SOEs: Our perennial acne

With over 15 years of professional practice experience, Junius Mungunda, the Managing Partner of Deloitte has extensive experience in corporate governance and State Owned Enterprise (SOE)-sector analysis in Namibia where he has assisted Government on matters including:

• The Governance of SOEs in Namibia: A Situational Analysis (1999);
• A Governance Policy Framework for SOEs in Namibia (2001);
• Review of framework for the remuneration of chief executive officers and senior executives of SOEs (2009); and
• Facilitation of Corporate Governance seminars for a number of organisations, both in the SOE and private sector.

Recently, SOEs have come under fire amidst the public outcry over excessive bailouts to keep these sub vented organisations of the Government afloat, in this article Mungunda dissects corporate governance in SOE’s in Namibia.

PF: What in your view is corporate Governance?

JM: Let me first start by saying that governance can be defined as the system by which institutions, organisations or companies are directed and controlled. This means that governance comprises the structures, processes and procedures employed by that institution or company to facilitate the achievement of its objectives. The objectives to be achieved may be diverse, but will normally include common sense matters such as sustainable returns, good relations with stakeholders, protecting assets, compliance with laws and regulations. The reference to ‘corporate governance’ is due to the fact that the governance in question relates to corporate organisations.

We should however not restrict our debates regarding governance to the corporates, governance is pervasive through-out society, from governance at school level, sport clubs, government, private sector bodies, churches and importantly at individual level. As a society, when we interrogate governance, we should define this at a societal level, in terms of an ideal moral value code, and then try to live up to these.

PF: Tell us how significant is your profession and position to good governance and the economic growth of Namibia?

JM: I believe that as accountants and professionals, there is reliance on our profession to provide guidance on best practices, we can only provide guidance and advice, however decisions are taken by the boards and management teams of the various companies. Therefore, the ultimate responsibility for instituting good governance lies with the boards.

PF: One definition of an SOE is, “a legal entity that is created by the government in order to partake in commercial activities on the government’s behalf. A state-owned enterprise (SOE) can be either wholly or partially owned by a government and is typically earmarked to participate in commercial activities”

Based on the above definition, an SOE is expected to take part in commercial activities on Government’s behalf. The Minister of Finance, Saara Kuugongelwa-Amadhila, has said SOE’s are perpetual beggars and she has issued an ultimatum to the SOEs to perform or pack their bags, (with reference to executives running the institutions). What is the reason for the synonymous and cancerous bankruptcy found at the country’s SOE’s?

JM: In most countries, SOEs come into existence because the government requires particular services which the private sector cannot provide as a result of significant infrastructure and capital requirements or because the government wants the provision of certain services of critical importance to the well-being of all citizens or to the competitiveness of the upstream and downstream sectors or industries. Therefore, the key question that should be asked upfront regarding any SOE is whether the SOE is providing a service which the private sector cannot or is not providing and secondly, whether the industry in which the SOE operates is one that requires government involvement due to an inability by the private sector to participate. I believe the answers to the above questions should start the necessary debate regarding the strategic nature of government’s shareholding in the various SOEs.

Improving governance at the SOEs has great potential to improve the performance of the respective SOEs, which will improve the economic and social outcomes in the country. I agree with the Honourable Minister that the underperformance of SOEs ultimately results in ongoing subsidies from the government and the resultant debilitating impact on the public fiscus. There are SOEs in monopolistic or near monopolistic environments, which may appear to be performing well financially, but this may not be an indicator of efficiency or good governance, but may indicate the need to assess arrangements regarding prices and tariffs – Such ‘good’ financial results may be hiding or clouding inefficiencies , thus overburdening the economy.

PF: With over 50 SOE’s operating in Namibia, how many are making a profit and what image is mirrored on the wall in terms of good governance.

JM: There are some SOEs making profits, but that should not be the ultimate measurement of good governance or good performance. The nature of some of the SOEs, such as those rendering basic essential services, is that they were not established to make profits, thus what is important in respect of these SOEs is not how much profits or losses these SOEs made, but we should look at how efficiently and effectively there are rendering these services. As I indicated earlier, the premise on which any of the SOEs should have been established, I believe, was not for them to make profits. I don’t believe that government is in the business of making profits, but wants to provide certain essential services or establish certain essential infrastructures for the benefit of the economy and citizens. What is important however, is that these services or infrastructures are provided as efficiently and effectively as possible.

