Budget 2016: clampdown on state-owned entities

Finance Minister Pravin Gordhan says government seeks to stop corruption, waste and the continued bailout of state-owned entities (SOEs). He delivered his much anticipated budget speech on Wednesday, amid cynicism over the economy.

Gordhan also defended a measure undertaken by Treasury to review all contracts above R10- million. Earlier in the day, Treasury had released a statement on the matter ahead of the budget speech. This, it said, was in response to reports in the Sunday Times that allegedly suggested that Eskom was being targeted for investigation – a move the paper implied was linked to Gordhan snubbing the politically influential Gupta family, which is in the running for a lucrative coal supply contract with Eskom.

“National Treasury has noted with concern recent reports from the Sunday Times suggesting that Eskom is being targeted for investigation,” read the statement. “The report was malicious and mischievous, based on unnamed and faceless sources purporting to be close to the National Treasury.

“It is a fact that since June 2015, the Office of the Chief Procurement Officer has been reviewing contracts above R10-million across government in its quest to ensure value for money and reduce wastage and irregularities in procurement.”

Gordhan reiterated this position in his speech, stating that an overhaul was needed in the administration of SOEs. “The budget relies on institutions of good governance and a public ethic that values honesty and fairness,” he said.

“Initiatives of the chief procurement officer (CPO) will be extended to include monitoring of state-owned companies’ procurement plans and supply chain processes, and reviews of contracts above R10-million to ensure value for money. Centrally negotiated contracts will be mandatory with effect from April 2016.”

He added that the CPO’s mandate is to help government save R25-billion a year by the third year of the current mid-term expenditure framework period. This would come out of a government procurement budget of about R500-billion a year. “Our reform proposals draw on a consultation programme last year that reached over 7 000 suppliers and 2 500 supply chain practitioners, and attracted over 27 000 responses to a national survey.”

Corruption Watch is part of a small group of civil society organisations which are working with the CPO on the procurement reforms.

Admin costs slashed

Gordhan’s speech also touched on the need for the cost-effective running of government services. This, he said, was because it is necessary for the government as an active shareholder to improve its capacity in order to manage the SOE reform process effectively. “SOE reforms must be accompanied by administrative reforms,” he said.

“Additional spending on higher education, small business development, and amounts set aside for responding to the drought and other contingencies, are accommodated through stringent cost containment measures across all departments.”

The measures include:

• Restrictions on filling managerial and administrative vacancies, subject to review of human resource plans and elimination of unnecessary positions;
• Reduced transfers for operating budgets of public entities;
• Capital budgeting reforms to align plans with budget allocations while strengthening maintenance procedures;
• Mandatory use of the new e-tender portal, thereby enforcing procurement transparency and accessible reference prices for a wide range of goods and services;
• A national travel and accommodation policy and instructions on conference costs;
• New guidelines to limit the value of vehicle purchases for political office-bearers;
• Renegotiation of government leasing contracts;
• New centrally negotiated contracts for banking services, ICT infrastructure and services, health technology, school building and learner support materials.

SOE governance structure unnecessarily complex

According to the report of the Presidential Review Commission (PRC) on SOEs, released earlier this month, SOEs operate under a governance structure that is quite complex, involving relationships between Parliament, ministers, boards and CEOs.

The report found this arrangement results in confusion over the allocation of responsibilities and the accountability for results. “…the importance of corporate governance generally for companies, whether private or state-owned, has been underscored by the global financial crises, corruption scandals, waste and bankruptcy of companies…

“Despite the noble reasons for the creation of SOEs, they are in many cases in many countries often less productive than private companies.”

The asset base of SOEs is over R1-trillion, equivalent to about 27% of GDP, said Gordhan. They maintain networks and provide services – power, roads, transport, water, communications – on which the rest of the economy depends.

“But the PRC report indicates that the mandates of some of our entities overlap, some operate in markets that should be more transparently competitive and some are no longer relevant to our development agenda,” he added.

“The strength of our major state-owned companies does not lie in protecting their dominant monopoly positions, but in their capacity to partner with business investors, industry, mining companies, property and logistics developers, both domestically and across global supply chains.”