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Reform state-owned enterprises now to avoid macroeconomic risks

Reform state-owned enterprises now to avoid macroeconomic risks

By Josef Kefas Sheehama.

There is strong pressure to improve the performance and quality of services delivered by SOEs. Namibia State-Owned Enterprises are facing a wide range of issues, from insolvency to weak accounting systems, as well as serious corporate governance shortcomings.

In some cases SOEs function like family businesses controlling or participating in the management, the family in these cases being the leadership of certain well connected group.

Research indicates that problems in governance can be attributed to the poor operational and financial performance of SOEs in general. Only an effective government shareholder management model that addresses the key challenges of SOE governance will improve the performance of SOEs and better protect the assets of government.

The Public Enterprises Governance Act, 2019 “ is to make provision for the efficient governance of public enterprises and the monitoring of their performance; to make provision for the restructuring of public enterprises; to provide for the powers and functions of the Minister of Public Enterprises; and to make provision for incidental matters.

It is clear that reforms are necessary to strengthen the performance and corporate governance of SOEs which are a core element of the Namibian economy. Urgent reforms are also needed to improve service delivery and competitiveness. With public debt levels above 60% of GDP and in the face of many macroeconomic shocks such as the pandemic and the conflict in Ukraine, the risks posed by a lack of reform are very substantial.

Yet, SOEs still remain an important instrument in any government’s toolbox for societal and public value creation given the right context and collaborating with other stakeholders. SOEs can be catalysts for sustainable value creation for the wider public, and can also build trust by being transparent and accountable through proper communication and reporting of objectives, activities, relationships and performance.

Unfortunately, the reality is that SOEs made a minor contribution to government revenue in recent years but required significant budgetary support and pose sizable fiscal risks, as the portfolio lacks financial viability.

In order to increase the impact of government support, the government should design a proper government support policy to generate a higher financial performance. In addition, clear communication between the government and SOEs is needed, especially in determining the policy direction of government support. An effective communication between the government and SOEs about their objectives might support the effectiveness of government support on SOE performance.

Government itself as a shareholder has not benefited meaningfully in financial terms. The current situation with most SOEs is counterproductive to the process of national development. SOE reform is not only crucial to Namibia’s transformation from an economy overly dependent on trade and investment to one more driven by domestic consumption, but is also a test of the political will and capability of Namibian authorities to develop a market-based domestic economy.

Reform of SOEs should be a pivotal component of the government’s agenda for sustaining domestic economic growth and tightening the political control over all aspects of the nation. The current wave of SOE reforms has, however, focused on the state’s push for consolidation through mergers and acquisitions, rather than pursuit of improving corporate governance.

Furthermore, a number of SOEs have been kept afloat despite overcapacity concerns and low profitability. These entities are now known as zombie enterprises. In order to boost growth and ensure an efficient allocation of resources, the Namibia authorities need to eliminate outdated and excessive capacity and dispose of inefficient assets amongst SOEs.

This could happen in various ways. For instance, state capital could be removed from some SOEs, allowing for a larger share of private ownership, while others may be restructured or upgraded. Inevitably the outcome will be a contraction in the total number of SOEs. I envision a greater participation of the private sector via public-private partnerships (PPP) in some industries. For profit-driven SOEs, private sector participation under the mixed-ownership model will be more aggressive. State capital may even be removed completely in some cases; opening these sectors to private capital entirely.

The unproductive misuse of SOEs have clogged up resources, savings and capacity from both the public and the private sector. The opportunity cost of this is that resources are channeled away from critical priority areas. The need to find resources, to prop up failing SOEs, has also distorted financial systems and monetary policy, at times contributing to wider macroeconomic crisis.

The bottom line is that effective implementation remains the primary concern for almost every reform measure on the agenda. All the more so for SOE reforms given that these face strong resistance from vested interest groups. On top of demonstrating their resolution, the authorities need to forge ahead with the SOE reforms in coordination with remedial measures.

SOEs’ reform will inevitably lead to higher levels of structural unemployment in the short-term. This could prove to be a sensitive issue unless measures that facilitate labour mobility and create privatization opportunities at a time when parastatal reform is on the lips of many.

Enterprise reform and public private partnership offer some clues how parastatals can be reformed. Due to public perception that some SOEs are bureaucracies that are plagued by ineffectiveness, inefficiencies, corruption and incompetence, the only way to counter this is to stop the drain of public resources immediately and drastically.

It is worth pointing out that Article 40 of the Namibian Constitution entrusts Cabinet with the duty of direction, co-ordination and supervision of parastatal enterprises and to review and advise both the President and the National Assembly on the rationale, desirability and wisdom of legislation, regulations or orders pertaining to such state enterprises considering the public interest. The trend in the restructuring process has been towards greater decision-making autonomy for boards and executive management.

Hence, the reforms should focus on the appropriate balance between commercial and non-commercial objectives linked to its purpose and mission, as well as between internal and external perspectives.

SOE boards should ensure that they possess the right level of competence, professionalism, authority, integrity and independence. SOEs should be managed according to principles of transparency and accountability, with its performance reported on a timely, consistent and transparent basis.

In conclusion, successful SOE reform is critical to reduce vulnerabilities from rising indebtedness and foster a more efficient resource allocation. It should leave Namibia with a more dynamic set of SOEs that compete on a level playing field with the private sector, and feature modern corporate governance with professional boards and management. Nonviable SOEs would be restructured or allowed to exit.

The application of good governance and reforms in SOEs should be supported by a thorough understanding of the concept of leadership, a clear demarcation of the roles of key players in the SOE governance environment, measurable performance indicators established in a shareholder’s compact, holding the board and management accountable for the performance of the SOE and ensuring its conformance to its strategic mandate.


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