Description
Document tell restructuring of state owned enterprise in south africa.
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P PR RE ES SI ID DE EN NT TI IA AL L R RE EV VI IE EW W C CO OM MM MI IT TT TE EE E
Restructuring of State Owned Enterprise in
South Africa
Reviewed by Thabo Mokwena
May 2012
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Table of Contents
1. INTRODUCTION .............................................................................................................................. 3
2. PROBLEM STATEMENT .................................................................................................................. 4
3. BACKGROUND ................................................................................................................................ 5
4. SYNOPSIS OF PREVIOUS RESTRUCTURING INITIATIVES ............................................................... 8
4.1 PRE-1994 RESTRUCTURING .................................................................................................... 9
4.2 POST 1994 TILL 2004 RESTRUCTURING.................................................................................. 9
4.3 POST 2004 RESTRUCTURING ................................................................................................. 11
5. INTERNATIONAL BENCHMARKING ............................................................................................... 12
6. MODELS AND OPTIONS FOR RESTRUCTURING .......................................................................... 16
6.1 REDESIGING BUSINESS MANAGEMENT .................................................................................. 17
6.2 STRATEGIC EQUITY PARTNERS .............................................................................................. 17
6.3 DIVESTMENT OF EQUITY ......................................................................................................... 18
6.4 TURNAROUND INITIATIVES ...................................................................................................... 18
6.5 PRIVATISATION ........................................................................................................................ 18
6.6 PUBLIC PRIVATE PARTNERSHIP ............................................................................................. 18
6.7 COMMERCIALISATION/CORPORATISATION ............................................................................. 18
6.8 OUTSOURCING ......................................................................................................................... 18
7. SUCCESS FACTORS..................................................................................................................... 20
8. CONCLUSION ............................................................................................................................... 21
9. RECOMMENDATIONS ................................................................................................................... 22
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1. INTRODUCTION
The creation of Public Enterprises in South Africa varies in terms of periods of
establishment, the purpose and the mandate for their creation. Some Public Enterprises
were created in the early 20
th
century, whilst others were established in the late 20
th
century.
The 21
st
century also witnessed the creation of a number of Public Enterprises. An important
factor concerning the lifecycle of Public Enterprises, is that they have undergone various
phases and stages of transformation and restructuring.
The need for ongoing restructuring of Public Enterprises is somehow inevitable. The
restructuring can be necessitated by various factors, such as the 1994 democratisation of
the state; the rapid changes in technology and modernisation; global economic conditions;
and changes of socio-economic and political imperatives.
The Public Enterprises in South Africa have undergone different levels of restructuring and
transformation. Some Public Enterprises have gone through a comprehensive process of
successful restructuring while others have initiated failed restructuring processes.
Restructuring can either be initiated or driven by the Executive Authority or it can be an
internally driven restructuring process, led either by the board or management.
The Public Enterprises restructuring initiatives of the recent past has attracted mixed re-
actions and yielded in some cases undesirable consequences. The first example is the
restructuring by the apartheid government on the eve of democratisation. This led to the
selling off of a number of strategic state entities and the creation of a department for
Privatisation. The second large scale restructuring was initiated in the late nineties leading to
number of entities either been sold or bringing equity partners on board. The majority of
these transactions have subsequently failed, causing the state to re-acquire the sold equities
at much higher values.
The third restructuring is the recent piecemeal and silo initiatives of some of the Public
Enterprises such as Transnet and the selling of the V&A Waterfront equity stake; attempts to
sell equity in Eskom; provincial reviews, and reviews of DFIs and subsequent consolidation
of some DFIs. Some of the latter restructuring initiatives are not demonstrating any evidence
of central coordination and alignment with country vision and key policy directives.
This paper explores the recent restructuring initiatives of Public Enterprises in South Africa,
as one of the terms of reference of the PRC, and will provide an overview of previous
restructuring initiatives. The PRC process is required to make case for or against any further
restructuring and if needs be propose acceptable restructuring options and models.
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The restructuring initiatives of Public Enterprises must be aligned with the broader long term
vision of the state. Central coordination which will ensure strategic alignment with all spheres
and organs of state is essential. The next phase of restructuring, if necessary, must avoid
piecemeal, silos, and restructuring based on narrow interest.
2. PROBLEM STATEMENT
The need for another round of large scale restructuring of Public Enterprises is definitely
eminent in South Africa. The fundamental question is;
“What is the most appropriate model for restructuring; what will inform and
guide this process of restructuring and who are the ultimate beneficiaries of
the process?”
The eminency of large scale restructuring of public enterprises is necessitated by, among
others, the following reasons:
i. Plethora of piecemeal and uncoordinated restructuring in all spheres of government
ii. The upcoming 20 years of democratic governance, among others, requires a
comprehensive review of success and failures of all organs of state including Public
Enterprises
iii. The eminent launch of a new long term vision for the state and the need for
alignment thereof
iv. The outcomes of the PRC survey on a number of non-viable enterprises
v. Rapid modernisation and technological changes across all sectors of society and the
economy
vi. Some enterprises are still operating on outdated mandates and legislation
vii. The need for South Africa to respond decisively to future challenges such as food
security, water, energy sustainability, telecoms, financial markets, etc.
viii. Respond to ever changing and dynamic global social, economic and political
imperatives.
The critical challenge for the next wave of restructuring Public Enterprises is to ensure a
centrally coordinated, shared vision, comprehensive alignment with state policies and a
government led process.
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3. BACKGROUND
In the post apartheid South Africa, Public Enterprises continue to play an important
economic role in the pursuit of developmental objectives. They are expected to lead in the
provision of the modern infrastructure that will result in the provision of key support to the
South African economy. Based on their respective mandates they have a targeted approach
towards job creation, economic infrastructure and economic growth.
The South African economy has enjoyed a period of sustained, but moderate, growth in the
past decade. Economic growth has been due to a number of factors, among others, sound
fiscal and monetary policies, capital inflows, government infrastructure spending,
democratisation of the state and hosting the 2010 Fifa Soccer World Cup. To confirm the
growth rate of the South African economy, the South African Reserve Bank (SARB) has
reported that “during the economic boom of 2004 to 2008, economic growth was about 5
percent per annum” (SARB, 2010).
The Public Enterprises are key institutions entrusted with a development mandate. They are
expected to posses some productive capabilities requisite for the contemporary global
economies. They allocate investment in plant, skills and technology to build the productive
base as well as drive processes to enhance the productivity of economic assets.
The South African Public Enterprises in the current and future conjuncture must be informed
by the objectives of developmental state. As the debate around the developmental state
progressed, it become apparent that a firm policy pertaining to the conditions under which
government should allocate different forms of capital to commercial enterprises is required.
Such conditions concerned which enterprises would be targeted for investment and what
forms of governance rights would be attached to such investment. These investments can
be made either directly from the fiscus, which meant that the state will directly own the
enterprise, or through development finance intermediaries, depending on government?s
intent on making investments.
There is no single consideration or simplistic framework of issues that determines how
Public Enterprises can be more effective in achieving strategic national objectives. There
are inevitably advantages and disadvantages, opportunities and risks to any restructuring.
What is required is the recognition that, in principle, Public Enterprises could be powerful
instruments of development and a robust governance process, to weigh up restructuring
opportunities.
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It is vital to provide a brief history of the role that Public Enterprises have played, historically,
in terms of economic and industrial development; and the contemporary challenges to the
South African economy today.
i. Strategic communications infrastructure was consolidated in state hands through
the establishment of the Department of Posts and Telegraphs in 1910. The
department over-saw the development of postal, telephony, broadcasting
infrastructure and related services.
ii. State ownership and control of key infrastructural activities played a significant
role in supporting the development of a resource-based economy (mining and
agriculture) and then the transition to a resource-processing economy. The first
key player in this regard was the development of ports and railways through the
establishment of the national company, South African Rail and Harbours (SARH),
in 1916. This was followed by the establishment of major enterprises in the
1920s (Iscor in steel manufacturing (1928) and later Eskom (1923) in electricity
generation) to support the development of national resource processing
capabilities which put in place a platform for industrialisation. State ownership of
these enterprises was necessary, as the investment required quantities of capital
to achieve necessary economies of scale, which were beyond the means of the
private sector. Until the eighties („80s) these organisations were funded by the
state, as instruments of industrial policy, and their products and services were
made available to targeted sectors on an effectively subsidised basis. In 1950,
Sasol was established to both beneficiate coal and to enhance national fuel
security in the context of the Apartheid state, which was constantly threatened by
sanctions.
iii. A special note should also be made of the State?s involvement in defence related
industries, initially consolidated under Armscor in 1968 and corporatized into
Denel in 1992. Through defence industries, advanced engineering capabilities
were developed, although there were limited opportunities to manufacture at the
scale required to be globally competitive.
iv. It should also be noted that all government activity, prior to 1994, was leveraged
by the Apartheid state to further the objectives of Afrikaner empowerment, and
Public Enterprises were no exception to this rule.
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The recent restructuring initiatives of Public Enterprises should be responding to the
imperatives of the current socio-economic climate in South Africa. The high levels of
infrastructure expenditure are a reaction to the overwhelming demands for both the need
and access to economic infrastructure, such as, rail transport and electricity. For example,
the Eskom load shedding of 2007/8 has necessitated the importance of new power building
programmes estimated at over R500 billion. Again the ageing rolling stock of PRASA and
continued train fatalities, delays and subsequent protest by commuters has also led to a
massive capital programme to both renew the fleet and overhaul the rail networks.
