Government confirmed its vision for the restructuring of state-owned enterprises (SOEs) at the Lekgotla in November 1999. This vision sets out the continued role of the state in the economy, in the light of recent international experience with SOE restructuring and the developmental needs of the country. It is generally accepted that South Africa employs a mixed economy to address the legacies of apartheid. The state’s role is dynamic, shifting emphases to meet the changing developmental needs of society. The key policy statements of Government also have both an explicit and implicit bearing on the state’s relationship with SOEs. The Constitution requires that the state should take proactive action to ensure that the injustices of the past are overcome in a manner that ensures fairness and equity. SOEs clearly have a role to play in this process.
The Reconstruction and Development Programme (RDP)(1) sets out an approach to the restructuring of state enterprises, arguing that Government should decide, on “the balance of evidence”, whether the public sector should be expanded in strategic areas through “nationalisation, purchasing a shareholding in companies, establishing new public corporations or joint ventures with the private sector”, or whether it should be reduced in a manner that will “enhance efficiency, advance affirmative action and empower the historically disadvantaged, while ensuring the protection of both consumers and the rights and employment of workers” (clause 4.2.5).
The Growth, Employment and Redistribution (GEAR) strategy(2) provides a similar view on restructuring, noting that it “may involve the total sale of the asset, a partial sale to strategic equity partners or the sale of the asset with Government retaining a strategic interest”. It also proposes a phased process of restructuring in order to maximise value and to ensure that adequate regulatory frameworks are put in place. GEAR argues for “decisive leadership by Government”. This entails a protocol on corporate governance indicating the objectives and performance appraisal norms for all SOEs, a programme of asset restructuring, and fair pricing policies that would ensure full cost recovery while “also promoting competition or protecting consumers against monopolistic practices” (s.7.2).
Meeting in November 1999, the key Ministries involved in SOE restructuring discussed the objectives of this process. It was evident that Government has benefited from its experience of restructuring over the past five years. Progress with the restructuring of some major SOEs has been considerable, but negative experiences with some smaller SOEs indicated that Government’s approach to restructuring needed to be refined. This is particularly important now that the South African economy is reorientating itself towards the regional and international markets, and the major public corporations (energy, telecommunications, transport and defence-related industries) must increasingly support this global positioning.
Despite their difficulties, the major SOEs represent massive financial, investment, labour, technology and infrastructure resources in the South African economy. They also dominate sub-Saharan Africa’s transport, communication, power and defence-related technology sectors. Government’s restructuring strategy aims at maximising the contribution that its assets can make to development both in South Africa and on the continent. The restructured South African SOEs can lead the way in promoting the African renaissance in their respective sectors, providing world-class expertise, resources, services and infrastructure to a developing continent, often in partnership with enterprises in other African countries.
Development cannot be measured only by financial criteria, and restructuring is not a means of improving government finances and enterprise efficiency at the expense of the poor. Rather, the success of restructuring will be measured by its contribution to improving the standard of living of the majority of the population. The goal of restructuring should therefore be sustainable economic and social benefits. Government’s strategy focuses on restructuring that benefits all South Africans by expanding infrastructure services that are competitively priced and accessible, and that provide an opportunity for economic participation. Private capital and expertise, within an appropriate framework to encourage delivery, will expand the potential for providing services and infrastructure beyond that which the state alone can deliver. The state will actively manage the economy through both direct and indirect mechanisms to ensure that this expanded potential translates into widespread improvements in service delivery. Restructuring should be accompanied by regulatory reforms to ensure that consumer interests are protected, that services and public participation in service delivery are extended, and that environmental and other public policy concerns are appropriately addressed.
The establishment of SOEs in apartheid South Africa created the conditions for skewed development aims, irregular infrastructure and service delivery, and a host of structural problems. Since 1994, these have limited the ability of SOEs to adjust to new requirements and new policies. Some corporations are struggling to overcome their legacy of unsustainable debt burdens, underinvestment in key infrastructure and technology, and unmanageable corporate structures. The state, therefore, currently risks not only failure to achieve its broader policy objectives, but also a severe depreciation in the value of these assets as the market discounts them owing to their present difficulties. The total effect would be continued failure to ensure rigorous and directed interventions for ensuring that socio-economic development takes root both in those areas most sorely affected by the past and in the areas of the new economy.
