COSATU's comments on the Presidential Review Committee's Report on State Owned Entities
On the 28th May 2013, the Minister in the Presidency, Comrade Collin Chabane, released a long-awaited report of the Presidential Review Committee (PRC) on State Owned Entities (SOEs).
According to the report, there are about 715 SOEs performing various functions at the national, provincial and local government levels. The PRC did not conduct a micro-assessment of SOEs and recommends that such an in-depth assessment should still be done to help the process of rationalising them.
While the Congress of South African Trade Unions supports a number of the recommendations of the PRC report, some of the recommendations aim to take the country back to the disastrous privatisation and commercialisation policies of the past. We welcome the acknowledgement by the report of the centrality of SOEs in economic and social development in the country. COSATU has been consistent in arguing that the task of fundamental transformation of our economy, the creation of decent work and the provision of basic services to the majority of our people cannot be left to the market forces.
For all this to happen there is a need for strong developmental state, which harnesses the developmental potential of SOEs. In its Growth Path for Full Employment, COSATU contends that the developmental state must intervene decisively in the economy to redistribute resources in order to address unemployment, inequalities, poverty, and the rural-urban development divide; and it must ensure the achievement of universal access to decent work, quality education, quality healthcare, comprehensive social security, decent housing, and access to water, energy and sanitation
The recommendations COSATU supports in principle, subject to the qualifications outlined below, include:
- Enactment of a single over-arching law to govern SOEs;
- Reincorporation of functions that can be optimally performed by government departments;
- Establishment of an SOE Council of Ministers;
- Establishment of a Central Remuneration Authority to regulate SOE board and executive pay;
- Mandatory collaboration among SOEs;
- Alignment of CEOs' incentives to performance;
- Use of a portion of resources tax to fund infrastructure development;
- Contribution of SOEs in skills development; and
- Leveraging SOEs procurement to transform the economy.
Recommendations for consolidation of SOEs that operate in similar sectors, and rationalisation of the number of SOEs, need to be subjected to criteria and processes which ensure that this reorganisation is indeed aimed at maximising the developmental impact of the SOEs, and not driven by a market or commercial logic. Further, one of the overriding considerations in the rationalisation process must be that there should be no job losses.
The proliferation of SOEs has in part been a product of outsourcing of services to agencies operating along commercial lines and at arm's length from government. Although this practice does not entail outsourcing to the private sector, it fragments the state and thus has a potential of weakening its capacity. The numerous entities performing responsibilities that should be performed by government departments are a challenge to coordination and alignment to the strategic and developmental objectives set by the state.
The crisis in relation to the funding of the Gauteng Freeway Improvement Project created by South African National Roads Agency Limited (Sanral), a company operating at arm's length from the Department of Transport and along commercial lines, with the mandate to maintain and develop South Africa's national road network, is a classic example of this coordination problem.
COSATU is also on record raising a concern that many SOEs tend to use consultants extensively and this amounts to the extension of the sunset clause as most of the former officials in the SOEs and DFIs are used to execute the responsibilities of these entities.
However, the PRC has failed dismally to use an opportunity presented by the review process to correct disastrous policies of the past. There is no recommendation on renationalisation and de-commercialisation of strategic SOEs that were privatised and commercialised by the apartheid state and the democratic state. These include Sasol, Arcelor Mittal (former Iscor), Telkom which was partially privatised and Eskom which has been corporatised. The PRC also missed an opportunity to propose the establishment of new state-owned enterprises like the state owned food company, a state owned pharmaceutical company, and state owned steel company.
Instead the report sadly recommends that government must exit from "those sectors where market failure no longer exists and/or that can be adequately provided for by the private sector, or the mandate is no longer justifiable". The report goes further to recommend that government must "divest fully or partially from those SOEs observed to be under-performing that are competing unsuccessfully against the private operations" and "inject private sector practices in non-financially viable SOEs and gradually phase them into commercial entities with a mix of public and private equity ownership".
The report leaves us in the dark about the specific SOEs that should be dealt with in the manner proposed here. As the PRC by its own admission did not conduct micro assessment of SOEs, it not clear how a conclusion that there are SOEs that are financially unviable was arrived at.
