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Should We Privatise Our Failing SOEs?

Tying The Tourniquet

In a recent interview on SABC 2’s Morning Live, Andile Mazwai, Founder and CEO of Ikhala Private Equity, gave some extremely thought-provoking answers to questions on whether or not South Africa’s State-Owned Enterprises (SOEs) should be privatised.

The issue of privatisation has been raised a lot recently as a response to the continuing failure of SOEs such as Eskom and SAA to do the jobs for which they were originally created. Of course, given the equally recent and just as catastrophic governance failures of private companies such as Steinhoff and Tongaat Hulett, people naturally question whether privatisation would indeed be the cure-all solution many are touting it to be.

Trade Union COSATU is just one of the vocal opponents of privatisation of “strategic” SOEs such as Eskom, believing such a move would result in “massive” job losses. Instead, their solution is to use the interest accrued on the R1.8 trillion currently sitting in government pension funds to bail out struggling public entities.

However, as Mazwai argues, this interest, and indeed the pension fund itself, belongs to government employees, not government itself.

“It sounds very noble to say that we as South Africans must all come together to help the situation because we are in a crisis,” he says. “It’s a little less noble when you’re using someone else’s money. Shifting pensioner’s money from tomorrow to fix today’s problem doesn’t make the problem go away, it simply defers it to a later date.”

The bottom line, says Mazwai, is that throwing money at a problem doesn’t fix it – it simply creates a more expensive problem.

So, if privatisation isn’t the solution, and nor is more government bailouts, then what is? Let’s use Eskom as an example…

“Eskom didn’t wake up with a R450 billion problem,” says Mazwai. “Before the debt, we had decline and dysfunction. The SIU (special investigation unit) has identified R170 billion stolen by contractors at Eskom since 2005. The two new power plants due to be built were supposed to cost R150 billion. To date we’ve spent R470 billion, and we’re not done yet.”

Reaching this level of dysfunction and deterioration takes time. It starts with a functioning SOE then, over time, the wrong people are deployed into critical positions, and poor or bad decisions are made with no regard for laws or good governance. Anyone who dares try to point that out is slapped with any one of a variety of offensive labels: counter revolutionary, “clever black” or racist. This is a deflective tactic, not actually aimed at attacking an individual, but to detract from the reality of what is going on.

It all serves to create a fertile breeding ground for fraud and corruption. And it again begs the question: What can we do to stop the rot?

Speaking simplistically, we need profitable SOEs. Profitable companies are less vulnerable to being compromised by questionable practices and unethical leadership. But this is obviously far easier said than done. Is it possible for drowning SOEs such as SAA and Eskom to once again become profitable without some kind of intervention from the private sector? And what form would this intervention take? Might it just be privatisation in disguise? Perhaps, as political analyst Khaya Sithole suggests, the solution is for SOEs to adopt a private sector mindset instead of opting to “sell off the family jewels simply because we have a high debt to GDP ratio.”

But what does that actually mean? What needs to happen in order for this private mindset to come into play?

From a leadership perspective, we need decisive action taken against those found guilty of corrupt practices and general non-performance. The “crooks” need to be weeded out, removed from their positions and, more importantly, be made to pay for what they’ve done. They, and not the public, must be the ones who suffer for their bad decisions, greed and outright corruption.

We need to do away with the heinous policies of awarding tenders without transparent processes, and overpaying for products and services. People should feel safe questioning suspicious practices without fear of being silenced with political force.

It’s vital that we pay attention to even the smallest incidences, investigating and fixing them before the rot takes hold. Decline is a direct result of management not managing, and not acting when they should. It’s vital to regularly bring in the experts to investigate and evaluate businesses – both SOEs and private. Prevention is always far cheaper than the loss created by corruption, fraud and mismanagement.

Like cancer, corruption requires radical surgery to stop it spreading. Remove whole boards and top management if necessary, and bring in fresh blood – leaders committed to the rule of law, good governance and transparency – to start the process of rebuilding our dying SOEs.

Our government is running out of money because taxpayers are getting tired of handing over their hard earned cash to a government that simply uses it to line its own pockets. The emotional and moral cry of “paying your tax is the right thing to do” is wearing dangerously thin because government itself isn’t doing the right thing i.e. spending our taxes in a responsible and transparent way.

We are reaching the point where, if the ruling party is not prepared to make the hard decisions, choosing instead to remain more interested in internal political fighting, then ordinary South Africans will make them for them.

It may well be the middle class who rebels first. They’re forced to pay twice for education, security and health care, with no real benefits for “doing the right thing.” We only have to look at the very clear lessons of E tolls and TV licences – you cannot force people to pay for something they don’t believe in.

So here’s the bottom line: Rot takes time. We need to act now to prevent further decay, and we need to inject strong, ethical leadership into our failing SOEs.

JGL Forensic Services is a multidisciplinary team of experienced forensic accounting and investigation professionals. We strongly believe in the rule of law and the scientific method as it applies to forensic accounting and investigation. Talk to us in confidence, and let’s work together to prevent corporate corruption and fraud.