The current socio-economic climate in South Africa requires a coordinated and integrated
strategy leading towards a robust role of Public Enterprises for long term development. A
Developmental State with a long term sustainable growth vision requires a strategy that will
inform its evolution and the specific role of Public Enterprises.
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4. SYNOPSIS OF PREVIOUS RESTRUCTURING INITIATIVES
This section provides a brief synopsis of the recent past restructuring initiatives. It focuses
on three phases of restructuring of public enterprise, namely the Pre-1994 restructuring; the
Post 1994 till 2004 restructuring; and the Post 2004 restructuring. This section will also
provide a high level summary of the restructuring initiative and highlight the key policies and
principles underpinning each process.
The illustration below (Figure 1) provides a high-level summary of the three different phases
of restructuring and the 2010 PRC Process.
Figure 1: High-level summary of the Restructuring of Public Enterprises
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4.1 Pre-1994 Restructuring
The history of the creation of Public Enterprises in South Africa goes as far back as the early
the 20
th
century until the recent past. There have been various stages of restructuring of
public entities in the pre-1994 era. The 1980s witnessed a period where the apartheid
government were feeling the effects of sanctions and were subjected to the influence of
economies, such as the United Kingdom, advocating for lean states.
In 1987 the National Party government produced a white paper on Privatisation and
Deregulation; in the white paper government sought to reduce the size of the public sector
and government spending, open investment opportunities for the private sector and raise
money through selling various assets. Thus, the process of commercialisation of Eskom,
Telkom and the Post Office commenced.
As per the white paper provisions, the selling of Iscor and Sasol was prioritised and
executed. The government also set up a specialised government department, called the
Department of Privatisation, which was to proceed with the selling of remaining assets.
The above restructuring took place on the eve of the democratisation process. This could be
interpreted politically as an effort to hive off key assets and thus undermine the efforts of the
new democratic government, and hinder its economic growth.
4.2 Post 1994 till 2004 Restructuring
In 1994 the Department of Public Enterprises was called the “Office for Privatisation” whose
overwhelming mandate was to sell its portfolio of State Owned Enterprises. Intrinsic to this
position was the notion that government no longer had an active role to play within the
economy. This policy was modified into a strategy of “restructuring”, the focus of which, was
to prioritise the introduction of the private sector into key areas of the Public Enterprises?
value chain, whilst continuing with Initial Public Offerings (which was a form of privatisation).
During this period, Public Enterprises (including key infrastructure providers) were prevented
by policy from investing in new capacity, despite the growing economy. Between 1994 and
2004, the following “restructuring” processes took place:
a. Equity stake of 20% were sold in SAA in June 1999 To Swiss Air, but the deal
was reversed in November 2001 after a global recession;
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b. An equity stake of 20% was sold in the Airports Company to Italian Aeroporti
di Roma in April 1998, but reversed in September 2005 and sold to Public
Investment Corporation;
c. Strategic foreign investment partners were introduced to Telkom in 1997 – in
2003 Telkom Initial Public Offering was concluded and the foreign strategic
investors exited in 2004;
d. 236 000 hectares of SAFCOL forests were privatized as of 1998, until
competition problems reversed sale of final allotment;
e. At Transnet, around 40 non-core business units were sold over a period of 24
months to enable greater focus, although enterprise was still active in a range
of non strategic infrastructure provision areas;
f. Concessioning of the Durban Container Terminal Port and the Sishen
Saldhanna Iron Ore Rail Line were attempted but stopped by effective Union
resistance (probably with managements support);
g. At Alexkor, Strategic Equity Partner sought as of 1998 but land claim of 3000
persons dating back 156 years derailed this process.
This period also witnessed a mushrooming of Provincial Public Enterprises and Municipal
entities. The provinces created Provincial Development and Finance entities with the aim
propelling provincial economic growth. There are also various entities, which provinces
created, in line with their Constitutional and Legislative mandates. The introduction of the
white paper on Local Government and the Promulgation of the Municipal Systems and
Structures Act, witnessed a creation of new utilities in various municipalities, especially
within various metros.
The table below (figure 2) illustrates a summary of various restructuring initiatives that took
place. The table notes the entity, for example Transnet, the restructuring that took place
specific to that entity and that category within which the restructuring falls.
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Summary of Restructuring Initiative, 2000
Figure 2: Summary of Restructuring. Source: An Accelerated Agenda Towards the Restructuring of State Owned Enterprises (Policy
Framework), Ministry of Public Enterprise, Republic of South Africa, August 2000.
4.3 Post 2004 Restructuring
In 2004, the privatization and restructuring agenda were subordinated to the objective of
deploying Public Enterprises to achieve strategic national objectives, as defined by their
shareholder managers, through strategic intent statements and shareholder compacts.
Entity Restructuring
Transnet Debt restructuring is being dealt with; significant progress has already been made in
dealing with pension fund debt
Spoornet Will be corporatized, with its different business units becoming separate corporate
entities
Coallink, Orex, Luxrail and Link
rail
Will be concessioned
Spoornet?s General Freight
Business
Will be commercialized and either an Initial Public Offering (IPO) or a strategic equity
partnership (SEP) entered into.
SAA Will be commenced with
Petronet Will be corporatized, its synergies with other pipeline projects assessed and restructuring
options developed
Telkom Work on the proposal IPO for Telkom is proceeding
SNO (Second National
Operator)
Work on a policy and a process to determine the Second National Operator (SNO) is
already quit advanced
Eskom ? Eskom will be corporatised, with transmission, distribution and generation each
forming a separate corporate entity.
? A full evaluation of the deferent models for restructuring Eskom is currently being
undertaken by the Department of Public Enterprises.
? Different generating companies will be formed to promote internal competition
before the introduction of private sector participation in generation
? The Department of Minerals and Energy is currently co-ordinating the design and
implementation of the regional electricity distributors.
? Strategic equity partners will be introduced into different Eskom Enterprises
business units.
? Private sector participation will be introduced specifically into the generation and
transmission entities, either through strategic equity partners or through IPOs.
Denel ? Denel will be corporatised, and an initial strategic equity partnering at the business
unit level of Denel Ordnance is expected
? The local ordnance industry may need to be consolidated; this will be followed by a
search for international equity partners at the corporate level.
? The consolidation of aircraft maintenance synergies between SAA and Denel
Safcol The sale of three packages is being concluded; the remainder will be consolidated and
re-offered.
Datavia, Ariel, Technology Options of the consolidation of the information technology capabilities of Datavia, Ariel
Technology and Eskom are being assessed
Alexkor A turnaround strategy is being affected with a strategy management partner.
Aventura A turnaround strategy is being affected with a strategy management partner; this will be
followed by sale of the entity.
Post Office A turnaround strategy is being affected with a strategy management partner.
Sentech Signal Distribution The department of Communications is undertaking a study into a restructuring strategy
for the entity.
SOE property portfolio The property portfolios of Denel, Eskom and Propnet are being studied with a view to
identifying restructuring options
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Eskom and Transnet were directed to focus on their core business and were given a
mandate to urgently establish Fixed Asset Investment programs based on funding from their
balance sheets; although, in the case of Eskom this was later supplemented by the fiscus
when the tariff did not increase at a rate that allowed Eskom to fund the required program.
The Competitive Supplier Development Program and Skills Development Programs were
established to start leveraging Public Enterprise investment and procurement spent to
develop relevant industrial supply chains.
No restructuring, or involvement of the private sector, in Eskom and Transnet?s value chains
were implemented – even in cases where this may have added value (e.g. rail branch lines,
inland terminals, etc.). Infraco was established from Eskom and Transnet?s non-core ICT
infrastructure to bring down the cost of broad-band in the context of Telkom?s monopoly
pricing.
The Review of DFIs was undertaken in this period and recommendations made regarding
these issues. Other initiatives included the restructuring PRASA, and various turn around
strategies initiated by Public Enterprises.
5. INTERNATIONAL BENCHMARKING
In 1996, the World Bank
1
study noted that “for most completed public enterprise
restructuring operations, sustainability of benefits has been a large problem, mainly because
of fragile sector reforms and inadequate governance and management. Those completed for
the private sector experienced poor outcomes, the result of inadequate attention to county
economic conditions and policy distortions. To overcome such problems, the study
recommends that future restructuring operations be designed and implemented to have an
impact at the firm level”.
Public enterprises became a major drain on government resources and were viewed to be in
need of reform, in cases where countries were faced with increasing economic difficulties
owing to external shocks, distorted policies and inefficient management. The World Bank
intervened with numerous projects intended to help restructure public enterprises.
Two major changes had occurred by the mid-1980s, first of which was the need for
government to reduce its role in direct ownership of enterprises was becoming more
generally accepted and, thus, privatisation emerged as the governments? major task and an
1
World Bank. Industrial Restructuring: World Bank experience, future challenges. May 1996.