Frequently, restructuring or privatisation programmes are interpreted as meaning a withdrawal of state power, authority and responsibility from the provision of services, employment and investment. In the South African context, however, public ownership of some SOEs is – due to their enormous debt – all but nominal, with control and power resting firmly within the purview of international financiers. Until recently, some SOEs operated in a manner that is not aligned with the broader objectives of Government, their policies containing only vague references to social responsibility. The restructuring programme aims at returning SOEs to the ambit of citizens’ concerns.
Hence, performance contracts, shareholder compacts and other regulation instruments have been designed to ensure that restructured SOEs understand fully their responsibilities while undertaking business in an economically efficient manner. Likewise, equity partners, management contractors and other participants from the private sector will be guided by a common commitment to the broader aims of the RDP. In short, a situation is envisaged in which the role of non-state institutions is incorporated into the organisation, financing and management of SOEs. Thus, rather than alienating state assets in the main, the role of private, national and international capital, and community-based capital resources such as trade union investment funds, employee share plans, public offerings and other forms of participation, is increased.
Rethinking the role of the state in a mixed economy
The role of the state in the development of the economy has been a major theme of 20th century development literature. It may be useful to refer to a recent paper by Rodrik on “Developmental strategies for the next century”.(3) This paper shows that, for the second half of the 20th century, most economies in both the developed and developing world depended on the state’s continued role in a mixed economy for their development. It also identifies some of the institutional prerequisites for continued development. These arguments will tie in with the discussion of various elements of the restructuring strategy described in the ensuing sections. Rodrik argued that:
… the idea of a mixed economy is possibly the most valuable heritage that the twentieth century bequeaths to the twenty-first in the realm of economic policy …The simple idea that markets and the state are complements – recognised in practice if not always in principle – enabled the unprecedented prosperity the United States, Western Europe, and parts of East Asia experienced during the second half of the century … the state and the market can be combined in different ways. There are many different models of a mixed economy. The major challenge facing developing nations in the first decades of the next century is to fashion their own particular brands of the mixed economy.(4)
By shifting the focus from conventional arguments on trade strategy and industrial policies (notwithstanding their importance),(5) to concerns about social conflict and the institutions required to manage them, Rodrik provides a fresh insight into the “developmental state” and the role of a mixed economy in a globalising world economy. He reviews the critical institutions required to sustain economic development in such an economy, emphasising the importance of institutional diversity. In an assessment of the history of economic development in the second half of the last century, Rodrik argues that successful economies have been those that have adapted “pre-existing institutions”, even where this has resulted in a more gradual integration into the world economy because they “economised on institution building”.
An interesting example of a mixed economy that is adapting to the global economy while the state still plays a strong developmental role is that of the People’s Republic of China. Although many industries are being privatised, the state intends keeping control of infrastructure used for providing public services.
It does, however, concede that control does not imply full ownership. At the same time, the state has shifted from a centralised planning approach to one that encourages market incentives. This, combined with the establishment of markets and the clarifying of rights and obligations of SOEs, has brought about a significant improvement in the quantity and quality of services provided by such enterprises. The private sector in China has also grown extremely rapidly.
A recent review by the Economic Commission of Africa traversed the whole range of development strategies that had been implemented in one way or another in Africa. These included structural adjustment programmes that followed the so-called Washington Consensus of the 1980s. One conclusion was that strategies have often been too narrowly focused and exclude critical issues such as the immediate political and social problems of structural poverty in Africa. In essence, the review argues that a range of issues previously excluded from the ambit of the Washington Consensus and its successors need to be included, such as:
… good governance, organized and supervised financial systems, poverty alleviation, investment in education and knowledge institutions, health and environment concerns and comprehensive strategies to address the issue of food production and transform agriculture.(6)
This is, in effect, a call for a broadened development agenda for Africa. Government believes that the state, inclusive of its business entities, has a role to play in developing strategies for South Africa in the new debate.