The financial performance of SOEs has been disappointing in the majority of cases, with government expenditure on and lending to SOEs increasing significantly. An example is that in 2006/7, money transfers from government to SOEs was just under N$1 billion, increasing from only N$102 million in 1993/1994. In 2011/2012 that figure increased to N$1.4 billion. One would expect some SOEs to have deficits, but if you have loss-making SOEs providing services in a competitive environment, this indicates a need for improved governance to better equip these entities to function under competitive conditions.

PF: But is all this not because SOE’s are plagued with bureaucracies plagued by inefficiencies, ineffectiveness, corruption and incompetence hence they are draining resources from public treasury?

JM: An enterprise or organisation operating in a competitive environment cannot afford bureaucratic decision making. When an exchange rate moves 10% in one day, the executive in charge of that organisation needs to make the decision within hours, it is therefore critical that once a decision is taken to provide services through enterprises in the form of SOEs, that all decision making powers be left with the boards of those SOEs, who will then delegate so much of the powers to the executive management as they deem fit. However, this requires that competent people be appointed to the boards and executive management to make the right decisions for the right reasons most of the time.

PF: As an experienced finance professional, where are the majority of loss making SOE’s in Namibia missing or getting the formula wrong to be profit making entities?

JM: Firstly, I don’t think profit making is the only measure of success. You could have SOEs making profits who would not be considered successful for the reason that they have not achieved or are not contributing to the course they were established for in the first place. It is important that one looks at the mandate of the SOE and then assess whether the particular SOE is successful in relation to the mandate for which it was established. Let me use a hypothetical example to illustrate this point. If an SOE was established to produce many pair of shoes for school children, and in consultations with the key stakeholders, their expectations is that they would like to see 1 000 pair of shoes made each year, and the SOE only makes 100 pair of shoes but makes a profit, I would not consider that company to be successful.

Secondly, I don’t think there is a magic or universal formula for success in leading or managing businesses. Every situation or incident will require a response specific to the given situation, what is needed is a board or manager with the skill and experience to respond appropriately given the problem at hand. I also believe that it is important that there are engagements and consultations between the SOE and the shareholder and key stakeholders on their expectations from the company. A successful company, and SOE for that matter, is one that delivers on the expectations of the key stakeholders or government as shareholder. SOEs should formally receive or obtain guidance on what is expected from them, and then set out to deliver

PF: Most SOE heads are politically appointed regardless of capability and professional credibility. Does this not compromise their efficiency?

JM: We must understand that the appointment of directors is probably the only instance where the shareholder of a company has a direct say in his invested company. With this in mind, it is important that the shareholder, when appointing a director, ensure that the director not only has the competency and skills, but also the moral compass, values and that the person shares the shareholder’s long-term ideals and goals required to guide the company to long-term sustainable success. Thus as shareholder, it is fair that he considers whether the director that he appoints shares certain values, ideals and a vision with him, be it economic, socio-political, etc., but he should still make sure that this person also has the required competencies, skills etc. These two aspects are not mutually exclusive. Regardless, the appointment of directors should be based on professional criteria – and a key ingredient of good governance is transparency regarding aspects such as rules, procedures and criteria for appointments, and I think as a country, this is probably one area where we should improve.

PF: King Code 3 was adopted by all parastatals. Is it paying dividends? Three years down the line after it was adopted the Ministry of Finance is still plagued with begging bowls?
JM: I am not sure if King 3 has been formally adopted by the business sector in Namibia, I understand that the Namibia Stock Exchange was at one point reviewing whether to adopt King 2 in Namibia, but I am not sure how far they have gone in this regard.

With regard to the parastatals, it will be a process which can take some time. Results should not be expected too soon, but in the long run, having good governance principles should lead to sustainable organisational results.

PF: You have previously raised concern about the acute shortage of qualified Chartered Accountants in Namibia with a pathetic ratio of one CA for every 10 000 Namibians. Can this be the reason why Namibia’s SOE’s are underperforming and perpetually begging for funds from the Government?

JM: I would not say that this is the only reason, but generally skilled, competent people with the relevant experience are needed to manage successful enterprises. Chartered Accountants are exposed to a broad range of disciplines and areas of specialisation such as general management, tax, managerial finance, information technology, financial accounting, internal control systems, etc to mention just a few, which make them qualified to be part of the management teams of many organisations. If you look at many large private sector organisations in South Africa or here in Namibia, you will find a CA at the helm or second in command in the role of Chief Financial Officer. Given the shortage of CAs in Namibia, it is difficult for the SOEs and the public sector in Namibia to attract these individuals. But I would say this apply to all skills – it is imperative that we increase and broaden the skills sets in the country, not only of chartered accountants.