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area where the World Bank could provide assistance. Secondly, the importance of macro-
economic stability and of reducing policy-induced distortions to promote efficient growth, was
recognised by governments and supported by the World Bank, mainly through structural and
sectoral adjustment loans. In this context, traditional lending for industrial restructuring came
to a gradual stop as efforts shifted toward „getting the prices right? through policy reforms and
the promotion of public enterprise privatisation. In some instances, adjustment lending dealt
with “macro” and “sectoral” issues, which directly impacted on industrial restructuring. While
in other instances, it included specific conditionality for the restructuring of certain public
enterprises, mainly leading to privatisation. Financial intermediation project loans directed to
one or more industries, and often accompanied by technical assistance and/or sub-sector
conditionality, continued to provide support for private – and some public – enterprise
restructuring.
Two major lessons from this period were the importance of economy-wide and sectoral
policy reforms, as a pre-requisite for successful industrial restructuring and the superiority of
privatisation over public enterprise restructuring. This 14-year period, also saw the first
complete codification of restructuring conditions and operational guidance for World Bank
support to restructuring.
The following lessons were noted by the World Bank:
i. Industrial restructuring remains a major development challenge for developing
countries. Their private sectors are often small and inefficient, unable to
benefit from economies of scale, have limited access to technology and
market information, and are poorly served by their countries' financial sectors.
Public enterprises have started to be privatized, but progress has been slow.
Many will not be privatized for a long time and will thus continue to be a major
cost to their countries' treasuries. In the transition economies, a large number
of private enterprises that have appeared as a result of mass privatization are
operating in new and unfamiliar environments that cannot often be described
as enabling. In all of these cases, the government has a role to play and the
World Bank can help governments (and private sectors) meet these
challenges.
ii. The role of government: Macro-economic stability, price liberalization, trade
reform, and interest and wage liberalization require government attention.
There are also more "institutional" issues that require government presence;
such as (a) prudential regulations and banking supervision to help financial
sectors operate competitively; (b) entry and exit of businesses (for example,
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bankruptcy legislation, judicial enforcement); (c) technology development,
technology transfers, and licensing; (d) arbitration mechanisms to settle
disputes in labour markets; (e) training of the labour force in cooperation with
the private sector; (f) improved information regarding market opportunities,
particularly for exports. For public enterprises, the most important objective is
privatisation but, in many circumstances, privatisation may be slow.
Governments cannot afford to allow public enterprises to continue operating
inefficiently; hard budget constraints needs to be instituted, and the
institutional relationship between public enterprises and government changed
through oversight bodies, increased managerial autonomy, and performance
and regulatory agreements.
iii. The newly privatised entities emerging from mass privatisation, in transition
economies, face a combination of problems – some similar to those in other
developing countries – but some peculiar to these economies. Most
importantly, institutional development in many areas falls short of the needs of
the new private sectors. The change from a situation where public entities
were a combination of units of production and social service providers, to a
situation where these two functions are to be more clearly separated between
businesses and government institutions, creates another category of
challenges to restructuring. Thus, in economies in transition, the government
should implement a range of systemic changes related to an enabling
environment in the areas of macro-economic policy, competition, finance, and
labour, while keeping in mind that these problems are more acute than in
other middle-income countries. Institutional support to enterprises to
counteract market failures in information, marketing, and technology is
particularly important because these failures are also more acute.
iv. Public enterprise restructuring: Privatisation cannot be the only instrument of
public enterprise reform. The World Bank's assistance strategy must take into
account the fact that many public enterprises in need of reform are unlikely to
be privatised in the near future. Policy dialogue, advice, and technical
assistance for public enterprise restructuring (including loans), and in some
cases financing of other restructuring related activities and investments, will
continue to be needed.
v. Private sector restructuring: The World Bank's role is likely to be larger in
helping governments establish an enabling environment for the private sector
to carry out restructuring operations. The establishment of an enabling
environment will often require going beyond general liberalisation and
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incentive policies, and reaching into the areas of technology development,
training, and market information – three areas where positive externalities
exist. World Bank assistance in these areas can be through advice, but can
also be incorporated in a variety of lending operations, from "specialized"
operations to technical assistance loans to financial intermediation operations
that include other components dealing with the enabling environment.
vi. Post-privatisation restructuring in transition economies: The
recommendations for Europe and Central Asia, and other transition
economies, are not fundamentally different from the above. However,
because the low level of institutional development is often more acute in
these economies, World Bank support for industrial restructuring in such
cases should first ensure that sufficient progress is being made on the
enabling environment front. Thus better sectoral knowledge; favorable
conditions for policy liberalization and industrial and financial sector reform;
more cooperation between government and business on industrial
restructuring strategies; and more fully articulated World Bank sectoral
assistance strategies will be required. In terms of individual lending
instruments, more stringent conditions should also be applied to financial
intermediary project lending (return on equity, capital adequacy ratio, debt
service capacity, degree of portfolio rescheduling, collection rate). Lending
operations other than Financial Intermediation Loans, to expand its arsenal of
lending instruments to support the private sector, should be used.
vii. Wherever redeployed and employees laid off occur, the World Bank should
help determine how national and local authorities, and other parties
concerned, can mitigate the costs of restructuring, in terms of retrenched
workers and provide adequate safety nets. Labour aspects of restructuring
need to be tackled in an explicit manner, either as part of a restructuring
operation or elsewhere in the country assistance program, in close
cooperation with the restructuring projects. Labour related aspects of
restructuring should include training, redeployment assistance, and closing
issues.
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Some of the findings related to country specific case studies, such as China, Hungry, Cjile
and the Philappines are also noted. In China and Hungary, production lines to be re-
modelled and developed were distinguished from those that had to be phased out, and
support institutions were established. Exposure to competition and good management seem
to be dominant factors in the successful public sector restructuring in China and Hungary.
In Chile and the Philippines, the restructuring process was not as subsector-directed as in
China and Hungary. It was left more to the financing decisions of commercial and
development bankers, which made restructuring decisions much more dependent on the
macro context. The process was slower, mainly because the enabling environment was
lacking, but once it finally developed, it appeared to relatively sustainable. When country
conditions were right, restructuring was satisfactory and there was seemed to be a level of
stability. Public enterprise restructuring projects had slightly higher satisfactory outcomes,
whereas private sector restructuring, satisfactory ratings at completion were low. Poor
outcomes were mainly the result of lack of attention to country economic conditions and
policy distortions.
6. MODELS AND OPTIONS FOR RESTRUCTURING
The PRC process, among others, is required to evaluate models and options for
restructuring. It is not the intention of the PRC to provide detailed pros and cons for each
option, but to highlight the types of options available as per international benchmarking.
The following deals with various options for restructuring. It only highlights descriptions of
options, and not necessarily the specifications as to which enterprises should follow which
options.
The diagram below (figure 3), illustrates the various options related to the restructuring of
Public Enterprises. These options include:
? Redesigning business management
? Strategic, Equity Partners
? Divestment of Equity
? Turnaround initiatives
? Privatisation
? Public, Private Partnership
? Commercialisation/corporatisation
? Outsourcing
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Figure 3: Diagram illustrating Restructuring options for Public Enterprises
6.1. Redesigning business management
This is the analysis and redesign of workflow and business processes within an
organisation. Business processes are a set of logically related tasks performed to
achieve the defined business outcomes.
6.2. Strategic Equity Partners
This refers to the strategic ownership in interest in a corporation, in the form of common
or preferred stock.
Restructuring Options
Redesign
Business
Management
Strategic,
Equity,
Partners
Divestment of
Equity
Turnaround
Initiatives
Privatisation
Public, Private,
Partnership
Commercialisation
/ corporatisation
Outsourcing
Restructuring
options for Public
Enterprises
Developed By
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6.3. Divestment of Equity
This refers to the sale of an asset for financial, legal or personal reasons. For
corporations, divestment can refer to a company selling off a portion of its assets, such
as a subsidiary, in order to raise capital or to focus the business on a smaller core of
goods and/or services.
6.4. Turnaround initiatives
These are initiatives aimed to turnaround underperforming and distressed companies.
6.5. Privatisation
This refers to the process by which formerly public assets or functions are sold or given
to corporate entities by listing the shares of the state-owned corporation on publicly-
traded stock exchanges. Thus, it is the transferring ownership of a business, enterprise,
agency, public service or property from the public sector to the private sector.
6.6. Public Private Partnership
This describes a government service or private business venture which is funded and
operated through a partnership of government and one, or more, private sector
companies.
6.7. Commercialisation/corporatisation
This is the transformation of state assets or agencies into State Owned Corporations, in
order to introduce corporate management techniques to their administration. Sometimes
this is a precursor to partial or full privatisation. A common model is for state entities to
be corporatised and operate as autonomous joint-stock companies, while still being a
majority state-owned enterprise.
6.8. Outsourcing
This is the process of contracting an existing business function or process of an
organisation to an independent organisation; ceasing to perform that function or process
internally, and purchasing it as a service instead. Thus, it is the practice of purchasing a
business function, instead of providing it internally.
The table below (figure 4) provides descriptions of the various restructuring options and
notes their applicability for each option.
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Matrix of Restructuring Options
Figure 4: Matrix of Restructuring Options
Option Description Applicability Examples
Redesign Business
Management
The analysis and design of workflows and
processes within an organization.
Business processes are a set of logically
related tasks performed to achieve a defined
business outcome.
? All Public Enterprises
? This type of restructuring is standard
and takes place regularly among Public
Enterprises
? It does not require national policy
guidelines
Strategic Equity
Partners
Strategic ownership in interest in a
corporation in the form of common or
preferred stock.