In conclusion, this discussion of the role of state, it should be noted that recent thinking on development provides important qualifications on the role of the state in the development of the economy. The range of ideological shifts in developmental economics in the second half of the 20th century include import substitution in the 1970s, to macroeconomic stabilisation in the 1980s, to overcoming financial instability in the late 1990s. The economies that have grown and have best weathered the storm of global economic integration, are those with institutional frameworks well suited to managing the balance of external shocks and internal development. Development is more likely to occur where appropriate, often pre-existing, institutions have adapted to the social and economic pressures arising from changes in the international economy. In these cases, having a mixed economy – i.e. an economy that is responsive to market incentives within a framework of socially integrative institutional mechanisms – has ensured more sustainable development.
In the ensuing discussion, an attempt is made to identify the institutional mechanisms required for ensuring the development of the South African economy in the face of globalisation.
It will be argued that the restructuring of SOEs has a better chance of success when it can exploit the potential of a mixed economy. This policy framework is, however, primarily about restructuring SOEs, and although it occurs within the overall restructuring of the economy as it is further integrated into the world economy, this document cannot cover all the social, political and economic issues arising from these developments. It instead aligns itself with the primary developmental thinking in Government and outside, while focusing primarily on issues related to the restructuring of SOEs.
Government policy on restructuring and development
Since 1994, the goals with restructuring have been broadly defined to address the economic, social and political objectives of Government, and have been refined from time to time. A discussion document by the Ministry of Public Enterprises,(7) which records the decisions arising from a Cabinet Bosberaad in January 1995, lists the objectives of restructuring as follows:
Since the publication of the document cited above, there have been a number of further elaborations of these objectives, including the GEAR strategy and the 1996 National Framework Agreement. Some objectives may have been prioritised differently in the various documents, but there is little difference in the overall statement of objectives, as shown in Table 1. Although it has been suggested that the objectives need further prioritisation if the restructuring process is to be improved,(8) it is not considered possible to provide a single set of priorities since different proposals may be best suited for achieving specific priorities. While such a prioritisation may assist managers in the public sector and in the SOEs in focusing their restructuring efforts, it is unlikely to change the outcomes of the process significantly.
Table1: Key objectives from various policy documents
| RDP (1994) | GEAR (1996) | NFA (1996) | IMCC (1999) |
| Meeting basic needs | Introducing budget reform to strengthen the redistribution of expenditure | Increasing economic growth and employment | Mobilising private sector capital and expertise |
| Developing human resources | Effecting a faster reduction in the fiscal deficit | Meeting basic needs | Ensuring wider participation in the South African economy |
| Building the economy | Encouraging a competitive and stable currency | Redeploying assets for growth | Creating effective market structures in the sectors currently dominated by SOEs |
| Democratising state and society | Ensuring monetary consistency to limit inflation | Facilitating infrastructural development by mobilising and redirecting private sector capital | Attracting foreign direct investment |
| Implementing the RDP | Reducing tariffs to complement industrial restructuring | Reducing state debt | Reducing the public sector borrowing requirement |
| Introducing tax incentives for new competitive investment and labour absorption | Enhancing competitiveness and efficiency of state enterprises | Enhancing the efficiency and effectiveness of SOEs | |
| Accelerating the restructuring of state assets to optimise investment resources | Financing growth and requirements for competitiveness | Financing growth and requirements for competitiveness | |
| Expanding infrastructure investment to address service deficiencies and backlogs | Developing human resources | Accessing globally competitive technology | |
| Ensuring appropriate flexibility in labour markets | |||
| Funding skills training commensurate with needs | |||
| Expanding trade and investment in Southern Africa | |||
| Implementing stable and co-ordinated policies |
The table shows a remarkable consistency among the main objectives of restructuring and other state industrial and economic policies.(9) As regards the objectives as stated at the IMCC Lekgotla(10) in 1999, some of the more specific earlier objectives (e.g. “developing human resources” and “increasing employment”) have been subsumed under the broader statement of “ensuring wider participation in the South African economy”. The more recent objectives have also become more specific about the manner in which the competitiveness and growth of the South African economy can be promoted, in particular the references to “attracting foreign direct investment”, “creating effective market structures” and “accessing globally competitive technology”. While these latter concerns reflect the changing perceptions of Government’s overall strategic needs, it is not believed that Government has abandoned or in any way de-emphasised its earlier objectives.
