For a long time, South Africa’s parastatals have been in a state of decline, weighing down the economy and in recent years wasting its resources through bribery, corruption and mismanagement. As President Ramaphosa takes on the task of cleaning-up these cumbersome ventures, we take a look at the theory behind state-owned enterprises (SOEs) and how they are being managed in other parts of the world, in order to fulfill their purpose to society.
A rising global influence
Known by many names across the world - government corporations, parastatals, public enterprises, government business enterprises - the State-Owned Enterprise (SOE) is essentially a business where the state has significant control through full, majority, or significant minority ownership.
Over the past decade, SOEs have been rising in influence in the global economy and represent an increasing share of the world’s largest companies. For instance, the proportion of SOEs among the Fortune Global 500 has grown from 9% in 2005 to 23% in 2014, including a greater presence in the top rankings. This increased presence has been driven primarily by Chinese SOEs, with three Chinese SOEs - Sinopec Group, China National Petroleum and State Grid - consistently making the top 10 since 2010. Today’s successful SOEs are a global force, engaged in international trade and set up as tools to better position their nation in the global economy, where the competition for finance, talent and resources is ever-increasing. They appear to be an enduring feature of the economic landscape, and as such, it’s important to ensure that the state’s investments actually deliver the societal outcomes desired.
Societal outcomes first
While in many respects SOEs face similar opportunities and threats as private sector businesses, at the heart of the matter lie the very different motivations and objectives. While the private sector uses business activities as a means of achieving financial profit as a goal, the public sector uses finances (taxes, fees etc) as a means of achieving services and outcomes for citizens. In PWC’s CEO Pulse Survey (2015), private sector CEOs believe that government ownership has advantages in certain circumstances to further social outcomes, provide physical infrastructure and create stability in times of crisis within and across supply chains. The OECD and World Bank have set out a range of commonly stated reasons for state ownership, all of which relate to developing strategic sectors and boosting the national economy, as well as fiscal, political and social considerations. Of course, there is the risk that state ownership can destroy value if best practices in ownership and management are not applied - with issues of corruption, bribery and inefficiency being of most concern. Ultimately, SOEs cannot be evaluated purely on the basis of financial results (profit and loss), but more widely on how they contribute to societal value creation, taking an integrated and holistic view of their impact.
Following Singapore’s independence in 1965, SOEs, known in Singapore as ’government-linked corporations’ have served to jumpstart industrialisation, spearhead development and lead to economic growth (primarily job creation) in various sectors of the Singaporean economy. They had a clear purpose: to compensate for a lack of private sector funds and expertise. Pioneering GLCs played a role in developing the shipping industry, building strategic alliances with foreign companies in order to kickstart local economic development, and launching the country’s entry into the petrochemicals industry.
A new era for SOEs?
Once SOEs have fulfilled their initial purpose, and the domestic market has matured, the question becomes: what is their new purpose? Towards the end of the 20th century, developed economies saw a wave of privatisation occur, and more recently, in Australia, there has been a trend towards "capital recycling", which has resulted in SOE asset sales (in public transport, energy poles and wires, power companies and ports) to free up funds for re-investment into much-needed infrastructure such as major road projects. After the liberalisation of India’s economy in 1991, a lack of market competiveness and efficiency was revealed in the country’s SOEs, which had previously laid a strong foundation for economic development in the country through large-scale investments in infrastructure, services and resources. As a result, reform measures were combined with ‘disinvestment’ to improve SOE viability, involving the partial sale of government equity in public sector enterprises, while retaining majority control with the government. This era of partial privatisation also enabled the government to use SOEs to raise resources for the annual budget cycle.
State ownership has also been used as a crisis response tool - the most recent large-scale example was the bailing out of banks by many governments during the financial crisis. In a volatile economic environment, government ownership may be a policy lever for the state to maintain jobs and also sustain a network of firms that serve as suppliers to troubled companies which are under current stress but are still seen to have a strategic value in the long term. Air New Zealand, for example, was re-nationalised in 2001 after having been privatised in 1989. This move was to bolster the country’s tourism industry, and this has paid off substantially, with the number of international arrivals increasing by 51% between 2000 and 2013. Air New Zealand was also named the top airline in the world in 2014.
The SOE of the future
To achieve this kind of public value creation and good growth, the SOE of the future needs to develop in the following ways:
- Be actively owned and managed by establishing a clear purpose and mission, linked to desired societal objectives. The SOE owner, governors and managers need to fulfil the tests called the "4 C’s": clarity, capacity, capability and commitment to integrity.
- Be transparent and accountable through quality, timely and reliable reporting of SOE performance. This aids in building trust between the government (owner) and the citizens and other stakeholders.
- Strike an appropriate internal-external balance: like any organisation, the SOE should develop and maintain sound internal management in order to maximise efficiency and effectiveness. At the same time, it needs to leverage its external influence by co-creating value with other stakeholders in society and driving good growth linked to its purpose and mission.
There is no doubt that SOEs have a crucial role to play in long-term development and transformation and should add to economic growth and stability. SOEs are a key source of jobs in South Africa, employing more than 300,000 people. Looking to best-in-class examples from the rest of the world, there are many options open to government in order to resolve the financial operation and governance challenges our SOEs face. Public listing and privatisation have all surfaced in previous conversations. Of course, cutting out the "dead wood" that has been responsible for the decline of these organisations is paramount; and the country eagerly awaits Ramaphosa’s moves on this front. As has become somewhat of a cliché in recent weeks, the proof of the pudding is in the eating; when it comes to the promises our newly elected president has made.
Nicole Cameron is a features writer with over twelve years’ experience, focusing primarily on the business market with a niche focus on entrepreneurship. She has written on a variety of topics for Sharenet and is excited to be focusing on women in finance in her new monthly column "Femmes in Finance". She holds a Business Science degree from UCT and is passionate about reporting on the events and people that make up the local business landscape.