Besides there being too many SOEs, we need to keep only the large and strategic ones and ensure they have a broader shareholder base
By THABILE WONCI
Over the past few months, South Africans have been deliberating over the shameful misfortunes that have engulfed the country’s state-owned entities (SOEs). For the first time since the end of the apartheid era, the country has experienced a massive degeneration of its SOEs, characterised by steady destruction of shareholder value. As such, our SOEs have now reached their road to Damascus.
The economic contraction SA’s SOEs are experiencing is driven by our own attitudes and actions — such as the “let the rand fall and we will pick it up again” attitude. This calls for the implementation of an urgent SOE reform programme that will serve as a catalyst for the country’s economic growth and broad-based economic developmental agenda.
Our SOEs have long been plagued by operational inefficiencies, debt and corruption. This profound dilemma can only be addressed by bringing in the necessary reforms. To resist such reforms is to risk these SOEs going bankrupt or overburden their already stretched balance sheets with more debt. This dilemma has gone unrecognised for many years and is only marginally visible as a public debate. This age of irresponsibility needs to end today.
The question we need to ask is whether SA needs all its SOEs, which are estimated to number more than 700 and operate under the sole ownership of the government. The only sensible rationalisation process will be to release the smaller and less strategic SOEs and retain only the large and strategic ones. This could be achieved through equity sales of the government’s interest through an open bidding process, or management buyout equity structures that generate and promote a culture of entrepreneurship and wealth creation.
If the management of these smaller SOEs are confident of their future sustainability and profitability, surely they will have an incentive to pool resources to acquire all or part of the businesses they manage. This would also resuscitate the lacklustre mergers and acquisition activity we are experiencing. In addition, the view to sell the smaller SOEs is supported by the resounding logic of eliminating the less strategic SOEs without sacrificing employment. Besides, any equity sale will result in a financial contribution to the fiscus.
A mixed shareholding structure will help untangle the internal bureaucratic systems and eradicate the culture of poor performance … [and] will rid the SOEs of their political appeal
The second logical step in the SOE rationalisation process is to look at the strategic SOEs vis-à-vis industries that are key to driving economic growth and development. This suggests the government will have to limit the focus of its remaining and large SOEs to key sectors such as pharmaceuticals, healthcare, energy, defence, oil and gas, telecommunications, aviation, water and transport.
The sale of smaller and less strategic SOEs would lead to a relatively smaller pool of more strategic and focused SOEs that would still be under the full or partial control of the state. Focusing the large and strategic SOEs on key sectors of our economy would be a deliberate mechanism to align them to the country’s economic developmental agenda. Key to the reform programme would be a commitment to run the SOEs purely on commercial terms and for profit.
Retaining only the large and strategic SOEs will be a significant steps towards building an SOE sector whose contribution and economic dividends to the country can be accurately monitored and evaluated against set strategic objectives by the shareholder(s). Gone will be the days when the government responds to the SOE crisis blindly, as there will now be increased concentration of them.
Most important, the state’s equity shareholding in the large and strategic SOEs must be reduced by bringing in private investment. This will enable private investors to gain control over daily operations through board representation. This will benefit the SOEs by regaining the required operational efficiencies and financial performance. This reform process of partial privatisation will drive our SOEs towards a commercial-orientated approach. Besides which the SOEs will gain additional technical and strategic expertise to drive value creation for their mixed shareholder base.
Notably, the introduction of private investors into the large and strategic SOEs will break down the inherent monopoly structures that have characterised most of the large SOEs and will lead to stronger internal pressure to improve business performance through corporatisation.
Market competitiveness of these large SOEs will improve, and this can only have positive spin-offs for the domestic economy. Consequently, the introduction of private capital will be an effective instrument to align mismatched management and shareholders’ interests. This misalignment often leads to agency problems.
A mixed shareholding structure will help untangle the internal bureaucratic systems and eradicate the culture of poor performance. It will rid the SOEs of their political appeal, which has been a serious impediment to transforming the deeply entrenched culture of cadre deployment that frustrates business growth. This reform agenda aims to improve SOE efficiencies and their competitiveness without extolling privatisation as an answer to our SOE woes.
Needless to say, selling the smaller and less strategic SOEs, coupled with an introduction of private investment to large and strategic ones, should not be tantamount to leaching away state assets. This is done only to bring about the necessary and much-needed reforms to our SOE sector. Without doubt, the view of an SOE rationalisation reform programme and mixed ownership suggests a rethink of the government’s role as a direct player in the economy.
The minimal contribution of our country’s SOEs to the national accounts has inevitably brought our government to a challenging juncture. By dismantling the existing SOE shareholding structure by bringing in investment partners, we will be laying a foundation for accountability and increased operational efficiency within our SOEs. As such, this will set our large and strategic SOEs on a path to listing on the JSE to gain access to capital markets and raise funds to finance future infrastructural and capital projects. This can be done — Telkom is our best template.
• Wonci is CEO at Kogae Rainbow Investment Holdings and a senior partner at Kogae Advisory Partners.