? Not all Public Enterprises
? This is a major restructuring project
? requires national government policy
guidance
Divestment of
Equity
Refers to the sale of an asset for financial,
legal or personal reasons. For corporations,
divestment can refer to a company selling off
a portion of its assets, such as a subsidiary, to
raise capital or to focus the business on a
smaller core of goods and services.
? Not all Public Enterprises
? This is a major restructuring project
? Requires national policy guidance
Turnaround
Initiatives
Initiatives aimed to turnaround
underperforming and distressed companies
? All Public Enterprises
? This type of restructuring is common
among Public Enterprises
? Turnaround sometimes might lead to
other forms of restructuring, such as
commercialisation, therefore these
initiatives must be guided by policy
Privatisation The incidence or process of transferring
ownership of business, enterprise, agency,
public service or property from the public
sector to the private sector.
Process by which formerly public assets or
functions are sold or given to corporate
entities by listing the shares of the state-
owned corporation on publicly-traded stock
exchanges.
? Not all Public Enterprises, depends on
various factors
? This is a major policy decision by
government
? Privatisation has major labour,
financial and other implications
Public Private
Partnership
Describes a government service or private
business venture which is funded and
operated through a partnership of
government and one, or more, private sector
companies.
? All Public Enterprises
? This type of restructuring is common
on public projects
Commercialisation/
corporatisation
The transformation of state assets or agencies
into State Owned Corporations, in order to
introduce corporate management techniques
to their administration. Sometimes this is a
precursor to partial or full privatization. A
common model is for state entities to be
corporatized and operate as autonomous
joint-stock companies, while still being a
majority state-owned enterprise.
? Not all Public Enterprises can embark
on commercialisation
? Depending on the legislative mandate
and provision of the Establishment
Acts
? This is a major restructuring process
? Will require Government policy
guidance
Outsourcing The process of contracting an existing
business function or process of an
organisation to an independent organisation;
ceasing to perform that function or process
internally, and purchasing it as a service
instead. Thus, it is the practice of purchasing a
business function, instead of providing it
internally.
? All Public Enterprises
? This restructuring has serious labour,
technology, financial and other
implications
? Government policy must provide
necessary guidance
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7. SUCCESS FACTORS
Restructuring, as outlined above, will depend on some strategic factors. The success factors
are informed by both challenges that need to be overcome and opportunities. The success
factors are critical in moving towards the desired state. What follows is a list of success
factors that require careful consideration and, in some instance, needs to be observed:
i. Informed by the long-term vision of the state
The restructuring of Public Enterprises must be informed by the long term vision
of the state. It is vital for ensuring that strategies plans and visions of Public
Enterprises, begins to take a multi decade approach in their planning
approaches. This long-term planning approach will only succeed in the
environment whereby government allows and gives conducive conditions.
Periodic and short term changes of political administration in government must
not cause major strategy changes and destabilise the long term vision. Also long
term plans and visions must be protected from boards and executive
management changes. The temptation of new leadership is always to try and
recreate a new vision of organisations.
ii. Alignment with state policies and set objectives
The Public Enterprises? restructuring process must ensure an alignment with the
necessary policies and objectives of the broader state. The alignment process
must be aimed at ensuring that policies, such as the National Development Plan,
the New Growth Path, IPAP2 and others are consistent with the operations and
conduct of Public Enterprises.
The key objective of the alignment process must ensure that all state organs
have a common and shared vision. This alignment process, among others, might
require amendments of establishment acts and a review of strategic plans.
iii. Regulated process
The restructuring of Public Enterprises must be led and guided firmly by
government, based on agreed policy. The policy parameters must be regulated or
legislated if need be. The example of the, (year) 2000 Policy Paper on
Accelerated Restructuring and the 1987 White Paper on Privatisation and
Deregulation must be followed.
21 | P a g e
iv. Underpinned by periodic reviews (20 year)
The government must adopt a strategy to review the progress and performance
of Public Enterprises. This should take the form of periodic reviews. In order to
avoid unnecessary destabilising operations of the Public Enterprises these
reviews must take place on a long term basis. The periodic reviews must take
place at least every 20 years. This will allow for the necessary adjustments to be
made, and successes and failures adequately gauged.
8. CONCLUSION
The most appropriate model for the restructuring of Public Enterprises will be informed by
the nature of the Public Enterprise and the specific objectives of the restructuring. This paper
has listed possible options to be considered.
It is absolutely important that, Public Enterprises when restructured, the broader society or
the specific stakeholders in the society are direct beneficiaries. The public mandate of
enterprise must be enhanced and strengthened through restructuring, not compromised.
The paper has demonstrated that the previous restructurings, especially the late 1980s and
in year 2000, were firmly guided through national policy, such as the white paper on
Privatisation and Deregulation and the Accelerated Restructuring Policy. This practice is
important and should guide the next phases of Public Enterprise restructuring.
There is also a clear need for the government to consider a large scale restructuring. This is
necessitated by various imperatives; economically, politically and developments within the
international and global community.
The success of restructuring is dependent on some key factors which will require serious
consideration by the authorities. The paper also makes key recommendations for
consideration and approval by the government.
22 | P a g e
9. RECOMMENDATIONS
9.1. Policy paper for restructuring Public Enterprises
The last government policy paper on restructuring was An Accelerated Agenda Towards the
Restructuring of SOEs (Policy Framework 2000). This policy paper is outdated and
inconsistent with various recent government policies. It is crucial that government initiate a
new and revised comprehensive policy that will guide and regulate restructuring of Public
Enterprises. This policy must cover all Public Enterprises and provide tools, templates and
restructuring mechanism.
It is recommended that an appropriate policy and legislative framework be developed and
adopted by government to define, guide and standardise restructuring of all Public
Enterprises.
9.2. Large scale restructuring of public enterprises
A number of Public Enterprises are faced with various challenges of viability, mandate
alignment, repositioning and consistency with government?s vision. There is a definite need
to restructure a substantial number of Public Enterprises. The process of restructuring must
be guided and led by government or, at least, approved by government.
It is recommended that a centrally coordinated large scale restructuring of Public
Enterprises be undertaken. The restructuring must be informed by approved
policy/legislative framework as recommended in 9.1 above.
9.3. Framework for restructuring
The framework for restructuring must be informed by key government policies and the long
term plan and vision for the state.
It is recommended that a guideline framework for restructuring, as presented in Figure 5, be
adopted.
9.5. Restructuring timelines and milestones
The government must outline and adopt timelines and milestones for restructuring of Public
Enterprises. The milestones and timelines must also be consistent with long-term planning.
It is recommended that a timelines and milestones programme for restructuring be adopted,
as presented in figure 6.
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9.5. No holy cows and genuine consultation framework
It important to appreciate the need for consideration, of all restructuring options, without
limitation. It is also important to note that issues such as privatisation, commercialisation and
outsourcing are sensitive issues and have both negative and positive consequences for the
state. Therefore all options and restructuring models must be fairly and objectively
considered. The consultation on these models and options must be genuine, and inclusive.
It is recommended that an appropriate consultation framework which genuinely considers
the views and submissions of the public must be developed. All restructuring options must
be considered on merit and there are no holy cows.
The diagram below (figure 5) illustrates the suggested framework for the restructuring of
Public Enterprises. It includes the objectives, policies and public entities which are impacted
by the PRC process and which, if done successfully will result in a desired state.
24 | P a g e
Figure 5: Framework for Restructuring of Public Enterprises.
The diagram below (figure 6) illustrates the suggested framework for the Timelines and
Milestones programme that should be adopted. This includes the various
GUIDELINE FRAMEWORK FOR RESTRUCTURING
Policy Framework for
Restructuring
Options & Models of
Restructuring
Periodic Reviews
( 20 yrs)
Building a Developmental State
RDP
Public Entities, Owned Regulated and Account
to Government
Public Enterprises
GEAR IPAP 1 & 2
PRC Recommendations
Evolution of Government Policies over the Past
18 years
Success Factors
Guidelines- Tools &
Template for
Restructuring
ASGISA
New
Growth
National
Development
Plan
Medium Term
Strategic Framework
2004-2009
Medium Terms
strategic Framework
2009-2015
Restructuring
Process
Objective
Policies
Public
Entities
Informed by
the long-term
vision of the
state
Alignment with
state polices
and set
objectives
Underpinned by
periodic review
(20) year
periodic
Regulated process
Developed By
25 | P a g e
2012
2013 2014 2018
Outcomes of
the
Restructuring
• Newly established
Public Enterprise
of key economic
sectors
• Restructure and
revised key
mandate of Public
Enterprise
• All SOEs align with
the
developmental
State objectives
• Viable and
effective public
enterprises
2015
M
i
l
e
s
t
o
n
e
s
Proposed Restructuring Time Table
Restructuring
Policy
Framework
Adoption
Restructuring
Framework
Government
Elections
Large Scale
Restructuring
Restructuring
completed
PRC Report
Government
Adopt Specific
recommendation
from PRC report
PRC Final
Report
Presentation
and Publishing
report
National and
Provincial
Elections
Large scale and
restructuring of
Public Enterprises
as per adopted
policy
Completion of
the restructuring
Developed By
Figure 6: proposed restructuring time line
doc_581967959.pdf
Document tell restructuring of state owned enterprise in south africa.
