Johannesburg: Globally, there is a debate about how states can optimise the developmental role of state-owned enterprises (SOEs). One of the questions is: how does the government strengthen its shareholder management and what are the institutional models to provide this oversight? The global financial crisis has legitimised state involvement in the economy and has shifted the focus to how this should happen. Part of this debate is how the state should leverage enterprise ownership in the developmental process.
SOEs have played a critical role in developing an industrial base in highly developed and emerging economies. Experience suggests that private and public companies have performed both well and badly in achieving key national developmental goals. There have been patriotic, efficient private companies that have made long-term investments to achieve national objectives. There have also been corrupt, inefficient and rent-seeking SOEs that have been captured to serve narrow interests and have undermined economic development.
Our challenge is to strengthen the state’s shareholder management capabilities to ensure that the contribution of our SOEs to national economic and social development is optimised, quantifiable and affects the lives of socially excluded South Africans.
When the African National Congress (ANC) assumed power in 1994, the Department of Public Enterprises was called the "Office for Privatisation", whose mandate was to sell its portfolio of SOEs. Intrinsic to this position was the notion that the state had no active role to play in the economy. SOEs were prevented from investing in new capacity as it was considered inappropriate in the context of imminent restructuring.
The notion was that the government should take a hands-off approach to economic governance and focus on regulating the functioning of the economy. As a result, some SOEs failed to achieve their objectives because of weak oversight and a deterioration of institutional capacity. It was only in 2004 that a firm decision was taken that the government would retain ownership of key SOEs. The shareholder manager department now had the role of providing SOEs with strategic economic mandates to align their strategies, business plans and processes with the government’s economic objectives.
SOEs were instructed to establish aggressive investment programmes to support the growing economy. These investments have proven critical in maintaining domestic demand and thus limiting the effect of the global crisis on SA. The department resolved that its new vision would be "to drive investment, productivity and transformation in our portfolio of SOEs, their customers and suppliers so as to unlock growth, drive industrialisation, create jobs and develop skills to sustain the economy".
To realise this vision :
* SOEs need to change their investment planning framework from one based on what their balance sheet can afford to one based on what investments are required to unlock growth in their customers and to create a stable demand platform for their suppliers;
* New sources of funding for the expanded investment plans need to be found, including from development finance institutions, pension funds and big SOE customers;
* SOEs need to procure in a way that promotes investment in local industry through providing medium-term demand information and entering into longer-term relationships with key suppliers; and
* Fortnightly meetings between the minister and SOE top management are held to monitor progress in the implementation of efficiency-enhancing initiatives and to entrench the principles of developmentalism.
SOEs are not ordinary commercial enterprises — they have a mandate to achieve longer-term strategic economic objectives (even if there are predictable short-term losses while capabilities are being built). This creates a delicate balance — if the strategic purpose subverts commercial discipline, the enterprise will collapse, but if commercial considerations over ride strategic purposes, government objectives will be compromised. Consequently, shareholder management of these multiple objectives is very complex.
Given this complexity, the department has learnt three key lessons about the shareholder manager function:
* The shareholder management role is highly specialised, requiring the ability to mediate between enterprise-level strategic, financial and risk concerns, sector policies, industrial policy and the broad national economic and social development imperatives;
* There is significant value that can be extracted from "portfolio synergies" between SOEs through shareholder co-ordination in areas such as planning, project implementation, procurement, skills development and knowledge sharing; and
* Significant value can be unlocked through high levels of co-ordination between SOEs, government departments and development finance institutions.
Driven by the specialised nature of the function and the need for co-ordination, there is a global trend towards the centralisation of state shareholder management of strategic enterprises. In certain cases, such as France and China, specialised government departments and shareholder management agencies have been established to oversee strategic enterprises. In other cases, such as Singapore, Malaysia and Kazakhstan, SOEs are held through a single state holding company. The result of centralisation is that the government will understand its asset base, achieve strategic alignment, use its asset base to leverage other investment opportunities, develop early warning systems and exchange market intelligence on businesses’ activities.
In this context, there are three broad approaches to housing the government’s shareholder management capability:
* We can continue with the ad hoc approach to shareholder management pursued by different departments;
* We can place the oversight of SOEs under their relevant policy department, which will inevitably create a conflict of interest between formulating policy and regulations to benefit the consumer and optimising the financial health of the enterprise; or
* We can place a selected portfolio of key strategic SOEs under a dedicated shareholder management department to optimise their effect individually and as a portfolio.
However, I need to add some caveats. Leaving aside the merits of the third option, I do not believe we have the capability to include development finance institutions, as this requires highly specialised skills that are absent from the department. SOEs that serve a social rather than economic purpose — such as passenger rail agency Prasa, or the public broadcaster — and that do not sustain themselves off their balance sheets, should remain with their relevant departments.
The issue is not, either the state or the private sector — the building of our economy will require a coherent partnership between the two sectors. How the state can provide leadership to SOEs — to optimise a partnership that supports decentralisation of industrial activities to other provinces, to ensure increased access to income for poor communities — is of vital importance. This is no call for a Chinese or any other model, but a call for a Proudly South African model that takes into consideration our own experiences and developmental aspirations.
- Gigaba is Public Enterprises Minister and a member of the ANC’s national executive committee.
