By Paison Tazvivinga
The poor performance of state-owned enterprises (SOEs) has been perpetual over the past two decades and the burden continues to weigh heavily on taxpayer dollars.
Most, if not all, state-owned enterprises have been marred by sub-optimal operations at all levels.
The comprehensive SOE report for the end of 2018 shows that SOEs generated a combined loss of US $ 150 million on an asset base of around US $ 17 billion.
If one were to apply an expectation of only 2% return on assets, the anticipation would be a profit of US $ 250 million.
Notable issues that have been raised about SOEs include non-compliance with tax obligations such as PAYE, even though it is assumed that these funds are withheld from employees; repeated requests for financial bailouts from the Treasury and debt, which led to requests for guarantees from line ministries and the Treasury.
In our efforts to solve these problems, we must learn from other nations as the saying goes: “No nation is an island in itself”. So we look at the Singaporean and South African experience.
The article adopts the Organization for Economic Co-operation and Development (OECD) definition of state-owned enterprises (SOEs), that is, “state-owned enterprises are companies in which the State exercises significant control, through a significant total, majority or minority stake”, (OECD, 2018).
Singapore’s Temasek model
Temasek is a company incorporated in Singapore and operates in accordance with the provisions of the Singapore Companies Act.
Temasek is neither a statutory council nor a government agency.
Temasek was incorporated under the Singapore Companies Act in 1974 to own and commercially manage investments and assets previously held by the Government of Singapore.
This allowed the Ministry of Finance to focus on its central policy-making and regulatory role, while Temasek would own and manage these investments on a commercial basis.
Temasek follows the centralized model of the OECD.
It is fully owned by the Ministry of Finance and no other government department or agency owns shares in companies invested by Temasek.
It is one of the renowned sovereign wealth funds, described by the Financial Time as “one of the most influential investors in the world”.
When it comes to restructuring state-owned enterprises, the main concern is to retain government control in strategic areas, which is why most proponents of privatization have come up against a brick wall. However, the Temasek model captures this aspect well:
The Singapore government controls key industries / services only through Temasek, including:
Energy: SP Group (the leading utility group in Asia-Pacific, with some of the world’s most reliable and cost-effective transportation, distribution and market support services);
Airline company: Singapore Airlines (often ranked among the best in the world)
Public transport: SMRT (multimodal transport operator in Singapore)
Marine: Sembcorp marine & Keppel Corp (two of the world’s largest manufacturers of jack-up platforms)
Financial: DBS Group (largest bank in Southeast Asia by assets)
Telecommunications: Singapore Telecommunications (SingTel) (leading telecom operator in the region in terms of turnover).
Thus, it is possible for the State to retain control of strategic sectors while allowing these entities to operate on a commercial basis.
Can the Temasek model be duplicated?
The model is based on three guiding principles:
- Respect for the law;
- Non-tolerance of bad governance, corruption and mismanagement; and
- The restraint of politicians on interference in public enterprises.
The question should therefore be: can these three characteristics be reproduced in our context?
Are we ready to promote respect for the law, what is our level of tolerance for corruption and mismanagement and are politicians prepared to refrain from interfering in the management of public enterprises regardless of the temptation?
The South African Select SOE experience.
Alexkor: Diamonds Mining, recorded a loss of R99 million in fiscal year 2019/2020.
Denel: Defense Equipment, recorded a loss of R 1.8 billion in fiscal year 2019/2020.
Eskom: Energy, recorded a loss of R20.5 billion in fiscal year 2019/2020.
SAA: Airline, recorded a loss of R5.5 billion in fiscal year 2019/2020.
Problems that disrupt SA SOEs
The following can be identified as key issues affecting SA SOEs:
The composition of their boards of directors;
their non-commercialization; and
Generalized conflict of interest.
All of these challenges show us the failure of SA public enterprises to meet strict corporate governance standards. It has also been a major problem for Zimbabwe’s SOEs.
What to do for SA SOE
According to (PWC), 2019) the following should be taken into account:
- The application of good governance must be supported by an understanding of the concept of leadership;
- Establish measurable performance indicators; and
- Enforce the responsibility of the board of directors and management for the performance of public enterprises and their compliance with its strategic mandate.
The South African experience teaches us that no matter how financially powerful the state is, SOEs will continue to fail if poorly managed. The problems of South African SOEs can be solved by learning from the Temasek model on how to maintain good standards of corporate governance. Maybe Zimbabwe can borrow a leaf too.
Key points to remember who help explain Temasek’s success
Singapore has a history of good public governance without the intention of exercising excessive political control. This allowed Temasek to:
- To pursue the long-term interests of shareholders (in this case, the interests of the government since it is the ultimate shareholder); and
- Align its interests (the interests of the government) with the objectives of corporate governance.
Temasek took a significant number of foreign investments so it became bound not only to national regulations but to foreign rules.
This has been the foundation for Temasek’s premium corporate governance standards as it has to prove its business management capability to governments and foreign investors.
The State is committed to being exemplary in respecting the standards of corporate governance. As Chen (2016) puts it, “One would expect the state to lead by example as it imposes corporate governance rules on private companies, whether through strict laws or voluntary codes ”.
Temasek sends a signal that state entities can be champions of good corporate governance. It also reinforces the idea that SOEs should not be used as custodians of political allies.
Rather, they should be allowed to operate commercially, with the government benefiting from the dividends.
- Paison Tazvivinga * is a development economist. E-mail: [email protected].
* These weekly articles are coordinated by Lovemore Kadenge, independent consultant, past president of the Zimbabwe Economics Society and past president of the Institute of Chartered Secretaries and Administrators in Zimbabwe. E-mail: [email protected] and mobile number +263 772 382 852