1 | P a g e
P PR RE ES SI ID DE EN NT TI IA AL L R RE EV VI IE EW W C CO OM MM MI IT TT TE EE E
Restructuring of State Owned Enterprise in
South Africa
Reviewed by Thabo Mokwena
May 2012
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Table of Contents
1. INTRODUCTION .............................................................................................................................. 3
2. PROBLEM STATEMENT .................................................................................................................. 4
3. BACKGROUND ................................................................................................................................ 5
4. SYNOPSIS OF PREVIOUS RESTRUCTURING INITIATIVES ............................................................... 8
4.1 PRE-1994 RESTRUCTURING .................................................................................................... 9
4.2 POST 1994 TILL 2004 RESTRUCTURING.................................................................................. 9
4.3 POST 2004 RESTRUCTURING ................................................................................................. 11
5. INTERNATIONAL BENCHMARKING ............................................................................................... 12
6. MODELS AND OPTIONS FOR RESTRUCTURING .......................................................................... 16
6.1 REDESIGING BUSINESS MANAGEMENT .................................................................................. 17
6.2 STRATEGIC EQUITY PARTNERS .............................................................................................. 17
6.3 DIVESTMENT OF EQUITY ......................................................................................................... 18
6.4 TURNAROUND INITIATIVES ...................................................................................................... 18
6.5 PRIVATISATION ........................................................................................................................ 18
6.6 PUBLIC PRIVATE PARTNERSHIP ............................................................................................. 18
6.7 COMMERCIALISATION/CORPORATISATION ............................................................................. 18
6.8 OUTSOURCING ......................................................................................................................... 18
7. SUCCESS FACTORS..................................................................................................................... 20
8. CONCLUSION ............................................................................................................................... 21
9. RECOMMENDATIONS ................................................................................................................... 22
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1. INTRODUCTION
The creation of Public Enterprises in South Africa varies in terms of periods of
establishment, the purpose and the mandate for their creation. Some Public Enterprises
were created in the early 20
th
century, whilst others were established in the late 20
th
century.
The 21
st
century also witnessed the creation of a number of Public Enterprises. An important
factor concerning the lifecycle of Public Enterprises, is that they have undergone various
phases and stages of transformation and restructuring.
The need for ongoing restructuring of Public Enterprises is somehow inevitable. The
restructuring can be necessitated by various factors, such as the 1994 democratisation of
the state; the rapid changes in technology and modernisation; global economic conditions;
and changes of socio-economic and political imperatives.
The Public Enterprises in South Africa have undergone different levels of restructuring and
transformation. Some Public Enterprises have gone through a comprehensive process of
successful restructuring while others have initiated failed restructuring processes.
Restructuring can either be initiated or driven by the Executive Authority or it can be an
internally driven restructuring process, led either by the board or management.
The Public Enterprises restructuring initiatives of the recent past has attracted mixed re-
actions and yielded in some cases undesirable consequences. The first example is the
restructuring by the apartheid government on the eve of democratisation. This led to the
selling off of a number of strategic state entities and the creation of a department for
Privatisation. The second large scale restructuring was initiated in the late nineties leading to
number of entities either been sold or bringing equity partners on board. The majority of
these transactions have subsequently failed, causing the state to re-acquire the sold equities
at much higher values.
The third restructuring is the recent piecemeal and silo initiatives of some of the Public
Enterprises such as Transnet and the selling of the V&A Waterfront equity stake; attempts to
sell equity in Eskom; provincial reviews, and reviews of DFIs and subsequent consolidation
of some DFIs. Some of the latter restructuring initiatives are not demonstrating any evidence
of central coordination and alignment with country vision and key policy directives.
This paper explores the recent restructuring initiatives of Public Enterprises in South Africa,
as one of the terms of reference of the PRC, and will provide an overview of previous
restructuring initiatives. The PRC process is required to make case for or against any further
restructuring and if needs be propose acceptable restructuring options and models.
4 | P a g e
The restructuring initiatives of Public Enterprises must be aligned with the broader long term
vision of the state. Central coordination which will ensure strategic alignment with all spheres
and organs of state is essential. The next phase of restructuring, if necessary, must avoid
piecemeal, silos, and restructuring based on narrow interest.
2. PROBLEM STATEMENT
The need for another round of large scale restructuring of Public Enterprises is definitely
eminent in South Africa. The fundamental question is;
“What is the most appropriate model for restructuring; what will inform and
guide this process of restructuring and who are the ultimate beneficiaries of
the process?”
The eminency of large scale restructuring of public enterprises is necessitated by, among
others, the following reasons:
i. Plethora of piecemeal and uncoordinated restructuring in all spheres of government
ii. The upcoming 20 years of democratic governance, among others, requires a
comprehensive review of success and failures of all organs of state including Public
Enterprises
iii. The eminent launch of a new long term vision for the state and the need for
alignment thereof
iv. The outcomes of the PRC survey on a number of non-viable enterprises
v. Rapid modernisation and technological changes across all sectors of society and the
economy
vi. Some enterprises are still operating on outdated mandates and legislation
vii. The need for South Africa to respond decisively to future challenges such as food
security, water, energy sustainability, telecoms, financial markets, etc.
viii. Respond to ever changing and dynamic global social, economic and political
imperatives.
The critical challenge for the next wave of restructuring Public Enterprises is to ensure a
centrally coordinated, shared vision, comprehensive alignment with state policies and a
government led process.
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3. BACKGROUND
In the post apartheid South Africa, Public Enterprises continue to play an important
economic role in the pursuit of developmental objectives. They are expected to lead in the
provision of the modern infrastructure that will result in the provision of key support to the
South African economy. Based on their respective mandates they have a targeted approach
towards job creation, economic infrastructure and economic growth.
The South African economy has enjoyed a period of sustained, but moderate, growth in the
past decade. Economic growth has been due to a number of factors, among others, sound
fiscal and monetary policies, capital inflows, government infrastructure spending,
democratisation of the state and hosting the 2010 Fifa Soccer World Cup. To confirm the
growth rate of the South African economy, the South African Reserve Bank (SARB) has
reported that “during the economic boom of 2004 to 2008, economic growth was about 5
percent per annum” (SARB, 2010).
The Public Enterprises are key institutions entrusted with a development mandate. They are
expected to posses some productive capabilities requisite for the contemporary global
economies. They allocate investment in plant, skills and technology to build the productive
base as well as drive processes to enhance the productivity of economic assets.
The South African Public Enterprises in the current and future conjuncture must be informed
by the objectives of developmental state. As the debate around the developmental state
progressed, it become apparent that a firm policy pertaining to the conditions under which
government should allocate different forms of capital to commercial enterprises is required.
Such conditions concerned which enterprises would be targeted for investment and what
forms of governance rights would be attached to such investment. These investments can
be made either directly from the fiscus, which meant that the state will directly own the
enterprise, or through development finance intermediaries, depending on government?s
intent on making investments.
There is no single consideration or simplistic framework of issues that determines how
Public Enterprises can be more effective in achieving strategic national objectives. There
are inevitably advantages and disadvantages, opportunities and risks to any restructuring.
What is required is the recognition that, in principle, Public Enterprises could be powerful
instruments of development and a robust governance process, to weigh up restructuring
opportunities.
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It is vital to provide a brief history of the role that Public Enterprises have played, historically,
in terms of economic and industrial development; and the contemporary challenges to the
South African economy today.
i. Strategic communications infrastructure was consolidated in state hands through
the establishment of the Department of Posts and Telegraphs in 1910. The
department over-saw the development of postal, telephony, broadcasting
infrastructure and related services.
ii. State ownership and control of key infrastructural activities played a significant
role in supporting the development of a resource-based economy (mining and
agriculture) and then the transition to a resource-processing economy. The first
key player in this regard was the development of ports and railways through the
establishment of the national company, South African Rail and Harbours (SARH),
in 1916. This was followed by the establishment of major enterprises in the
1920s (Iscor in steel manufacturing (1928) and later Eskom (1923) in electricity
generation) to support the development of national resource processing
capabilities which put in place a platform for industrialisation. State ownership of
these enterprises was necessary, as the investment required quantities of capital
to achieve necessary economies of scale, which were beyond the means of the
private sector. Until the eighties („80s) these organisations were funded by the
state, as instruments of industrial policy, and their products and services were
made available to targeted sectors on an effectively subsidised basis. In 1950,
Sasol was established to both beneficiate coal and to enhance national fuel
security in the context of the Apartheid state, which was constantly threatened by
sanctions.
iii. A special note should also be made of the State?s involvement in defence related
industries, initially consolidated under Armscor in 1968 and corporatized into
Denel in 1992. Through defence industries, advanced engineering capabilities
were developed, although there were limited opportunities to manufacture at the
scale required to be globally competitive.
iv. It should also be noted that all government activity, prior to 1994, was leveraged
by the Apartheid state to further the objectives of Afrikaner empowerment, and
Public Enterprises were no exception to this rule.
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The recent restructuring initiatives of Public Enterprises should be responding to the
imperatives of the current socio-economic climate in South Africa. The high levels of
infrastructure expenditure are a reaction to the overwhelming demands for both the need
and access to economic infrastructure, such as, rail transport and electricity. For example,
the Eskom load shedding of 2007/8 has necessitated the importance of new power building
programmes estimated at over R500 billion. Again the ageing rolling stock of PRASA and
continued train fatalities, delays and subsequent protest by commuters has also led to a
massive capital programme to both renew the fleet and overhaul the rail networks.
