sustainable profits in five years’ time and, for SAA to continue operating, continued government support would be needed.

State oil company PetroSA reported losses of more than R14.5-billion in its financial results this year. In large part, these are thanks to its failing Project Ikhwezi, the development of offshore fields to secure more feedstock for its Mossel Bay gas-to-liquid fuel refinery. Without new sources of gas, the plant is only expected to continue operating until 2017.

A soured investment in Ghana as well as the low oil prices further contributed to losses.

Last week, the company announced that it has reached an agreement with Nosizwe Nokwe-Macamo, its chief executive, on the termination of her contract. She and the chief financial officer, Lindiwe Mthimunye-Bakoro, were suspended in June when the board sought to investigate the performance of the company.

Media reports suggested that it would be selling off assets to sustain itself. But the company spokesperson, Thabo Mabaso, said it would not be doing so, and was instead seeking parnerships with other firms in a bid to develop its assets.

Power utility Eskom has only just returned to a modicum of calm after it lost its board chairperson, its chief executive and two members of its executive management team in quick succession. Former chief executive Tshediso Matona, head of group capital Dan Marokane and finance director Tsholofelo Molefe left Eskom earlier this year after an investigation was launched into the problems facing the company.

Matona had been in the job for only six months, and a number of the issues Eskom faces are long-standing. All were ultimately cleared of any wrongdoing.

The utility is still not out of the woods. It has had to been bailed out with a R23-billion capital injection by the government, funded by the sale of its stake in Vodacom. The treasury has attached strict conditions to the bail-out.