By: Hadebe Hadebe
There is a growing call for South Africa’s energy utility company Eskom to be moved out of the department of public enterprises (DPE) to the newly created department of mineral resources and energy (DMRE). In an interview with Eyewitness News, African National Congress (ANC) treasurer-general Paul Mashatile says this “would assist in policy and implementation.” The ANC Women’s League and the National Union of Metalworkers of South Africa (Numsa) also back this proposal.
On the other hand, Congress of South African Trade Unions (Cosatu) opposes the suggestion as it believes such a move will not solve the raging power crisis troubling the country at the moment. Interestingly, Cosatu has always has been against the existence of the DPE and has repeatedly called for its dissolution. As a result, public commentators interpret the proposal to move Eskom as ‘a political football in succession debate’.
The governing ANC will host its mid-term national governing council (NGC) meeting in June 2020 to evaluate the party’s success in implementing policy resolutions. It is also in the NGC where issues of succession are likely to feature prominently. For that reason, political analyst Ralph Mathekga thinks that the heightening tensions within the ANC have spilled over to include Eskom. And, Cosatu parliamentary coordinator Matthew Parks told Fin24 that the ongoing war of words was being fuelled by “factional battles”.
On its part, government wants to create an institution, let us call it State-Owned Enterprise (SOE) Governing Council (or the SOE Council), to be modelled on the hugely successful Temasek Holdings of Singapore. Meaning, the SOE Council will follow a centralised ownership model that will improve coordination and will also allow for effective oversight. South Africa has at least 700 entities within which government is the sole or a part owner. But the devil is in the detail in as far as ownership control of SOEs is concerned.
Government can choose to strictly control the SOE Council like China does with its SOE supervisory body, the Assets Supervision and Administration Commission (SASAC). Alternatively, it can let it loose and establish a very autonomous investment company like the Singaporean Temasek Holdings. Or, the SOE Council can be a convenient vehicle to facilitate a large-scale sale of national assets.
Temasek Holdings provides an interesting case since it is central to state-led development in Singapore, but at the same time is a well-regarded global investment company. This commercial investment company is wholly owned by the Singaporean government. It was established in 1974 to manage SOEs and to act as “an active investor with long-term returns maximisation as its key motive in its investment decision-making.”
This means that the company ensures that the SOEs are managed on a commercial basis. Temasek oversees and manages a net portfolio of $313 billion. Some of the notable SOEs include Singapore Airlines, SingTel, ST Engineering, Singapore Power, SMRT, Olam and MediaCorp. Although fully autonomous, the company is wholly owned by the Minister for Finance and declares dividends annually and contributes to the Singapore Government budget via the dividends it pays to its shareholder and the tax on its profits. However, it is by law exempted from financial information public disclosure.
Starting from 2004, it nonetheless elected to publish its financial statements. In a study ‘The State as Shareholder: The Case of Singapore’, Isabel Sim, Steen Thomsen and Gerard Yeong state that Temasek in 2013 obtained “a rating of 10/10 in the Linaburg-Maduell Transparency Index, ranking Temasek among the most transparent of all Sovereign Wealth Funds worldwide.” It also has perfect credit rating scores according Moody’s and S&P. In a way, Temasek is a sovereign wealth fund (SWF) but it is different from other funds since it only invests in equities to be an outright owner of assets in Singapore and abroad.
Focusing on the Public Investment Corporation (PIC), it shares some similarities with Temasek, the Norwegian Oil Fund and other sovereign wealth funds, but the biggest difference is that its principal client is the Government Employees Pension Fund (GEPF). This obviously means that its portfolio would have to be greatly altered to match a Temasek. The challenge at the moment is that many SOEs are underperforming and below junk status to create a solid anything close to the Singaporean entity.
Modeled after Temasek, China established in 2003 the SASAC to act as majority shareholder of SOEs and exercise shareholders’ rights on the behalf of the State. It is an ad-hoc ministerial-level organization directly subordinated to the State Council (cabinet), so it is not an independent entity as such. The SASAC initially controlled 196 strategic SOEs firms in important Chinese industries, this number decline to about 106 firms in 2015, but this number has declined further to ninety six. Its portfolio includes giants such as China National Nuclear Corporation, China National Petroleum Corporation and Sinosteel.
The reduction in the number of companies doesn’t mean a disaster for China because the remaining ones hold significant assets at $26 trillion, which makes SASAC the largest single entity in the world. This is as a result of the Chinese government’s policy adopted in 1995 which said, “Keep only large firms and let small ones go!” The government did not want to lose control over strategic sectors of the economy such as resources, utilities and energy. In January 2020, the SASAC declared that it would focus on high-quality development of SOEs as part of the ongoing restructuring process. Chinese SOEs reported an insane combined profit of $188.8 billion in 2019 alone.
