SOEs are a necessary national burden | Sunday Standard
Thursday, July 2, 2020

SOEs are a necessary national burden

For a country without a robust private sector like Botswana, it is compelling that government comes in to fill the void, hence the creation of more than 30 public-owned enterprises. But really what are SOES, in a nutshell? State owned enterprises are classified as those enterprises in which the state exerts significant control through full, majority, or significant minority ownership.

 In the Botswana context, SOEs and statutory corporations, that is, a corporation created by a specific statute and not a company formed under the Companies Act, sometimes have a dual mandates, namely, a commercial and a developmental one. In Botswana as in many countries, the public enterprise landscape is sometimes a reflection of resources allocation in the pursuit of socio-economic development.

A practice note for Botswana SOEs observes that historically, too focus has been aimed at administration rather than the enterprise itself leading to a history of “service operational inefficiencies and poor financial results. This does not however mean that SOEs should not be bound by the principles of good governance set out in the Botswana code”.

In the same practice note, it is further acknowledged that “it is extremely difficult if not impossible to lay down procedures which would be appropriate for all kinds of enterprises. More particularly is this so in the case of SOEs where sometimes there is a dual mandate, one development and one of enterprise”.

The SOE Network for Southern Africa in its November 2014 Guidelines on the Governance of State-Owned Enterprises also underscores the importance of SOEs holding that they form one of the largest sectors of the economy in many African countries, and are important contributors to national development. SOEs provide citizens with access vital to services such as water, electricity, health, sanitation, telecommunications, and transportation.

“The competitive position of the private sector-led economy, including small and medium-sized enterprises, is also heavily dependent the services and infrastructure provided by these firms. On a regional level, SOEs are key players in large cross-border infrastructure projects, which are crucial to realizing regional integration goals and to achieving what is considered to be an important development objective” pronounces the Southern Africa SOEs Network.

The network further acknowledges that many southern African economies have placed SOEs at the center of their national development strategies with a growing trend to rely on SOEs to remedy market failures and remove direct obstacles to development. Some go beyond this and aspire to be a “developmental” state model in which SOEs drive competitiveness, job creation and industrial development. This is partially a response to disappointment with the outcomes of privatizations and structural reform programmes in the 1990s, but there is also a growing consensus that if governed properly SOEs, can support national development.

“Some concerns have been expressed regarding the effectiveness of these approaches, including the managerial and technical capabilities of the participating SOEs. Irregular practices including conflict of interest and outright corruption have also been alleged. Thus, there is need for strong efforts to ramp up the efficiency, competitiveness and commercial viability of existing SOEs”, asserts the network.

An international consensus in the economics fraternity has been quickly building up, acknowledging that “SOEs are an influential and growing force globally. For instance, the proportion of SOEs among the Fortune 500 has grown from 9 percent in 2005 to 23 percent in 2014, driven particularly by the growth of Chinese SOEs”.

According to a PwC 2017 report on SOEs as Catalysts for Value Creation emphasizes that the motivations for state-ownership can wax and wane over time, but SOEs appear to be an “enduring feature of the economic landscape and will remain an influential force globally for some years to come. As such, it is important to ensure that – whether held nationally, regionally or locally – the state’s investments actually deliver the societal outcomes desired” and are therefore likely to remain an important instrument in any government’s tool box for societal and public value creation given the right context.

The PwC reports further notes SOEs have become tools for some countries to better position themselves for the future in the global economy given the increased global competition for finance, talent, and resources, It appears, however, that while existing SOEs are growing larger, there is a more general downward trend in state ownership, even when considering the effects of the past financial crisis.

There is however an interesting observation in the report that “there is tendency governments to only partially divest their ownership stakes also means that while there may be a drop in the share of SOEs in a national economy, “this does not necessarily equate to a corresponding decrease in the government’s ability to wield influence over these enterprises”.

It is argued that government objectives of SOEs are, generally speaking, to create wealth in the economy and well-being and jobs for its citizens. In contrast, shareholders of private businesses have a primary focus on seeing financial wealth created by the company, leading to financial dividends (although many are now seeing the wider contribution needed from businesses in society, as shown by the growth of corporate social responsibility programmes).

The PwC report concludes that in an increasingly borderless world, SOEs will continue to have an influential role to play, both domestically and abroad in the places they operate. SOEs leaders need to actively own and manage these SOEs in order to ensure that they not only achieve their stated objectives in an efficient, effective and socially responsible way, but that they deliver on wider societal outcomes that create value for citizens and stakeholders.

An Asian Development Bank Institute December 2017 policy brief also underscores the importance of SOEs by pronouncing that, “despite a wave of privatization in the past three decades, SOEs still contribute significantly to economic growth of both developed and developing countries”.

Most SOEs, especially in developing countries, are not just expected to be financially profitable, but are also tasked to provide crucial public goods. The provision of clean water, electricity, and sanitation services in remote town and villages, for example, might not be financially profitable as they would be in big towns, but they are equally essential for both sets of populations. Privatizing SOEs, which provide these essential services often at subsidized rates, thus could deprive people of critical services.

Despite their usefulness in the national economy, SOEs are also seized with numerous challenges, ranging from corruption to operational inefficiencies as well as lack of profitability. The World Bank also lamented in 2017 that under-performing SOEs not only “drain scarce resources to provide essential services to people in developing countries, but can also crowd out private investment and distort domestic financial market”, and to this end, many developing countries, therefore, have sought to reform their SOE management and governance structures to improve their performance.

Botswana has equally has not escaped the globally unique challenges facing SOEs. In a paper presented at the July 2017 2nd Annual Conference on Public Administration and Development Alternatives in Gaborone titled: The Slip-Ups of Corporate Governance in Botswana Public Enterprises, the authors acknowledge that the enterprises suffer from various problems.

The paper’s authors, B. Motshegwa, K. Mooketsane and K. Bodilenyane argue that mismanagement, corruption, personal and political interests often blemish the important role that these institutions have to play. Several cases of mismanagement and corruption have been reported in Botswana.

It is acknowledged that Botswana has been hit hard by corporate scandals in the past continuing into the present. The scandals mainly happen in the parastatals. On the back of the corruption scandals, corporate governance has taken center stage as a major reform, not only for Botswana but the whole world at large.

The other discernible problems facing SOEs is that most have been created by government as monopolies in the services they offer to the public, something that has been found to be problematic for governments because “ if SOEs are not profitable, governments pump a lot of money into their operations at the expense of other development objectives”.

Faced with a similar problem, Botswana government weaned the parastatals from the defunct Public Service Debt Fund (PDSF) in the early 2000s. This however, did not deter government from pumping more money into the underperforming parastatals. The only difference currently is that the parastatals are getting annual government subventions or grants while previously they had a borrowing window from the PDSF.

Lastly, government efforts to privatize most of its parastatals have been in vain. The Public Enterprises, Evaluation and Privatization Agency (PEEPA) which was established to spearhead the privatization process has not been successful in the delivery of its mandate.

RELATED STORIES

Read this week's paper

Sunday Standard June 28 – 4 July

Digital copy of Sunday Standard issue of June 28 - 4 July, 2020.