SOEs must never become platforms of capture again

Aviation. Energy. Forestry. Logistics. Arms. These different sectors of the economy represent the current portfolio of the Department of Public Enterprises (DPE). To most observers, it is difficult to find common ground among the state-owned entities (SOEs) managed by the DPE given the rather odd combination it currently oversees.

In its conceptualisation, the DPE seems to be a good place to put enterprises that are strategically important enough for the government to want to run them differently from the rest of the country’s SOEs.

While there are hundreds of entities scattered throughout the public sector, not all are equal – and some are definitely more important than others.

Eskom and Transnet – when functioning well – represent the heartbeat of the country’s economy. By extension, when they are not functioning well, they represent the Achilles’ Heel of the economic and social fabric.

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In their failure, the country’s economic prospects falter and the capacity to leverage the national economic potential to address social issues is fatally undermined.

Where did it all go wrong?

As their performance and capacity keeps declining, questions about where it all went wrong remain a persistent feature of the national debate.

This week, as German multinational software company SAP settled a long-running corruption case with the US Securities and Exchange Commission – which involved multiple countries, including South Africa – we were reminded about one of the contributors to the decline of the state enterprises portfolio.

Transnet and Eskom, given their large balance sheets and undeniable importance to the economy, were always obvious targets for those who run large-scale interventions across multiple industries.

Whether it be the consulting firms, software providers or banks, the entanglement with large strategic state entities and their large spending budgets was and remains a common feature of business practices. The private sector business partners regard state contracts as lucrative not just for the profits to be generated but also for the fact government departments tend to develop a permanent sense of reliance on business and thereby create a quasi-permanent business pipeline.

The need to secure state contracts is best captured by the prevalence of public sector business development executives across multiple businesses whose job it is to maintain relations with state functionaries.

In such relationships, the ability to secure state contracts is not just a question of technical capacity but also relationship building. When these relationships are direct, the awareness of looming projects and spending priorities may be enough to give one’s company a leg-up in the process of preparing bids for new contracts.

The practice of paying commissions to those who land major contracts is a common feature of the services and consulting industry that immediately creates a scope for problems.

In the SAP case, the business model allowed for SAP mavericks who secured lucrative contracts for the company to factor in a “business development facilitation fee or commission” that was as good an incentive as it was a licence for malpractice.

The commission rate was subject to the discretionary limit of 14.9% of the contract value where no senior approval was required, and the rate above 15% which required approvals.

As it turned out, the value of the contracts with state entities like Transnet and Eskom was so high that commission rates of 10% were good enough to placate all the roleplayers in the value chain.

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According to the Zondo Commission of Inquiry into Allegations of State Capture and the SEC’s settlement agreement, the problem with these business development partners is that they actually played no role in the business development and the payments were merely bribes by another name.

The multimillion-rand contracts signed by SAP with multiple state entities were all tied together by the common thread of corruption whose entry point was the commission model.

While SAP states that it has stopped this practice, the SEC indictment indicates that it was a model that was applied across multiple jurisdictions …

Perhaps the reason any form of settlement and penance has materialised is a consequence of accidental discovery rather than the acknowledgment of the corrupt nature of the business model.

Taking hold of the reins

For local SOEs, the multifaceted challenges they face – from funding constraints (underpinned by weak balance sheets and poor credit profiles) to business models that have been superceded by market shifts and led to displacement by private sector alternatives – mean they need to be more diligent in managing what little they have.

The recently published National State Enterprises Bill represents another attempt by the government to address the problem of the portfolio at large.

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A core focus of the bill is to establish uniform governance practices across the portfolio rather than the current model of every entity designing its own rules – occasionally to the detriment of the company’s prospects.

The secondary focus seems to be finally acknowledging that some entities are more important than others and actually identifying entities that are core to the backbone of the economy.

While the latter might mean SA Express and Alexkor are finally jettisoned off, it means other entities of strategic importance would fall within the ambit of the state enterprises portfolio.

While this all sounds like it is addressing the question of purpose for the DPE, it remains unclear how entities will actually manage the sense of belonging to the DPE and the ministries where much of their policy orientation originated.

As we have seen in the eternal confusion about the accountability of Eskom, which reports to multiple ministries, getting this wrong will mean even the boards chosen using the new model will find themselves as paralysed as their predecessors – who seemed to be unsure what they were overseeing in the first place.

Read: SOE CEO appointments remain a governance minefield – IoDSA

Given the importance of running these entities properly and ensuring they never become platforms of capture again, a lot hinges on how this bill is ultimately implemented.

Listen to Jimmy Moyaha’s interview with Econometrix chief economist Azar Jammine in this SAfm Market Update with Moneyweb podcast:

You can also listen to this podcast on iono.fm here.

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