Another crucial aspect in reforming SOEs is ensuring that the entities are profit-oriented, says Thabile Wonci is the chief executive at Kogae Rainbow Investment Holdings and a Senior Partner at Kogae Advisory Partners. Photo: Supplied
Another crucial aspect in reforming SOEs is ensuring that the entities are profit-oriented, says Thabile Wonci is the chief executive at Kogae Rainbow Investment Holdings and a Senior Partner at Kogae Advisory Partners. Photo: Supplied

OPINION: SOEs need to be exposed to robust competitive market forces

By Thabile Wonci Time of article published Jun 19, 2020

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JOHANNESBURG - The words of Pádraig Carmody remain true that South Africa is battling with a compromise between globalisation and social democracy. 

The economy is rapidly globalising. All this is happening in an era where our economy is currently in a recession with rising government debt levels, poor performing and failing state-owned entities (SOEs). For a transition economy like South Africa, the time has come for the government to cease the moment and gradually bring the necessary reforms into our SOEs. 

Our SOEs need to be effective instruments in generating our country’s economic fortunes and as such, be the backbone of the economy. However, any SOE reform policy needs to align to the country’s economic developmental agenda for meaningful economic reforms and impact. This is crucial as the government needs to create necessary conditions in these SOEs in order to effect change. 

Critically, tempering with the SOEs can lead to significant economic, social and political consequences. Without doubt, South Africa needs to build a market-driven economy with the SOEs leading the charge. This will only be possible if we bolster the efficiency and competitiveness of the SOEs. 

We would be failing once more if the country’s SOE reform programme fails to modernise areas such as management structures, governance and institutional reforms, organisational performance and oversight structures. Accordingly, we have to shift our SOE focus towards a more commercial orientation. This includes exploiting these SOEs into effective instruments for economic advancement. 

Our government needs to loosen their operational control over the SOEs and create space for management to have more autonomy on the day-to-day operations. The primary 
objective of the SOE reform process is to reduce government interference in the daily business operations, provide management with autonomy and delegate full business management responsibilities to the executives. 

Consequently, there is a separation of powers between shareholders and management and this can lead to agency problems but only if the shareholder and management share different goals. There is an inherent risk that management may abuse their powers for self-gain. This is more pervasive within the SOE environment. This practice requires a well capacitate and independent board of directors and a vigilant shareholder. 

The form and character of our SOEs corporate structures and governance mechanisms need to change from a political orientation towards a more economic focused approach. 

The SOEs must run on commercial terms similar to private entities. 
Critically, corporate governance reforms are internal governance structures and standard operating procedures that guide management decisions which we must use to hold them accountable. As such these SOEs need to be run efficiently through a clear corporatisation plan.  

The key to the renewed push for a broad-based SOE reform programme is the need to curb the worsening financial performance of our SOEs. 

As a result, the contribution of SOEs to state’s revenue coffers is negligible if non-existent. Instead their survival has been guaranteed by government through financial bailouts. 

Most of our SOEs have been dealt with a major setback in the last few years - a total pause in their economic-oriented approach thus leading to hemorrhaging of their profitability and its prospects. This has exposed the inefficient and structurally bankrupt SOE sector that’s riddled with weak corporate governance structures. 

The response to the failure of our SOEs is coupled with the failure of taking responsibility and a dismal failure to hold those in charge accountable. To remedy this situation, our SOEs require well capacitated and independent boards who are motivated by good corporate governance principles and have determination to discharge their duties and responsibilities with ethical and moral standards. 

Our SOEs are in need of board structures with capacity to play an effective oversight role over managerial processes and decision-making that impact operational and overall strategic direction of the entities including leverage and capital allocation decisions.

The monopolistic nature of some of our strategic SOEs has reduced their market competitiveness.

These SOEs need to be exposed to robust competitive market forces. South Africa needs to build a system that will foster its SOEs towards corporatisation and business competitiveness. The government need to set strategic targets and monitor the implementation progress through boards and shareholder activism instruments. Such decisions 
must be driven by commercial objectives.

Another crucial aspect in reforming SOEs is ensuring that the entities are profit-oriented. The legacy of mismanagement, loss-making and less-competitiveness must be replaced by shareholder vigilance and a clear government policy that outlines its objectives for the SOEs. Any policy instrument that government sponsors must make it easier to assess the performance of SOEs, their operational and strategic outcomes. 

Without doubt, our SOEs play an important role in our economy. Needless to say, a significant large number of them are infested with inefficiencies, less innovative with gloomy growth prospects. As South Africa is drifting towards globalisation, a well-developed and vibrant SOE sector is crucial in enhancing our innovative capacity and productivity growth.

In the long run, South Africa could bolster its macroeconomic strategy by implementing these necessary SOE reforms and restructure these entities so they remain effective instruments for our national developmental agenda. State control of SOEs needs to be reviewed and possible reduced over time by bringing in private investment. Our government needs to reflect deeply on its role as the sole shareholder and direct player in the economy.

Consequently, the implementation of the SOE reform programme will carry its own unique risks and uncertainties. As such, our political masters will need to thread so gently in pursuing such reforms in order to minimise any political and economic ambiguities. The outcome of these reforms, if implemented successfully, will have a profound impact in our domestic economy and should shape our SOEs contribution to the country’s developmental agenda for better.

Thabile Wonci is the chief executive at Kogae Rainbow Investment Holdings and a Senior Partner at Kogae Advisory Partners.


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