The SOE reforms in China resulted in the restructuring these companies into joint stock companies with the government owning large shares. Many of the Chinese SOEs now operate like private firms with private shareholders who can trade in stock exchanges. Government stock is managed by the SASAC. Sea-Jin Chang and Sandy Yuan Jin maintain, “most SOEs transformed into limited liability firms or joint stock companies, with state ownership converted to tradable shares.” As a result, private investors became shareholders in SOEs.
Many states such as the United States, Japan and European Union (EU), however, contest that the private sector even exists in China, or they say it is insignificant. Steve Koch, economics professor at the University of Pretoria, estimates that the share of state-owned companies among the top ten firms is in China 96%. The view about the absence of the private sector in China is further strengthened by President Xi Jinping’s “enthusiasm for ever bigger, stronger SOEs and his repeated admonishments that the Communist party is the ‘ruler of all’,” so claims the Financial Times.
At the heart of the so-called trade wars result from assertions that China is a ‘non-market economy’ in terms of the rules of the World Trade Organization (WTO). According to the US Department of Commerce, for example, China is one of the eleven countries that do not have a free market regime. Other countries are Vietnam and former east bloc states like Georgia and Armenia. To ease tensions with Washington, the Chinese government reported on January 2020 that it doesn’t provide special subsidies for state-owned firms any longer. Of course, this claim is indeed outrageous because it is impossible to separate SOEs and government in China.
At the moment though the attention is focused on challenges facing SOEs such as mismanagement, incompetence, corruption and looting and less on what it is intended with them. It is therefore unsurprising to hear more and more people demanding that the likes of South African Airways must be sold as a matter of priority. Unfortunately, no one talks about the nation’s long-term development goals any more, surely those resources will not necessarily come from the private investment.
My view is that South Africa’s unique circumstances necessitate an increased role of SOEs to not only spearhead economic growth but also to promote “structural change in production patterns and implementing welfare policies to achieve social equity.” The past twenty-five years have been shambolic instead.
A few years ago, government initiated an SOE reform process that is yet to bear fruit. This is where the SOEs are now becoming a rugby ball. In a paper titled ‘Why listing South Africa’s state-owned enterprises is not a solution’, UCT’s Misheck Mutize is of the view that listing the SOEs would be waste of time due to administrative problems and corruption.
Consequently, Mutize proposes outright privatization of state assets. Mutize is like all other commentators who prefer to deal with secondary aspects of the reform process rather than structural matters. From an ideological perspective, it is increasingly confusing what role the state companies are supposed to play in shaping South Africa’s future, and how they complement the ideals of a developmental state.
In the case of China, Karen Yeung points out that the government maintains SOEs “as a safeguard against unemployment or as a means of creating national champions that can compete with foreign multinationals abroad.” Besides commercial objectives, SOEs also serve political policy ends including supporting the real economy as well as ensuring financial stability.
The government holds a minority stake in the telecoms company Telkom SA at 40%, for example. But the company shockingly intends to cut up to 3,000 of more than 15,000 staff. This is happening against a tough background of high unemployment at approximately 29.1%. Not so long ago, Telkom was hailed as exemplary on how to fix South Africa’s broken SOEs. Duncan McLeod, TechCentral editor, asked in June 2019, “How has Telkom managed to do so well, while many other SOEs are mired in debt and red ink?” The answer: Telkom is not any better as it has contributed to the job bloodbath over many years to date, and counting.
Meanwhile, the German government recently announced an €86 billion plan to modernise its transport infrastructure over a ten year period. The federal government in Berlin will contribute €62 billion and state-owned Deutsche Bahn AG come up with the rest of the funding. Germany is known for cushioning employees during times of economic hardship. The German labour market policy at all levels would not be successful without the SOEs playing their part together with private enterprises.
In addition, state-owned Ethiopian Airlines plans to build a $5 billion airport 39 km outside Addis Ababa. The German and Ethiopian examples illustrate the importance of integrating SOEs into the state’s development agenda. Clearly, both Ethiopia and Germany understand how to integrate SOEs in their economic development plans.
Now the questions are:
- Is the establishment of the SOE Council an expression of lack of faith in DPE?
- Is the goal of privatisation proving rather difficult now?
- Or, there is more to this than meets the eye?
The DPE was created by the apartheid government in 1987 to house all SOEs to be privatized. When the ANC took over, the department remained and continued to oversee a number of state companies from SAA to Eskom as well as continued with privatization of state assets.
Some companies were sold in full or in part like Telkom, Sasol, Iscor and others before and after 1994. Swissair, for example acquired a 20% stake in SAA for R1.4bn in 1999 (this sale was reversed when the Swiss airline went under in 2002). Notwithstanding all this, the number of many but insignificant SOEs ballooned in the past 25 years or so. This came with many challenges that triggered a need for reform.
