They are worth an estimated R350bn, turn over about R200bn/year and employ 200 000 people. And they are firmly under the control of government.
Over the past decade, under the ANC government, the role of state-owned enterprises (SOEs) in the economy has shifted dramatically. Though there has been the occasional shift in government thinking on SOEs, the overall policy priorities have remained consistent.
They have become the main implementing organs of government's socioeconomic policies and as such have been at the forefront of the drive to bring social infrastructure to SA's urban and rural poor.
Since June, under new public enterprises minister Alec Erwin, the implementation of government's R110bn public works programme is an added dimension to the socioeconomic mandate of public-sector corporations.
SOEs have also taken the lead in implementing important black economic empowerment (BEE) initiatives such as employment equity, procurement from black suppliers and training.
Under Erwin, they have added a crucial third aspect to their policy priorities: to ensure that the country's energy, transport and telecom infrastructure helps SA companies to conduct business more effectively and affordably.
Meeting only one of these mandates would be onerous enough. Implementing all three policy priorities has required that the SOEs restructure themselves to strike a delicate balance.
Consider, for example, that power utility Eskom had to electrify about 1 500 homes every day for the past few years, while at the same time providing household and corporate customers with affordable electricity. Or that many SOEs have to retain vital technical skills, while simultaneously advancing affirmative action aggressively in their organisations.
The result is that today's SOEs are unrecognisable from the sluggish behemoths they were 10 years ago. Most large SOEs have now been "corporatised" in line with private-sector practices, with government as its sole or largest shareholder.
The list of SOEs ranges from the four giants in the public sector - Eskom, Transnet, Denel and Telkom - and financing institutions (Land Bank, Development Bank of Southern Africa and the Industrial Development Corp) to smaller operations involved in a wide range of activities, from mining (Alexkor) to forestry (SA Forestry Company), and from airports (Airports Company of SA) to IT (Arivia and the State IT Agency).
Many economists argue that most SOEs have no role in the public sector.
Erwin, however, disagrees and has virtually put a stop to the sale of SOEs. Since 1997, the restructuring and privatisation of SOEs has realised about R24bn, with the 30% sale of Telkom in 1997 heading that list. But the 2004 budget projected a paltry R2,5bn over the next two years in privatisation proceeds.
The sale of 30% of Eskom's generation business has been shelved and the partial privatisation of Transnet subsidiary SA Airways postponed for now.
Even where an SOE is considered noncore, Erwin has hinted that government wants to retain a crucial shareholding to ensure it meets certain strategic requirements.
Though ruling out a wholesale sell-off, Erwin said in his inaugural address as public enterprises minister to parliament that government "will concentrate on concessions, joint ventures and public-private partnerships".
Since then Erwin has outlined a R156bn, five-year investment strategy for the transport and energy industry, primarily Transnet and Eskom. He also made room for private-sector operators to provide 30% of new electricity capacity over the period.
His drive has placed a renewed emphasis on policies that ensure SOEs are appropriately governed, have strong balance sheets and are regulated effectively.
Public enterprises director-general Eugene Mokeyane told parliament recently that this strategic shift requires important adjustments to policies:
- A review of the skills composition and attendant budget required to implement new policy priorities;
- Ensuring that levels of investment by SOEs are increased; and
- A need to further increase the efficiency and effectiveness of the main SOEs - Eskom, Transnet and Denel.
Corporate governance has been identified as crucial in enhancing the effectiveness of SOEs. Erwin emphasised this by implementing a dramatic overhaul and recomposition of the boards and senior management of Transnet and SA Airways two months ago.
Most SOEs adhere, at least on paper, to the best practice corporate governance standards as advocated by the two King commissions.
According to public enterprises' "Protocol on corporate governance", government's relationship with its SOEs "is similar to the one between a holding company and its subsidiary". The board of an SOE is appointed by government and "has absolute responsibility for the performance of an SOE and is fully accountable to the shareholder for such performance".
