The only sensible rationalisation process will be to release the smaller and less strategic SOEs and only retain the large and strategic ones, says Thabile Wonci, the chief executive at Kogae Rainbow Investment Holdings. Photo: Supplied
The only sensible rationalisation process will be to release the smaller and less strategic SOEs and only retain the large and strategic ones, says Thabile Wonci, the chief executive at Kogae Rainbow Investment Holdings. Photo: Supplied

The question that we need to answer is whether SA needs all of its SOEs?

By Thabile Wonci Time of article published Jun 30, 2020

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JOHANNESBURG - Over the past few months, South Africans have been deliberating the shameful misfortunes that have engulfed the country’s state-owned Enterprises (SOEs).

For the first time since the downfall of the gruesome apartheid era, the country has experienced a massive degeneration of its SOEs and this is characterised by a steady destruction of shareholders value. As such, we have now reached the road to Damascus on our SOEs.

The economic contraction that South Africa’s SOE are experiencing is driven by our own attitudes and actions. Typically the “let the Rand fall and we will pick it up again” kind of an 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. And to resist the reforms is to risk these SOEs into becoming bankrupt or overburden their already stretched balance sheets with more debt. This dilemma has gone unrecognised for many years and only marginally visible as a public debate. This age of irresponsibility needs to end today.

The question that we need to answer is whether South Africa needs all of its SOEs, which are estimated to be more than 700 and operating under the sole ownership of the government. The only sensible rationalisation process will be to release the smaller and less strategic SOEs and only retain the large and strategic ones. 

This could be achieved through equity sale of the government’s interest through an open bidding process or at best management buyout equity structures thus creating and promoting a culture of entrepreneurship and wealth creation. 

If management of these smaller SOEs are confident of their future sustainability and profitability, surely they will have an incentive to pool resources together to acquire all or part of the businesses they manage. 

This will also resuscitate the lacklustre mergers and acquisition activity we are currently experiencing in the country. 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 into the fiscus purse.

The second logical step in the SOE rationalisation process is to look at the strategic SOEs vis-à-vis industries that are key in driving economic growth and development. Consequently, this suggests that 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 will lead to a relatively smaller pool of more strategic and focused SOEs that will still be under the full or part control of the state. Focusing the large and strategic SOEs to key sectors of our economy will 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 a 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 where the government will respond to the SOE crisis blindly and deeply misguided as there will now be increased concentration of the SOEs.

Most importantly, 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-oriented approach. Besides, the SOEs will also gain additional technical and strategic expertise to drive value creation for its mixed shareholder base.    

Notable 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 spill-offs into the domestic economy. Consequently, the introduction of private capital will be an effective instrument to align the mismatched management and shareholders’ interests. And 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 off 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 point aims to improve SOE efficiencies and their competitiveness without extolling privatisation as an answer to our SOE woes. 

Needless to say that selling the smaller and less strategic SOEs coupled with an introduction of private investment into large and strategic SOEs should not be tantamount to leaching away of state assets. This is done only to bring about the necessary and much-needed reforms into our SOE sector. Without doubt the view of 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 into the national accounts has inevitable brought our government into a challenging juncture. By dismantling the existing SOE shareholding structure through bringing in co-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 in order to gain access to capital markets and raise funds to finance any future infrastructural and capital projects. This can be done – Telkom is our best template.

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

BUSINESS REPORT 

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