It appears that when China was moving towards consolidation and building large competitive SOEs, the DPE was doing the opposite. In China, the mixed ownership reforms were embarked upon in order to improve their SOEs’ price consciousness and efficiency on both national champions and deadwood. Looking at their impact, today these entities are doing much better to create jobs, develop infrastructure and contribute to impressive growth to the Chinese economy as well as form an integral part of forceful Dragon foreign policy abroad. Other the other hand, South African government-owned entities are a battlefield and threaten the very existence of the state it created.
There is no evidence to suggest that, say, Transnet was split to several companies for efficiency and to improve governance. Instead, the likes of PRASA, Transnet, SAA have become a heap of problems to the economy and are a platform for patronage and corruption. Another point is that PRASA, Transnet, SAA are not vertically integrated anymore. When they were under one umbrella, they were a conglomerate that could easily be disentangled, not separated, without losing economies of scale and advantages that come with vertically integrated systems. In the absence of the terms of reference, it unclear how the envisage role of the SOE Council will differ from what the DPE mandate entails.
An argument can thus be made that the transfer of SOEs to the respective departments, or even to another entity, cannot be piecemeal but needs to be done systematically and in a coordinated manner. The logic for Eskom to be moved to DMRE also applies to Transnet, Denel, SAA and others. Otherwise, the current proposal to move only Eskom would be rightly interpreted as ANC factionalism since it ignores the reform process that is yet to be activated. But when wholesale changes are made, it would make sense for the ministries that control one or more state companies can have a shareholding in the SOE Council should the Chinese model be replicated.
The DMRE proposal is way too simplistic to solve a very complicated problem. No scientific study to prove that this will result in efficiency, financial health, operational excellence and good governance. There are claims that many of the challenges facing Eskom today originate from the days while the company was still under the then energy department. The department reduced the company’s budget on maintenance for powers stations and critical assets. In 2001 when Eskom was converted to a public it was handed over to DPE supposedly to reduce those risks. However, the general collapse of governance and irrational decision making in the past two decades mean that SOE boards were used for nefarious agendas that never advanced the national agenda.
There are also serious concerns with following Temasek or SASAC model. Recent experience indicates South Africa is littered with evidence of half-hearted solutions. There are similarities between the process to amend section 25 of the constitution and SOE governance. For example, the proposed text for the amendment says absolutely nothing in lieu of the Nasrec resolution on land expropriation without compensation.
It is predicted that the change from DPE to the proposed SOE Council could take place along the same lines. Not well meant at all, or to create false hope and confusion. The problem is created by highly opposing positions between the ANC in Luthuli House and ANC in government. Neither the Chinese Communist Party nor the People’s Action Party in Singapore would ever allow such occurrence to happen. The public spat over Eskom just goes to show that there is a very long way to go.
Furthermore, moving the SOEs to the SOE Council is unlikely to result in an efficient Temasek but yet another PIC that will disregard development imperatives and feed guzzling stomachs of greedy individuals like it occurred in Mexico in the early 1990s. When this happens, a loud arrogant scream ‘I did not join the struggle to be poor!’ will reverberate somewhere along the N1 highway linking Pretoria and Johannesburg.
With privatization, the state will lose control over strategic sectors like energy, water, logistics, airspace, defence, etc. For example, government holds minority stakes in Telkom and Vodacom (telecoms) as well as in Sasol (energy). And, it has no or little control over these companies in a true sense ever since they under went commercialization, another word for privatization.
There is an idea is to do partial privatization of Eskom along Telkom lines when the company is separated into three separate entities. Electricity generation was a guinea-pig with the highly secret renewable energy contracts that are said to be draining Eskom’s resources today. Although no asset was sold but the private sector is allowed in the space which will eventually replace state participation.
When something like that is permitted, it will pave the way for an outright sale once a state company is weakened like SAA. In the end, policymaking and control in respect of strategic sectors is likely to slip away from government to the private sector as it is the case with mining. It is deliberate that South Africa has no large state-owned mining company besides the state being a custodian of all mineral wealth.
In conclusion and based on a number of examples provided, it is incorrect to generalize SOEs as a problem based on the chaotic manner they are presently being managed and diverted from their core mandates. It is undisputed that some may have to be discarded but many have potential to contribute to the economy. Sovereignty of the South African state lies in its ability to take full control of key and strategic sectors in the economy.
Unfortunately bickering on ownership control of the SOEs and maladministration pose a threat to the economy. Furthermore, there is a huge political risk in the perception that has been created that SOEs are an unnecessary burden. Loss of SOEs due to inability to manage them efficiently at different levels means South Africa miss a great opportunity to change lives of millions within and outside its borders.