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Opinion - Reform SOEs to avoid macroeconomic risk

2022-10-20  Josef Kefas Sheehama

Opinion - Reform SOEs to avoid macroeconomic risk

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, weak accounting systems, and the corporate governance issues. 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 groups.

Research indicates that problems in governance can be attributed to the poor operational and financial performance of SOEs in general. An effective government shareholder management model that addresses the key challenges of SOEs’ 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.” Therefore, reforms are necessary to strengthen the performance and corporate governance of SOEs which are a core element of the Namibian economy as well as 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, Ukraine war, in a no reform scenario, is simply too large not to merit urgent and substantial action. The SOEs 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, SOEs made a minor contribution to the government revenue in recent years but required significant budget 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 proper government support policy to generate a higher financial performance. In addition, a clear communication between the government and SOEs is needed, especially in determining the policy direction of government support. 

Effective communication between government and SOEs about the government’s objectives might support the effectiveness of government support on SOEs’ 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. The SOEs’ 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 the Namibian authority to develop a market-based domestic economy. Reform of the SOEs is a central 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 SOEs reform 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 authority needs to eliminate outdated and excessive capacity and dispose of inefficient assets amongst SOEs. This could happen in various ways, 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 has 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 authority’s 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 authority needs to forge ahead with the SOE reforms in coordination with 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 opportunities are implemented. The enterprise reform and private public partnership are ways in which parastatals can be reformed. This is due to public perception that some SOEs are bureaucracies that are plagued by ineffectiveness, inefficiencies, corruption and incompetence as well as being a drain of public resources. 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 legislations, 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. The SOEs’ boards should ensure that they possess the right level of competence, professionalism, authority, integrity and independence. The 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 SOEs 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.

Therefore, 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 its conformance to its strategic mandate.

2022-10-20  Josef Kefas Sheehama

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