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SA’s proposed state owned enterprises reform: A hard look at the centralised formula of Singapore

Redge Nkosi is the executive director at Firstsource Money and founding executive board member of the London-based Monetary Reform International. Photo: File

Redge Nkosi is the executive director at Firstsource Money and founding executive board member of the London-based Monetary Reform International. Photo: File

Published Mar 16, 2022


ONE of the key issues announced by President Cyril Ramaphosa in his State of the Nation Address (Sona) was the outcome of the Presidential State Owned Enterprises (SOE) Council’s recommendations.

The Council recommended, as part of SOE reform agenda, the adoption of a centralised shareholder model for its key commercial state-owned companies.

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The model entails separating the state’s ownership functions from its policymaking and regulatory functions, minimising the scope of political interference and introduce greater professionalism and manage state assets in a way that protects shareholder value.

While not explicitly stated, the model is that of Singapore’s Temasek Holdings.

What does this model entail and would the centralisation of SOEs help advance South Africa’s economic and social development agenda, given South Africa’s stage of development? What similarities, superficial or not, can we tie to the possible success of this Temasek model in South Africa? And aside from hope, what factors can play to the model’s viability.

Singapore, a city state whose population is that of Johannesburg (5.7m), is slightly less than half the land size of the City of Johannesburg. Land is 90 percent state owned, as well as housing in which 80 percent of the population lives.

Splitting out of Malaysia in 1965 to receive independence, Singapore, a highly interventionist state, pursued an aggressive industrialisation and economic development programme, growing at an annual 12.7 percent from 1965-1973. This rapid industrialisation was under a model where any foreign capital investment had to have the government as a shareholder.

Besides its shareholding in foreign investors, the government also established start-ups in key strategic sectors of the economy, including engineering, transportation, industry and logistics. This was in addition to its inherited ownership of many established aviation, telecommunication and defence companies from Britain.

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With high government intervention and a large swath of the economy in the hands of about 2 million citizens then, Singapore achieved full employment by early 1970s. Having achieved these vital accomplishments, the government sought to shift its economic emphasis and opted to separate its role as a policymaker from its role as a business owner.

Temasek Holdings was thus formed in 1974 to shepherd the government-held shareholdings of these businesses. Singapore’s Departments of Trade and Industry (DTI) and Finance (Treasury) were thus relieved of the commercial management of the government-linked companies in which the state had a controlling interest.

But the rather sleepy Temasek of the 70s, whose SOEs played a highly transformative role from a developing to a developed Singapore has now evolved into an autonomous return-seeking domestic and international investment company with a wealth management and “developmental” mandates.

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The turn away from its historical domestic investment agenda aimed at developing and diversifying the Singapore economy occurred in 2002, whose new charter emphasised a new role as a “commercial” investment company. Revising its charter further in 2009, Temasek again emphasised its role as a “commercial” rather than a strategic state investor that prioritised long-term wealth creation in pursuit of the government’s national economic and social objectives.

It is the new Temasek that South Africa seeks to replicate, and not the one that propelled Singapore to advanced country status.

Temasek’s current “developmental” mission, unlike that of South Africa and most developing countries is about, so the 2002/2009 charters say, moving Temasek away from its historical domestic social and investment agenda aimed at diversifying and developing Singapore’s economy to a new role as a “commercial” investment firm, creating and delivering sustainable long- term returns.

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Here, the term “commercial” means profit maximising activities devoid of state developmental appendages. Is this South Africa’s desired road?

With the developmental challenges confronting South Africa so overwhelming, shouldn’t the role of SOEs be highly developmental (like the older Temasek) as they were during apartheid; lifting the economic power of the minority white population and the economy through state’s direct hand?

Differently put, shouldn’t commercial objectives be subservient to the broader developmental imperatives given the dearth of South Africa’s challenges. Playing the crucial role of executing the state’s economic, social, strategic and in certain instances even foreign policies should be, as indeed were the revealed preferences for Singapore’s earlier SOEs and China’s SOEs today.

What is more, in a polity where other institutions are rather poorly equipped to fulfil these national policies, strategic SOEs are treated as and are vital extensions of the state apparatus whose “unit of maximisation” is not the individual firm, rather the state developmental interests as a whole.

And interestingly, the voting public expect of SOEs to perform, as they did during apartheid, such non-commercial functions as supplying cheap credit, affordable housing and infrastructure, lighting up townships and informal dwellings with little money to make or even ensuring that black economic empowerment (BEE) considerations are factored in their business operations.

The current Temasek commercial model does not support these as they would run counter to both the profit maximisation and non-preference principles. Importantly, Temasek’s evolution must be set against Singapore’s wider policy framework, especially monetary and financial policies which were incredibly supportive, unlike South Africa’s.

This is not to ignore Singapore’s unique historical regulatory culture, its Confucian culture, which stresses moral leadership over political competition, Singapore’s ruling party’s true Leninist features, all of which are inextricably intertwined with the Temasek model.

Additionally, central to replicating Temasek’s model of “commercial” basis of its operations are two principles: non-interference and non-preference.

Non-interference means government involvement stops at appointing a board of Temasek only. Temasek itself would also only go as far as appointing a board of its other SOEs. The government refrains not just from Temasek’s operations but also from any other subsequent appointments.

On the other hand, non-preference entails that whether an SOE is distressed, as are Eskom, SAA, Denel, Land Bank etc, no cash can be doled out from the government, as this would constitute preferential support vis a vis non SOE distressed firms.

Hence the focus on non-commercial tasks by an SOE inhibits non-interference and non-preference principles that may even render an SOE bankrupt, running contrary to the “profit maximisation” commercial principle.

Strategic SOEs like Transnet, Eskom and others, as per policy, play meaningful developmental roles and not just necessarily that of improving the efficacy of state’s capital, which is what defines “commercial”. Therefore, broader policy reforms are necessary for SOEs unit of maximisation to be narrowed.

Given the Temasek’s governance principles, Singapore’s development stage, there are thus several factors that inhibit the potential replication of the model features in South Africa. On the other hand, the economics of this model can leave SA expensive and highly uncompetitive.

South Africa’s current policy setting, and the institutional characteristics of SOEs such as functions, power of SOEs and corruption (special interest capture) and current politics militate against the successful adoption of the centralisation model.

Development economics literature also supports the above conclusions. Path dependence theory suggests that pre-existing institutional settings within a polity have profound influence on the viability of any proposed reform effort, prohibiting the most efficient outcome.

Besides, South Africa’s proposed SOE reforms will be anti-developmental.

Redge Nkosi is the executive director at Firstsource Money and founding executive board member of the London-based Monetary Reform International. @redgenkosi

*The views expressed here are not necessarily those of IOL or of title sites.