The current socio-economic climate in South Africa requires a coordinated and integrated
strategy leading towards a robust role of Public Enterprises for long term development. A
Developmental State with a long term sustainable growth vision requires a strategy that will
inform its evolution and the specific role of Public Enterprises.
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4. SYNOPSIS OF PREVIOUS RESTRUCTURING INITIATIVES
This section provides a brief synopsis of the recent past restructuring initiatives. It focuses
on three phases of restructuring of public enterprise, namely the Pre-1994 restructuring; the
Post 1994 till 2004 restructuring; and the Post 2004 restructuring. This section will also
provide a high level summary of the restructuring initiative and highlight the key policies and
principles underpinning each process.
The illustration below (Figure 1) provides a high-level summary of the three different phases
of restructuring and the 2010 PRC Process.
Figure 1: High-level summary of the Restructuring of Public Enterprises
9 | P a g e
4.1 Pre-1994 Restructuring
The history of the creation of Public Enterprises in South Africa goes as far back as the early
the 20
th
century until the recent past. There have been various stages of restructuring of
public entities in the pre-1994 era. The 1980s witnessed a period where the apartheid
government were feeling the effects of sanctions and were subjected to the influence of
economies, such as the United Kingdom, advocating for lean states.
In 1987 the National Party government produced a white paper on Privatisation and
Deregulation; in the white paper government sought to reduce the size of the public sector
and government spending, open investment opportunities for the private sector and raise
money through selling various assets. Thus, the process of commercialisation of Eskom,
Telkom and the Post Office commenced.
As per the white paper provisions, the selling of Iscor and Sasol was prioritised and
executed. The government also set up a specialised government department, called the
Department of Privatisation, which was to proceed with the selling of remaining assets.
The above restructuring took place on the eve of the democratisation process. This could be
interpreted politically as an effort to hive off key assets and thus undermine the efforts of the
new democratic government, and hinder its economic growth.
4.2 Post 1994 till 2004 Restructuring
In 1994 the Department of Public Enterprises was called the “Office for Privatisation” whose
overwhelming mandate was to sell its portfolio of State Owned Enterprises. Intrinsic to this
position was the notion that government no longer had an active role to play within the
economy. This policy was modified into a strategy of “restructuring”, the focus of which, was
to prioritise the introduction of the private sector into key areas of the Public Enterprises?
value chain, whilst continuing with Initial Public Offerings (which was a form of privatisation).
During this period, Public Enterprises (including key infrastructure providers) were prevented
by policy from investing in new capacity, despite the growing economy. Between 1994 and
2004, the following “restructuring” processes took place:
a. Equity stake of 20% were sold in SAA in June 1999 To Swiss Air, but the deal
was reversed in November 2001 after a global recession;
10 | P a g e
b. An equity stake of 20% was sold in the Airports Company to Italian Aeroporti
di Roma in April 1998, but reversed in September 2005 and sold to Public
Investment Corporation;
c. Strategic foreign investment partners were introduced to Telkom in 1997 – in
2003 Telkom Initial Public Offering was concluded and the foreign strategic
investors exited in 2004;
d. 236 000 hectares of SAFCOL forests were privatized as of 1998, until
competition problems reversed sale of final allotment;
e. At Transnet, around 40 non-core business units were sold over a period of 24
months to enable greater focus, although enterprise was still active in a range
of non strategic infrastructure provision areas;
f. Concessioning of the Durban Container Terminal Port and the Sishen
Saldhanna Iron Ore Rail Line were attempted but stopped by effective Union
resistance (probably with managements support);
g. At Alexkor, Strategic Equity Partner sought as of 1998 but land claim of 3000
persons dating back 156 years derailed this process.
This period also witnessed a mushrooming of Provincial Public Enterprises and Municipal
entities. The provinces created Provincial Development and Finance entities with the aim
propelling provincial economic growth. There are also various entities, which provinces
created, in line with their Constitutional and Legislative mandates. The introduction of the
white paper on Local Government and the Promulgation of the Municipal Systems and
Structures Act, witnessed a creation of new utilities in various municipalities, especially
within various metros.
The table below (figure 2) illustrates a summary of various restructuring initiatives that took
place. The table notes the entity, for example Transnet, the restructuring that took place
specific to that entity and that category within which the restructuring falls.
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Summary of Restructuring Initiative, 2000
Figure 2: Summary of Restructuring. Source: An Accelerated Agenda Towards the Restructuring of State Owned Enterprises (Policy
Framework), Ministry of Public Enterprise, Republic of South Africa, August 2000.
4.3 Post 2004 Restructuring
In 2004, the privatization and restructuring agenda were subordinated to the objective of
deploying Public Enterprises to achieve strategic national objectives, as defined by their
shareholder managers, through strategic intent statements and shareholder compacts.
Entity Restructuring
Transnet Debt restructuring is being dealt with; significant progress has already been made in
dealing with pension fund debt
Spoornet Will be corporatized, with its different business units becoming separate corporate
entities
Coallink, Orex, Luxrail and Link
rail
Will be concessioned
Spoornet?s General Freight
Business
Will be commercialized and either an Initial Public Offering (IPO) or a strategic equity
partnership (SEP) entered into.
SAA Will be commenced with
Petronet Will be corporatized, its synergies with other pipeline projects assessed and restructuring
options developed
Telkom Work on the proposal IPO for Telkom is proceeding
SNO (Second National
Operator)
Work on a policy and a process to determine the Second National Operator (SNO) is
already quit advanced
Eskom ? Eskom will be corporatised, with transmission, distribution and generation each
forming a separate corporate entity.
? A full evaluation of the deferent models for restructuring Eskom is currently being
undertaken by the Department of Public Enterprises.
? Different generating companies will be formed to promote internal competition
before the introduction of private sector participation in generation
? The Department of Minerals and Energy is currently co-ordinating the design and
implementation of the regional electricity distributors.
? Strategic equity partners will be introduced into different Eskom Enterprises
business units.
? Private sector participation will be introduced specifically into the generation and
transmission entities, either through strategic equity partners or through IPOs.
Denel ? Denel will be corporatised, and an initial strategic equity partnering at the business
unit level of Denel Ordnance is expected
? The local ordnance industry may need to be consolidated; this will be followed by a
search for international equity partners at the corporate level.
? The consolidation of aircraft maintenance synergies between SAA and Denel
Safcol The sale of three packages is being concluded; the remainder will be consolidated and
re-offered.
Datavia, Ariel, Technology Options of the consolidation of the information technology capabilities of Datavia, Ariel
Technology and Eskom are being assessed
Alexkor A turnaround strategy is being affected with a strategy management partner.
Aventura A turnaround strategy is being affected with a strategy management partner; this will be
followed by sale of the entity.
Post Office A turnaround strategy is being affected with a strategy management partner.
Sentech Signal Distribution The department of Communications is undertaking a study into a restructuring strategy
for the entity.
SOE property portfolio The property portfolios of Denel, Eskom and Propnet are being studied with a view to
identifying restructuring options
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Eskom and Transnet were directed to focus on their core business and were given a
mandate to urgently establish Fixed Asset Investment programs based on funding from their
balance sheets; although, in the case of Eskom this was later supplemented by the fiscus
when the tariff did not increase at a rate that allowed Eskom to fund the required program.
The Competitive Supplier Development Program and Skills Development Programs were
established to start leveraging Public Enterprise investment and procurement spent to
develop relevant industrial supply chains.
No restructuring, or involvement of the private sector, in Eskom and Transnet?s value chains
were implemented – even in cases where this may have added value (e.g. rail branch lines,
inland terminals, etc.). Infraco was established from Eskom and Transnet?s non-core ICT
infrastructure to bring down the cost of broad-band in the context of Telkom?s monopoly
pricing.
The Review of DFIs was undertaken in this period and recommendations made regarding
these issues. Other initiatives included the restructuring PRASA, and various turn around
strategies initiated by Public Enterprises.
5. INTERNATIONAL BENCHMARKING
In 1996, the World Bank
1
study noted that “for most completed public enterprise
restructuring operations, sustainability of benefits has been a large problem, mainly because
of fragile sector reforms and inadequate governance and management. Those completed for
the private sector experienced poor outcomes, the result of inadequate attention to county
economic conditions and policy distortions. To overcome such problems, the study
recommends that future restructuring operations be designed and implemented to have an
impact at the firm level”.
Public enterprises became a major drain on government resources and were viewed to be in
need of reform, in cases where countries were faced with increasing economic difficulties
owing to external shocks, distorted policies and inefficient management. The World Bank
intervened with numerous projects intended to help restructure public enterprises.
Two major changes had occurred by the mid-1980s, first of which was the need for
government to reduce its role in direct ownership of enterprises was becoming more
generally accepted and, thus, privatisation emerged as the governments? major task and an
1
World Bank. Industrial Restructuring: World Bank experience, future challenges. May 1996.