We would also need to be convinced that in the South African economy, which is dominated by private monopolies, there is any sector where "market failure no longer exists". It is worrying for example that the developmental role of a key SOE like Telkom (albeit partially privatised) is classified by the PRC as "unknown", which implies that the provision of an essential service such as Telecommunications should be left to the private sector.
This market-driven logic continues to be entrenched by the report when it boldly recommends that "private sector participation in partnering with SOEs to deliver on the provision of both economic and social infrastructure should be encouraged and expanded". While the report encourages public-private-partnerships, it is silent on the importance of public-public partnerships.
The report raises critical issues around the funding of SOE provided infrastructure, but ends up giving a mixed and confusing message. At one point it states that "Arguably, the massive national requirements for investment-- in social infrastructure such as schools, health facilities, communal infrastructure, public amenities and roads as essential social goods and services - largely remain a direct responsibility of the State and cannot justifiably and sustainably be funded on a ‘user pays' principle in a country where most citizens have limited means."
It notes that the ‘user pay' principle favoured by Treasury for economic infrastructure has been called into question by popular resistance to the E-tolls, but the issues it raises has implications going way beyond road infrastructure. It states that "It is unusual that basic infrastructure is funded such that the servicing of that debt must rely on exorbitant increases in tariffs as exemplified by funding methods being use for infrastructure development by Transnet, Eskom and ACSA, and those proposed by Sanral for Gauteng's freeways. Other countries like China have chosen an economic development policy in which Government takes full responsibility for infrastructure investment..."
Nevertheless it strongly encourages the Treasury-supported user-pays model of funding for economic infrastructure as opposed to social infrastructure, recommending that "Economic infrastructure, where relevant, must be funded on a ‘user pays' basis... and funding of social infrastructure, including roads, should have less reliance on the ‘user pays' principle, and more on taxes."
Having made this recommendation it then questions the consistency of this approach, stating: "The PRC engagements with both National Treasury and the Department of Public Enterprises revealed that a model is still evolving with inadequate policy convergence among them... National roads are considered economic infrastructure that should be tolled to fund their development and other roads as social infrastructure."
The PRC fails to learn from history of privatisation of state owned assets post-1994 and the impact it had and continues to have on the provision and affordability of basic services. Privatisation of state owned assets involved:
- Outright sale of the enterprise;
- Partial sale of the enterprise;
- Introducing strategic equity partner;
- Introducing management contract between government and the private sector; and
- Commercialisation and corporatisation.
For instance, with the corporatisation of Eskom and privatisation of Telkom in the early 2000s, the prices of the services provided by these entities have shot up dramatically. After the privatisation of Telkom, while the democratic government had managed to connect many of our people who had been denied telephone services in the past, these services had to be disconnected due to affordability problems. The high electricity tariffs by Eskom, which are compounded by huge municipal surcharges and water disconnections for those who have pre-paid meters, are some of the sad stories which are an outcome of privatisation.
The report does not properly consider the concern that the private sector in the public-private-partnerships takes less risk while government takes most of the risk involved. While we welcome the report's proposal to use a portion of a minerals resources tax to fund infrastructure, it fails to go far enough to explore other funding options like prescribed assets, tax on imported luxury goods, and a financial transaction tax.
While the report talks about the leveraging of procurement by SOEs to promote economic transformation, it says nothing about local content and procurement. It merely recommends the revision of the threshold for BEE preference point system from 80/20 and 90/10 to a uniformed 70/30 system. This neglect of the need to systematically promote local procurement undermines the local procurement accord signed by the social partners, and sends a problematic message to the private sector.
Finally the report does not make any recommendation about the role of SOEs in sustainable development and preservation of environment. This should be an important consideration particularly for SOEs that fund social and economic infrastructure projects.
COSATU will be requesting that the PRC report is tabled for engagement at Nedlac, and will also be tabling our concerns at the Alliance Economic Summit next month, in the commission focusing on the role of SOEs.
Statement issued by Patrick Craven, COSATU national spokesperson, June 13 2013
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