DA’s rescue plan to transform SOEs will make service delivery to citizens a priority
22 May 2018
South Africa’s State-Owned Entities (SOEs) are currently failing to perform their most basic mandates - providing services and opportunities to the citizens of our country. Instead, SOEs stumble from one crisis to another and average South Africans, especially the poor, are left to bear the brunt of the ANC’s continued broken promises.
The reality is that if we do not turn around the current status quo at SOEs, our economy could face possible collapse. Urgent reform of our state entities is desperately needed.
SOEs represent a major risk to South Africa’s economy with government guarantees reaching R466 billion in the 2017/18 financial year. Another R10 billion was borrowed against these guarantees over the period, taking the total exposure up to R300 billion.
Billions of rands which could have funded higher education for the poor, housing projects, build clinics and schools, fund effective job-creation initiatives and replace pit toilets at schools - have been allocated to prop up falling SOEs under the leadership of ineffective executives.
In the 2016/17 financial year, 38% of all SOEs made losses totalling a staggering R53.7 billion. Among the biggest offenders were PETROSA, PRASA, SAA, SABC, SANRAL, and SAPO, which made a combined loss of more than R15 billion, nearly 28% of total losses. The combined profitability of SOEs fell from 0.8% in 2015/16 to 0.3% in 2016/17.
It is evident that South Africa’s SOEs are in serious financial distress. This is largely due to State Capture, corruption, financial mismanagement, poor governance and a general lack of state oversight.
Just because State Capture has been exposed, does not mean SOEs are in the clear. The hard work will only start now.
Just recently, the existence of a “commitment letter” emerged which, according to the SAA CEO, contains a commitment by National Treasury to “inject capital” into the struggling national carrier. This seems to indicate that government will provide SAA with the R21.7 billion it requires to stay afloat.
This “commitment letter to inject capital” has seemingly also made it possible to persuade banks to lend SAA R5 billion.
It is still unclear whether Cabinet is aware of this letter, but the DA will submit a PAIA application to make the letter public, as its contents could have massive implications on the fiscus, and ultimately National Treasury.
Cyril Ramaphosa’s “New Dawn” must be more than a mere slogan. If the pertinent challenges at SOEs are not attended to with haste, large-scale corruption will continue to fester.
An effective turn around strategy is needed to ensure that SOEs get back to the work of service delivery, after years of parastatals being abused by Gupta-linked companies receiving dodgy tenders, children of top management awarded multi-million rand contracts and certain ANC politicians and private companies colluding to defraud the state of billions.
The level of corruption and mismanagement was able to manifest because the operations of SOEs often go unchecked and their dominance is largely uncontested.
It is for the same reason SOEs have developed into archaic monopolies. With no competition to drive innovation, it is no wonder parastatals are underperforming and continue to cost taxpayers billions in bailouts. This is once again proof that reform is needed.
The current state of SOEs is also a damning indictment on the lack of clear vision and political will from the ruling party. The ANC does not have the appetite to unlock the true potential of SOEs in order to drive growth and job creation.
Instead of creating tangible change for the poor and marginalised, the ANC exploits SOEs to line the pockets of loyal cronies.
Under the disastrous term of disgraced former President, Jacob Zuma - SOEs, such as Eskom, essentially became cash cows for the Guptas and their lieutenants to loot. Minister of Public Enterprises, Pavin Gordhan, estimated the total amount syphoned from South Africa at R100 billion.
What our SOEs require is a complete turnaround strategy and DA has a sound six-point rescue plan which will revitalise our parastatals.
Our SOEs need to become depoliticised. Political appointments to the boards of SOEs through the ANC’s cadre deployment policy have come at the expense of exceptionally skilled and knowledgeable candidates.
Not only does this lead to stagnation, but also opens parastatals to the possibility of being captured by political rent-seekers or connected individuals. To this end, the DA would advocate for board members to, among other things:
Be appointed based on their business knowledge and expertise;
Be vetted for political connections and conflicting business interests with the SOE and its suppliers;
Lifestyle audits should be carried out annually; and
A Codes of Good Practise should be instituted.
