Cape Town - The cabinet has approved a framework for sorting strategic from non-strategic state-owned enterprises as the government looks for ways to raise funds for some ailing entities – either by selling off other, non-core assets, or allowing for private investment to boost their balance sheets.
It has also given top priority to resolving the thorny question of appointment and removal processes for the boards and executives of SOEs – a contested area that has pitted ministers against boards in a number of entities in recent months.
The fate of SOEs has come under renewed focus after a number of financially distressed entities, including Eskom, SAA, the SA Post Office and SA Express, forced the Treasury to extend loan guarantees or inject capital to keep them afloat, even as commentators sounded the alarm over the country’s rising debt levels.
This prompted Finance Minister Nhlanhla Nene to promise in October he would no longer borrow money to prop-up SOEs in trouble.
Instead, the funds would be raised by disposing of non-strategic assets, among others.
But the spectre of a new round of privatisation has been sharply criticised by the ANC’s alliance partners, Cosatu and the SACP.
Nene stuck to his guns when he delivered his Budget on Wednesday and later told Parliament the government would consider selling off more than just the non-core assets required to fund a promised R23bn capital injection for Eskom.
“The government is invested in areas of the private sector where it should not be,” Nene said in a briefing on the Budget.
Framing the debate in government is the report of a review committee on state-owned enterprises commissioned by President Jacob Zuma in 2010 which, among other things, recommended the government should develop an overarching vision for the role it expected SOEs to play in the “developmental state” and use this to determine which sectors it considered strategic.
The committee discovered there were more than 700 public entities across all three spheres of government, some hailing from the early days of the republic and not necessarily relevant to the modern state, operating under confused mandates, reporting lines and overlapping legislation.
Nene said the cabinet lekgotla in February had discussed this report.
Matsietsi Mokholo, acting director-general in the Department of Public Enterprises, said the lekgotla had agreed on a set of criteria for distinguishing between strategic and non-strategic SOEs and officials had now embarked on a “filtering process” of Public Finance Management Act schedule 2 entities – essentially the major public entities operated as businesses and generally independent of government funding.
“We’re doing that work now because we’ve got a principle endorsement by the cabinet to proceed,” Mokholo said.
Criteria being used included whether the entity operated in a monopoly or poorly regulated environment, whether the sector could be easily penetrated by the private sector and whether the failure of the entity to deliver its core services would result in a systemic failure across the economy.
Mokholo said the criteria would be refined further and might include other considerations like national security.
If an entity passed all the tests it would automatically be deemed to fall in the “priority one” category.
“We will try to use that test as well to determine how you introduce private sector participation in state-owned companies,” Mokholo said.
However, the cabinet lekgotla had sent officials back to the drawing board to refine two other contentious proposals, the framework for private-sector participation and a model for funding the developmental mandates of public entities.
The review committee commissioned by Zuma recommended that the developmental objectives imposed on SOEs – such as job creation, transformation and skills development – should be separated from their commercial objectives and paid for by the state, but Mokholo said the cabinet wanted this proposal refined as there was a feeling not all options and permutations had been considered.
“They said before we can say yes or no to that proposal of how you fund a developmental mandate, go back and try to crystallise that developmental mandate, define it appropriately, and then come back.
“Because the other thing you don’t want is to find yourself in a situation where you have unintended consequences of having a developmental mandate taking precedence over a commercial mandate, or vice versa,” Mokholo said.
This position is contested by the SACP, which believes commercial considerations – the profit imperative – should be subordinated to the development goals of SOEs.
SACP spokesman Alex Mashilo said much of the “noise” about the performance of SOEs was a result of them being viewed as though they were private companies.
“If they were to be looked at as if they were private, profit-making companies at the cost of their developmental mandate, it means you will run down the whole transformation objective of developing society through the use of these SOEs,” Mashilo said.
He cited the example of the SA Post Office, which has run into financial difficulty after a subsidy to provide unprofitable services in remote areas was phased out.
He said it was hypocritical for the private sector to bemoan government bailouts of SOEs when businesses frequently turned to the government for help when they ran into trouble – as had happened with African Bank. The review committee report, however, warned against overemphasising non-commercial mandates as this could lead to directors feeling less of an obligation to run a tight ship.
Mokholo said the cabinet had also wanted more work done on the private-sector participation framework, though there was an understanding the government and private sector needed one another.
Referring to a proposed State Owned Companies Act, which is intended to standardise governance and legislative frameworks for the whole sector, among others, Mokholo said the government wanted to avoid creating the perception that its intention with the bill was to “crowd out the private sector”.
“We also want to deal with this perception of a trust deficit between the private sector and the public sector. Actually, we need one another.”
The model would be seeking to lay the ground for a “more complementary relationship”.
“For example, where we realise we have challenges with technology, we have challenges with skills, with capacity, and sometimes we feel there are areas of market failure and the state has done what it thinks is relevant to catalyse the environment, then how do we wean ourselves out of that situation to allow for the private sector to take over.
“That’s what our model will be looking at, a more complementary relationship, but also acknowledging that you want the private sector to be able to invest in the country, and as they invest, there are certain areas that we’ll make attractive for you, because I have long-term benefits that I want to derive out of it, in terms of localisation, job creation and skills transfer,” Mokholo said.
Mashilo said SACP policy allowed for private-sector participation but the economy was already dominated by the private sector.
The question of strategic and non-strategic sectors was also a “matter for discussion”, but the Freedom Charter had already identified which areas were strategic, Mashilo said.
Following previous rounds of privatisation, there were only strategic entities left, which private interests were eager to weaken to the point where they had to be sold off so they could get their hands on them. “You don’t need a weak state that relies on the private sector for development and it drops money like a helicopter throwing tenders. You need to build a strong state capacity to move forward and deliver developmental services to the people,” Mashilo said.
Cosatu declined to comment on the outcome of the cabinet lekgotla, but said in reaction to the Budget it was “unacceptable” that Nene had not released a list of entities to be sold. The question of strengthening governance at SOEs was a top priority, said Mokholo, which would be dealt with even before the proposed legislation had been finalised.
Her department was working with the Department of Public Service and Administration to define criteria that would “trigger” intervention by the state in the running of SOEs, including the removal of boards and chief executives, which she termed “step-in rights”.
“What we find to be a challenge is that in the private sector it’s easy to come in and make decisions if the board is failing, shareholders can say we want our investment protected and we think you’re eroding our value here. But in the public sector when we do that there’s always a perception from the public that there’s interference, it’s political interference,” Mokholo said.
However, the government acknowledged there needed to be “a good distance between the shareholder and the entities” and that those doing business with SOEs needed certainty on these questions.
“So our process is going to be clarifying those things – if this is the appointment process, what will be the triggers for a removal process and how do we embark on it?”
Mashilo said the SACP central committee would be meeting next weekend and the governance of SOEs would be on the agenda.
“But one thing is certain, we can’t have private hands fiddling with the process of the appointment of board members. If that continues or succeeds, it is clear SOEs will continue to have problems. Those people will not be promoting public but private interests,” Mashilo said.