13 | P a g e
area where the World Bank could provide assistance. Secondly, the importance of macro-
economic stability and of reducing policy-induced distortions to promote efficient growth, was
recognised by governments and supported by the World Bank, mainly through structural and
sectoral adjustment loans. In this context, traditional lending for industrial restructuring came
to a gradual stop as efforts shifted toward „getting the prices right? through policy reforms and
the promotion of public enterprise privatisation. In some instances, adjustment lending dealt
with “macro” and “sectoral” issues, which directly impacted on industrial restructuring. While
in other instances, it included specific conditionality for the restructuring of certain public
enterprises, mainly leading to privatisation. Financial intermediation project loans directed to
one or more industries, and often accompanied by technical assistance and/or sub-sector
conditionality, continued to provide support for private – and some public – enterprise
restructuring.
Two major lessons from this period were the importance of economy-wide and sectoral
policy reforms, as a pre-requisite for successful industrial restructuring and the superiority of
privatisation over public enterprise restructuring. This 14-year period, also saw the first
complete codification of restructuring conditions and operational guidance for World Bank
support to restructuring.
The following lessons were noted by the World Bank:
i. Industrial restructuring remains a major development challenge for developing
countries. Their private sectors are often small and inefficient, unable to
benefit from economies of scale, have limited access to technology and
market information, and are poorly served by their countries' financial sectors.
Public enterprises have started to be privatized, but progress has been slow.
Many will not be privatized for a long time and will thus continue to be a major
cost to their countries' treasuries. In the transition economies, a large number
of private enterprises that have appeared as a result of mass privatization are
operating in new and unfamiliar environments that cannot often be described
as enabling. In all of these cases, the government has a role to play and the
World Bank can help governments (and private sectors) meet these
challenges.
ii. The role of government: Macro-economic stability, price liberalization, trade
reform, and interest and wage liberalization require government attention.
There are also more "institutional" issues that require government presence;
such as (a) prudential regulations and banking supervision to help financial
sectors operate competitively; (b) entry and exit of businesses (for example,
14 | P a g e
bankruptcy legislation, judicial enforcement); (c) technology development,
technology transfers, and licensing; (d) arbitration mechanisms to settle
disputes in labour markets; (e) training of the labour force in cooperation with
the private sector; (f) improved information regarding market opportunities,
particularly for exports. For public enterprises, the most important objective is
privatisation but, in many circumstances, privatisation may be slow.
Governments cannot afford to allow public enterprises to continue operating
inefficiently; hard budget constraints needs to be instituted, and the
institutional relationship between public enterprises and government changed
through oversight bodies, increased managerial autonomy, and performance
and regulatory agreements.
iii. The newly privatised entities emerging from mass privatisation, in transition
economies, face a combination of problems – some similar to those in other
developing countries – but some peculiar to these economies. Most
importantly, institutional development in many areas falls short of the needs of
the new private sectors. The change from a situation where public entities
were a combination of units of production and social service providers, to a
situation where these two functions are to be more clearly separated between
businesses and government institutions, creates another category of
challenges to restructuring. Thus, in economies in transition, the government
should implement a range of systemic changes related to an enabling
environment in the areas of macro-economic policy, competition, finance, and
labour, while keeping in mind that these problems are more acute than in
other middle-income countries. Institutional support to enterprises to
counteract market failures in information, marketing, and technology is
particularly important because these failures are also more acute.
iv. Public enterprise restructuring: Privatisation cannot be the only instrument of
public enterprise reform. The World Bank's assistance strategy must take into
account the fact that many public enterprises in need of reform are unlikely to
be privatised in the near future. Policy dialogue, advice, and technical
assistance for public enterprise restructuring (including loans), and in some
cases financing of other restructuring related activities and investments, will
continue to be needed.
v. Private sector restructuring: The World Bank's role is likely to be larger in
helping governments establish an enabling environment for the private sector
to carry out restructuring operations. The establishment of an enabling
environment will often require going beyond general liberalisation and
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incentive policies, and reaching into the areas of technology development,
training, and market information – three areas where positive externalities
exist. World Bank assistance in these areas can be through advice, but can
also be incorporated in a variety of lending operations, from "specialized"
operations to technical assistance loans to financial intermediation operations
that include other components dealing with the enabling environment.
vi. Post-privatisation restructuring in transition economies: The
recommendations for Europe and Central Asia, and other transition
economies, are not fundamentally different from the above. However,
because the low level of institutional development is often more acute in
these economies, World Bank support for industrial restructuring in such
cases should first ensure that sufficient progress is being made on the
enabling environment front. Thus better sectoral knowledge; favorable
conditions for policy liberalization and industrial and financial sector reform;
more cooperation between government and business on industrial
restructuring strategies; and more fully articulated World Bank sectoral
assistance strategies will be required. In terms of individual lending
instruments, more stringent conditions should also be applied to financial
intermediary project lending (return on equity, capital adequacy ratio, debt
service capacity, degree of portfolio rescheduling, collection rate). Lending
operations other than Financial Intermediation Loans, to expand its arsenal of
lending instruments to support the private sector, should be used.
vii. Wherever redeployed and employees laid off occur, the World Bank should
help determine how national and local authorities, and other parties
concerned, can mitigate the costs of restructuring, in terms of retrenched
workers and provide adequate safety nets. Labour aspects of restructuring
need to be tackled in an explicit manner, either as part of a restructuring
operation or elsewhere in the country assistance program, in close
cooperation with the restructuring projects. Labour related aspects of
restructuring should include training, redeployment assistance, and closing
issues.
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Some of the findings related to country specific case studies, such as China, Hungry, Cjile
and the Philappines are also noted. In China and Hungary, production lines to be re-
modelled and developed were distinguished from those that had to be phased out, and
support institutions were established. Exposure to competition and good management seem
to be dominant factors in the successful public sector restructuring in China and Hungary.
In Chile and the Philippines, the restructuring process was not as subsector-directed as in
China and Hungary. It was left more to the financing decisions of commercial and
development bankers, which made restructuring decisions much more dependent on the
macro context. The process was slower, mainly because the enabling environment was
lacking, but once it finally developed, it appeared to relatively sustainable. When country
conditions were right, restructuring was satisfactory and there was seemed to be a level of
stability. Public enterprise restructuring projects had slightly higher satisfactory outcomes,
whereas private sector restructuring, satisfactory ratings at completion were low. Poor
outcomes were mainly the result of lack of attention to country economic conditions and
policy distortions.
6. MODELS AND OPTIONS FOR RESTRUCTURING
The PRC process, among others, is required to evaluate models and options for
restructuring. It is not the intention of the PRC to provide detailed pros and cons for each
option, but to highlight the types of options available as per international benchmarking.
The following deals with various options for restructuring. It only highlights descriptions of
options, and not necessarily the specifications as to which enterprises should follow which
options.
The diagram below (figure 3), illustrates the various options related to the restructuring of
Public Enterprises. These options include:
? Redesigning business management
? Strategic, Equity Partners
? Divestment of Equity
? Turnaround initiatives
? Privatisation
? Public, Private Partnership
? Commercialisation/corporatisation
? Outsourcing
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Figure 3: Diagram illustrating Restructuring options for Public Enterprises
6.1. Redesigning business management
This is the analysis and redesign of workflow and business processes within an
organisation. Business processes are a set of logically related tasks performed to
achieve the defined business outcomes.
6.2. Strategic Equity Partners
This refers to the strategic ownership in interest in a corporation, in the form of common
or preferred stock.
Restructuring Options
Redesign
Business
Management
Strategic,
Equity,
Partners
Divestment of
Equity
Turnaround
Initiatives
Privatisation
Public, Private,
Partnership
Commercialisation
/ corporatisation
Outsourcing
Restructuring
options for Public
Enterprises
Developed By
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6.3. Divestment of Equity
This refers to the sale of an asset for financial, legal or personal reasons. For
corporations, divestment can refer to a company selling off a portion of its assets, such
as a subsidiary, in order to raise capital or to focus the business on a smaller core of
goods and/or services.
6.4. Turnaround initiatives
These are initiatives aimed to turnaround underperforming and distressed companies.
6.5. Privatisation
This refers to the process by which formerly public assets or functions are sold or given
to corporate entities by listing the shares of the state-owned corporation on publicly-
traded stock exchanges. Thus, it is the transferring ownership of a business, enterprise,
agency, public service or property from the public sector to the private sector.
6.6. Public Private Partnership
This describes a government service or private business venture which is funded and
operated through a partnership of government and one, or more, private sector
companies.
6.7. Commercialisation/corporatisation
This is the transformation of state assets or agencies into State Owned Corporations, in
order to introduce corporate management techniques to their administration. Sometimes
this is a precursor to partial or full privatisation. A common model is for state entities to
be corporatised and operate as autonomous joint-stock companies, while still being a
majority state-owned enterprise.
6.8. Outsourcing
This is the process of contracting an existing business function or process of an
organisation to an independent organisation; ceasing to perform that function or process
internally, and purchasing it as a service instead. Thus, it is the practice of purchasing a
business function, instead of providing it internally.
The table below (figure 4) provides descriptions of the various restructuring options and
notes their applicability for each option.
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Matrix of Restructuring Options
Figure 4: Matrix of Restructuring Options
Option Description Applicability Examples
Redesign Business
Management
The analysis and design of workflows and
processes within an organization.
Business processes are a set of logically
related tasks performed to achieve a defined
business outcome.