This policy framework aims at providing Government, SOEs and stakeholders with a common frame of reference, integrating and reconciling the various objectives for restructuring as championed by the different stakeholders concerned with SOEs. In general, the objectives of restructuring enhance the business efficiency and effectiveness of the enterprises, address macroeconomic needs to promote investment and/or reduce public sector debt, and involve social concerns such as employment losses and/or improving service delivery.
Although the policy framework seeks to reconcile the different objectives, it remains true that different stakeholders will seek to emphasise different objectives at the expense of others. For example, management and boards are usually more concerned with improving business efficiency and effectiveness, which will undoubtedly ensure better service delivery and better investment values, thus also meeting macro-economic and social objectives. Nevertheless, other stakeholders who value the latter objectives more highly, may be less enthusiastic about realising improved business performance, especially if they believe that this will occur at the expense of realising their priorities.
Those who champion the macro-economic objectives of reducing public debt and/or promoting investment may seek to emphasise these objectives and discount the extent to which current management can improve the performance of or turn around poorly performing SOEs. Indeed, it is often the strategy of investors to acquire failing firms at bargain basement prices rather than wait for a turnaround that would enhance the value and, hence, the cost of these firms.
Some may harbour doubts as to whether the turnaround strategies will be effective or whether they will merely further extend the public sector borrowing requirement.
Those, such as the trade union movement, concerned about job losses, increased service costs or reduced service delivery to the poor, may be sceptical about any restructuring initiatives that do not prioritise these objectives over others. It has been argued that the objectives of reducing public sector debt and improving investment and/or business efficiency and effectiveness are, in fact, subordinate to those of improving service delivery for the poor, creating additional jobs or overcoming the socio-economic legacy of Apartheid.
Finally, the shareholder – in this instance, Government – is concerned with broader economic and social objectives, while still requiring business efficiency and effectiveness. Given the developmental role of the state and the part that SOEs need to play in achieving developmental objectives, Government will be seeking to ensure that infrastructure and services are provided at the lowest cost and highest quality, and that access is extended to those who were previously disadvantaged. Government will ensure that this occurs through shareholder compacts with the enterprises and through direct interventions (e.g. subsidies) to pay for social requirements.
The policy framework therefore addresses these different emphases by attempting to establish a means of reconciling them in a manner that enhances overall social and economic welfare. Many of the objectives may be achieved in a specific restructuring initiative, but the extent to which trade-offs between different objectives occur will ultimately be determined in each individual case.
Therefore, although it is unlikely that every initiative will adequately address all the objectives, Government is committed to ensuring that the entire restructuring programme will improve overall public welfare.
Notes:
ANC/Alliance. 1994. Reconstruction and Development Programme, Johannesburg: Umanyano.
Department of Finance. 1996. Growth, Employment and Redistribution: A Macroeconomic Strategy. Pretoria: Government Printers.
Rodrik, D. 2000a. Developmental strategies for the next century. Paper prepared for the conference on “Developing Economies in the 21st Century”, Institute for Developing Economies, Japan External Trade Organisation, 26–27 January, 2000. This paper has been used extensively because it moves beyond the ideological debates about the developmental state that characterise many discussions of the role of the state and the market in South Africa and elsewhere.
Rodrik, D. 2000b. Can integration into the world economy substitute for a developmental strategy. Paper prepared for the World Bank ABCDE-European Conference, Paris, 26–28 June 2000.
Economic Commission for Africa (United Nations). 2000. Report of the Ad-Hoc Expert Group Meeting on African Development Strategies. Addis Adaba, Ethiopia, 20–24 March 2000.
Ministry of Public Enterprises. 1995. Discussion document by Government of National Unity on the consultative and implementation framework for the restructuring of the state assets. Pretoria: Government Printer.
Separate suggestions from HSBC, Handover Report, October 1999, and Cosatu, Initial response to policy framework, April 2000.
Some of the GEAR objectives do not relate directly to restructuring, but support the economic environment in which the restructuring objectives are met.