Reform of State Owned Enterprises the process

29 September 2016

The PRC report

The PRC report Growing the Economy: Bridging the Gap[1] recommended a wide-ranging process of reform of state owned entities.  The report recommended that the proposed reform principles and recommendations in the report should be implemented from the highest office in the land.  It proposed that government should establish a Transitional State Owned Entities Reforms Committee to drive implementation of the recommendations of the PRC.  It said that the Committee should be established as soon as the PRC recommendations were accepted and that it should report progress to the President.  It was to consist of experts nominated by the President and the Department of Public Enterprises, the Treasury, the Department of Trade and Industry, the Economic Development Department, the National Planning and Monitoring Ministry, and other relevant stakeholders. 

The report recommended that an over-arching, long-term strategy for state owned entities should find expression in a White Paper, leading to a comprehensive State Owned Entities Act.

The Inter-Ministerial Committee

In 2014, the President appointed an Inter-Ministerial Committee (IMC) chaired by the Deputy President to oversee the implementation of the PRC’s recommendations[2].  The full composition of this committee has not been published, but Business Day Live has reported that the Minister of Public Enterprises, Lynne Brown is a member of it.  No full account of what the IMC has achieved to date is publicly available.

In the 2016 State of the Nation address, the President said:

Government departments to which they report, will set the agenda and identify key projects for the SOCs to implement, over a defined period. Proper monitoring and evaluation will be done.

The Chinese connection

According to a SA News report[3] it was announced that, during the President’s state visit to China in December 2014, South Africa will extend the terms of the Memorandum of Understanding[4] between the Department of Public Enterprises and the Chinese State-Owned Assets Supervision and Administration Commission (SASAC) on the management of state owned enterprises.  The aim of the memorandum is to strengthen cooperation in terms of infrastructure construction project and information communications, as well as co-operation between Chinese and South African energy related companies.  The memorandum enables South Africa and China to share information on shareholder management practices, tools and government frameworks.

In July 2015, the Deputy President visited China with an entourage of two ministers (the Minister of Public Enterprises and the Minister of Higher Education and Training) and four deputy ministers.  During this visit, he addressed a seminar at SASAC.  He told the seminar that a new shareholder policy was being developed in South Africa to ensure that the current portfolio is fit for purpose and that development of legislation to codify the participation of the state as shareholder is under way.  He said that South Africa would also like to know about the institutional framework for private sector participation in state owned entities to augment the capacity of the state[5].  It was also reported by the SABC that China’s Academy of Governance has offered to train officials in the public sector and state owned enterprises[6].

Recent controversy

A statement on the August 2016 Cabinet Lekgotla issued on 22 August contained the following statement:

Work will also start for the creation of the Presidential SOCs [State Owned Companies] Co-ordinating Council which will provide President Zuma line of sight on strategic decisions and interventions to create SOCs that play a transformative role in a capable developmental state.

This unleashed a public controversy.  On the same day, The Daily Maverick[7] said that the Committee was expected to be in place by the end of the year, and it went on to say:

This decision effectively means Zuma is taking over from his deputy Cyril Ramaphosa, who since December 2014 has chaired the SOE inter-ministerial committee. Is this yet another twist to Cabinet power plays which previously have seen stand-offs with National Treasury?

In response, the Presidency issued a statement on 25 August[8], stating that Ramaphosa’s IMC is responsible for overseeing the stabilisation and reform of state owned entities, and that the IMC had recommended to the Cabinet Lekgotla that the Presidential SOCs Co-ordinating Council be established in line with the PRC’s recommendation.  It was stated that the role of the Council is only to co-ordinate and oversee and ensure that all work together and not in silos.  The last point fails to clarify the division of functions between the Council and the IMC.

Assessment

1. The PRC recommendations were very ambitious, proposing a radical overhaul of the framework within which state owned entities operate.  Three and a half years later, the public does not have a complete picture of what has been achieved so far.  No White Paper has been published since April 2013.  No relevant legislation has been introduced.  This situation raises two questions:

·Could it be, once again, that our policy eyes are too big for our implementation stomach? 

·Might it not be a good idea to publish an account of what the IMC has managed to do, rather than just letting snippets of information to dribble out?   We know what the PRC recommended and that need not be repeated.  What is missing is a progress report on achievement to date.  A better informed public will be able to produce a better debate.

2. Learning from successes in other countries is always desirable.  But from China, on state owned enterprises?  An article in the Financial Times on 29 February 2016[9] made the following points:

·China’s state owned enterprises are clustered in smokestack industries like steel, coal, shipbuilding and heavy machinery, all tied to the old growth model.  They are ill-suited to meet demand in emerging services sectors, such as health care, technology, education and entertainment.

·SOE reform, debt, overcapacity and zombie companies are all deeply connected issues, made worse by the response to the 2008 global financial crisis.  Banks were ordered to increase lending to state owned enterprises, resulting in investment in new factories and equipment, regardless of commercial need.

·SASAC has cautiously experimented with ‘mixed ownership’, a euphemism for selling minority stakes.  At a politburo meeting on 23 November 2015, it was decided to ‘strengthen, optimise and enlarge’ state firms, while rejecting ‘privatisation’.  Lumbering giants are to be developed into lumbering super-giants. 

The assistance of Kimera Chetty and Anele Mtwesi in producing this brief is gratefully acknowledged.

Charles Simkins, Head of Research, HSF, 29 September 2016