? All Public Enterprises
? This type of restructuring is standard
and takes place regularly among Public
Enterprises
? It does not require national policy
guidelines
Strategic Equity
Partners
Strategic ownership in interest in a
corporation in the form of common or
preferred stock.
? Not all Public Enterprises
? This is a major restructuring project
? requires national government policy
guidance
Divestment of
Equity
Refers to the sale of an asset for financial,
legal or personal reasons. For corporations,
divestment can refer to a company selling off
a portion of its assets, such as a subsidiary, to
raise capital or to focus the business on a
smaller core of goods and services.
? Not all Public Enterprises
? This is a major restructuring project
? Requires national policy guidance
Turnaround
Initiatives
Initiatives aimed to turnaround
underperforming and distressed companies
? All Public Enterprises
? This type of restructuring is common
among Public Enterprises
? Turnaround sometimes might lead to
other forms of restructuring, such as
commercialisation, therefore these
initiatives must be guided by policy
Privatisation The incidence or process of transferring
ownership of business, enterprise, agency,
public service or property from the public
sector to the private sector.
Process by which formerly public assets or
functions are sold or given to corporate
entities by listing the shares of the state-
owned corporation on publicly-traded stock
exchanges.
? Not all Public Enterprises, depends on
various factors
? This is a major policy decision by
government
? Privatisation has major labour,
financial and other implications
Public Private
Partnership
Describes a government service or private
business venture which is funded and
operated through a partnership of
government and one, or more, private sector
companies.
? All Public Enterprises
? This type of restructuring is common
on public projects
Commercialisation/
corporatisation
The transformation of state assets or agencies
into State Owned Corporations, in order to
introduce corporate management techniques
to their administration. Sometimes this is a
precursor to partial or full privatization. A
common model is for state entities to be
corporatized and operate as autonomous
joint-stock companies, while still being a
majority state-owned enterprise.
? Not all Public Enterprises can embark
on commercialisation
? Depending on the legislative mandate
and provision of the Establishment
Acts
? This is a major restructuring process
? Will require Government policy
guidance
Outsourcing The process of contracting an existing
business function or process of an
organisation to an independent organisation;
ceasing to perform that function or process
internally, and purchasing it as a service
instead. Thus, it is the practice of purchasing a
business function, instead of providing it
internally.
? All Public Enterprises
? This restructuring has serious labour,
technology, financial and other
implications
? Government policy must provide
necessary guidance
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7. SUCCESS FACTORS
Restructuring, as outlined above, will depend on some strategic factors. The success factors
are informed by both challenges that need to be overcome and opportunities. The success
factors are critical in moving towards the desired state. What follows is a list of success
factors that require careful consideration and, in some instance, needs to be observed:
i. Informed by the long-term vision of the state
The restructuring of Public Enterprises must be informed by the long term vision
of the state. It is vital for ensuring that strategies plans and visions of Public
Enterprises, begins to take a multi decade approach in their planning
approaches. This long-term planning approach will only succeed in the
environment whereby government allows and gives conducive conditions.
Periodic and short term changes of political administration in government must
not cause major strategy changes and destabilise the long term vision. Also long
term plans and visions must be protected from boards and executive
management changes. The temptation of new leadership is always to try and
recreate a new vision of organisations.
ii. Alignment with state policies and set objectives
The Public Enterprises? restructuring process must ensure an alignment with the
necessary policies and objectives of the broader state. The alignment process
must be aimed at ensuring that policies, such as the National Development Plan,
the New Growth Path, IPAP2 and others are consistent with the operations and
conduct of Public Enterprises.
The key objective of the alignment process must ensure that all state organs
have a common and shared vision. This alignment process, among others, might
require amendments of establishment acts and a review of strategic plans.
iii. Regulated process
The restructuring of Public Enterprises must be led and guided firmly by
government, based on agreed policy. The policy parameters must be regulated or
legislated if need be. The example of the, (year) 2000 Policy Paper on
Accelerated Restructuring and the 1987 White Paper on Privatisation and
Deregulation must be followed.
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iv. Underpinned by periodic reviews (20 year)
The government must adopt a strategy to review the progress and performance
of Public Enterprises. This should take the form of periodic reviews. In order to
avoid unnecessary destabilising operations of the Public Enterprises these
reviews must take place on a long term basis. The periodic reviews must take
place at least every 20 years. This will allow for the necessary adjustments to be
made, and successes and failures adequately gauged.
8. CONCLUSION
The most appropriate model for the restructuring of Public Enterprises will be informed by
the nature of the Public Enterprise and the specific objectives of the restructuring. This paper
has listed possible options to be considered.
It is absolutely important that, Public Enterprises when restructured, the broader society or
the specific stakeholders in the society are direct beneficiaries. The public mandate of
enterprise must be enhanced and strengthened through restructuring, not compromised.
The paper has demonstrated that the previous restructurings, especially the late 1980s and
in year 2000, were firmly guided through national policy, such as the white paper on
Privatisation and Deregulation and the Accelerated Restructuring Policy. This practice is
important and should guide the next phases of Public Enterprise restructuring.
There is also a clear need for the government to consider a large scale restructuring. This is
necessitated by various imperatives; economically, politically and developments within the
international and global community.
The success of restructuring is dependent on some key factors which will require serious
consideration by the authorities. The paper also makes key recommendations for
consideration and approval by the government.
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9. RECOMMENDATIONS
9.1. Policy paper for restructuring Public Enterprises
The last government policy paper on restructuring was An Accelerated Agenda Towards the
Restructuring of SOEs (Policy Framework 2000). This policy paper is outdated and
inconsistent with various recent government policies. It is crucial that government initiate a
new and revised comprehensive policy that will guide and regulate restructuring of Public
Enterprises. This policy must cover all Public Enterprises and provide tools, templates and
restructuring mechanism.
It is recommended that an appropriate policy and legislative framework be developed and
adopted by government to define, guide and standardise restructuring of all Public
Enterprises.
9.2. Large scale restructuring of public enterprises
A number of Public Enterprises are faced with various challenges of viability, mandate
alignment, repositioning and consistency with government?s vision. There is a definite need
to restructure a substantial number of Public Enterprises. The process of restructuring must
be guided and led by government or, at least, approved by government.
It is recommended that a centrally coordinated large scale restructuring of Public
Enterprises be undertaken. The restructuring must be informed by approved
policy/legislative framework as recommended in 9.1 above.
9.3. Framework for restructuring
The framework for restructuring must be informed by key government policies and the long
term plan and vision for the state.
It is recommended that a guideline framework for restructuring, as presented in Figure 5, be
adopted.
9.5. Restructuring timelines and milestones
The government must outline and adopt timelines and milestones for restructuring of Public
Enterprises. The milestones and timelines must also be consistent with long-term planning.
It is recommended that a timelines and milestones programme for restructuring be adopted,
as presented in figure 6.
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9.5. No holy cows and genuine consultation framework
It important to appreciate the need for consideration, of all restructuring options, without
limitation. It is also important to note that issues such as privatisation, commercialisation and
outsourcing are sensitive issues and have both negative and positive consequences for the
state. Therefore all options and restructuring models must be fairly and objectively
considered. The consultation on these models and options must be genuine, and inclusive.
It is recommended that an appropriate consultation framework which genuinely considers
the views and submissions of the public must be developed. All restructuring options must
be considered on merit and there are no holy cows.
The diagram below (figure 5) illustrates the suggested framework for the restructuring of
Public Enterprises. It includes the objectives, policies and public entities which are impacted
by the PRC process and which, if done successfully will result in a desired state.
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Figure 5: Framework for Restructuring of Public Enterprises.
The diagram below (figure 6) illustrates the suggested framework for the Timelines and
Milestones programme that should be adopted. This includes the various
GUIDELINE FRAMEWORK FOR RESTRUCTURING
Policy Framework for
Restructuring
Options & Models of
Restructuring
Periodic Reviews
( 20 yrs)
Building a Developmental State
RDP
Public Entities, Owned Regulated and Account
to Government
Public Enterprises
GEAR IPAP 1 & 2
PRC Recommendations
Evolution of Government Policies over the Past
18 years
Success Factors
Guidelines- Tools &
Template for
Restructuring
ASGISA
New
Growth
National
Development
Plan
Medium Term
Strategic Framework
2004-2009
Medium Terms
strategic Framework
2009-2015
Restructuring
Process
Objective
Policies
Public
Entities
Informed by
the long-term
vision of the
state
Alignment with
state polices
and set
objectives
Underpinned by
periodic review
(20) year
periodic
Regulated process
Developed By
25 | P a g e
2012
2013 2014 2018
Outcomes of
the
Restructuring
• Newly established
Public Enterprise
of key economic
sectors
• Restructure and
revised key
mandate of Public
Enterprise
• All SOEs align with
the
developmental
State objectives
• Viable and
effective public
enterprises
2015
M
i
l
e
s
t
o
n
e
s
Proposed Restructuring Time Table
Restructuring
Policy
Framework
Adoption
Restructuring
Framework
Government
Elections
Large Scale
Restructuring
Restructuring
completed
PRC Report
Government
Adopt Specific
recommendation
from PRC report
PRC Final
Report
Presentation
and Publishing
report
National and
Provincial
Elections
Large scale and
restructuring of
Public Enterprises
as per adopted
policy
Completion of
the restructuring
Developed By
Figure 6: proposed restructuring time line
doc_581967959.pdf