Introduce professional expertise
Often SOE boards and top management lack commercial expertise and requisite skills to create environments in which decisions are made with profitability or sustainability in mind. This can be attributed to the ANC’s policy of cadre deployment and the absence of young graduates at SOEs.
Some of the DA’s proposals in this regard is the following:
A greater emphasis on graduate recruitment programmes and the hiring talented immigrants, who can bring much-needed skills;
A revamp of employee-compensation systems in line with international best practices, which is linked to stringent performance criteria; and
Rewards and promotions should be based on merit, not tenure.
A focus on becoming competitive
The Department of Public Enterprises (DPE) is the sole or main shareholder of SOEs. This means SOE executives often have to juggle multiple conflicting and opaque financial and social objectives. The result is that profitability and economic sustainability is conflated with ideological and political concerns. Furthermore, SOEs are often shielded from competitive pressures given their monopolistic nature in the market, allowing them to become bloated and inefficient.
For this reason, the DA proposes that:
SOEs have clear mandates that set financial objectives and sustainability as primary goals;
Key performance indicators (KPI) are selected, contributing to the creation of a performance-based culture;
Profit and non-profit objectives of SOEs must be clearly defined and matched to industry standards and best practices for financial targets;
Non-core activities and assets need to be examined and if necessary sold off, franchised, outsourced, or terminated; and
SOEs must pursue an operational campaign focusing on improved technical capabilities and a more effective working culture with excellence at its core.
Good governance based on transparency
SOEs must become more transparent in order to minimise the opportunity for corruption. A major reason for the corruption is the lack of clear and transparent procurement of contracts and tenders for politically connected parties which have hampered service delivery.
The DA would see that:
SOEs communicate regularly (monthly) on progress achieved with regard to KPIs and on social and financial objectives to maintain public support and buy-in;
Performance agreements with executives must be publicly available and executives must be held accountable for these;
The tender awarding process for contracts over a certain value should be made open to the public at the adjudication stage to avoid cases of political interference; and
Procurement oversight at SOEs must be strengthened through the creation of internal procurement oversight committees, consisting of selected internal auditors that would report to the board.
Accelerate the introduction of private equity partners
It is unsustainable for government to continue to support financially unviable SOEs. The Department must accelerate the process of restructuring ownership. This requires the government to look at the partial or full privatisation of a number of SOEs by bringing in private equity partners and disinvesting from non-core SOEs urgently. Privatisation which can stimulate a more dynamic industrial infrastructure; provide SOEs with the fiscal discipline of the marketplace; and bring in vital cash injections, skills, systems and expertise.
The sales of SOEs would need to be managed by an independent board to prevent oligarchs from forming. Share options for employees can be offered to get buy-in for privatisation from workers. The Competition Commission would need to be strengthened to regulate the sale of SOEs as they are currently under-capacitated to deal with this mammoth task.
Streamline government oversight
It is urgent that we dissolve the ineffective and frankly, pointless, Department of Public Enterprises and manage the SOEs under their rightful Departments.
For example, in the case of Transnet, the government should return it entirely to the Department of Transport. Eskom should move to the Department of Energy and Denel should go to the Department of Defence. This would improve the lines of accountability and communication and also align SOEs with the efforts of their rightful portfolio.
Another option would be to move and consolidate SOEs to different departments. Clustering and centralising them in the following groupings: commercial, development finance institutions, statutory corporations, and non-commercial SOEs.
Reducing the number of SOEs and streamlining them where appropriate, would be a necessity. This will mean better synergy and efficiency and it will reduce the demand for monitoring resources.
South Africa simply cannot afford to continue down the downward spiral of underperforming and financially distressed parastatals. The DA’s action plan will go a long way in ensuring that good governance and efficiency is restored in our SOEs.
The reality is that while our SOEs are failing, the biggest losers are the average citizens on the ground, as service delivery is no longer a priority for parastatals.
South Africans deserve SOEs to be proud of. We need reliable public transport services and an efficient power utility, among other crucial services, and the DA’s rescue plan is the first step in improving services to our citizens, especially the poor.
Issued by Natasha Mazzone, DA Shadow Minister of Public Enterprises, 22 May 2018