Mokeyane says his department has instituted a number of mechanisms to ensure financial and corporate governance procedures are adhered to.
But the most effective tool in regulating behaviour by SOEs and their directors is the Public Finance Management Act (PFMA). The duties and liabilities imposed on SOE directors under the PFMA are in many cases more onerous than those imposed on private-sector companies.
Ken van Sweeden, director of Camarque Underwriting Managers, a company that offers policies aimed at protecting directors against liability suits, says that apart from the "normal" duties of company directors and executives, the PFMA adds another dimension to their role in the public sector.
"Directors subject to the PFMA are required to prevent any prejudice to the financial interests of the state, which puts the state's interests above company interests," Van Sweeden says.
As such, the directors of an SOE must be accountable for the financial health of the company and take cognisance of trends and issues that may influence government policies.
Telkom, partially privatised with a listing on both the Johannesburg and New York stock exchanges, is the most advanced of the SOEs in terms of implementing strong corporate governance standards. Telkom regulatory affairs head Nkenke Kekana says that over the past 10 years the implementation and adherence to governance standards "has changed dramatically".
"The board exercises its oversight far more rigorously than before. Management has been guided by, and had to comply with, the King principles in SA and Sarbannes-Oxley legislation in the US, which requires full disclosure and absolute transparency," Kekana says.
Telkom's stock market exposure has also put more pressure on the group than other SOEs to produce a strong set of financial results every year. So far, the group has succeeded and it is one of the world's top-rated telecom stocks.
At the same time, the group has had to ensure that it continues to meet government's broader socioeconomic obligations, a balancing act that has often put it in conflict with industry regulators.
Kekana explains the dichotomy: "As a listed company there are different priorities when we talk about shareholder demands. We have to balance the demands from government in terms of universal telephony access and paying our taxes, with the need to attract shareholders who expect a good rate of return."
To a lesser extent, similar pressures are put on all SOEs, particularly those at the forefront of Erwin's drive to provide a more efficient infrastructure network in which SA business operates.
As they are faced with the financial demands of their infrastructure expansion, the SOEs need to ensure that their core operations are profitable enough to finance future growth. SA's large SOEs have a mixed track record to date.
A significant challenge in this respect is the fact that their prices are often set by industry regulators - the Independent Communications Authority of SA (Icasa) for Telkom, Sentech and the SABC and the National Electricity Regulator (NER) for Eskom.
As the regulators have been given the task of looking after consumers first, they have managed to keep price increases to a minimum, particularly for electricity and, to some extent, telephony. But Eskom, for example, is seeking higher tariff hikes to fund its huge R84bn power expansion over the next five years.
Kekana strongly supports the separation of policy, regulation and operation in an industry, but also argues that "SOEs be given the resources to meet their national objectives".
Erwin has recently hinted that regulated prices should reflect the need to allow SOEs to boost future capacity.
Undoubtedly, the role, mandate and operations of SOEs have expanded significantly over the past 10 years, placing significant strains on the corporations' senior executives and managers.
But there is not only added responsibility and risk, there has also been a big adjustment in working conditions. Pay packages of top managers at SOEs are comparable to those in the private sector, and comprise salaries as well as performance-linked pay.
In many cases, SOE executives are paid more than their private-sector counterparts because the state has made employing black managers a priority.
All SOEs have implemented aggressive affirmative action programmes that ensure that most new recruits come from previously disadvantaged communities and in-house training is largely dedicated to black staff. In its past financial year Eskom spent more than R500m on 1 850 bursary recipients and trainees, 87% of whom are black.
The BEE commitment extends to the SOEs procurement programmes, which have increasingly been channelled to black-owned suppliers, particularly small to medium-sized companies.
Government's drive to transform its enterprises has succeeded on many fronts, particularly BEE-related activity and the introduction of private-sector best financial and governance practices.
