Increased competition should be at the centre of the reform of state-owned enterprises (SOEs), the Centre for Development and Enterprise (CDE) says.
The think-tank has urged President Cyril Ramaphosa to appoint a high-level team led by business leaders to conduct a review of the financial position of all the major SOEs and identify solutions to their most pressing challenges.
The team should produce proposals on, among other issues, asset sales to address weak balance sheets. Its work should be linked to a commitment to generate income from privatisation in the 2025/26 budget.
This was among several recommendations on solving the challenges posed by SOEs contained in the CDE report, which is part of a series focused on the priorities for SA’s new government of national unity (GNU).
Ramaphosa did establish the Presidential SOE Council in 2020 to reposition SOEs and identify interventions to stabilise and strengthen their financial and operational performance. The council recommended the establishment of a centralised SOE holding company, which is provided for in the National State Enterprises Bill now before parliament.
However, CDE executive director Ann Bernstein said in a statement on the release of the CDE report that the bill was not the answer as it did nothing to alleviate most of the crises SOEs faced. “It is a distraction. The cost and effort of setting up this complex new institution will far outweigh whatever marginal benefits such an approach to managing the SOEs might have,” she added.
The proposal for a holding company was “weak and unconvincing” the report said, adding that what was needed was to strengthen the competitive pressures in the markets where energy, logistics and other services were produced. Strengthening competitive pressures on SOEs such as Transnet and Eskom would constrain costs and maximise efficiency in service provision.
The CDE report recognised that competition has been introduced in the energy generation and rail freight sectors, but said it had not gone far enough. It also recognised that competition alone could not solve all the SOEs’ challenges.
“There are limits to using competition for the production and delivery of some of the public goods and services that SOEs are mandated to provide. Competition between alternative providers of electricity transmission lines or rail tracks between major centres would not be efficient, for example. Some transformation mandates, furthermore, may be desirable and the delivery of many services cannot be wholly driven by the profit motive.
“However, even where some portion of what an SOE does is a ‘natural monopoly’, there are many ways to introduce competition between service providers which, having paid an SOE to secure access to shared (public) infrastructure, can compete to provide services to customers.”
The report recommended that an overarching competition policy for SOEs be developed that sets out the principles for their role in the economy. This should be based on a thorough review of SOE-dominated sectors to identify where competition could be intensified. “The broad approach, we argue, must be based on reducing the protected status enjoyed by many SOEs located at key choke points of the economy — a status which they vigorously defend,” the report said.
Bernstein added that “the general approach must be to increase the role of competition between service providers to discipline SOEs, so that they are incentivised to improve and develop their own sustainable solutions.
“It is not enough to say that the parlous state of our SOEs is the result of bad governance. What needs to be recognised is that bad governance is enabled by the SOEs’ status as protected monopolies — there are no consequences for poor performance since these firms do not have to compete for business.”
The CDE believes the recent decision to place SOEs in their “policy departments” is a mistake and as an interim measure they should be managed by the Treasury with the minister of finance as the shareholder.
Its report argued that making the policy departments responsible for the relevant SOEs would make it harder for the policymakers to focus on the national interest, rather than the interests of the SOEs for which they are responsible. This would slow down reforms that the SOEs oppose.
In the medium term, the government should establish a small, new and highly skilled department, led by the right people committed to competition and effective regulation.
The CDE report recommended that the National Treasury should review the boards and management of all major SOEs and replace those that are not functioning well.
Experts should review all large capital projects under way to assess whether they are fit for purpose and the extent to which their delivery and cost are optimised.
The framework for public-private partnerships should be strengthened and capacity and other weaknesses in key regulators must be addressed. “Strong and independent regulators will become even more vital as competition is progressively introduced,” the report said.
The CDE report identified five key problems plaguing SOEs: confusion over their role and mandate; commercial crises; shareholder interference coupled with weak boards; corrupted procurement processes; and weak regulators.
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