By David Lewis
First published in Business Day

Pravin Gordhan’s recent presentation to the parliamentary portfolio committee on public enterprises does indeed portend a “new dawn” for state-owned enterprises (SOEs). These massive corporations, many of which are producing critical basic goods for the country’s public and industry, have been front and centre of the plunder of the Zuma years.

“Just words”, the cynics will say. But words in the form of clearly stated plans have to precede action. Besides which, we can all take great comfort from the fact that some of these words have already been translated into action, as graphically demonstrated by the Transnet board’s decision, announced on the day, of its intention to suspend CEO Siyabonga Gama and two senior executives responsible for procurement and supply chain management.

Anyone who questions the necessity of their suspension should read the recently published draft forensic report commissioned by the Treasury, which clearly establishes that the executives concerned were, in collusion with household-name private-sector companies such as McKinsey, key players in the capture of Transnet. It seems McKinsey even wrote Gama’s MBA thesis for him. It doesn’t take much of a scatological leap to imagine what other personal services McKinsey may have provided for Gama to secure a Transnet contract.

There are in essence five key takeaways from Gordhan’s presentation:

First, there is the clear attempt to develop a holistic approach to the portfolio of SOEs that fall within the remit of the public enterprises minister. Although separately mandated, governed and managed, and each with their own challenges and opportunities, there are key framework questions that apply to all of these enterprises: what is the appropriate governance framework? How will their developmental mandate be funded? What factors will be considered in deciding whether a particular enterprise is appropriately located within the state?

These and other questions are raised in the presentation. One that doesn’t appear to have been addressed is the process of making board appointments and the criteria applied for selecting board members. There is a solid argument for a more transparent and rational process than is presently the case.

Second, is the appreciation of the fundamental tenet of good governance — whether of public or private enterprises, namely the division of responsibilities between the shareholder, the board and executive management.

The shareholder is responsible for the mandate, the board is responsible for developing and enforcing the strategy necessary to meet that mandate, and the executive management is responsible for the implementation of that strategy. This may seem quite obvious at the outset, but the history, particularly the recent history, of these enterprises is characterised by transgression of these boundaries.

And so, for example, the shareholder should not be appointing the CEO or the CFO of the enterprise. If these key executives are to be accountable to the board, as they must be, their appointment has to be the responsibility of the board. Obviously, any board of a company in which there is a dominant, much less sole, shareholder will closely consult that shareholder representative in the appointment of the CEO and CFO and seriously consider their opinion.

However, it must be clear that the decision belongs to the board. Anything else fatally undermines the critical function of the board by way of compromising its ability to hold the executive accountable.

Third, specifying the approach to dealing with corruption and procurement has been identified as a first-order priority. Attracting the investment necessary to deal with the financial woes of each of these enterprises— obviously the first-order priority — will not be successful if corruption, particularly in procurement, is not immediately confronted. In this regard, it’s pleasing to note that not only have many malfeasant and incompetent directors and executives already been removed and disciplined, but in several important instances criminal charges have been preferred.

The clear indication that board intervention in day-to-day procurement matters will cease is an important development in instilling good governance and tackling corruption. It’s remarkable how easily the establishment of board procurement committees was introduced. In the ordinary course, this is not a board responsibility. The notion that a committee of the board should be assigned responsibility for this function has, it seems, been an invention of Eskom and Transnet, and presumably other SOEs. What is absolutely clear is that these committees were established with the sole purpose of giving their members — and the Guptas, Zumas and others who pulled their strings — direct access to the procurement budgets of these enterprises.

Fourth, and particularly gratifying, is the clear appreciation of the consequences of mandating, directing and managing a company with a dual mandate. The abiding and unique character of a public enterprise is that it is mandated to be commercially and financially sustainable so as not to be a permanent drain on the fiscus. But it is also mandated to support developmental or public-interest goals, the attainment of which will not be commercially sustainable. If the two elements of a public enterprise’s mandate are to be compatible, the developmental mandate must be costed and funded. This can be done in a variety of ways. It may be funded by a direct grant from the fiscus, or funded via a subsidy from those parts of the enterprise that are income-and profit-generating in favour of those activities that support the developmental mandate.

If the latter, it must be understood that a consequence of the cross-subsidy is that the enterprise will not generate the sorts of returns that are attainable by an equivalent private enterprise. This is perfectly acceptable — and, indeed, this is as it should be. What is required is that the developmental mandate be costed and its intended impact on development clearly stated upfront and then monitored and evaluated so as to ensure the intended developmental returns are actually attained.

The final key takeaway is the commitment to review, in the longer term, the SOE portfolio. One doesn’t have to adopt one or other ideological extreme on state versus private ownership to acknowledge that some enterprises are more conducive to public than private ownership, and vice versa. The outcome of a pragmatic approach to this usually vexed issue would certainly conclude that public ownership is appropriate in certain enterprises because of their critical developmental impact — Transnet is a good example. In other instances — think SAA — where there is not an immediately clear developmental goal, private ownership may well be the way to go. And still, in others, mixed ownership is the right approach. Telkom appears to exemplify the latter approach.

If the public enterprises ministry manages to replace the heat generated by this issue with a little light, it will have crowned all of the other important objectives it has set for itself.

•  David Lewis is executive director of Corruption Watch