In an open letter to the State-Owned Enterprises Council, appointed by President Cyril Ramaphosa, Business Leadership South Africa (BLSA) has warned of the tough task ahead.

BLSA has also urged the Council that state capture must never reoccur at SOEs, which has been the case in the recent past.

The Council was set up by President Ramaphosa to look at ways of fixing SOEs that are in huge financial problems with debt running into hundreds of billions of rands.

Below is BLSA’s open letter to the Council:

Dear SOE council members,

Congratulations on your appointment to this crucial advisory body. Your role is a critical one: many of our SOEs are financially broken and are not adequately providing the services that the economy needs to grow and create jobs. Many are struggling after years of neglect and plunder by vested interests. With more than 700 SOEs, you have much work to do. So, we wish you luck in fulfilling your mandate.

Your job will not be easy. Each SOE has a complex mixture of ideology, legislation and regulation, so there is no standard model. There are complex mechanics surrounding how each fits into the state and into the economy, while their true functions are often a mix of myth and necessity. You will need to find a systematic way of thinking about SOEs while not losing sight of the nature of each.

Indeed, in this sense you’ve been given a tough task – to come up with some overarching SOE legalisation. SOEs are expected both to facilitate the economy to create jobs and wealth while delivering direct outcomes. There are trade-offs in this. Does Eskom employing 2 000 more people count for much if it raises electricity prices for everyone so that it means 20 000 fewer people are employed outside Eskom in the private sector? In thinking through an overarching strategy, we need a rational mechanism to decide on these trade-offs that takes a holistic view of the economy.

First, though, there is some firefighting to be done. Taxpayers and consumers must be protected from future state capture. Your role as a council should be to ensure that our experience of state capture can never happen again.

Transparency will be key – radical transparency –  to allow the public to see when things are going wrong, and indeed when they are going right.

Government needs a cool head in thinking about how some SOEs can be rescued and, as importantly, how others cannot – where the rot is too deep and where systems and controls cannot be put in place. In such cases alternatives, particularly private sector alternatives, should be considered. This leads to issue of when it is appropriate for the state to provide goods and services and when the private sector should do so. There are going to be some services best provided by SOEs but others where SOEs are needlessly competing with private sector providers at greater cost.

We note that you’ve been mandated to look at SOE liquidity, which is a difficult issue given that each individual case is quite different. There are, however, some big picture, complex issues here to get your teeth into. For instance, why does government continually insist that SOEs must borrow off their own unsustainable balance sheets at very high interest rates, but then have to use its own balance sheet to bail them out later, rather than fund them through a central treasury operation at lower interest rates? How much more space is there on the fiscus to support SOEs with endless guarantees?

When things go wrong, how should SOEs go through a restructuring and workout? The current SAA situation with its business rescue practitioners and their conflict with the Public Finance Management Act is a key case study that can provide some guidance on what the correct resolution process should be for a bankrupt SOE.

A further question is whether government has the capacity to deal with SOEs – both at a macro policy level and at a shareholder oversight level on an individual departmental basis. Does National Treasury have adequate capacity to provide real-time oversight to over 700 SOEs? And should it be more transparent about how it does so in order to lend more eyes to the problem and prevent balls being dropped, as with the Land Bank?

BLSA will support government, SOEs and you in your new role in trying to answer these difficult questions – with capacity where needed. Our asks are ultimately simple – the lowest possible electricity costs; taxes directed to social security, investment, healthcare and education rather than bailouts for SOEs; and fair competition without perverse incentives for SOEs. We stand ready to invest, create jobs, fund the economic recovery post the COVID-19 crisis and help society to flourish.

The COVID-19 pandemic has brought into much sharper and more immediate relief the weakness of all SOEs (not just the obvious ones). As such, your role is more important than ever. You will have to prepare for a difficult time ahead: be wary of being kicked into the long grass or sidetracked by various vested interests and elements within and outside government – and work for what’s best for South Africa.

With warmest wishes for the crucial role you are embarking on.

This article was first published in SABC News website