/ 18 February 2016

State forced to reconsider review of parastatals

State Forced To Reconsider Review Of Parastatals


A change in political and economic circumstances has forced the state to seriously consider the game-changing recommendations of the presidential review committee on state-owned enterprises, analysts say.

The committee’s report, which has been out since 2013, made wide-ranging recommendations on how the hundreds of state-owned entities across all levels of government are managed.

After languishing for three years, the report has now received overt support from President Jacob Zuma, who promised to implement its recommendations during last week’s State of the Nation address.

The report has not been totally ignored by all in government. The treasury, under former minister Nhlanhla Nene, has been pushing for the overhaul of legislation governing parastatals. During the October medium-term budget, he noted government wished to create legislation that would grant the state greater power to intervene in floundering state-owned entities. The report recommended creating an overarching “state-owned entities Act”.

At the time, the treasury told the Mail & Guardian that its work was in line with the recommendations of the review panel and that it was working with the public enterprises department to create the legislation.

The strain that poorly run parastatals have placed on the state’s resources can no longer be ignored in a context of declining economic growth, reduced tax revenues and the threat of a ratings downgrade, which would have a knock-on effect on the cost of borrowing for these already heavily indebted entities.

SAA extension
This week, Finance Minister Pravin Gordhan asked Parliament to grant SAA yet another extension to table its 2014-2015 financial results. The airline is awaiting a decision from the treasury to grant it a guarantee to ensure it remains a going concern.

The finance ministry said: “Given the potential implication for the sovereign and for the economy, the matter requires extensive and careful consideration. SAA is unable to finalise their annual financial statements for the tabling in Parliament until a decision has been made on the going concern application.”

It is against this backdrop that Zuma said in his State of the Nation address that the government would implement the report’s recommendations. He stopped short of mentioning the “privatisation” word – although this is one of the solutions to parastatals’ growing debt burden advanced in the report.

The report said other funding options should be explored. These included the “policy shift towards a greater mix [of] debt finance and possible equity finance through partial listing of [state-owned enterprises] on the JSE, whilst astutely preserving government control and maximising investor appetite”.

The other option, it said, was the use of public-private partnerships. These could include private equity invested into certain projects in the form of “classic build, operate, own and transfer” structures, but with a higher stipulated level of equity capital to increase affordability for users.

Another option would be for the private sector to invest in certain state-owned entities through “vertically separating certain infrastructure and operations”.

Shift in approach
Alan Hirsch, the director of the graduate school of development policy and practice at the University of Cape Town, said the shift in the government’s approach appears to stem from a “political change as well as a change in economic circumstances”.

“Political in the sense that privileged relationships have been revealed and are not as protected as before, and economic in the sense that the state of government finances makes action imperative, or inaction grossly irresponsible,” he said.

Proposals to list partially or get private investors to fund specific parastatal projects may prove challenging, given the financial difficulties many face and the economic climate.

Hirsch said much depends on how private investors are brought in. Entities with weak balance sheets could financially separate exciting new ventures to extract full value from the private investors. “For example, Eskom could have joint investments in new renewable projects with private investors,” he said.

It is difficult to raise capital at fair value with a poor balance sheet, but there are ways of doing it, he said.

Strategic partnerships were successfully brought into state-owned defence firm Denel in the late 2000s, Hirsch said – a model that could be adapted for other parastatals.

Hirsch said a partial listing on the JSE would have the advantage of broadening the governance structures of an entity.

Some of these options were put forward as a way to revitalise power utility Eskom. In the early stages of the construction of the mega-station Kusile, Eskom explored selling a stake in the project. The power station, like its sister project Medupi, is still not complete and has been plagued by cost overruns and delays.

Market appetite
Energy specialist Chris Yelland of EE Publishers said there may yet be market appetite for either the partial privatisation of Eskom or a public-private partnership, despite the company’s financial difficulties.

Partial privatisation or public-private partnerships could take many forms beyond a listing on the stock exchange, said Yelland.

Eskom could dispose of “noncore” assets such as midlife power stations that are not compliant with environmental regulations, selling them to investors who may have the appetite and money to overhaul them.

The utility could also take on strategic equity partners to bring greater management and operational skills and expertise to the organisation.

It was inevitable that this would meet with resistance from organised labour, said Yelland. Nevertheless, it appears “that government is starting to talk this language” and that the “taboo” of privatisation was “quietly being considered”, he said.

The report also recommended jettisoning some state-owned entities, which was referenced by Zuma in his speech. It said the government should rationalise its holding by focusing only on entities serving “national interests, national security and priority sectors”.

The committee estimated at the time that there were about 700 state-owned bodies, but a 2011 survey analysis done for the committee noted that, of a sample of 140 entities, 30 were found to be either no longer in existence, deregistered, merged with other entities or untraceable, suggesting the number of functional entities may be lower than expected.

Difficult to dismantle
It may be difficult to dismantle institutions, argued Hirsch, as they “tend to have strong interests protecting them, and they can use populist strategies to protect themselves”.

“But this is the best opportunity we will get for decades to sweep out the dead wood,” he said, cautioning that it was hard to rebuild an institution once it has been dismantled.

The committee also recommended establishing a dual model of parastatal ownership because many government departments and ministries lack the capacity to oversee these institutions properly.

It proposed that the ownership of commercial entities and development finance institutions be centralised under one ministry. It pointed to Denmark, the Netherlands and Spain, where this central department was the ministry of finance. A decentralised model was recommended for statutory and noncommercial entities, which would remain with branch or sector ministries.

Hirsch said there is “excessive complexity in [state-owned entity] governance” and it should be reduced as much as possible by, for example, locating the public enterprises department within the treasury, even if it retained its own minister.

This excessive complexity was one of the causes of the 2008 electricity crisis that resulted in South Africa’s mining sector having to shut down operations to avoid a countrywide blackout, he said. – Additional reporting by Phillip de Wet