Finance Minister Nhlanhla Nene on Tuesday addressed governance challenges in State-owned enterprises (SOEs) during a National Council of Provinces gathering, stating that rebuilding should focus on the institutions, rather than individuals.
“Given the dire situation in which some of these SOEs are, we need capable and morally upright [individuals] that we can parachute into SOEs for stabilisation, but we should not search for heroes we can drop behind enemy lines without applying our minds to the institutional frameworks that will help secure long-term futures.”
In this regard, preparatory work has been done, said Nene, drawing in large part from the recommendations of the Presidential Review Committee on SOEs.
The committee had concluded that the key challenges that led to the poor performance by SOEs included policy and mandate misalignments; inefficient operations and failure to keep pace with changes in industry; governance failings; weak balance sheets coupled with poor financial performance; an inability to refinance existing debt, leading to liquidity risk; and inadequate mechanisms to enforce accountability.
In addressing these missteps, Nene suggested measures including the adoption of private sector participation (PSP) frameworks, costing the developmental frameworks of SOEs, and adapting the framework for the appointment of board members and executive remuneration.
The PSP framework approved by government in 2016 provides for alternative financing strategies to enable infrastructure investment and highlights considerations for SOEs to partner with private sector companies to enable the faster, more efficient delivery of goods, services and economic infrastructure, in support of the country’s higher economic growth aspirations.
“PSP projects must be a by-product of the filtering process based on sector performance and market structure analysis, with a key focus on economic development,” Nene remarked.
In crafting the PSP framework, consultations were held with national departments including Economic Development, Public Enterprises, Transport, Energy, Water and Sanitation, and Telecommunications and Postal Services.
Currently, all SOEs are required to implement the PSP framework in their respective corporate plans.
Regarding the costing development mandates, Nene explained that the proposed mechanisms include identifying existing and future development activities, and quantifying the net cost of the activity using a corporate finance approach to measure the net present value (NPV) and quantify the value-add.
“SOEs contribute to the development of the country through their commercial and noncommercial development activities. Many poorly performing SOEs claim that noncommercial developmental activities have contributed to their poor financial performance,” said Nene.
Therefore, it has become important that the costs associated with the developmental activities be clearly specified and that these generate external benefits without compromising financial stability of the SOE.
Currently, all SOEs are required to identify these activities, quantify the net costs of the activity and calculate the NPV using a specified rate of return. Where activities have a negative NPV, while being strategic and development, fiscal support may be considered.
Additionally, the commercial and developmental mandates of SOEs are also being aligned to government’s objectives and being strengthened to ensure that services are delivered cost effectively, while taking market conditions into consideration.
Moreover, under the guidance of the Public Service and Administration Minister, government has developed a framework for the appointment of members to SOE boards and executives.
This framework entails reviewing minimum qualification requirements for these positions, reviewing the methodology for the processing of board appointments and their submissions to Cabinet, reviewing the number of boards each person may serve on and developing guidelines regarding the level of security clearances for board appointees.
“It is also important that the appointment framework be aligned to the remunerations framework, both guaranteed packages and short-term incentives, for the boards and management to standardise the determination of compensation and close the gaps between the compensation of boards and management of the different SOEs,” noted Nene.
He added that successful implementation of these measures requires close coordination within government and effective collaboration with the private sector.