PF: What needs to be done to reverse the situation or what are the best practices that need to be implemented to ensure positive results?

JM: In addition to the need for the necessary skills I referred to earlier, there is a need to have a strong governance structure, i.e. strong boards that provides the necessary guidance and monitoring to the management teams, strong moral code that encompasses honesty, transparency, fairness, etc. and a clear understanding of the strategic mandate and direction of the company. I believe that a combination of these aspects will take us far as a country.

PF: Namibia has the State Owned Enterprise Governance Council headed by Prime Minister Nahas Angula. Does its teeth bite considering the SOE’s still run their own shows?

JM: The idea with the establishment of the SOEGC, I believe, is right. There are still some inconsistencies that need resolving such as the role played by the respective line ministries in matters such as the appointment of board members, etc. which goes against the main reason for having a central coordinating unit.

PF: Most SOE’s have been borrowing to increase loan capital. Doesn’t that compromise the future sustainability of these companies?

JM: When a company borrows, the financier will consider a number of things to ensure that they do not put their assets at risk, amongst these is whether the company borrowing, based on its own business plan, is in a position to repay the loan. The second consideration is the collateral, i.e. where the company is not in a position to repay, what assets or guarantees are in place to which the financier can have recourse. I think that we have seen incidences of government, as shareholder, providing guarantees for loans on behalf of SOEs which came back to haunt them. It is important that due diligences performed before governments provides guarantees be strengthened. When this is done, it does not mean that guarantees will not be provided, but it provides for an opportunity to further strengthen the SOE’s underlying business plan where after, the risk attached to this lending decision is understood by all concerned including the main shareholder.

PF: What should be the way forward, semi-privatisation or full implementation of corporate governance policy in SOE’s?

JM: I wouldn’t call it “semi-privatisation”, but will rather refer to it as ‘corporatisation’ – If government decides that it is best to provide certain services via a corporate instead of through the public service, then it should follow through with that decision. Where a semi-autonomous entity is established, it should be allowed to have the powers to trade towards the mandate for which it was established.

As a shareholder, once you have appointed the Board members, and you have right to dismiss them at any time, but once you have appointed the board members, they have powers and right to run the enterprise in accordance with the purpose of the enterprise, at least as they understand this purpose. The Board should remember to identify the key expectations of the shareholder, in this case the government, as a key stakeholder and consider these in the company’s long-term planning.

PF: Some SOE’s do not fall under the State Owned Enterprise Governance Council. Doesn’t that compromise Government’s ability to act?

JM: It is important that a framework with respect to the governance of SOEs be centrally coordinated so as to ensure consistency and simplify monitoring and assessment of practices across all the enterprises. The difficulty with leaving out certain SOEs, is that the governance practices employed at these SOEs will now be at the discretion of the line minister, which could have the risk of differing practices and inconsistencies in the interpretation and application of governance.

PF: Critics have said the one size fits all policy of corporate governance in Namibia does not work because SOE’s have varying roles and objectives. What is your take on this?

JM: I think that the intention with the SOE Act is to deal with aspects of governance specific to the requirements and needs of the shareholder which are not necessarily addressed by the Companies Acts or the Establishing Acts of some of the SOEs. Therefore, this was meant to address matters that are generic to all the SOEs, with regard to the expectations of the shareholder regarding governance practices. This is the equivalent to the King 3 Report as adapted to the needs and expectations of the shareholder.

PF: Government has never given independence of operations to SOE boards. How does that affect their operations?

JM: As I said, it is fundamental to best governance practices that the Boards of companies are independent and have the full powers and authority to direct the companies. It is unthinkable that you will expect accountability from the boards if the boards do not have the ultimate powers in the running of the companies.

PF: It is said in some quarters that the CEO’s of SOE’s in Namibia receive far less than their peers in the region. Can this impact on the performance of the executives and erode good governance?

JM: We should be mindful of the fact that the SOEs operate in a competitive sector – they need to compete for these rare skills against the private sector companies, therefore, for the SOE sector to attract the best skills possible, it is important that they are competitive in terms of their remuneration packages. What is equally important is that, as we see in the private sector, the performance management of the executives is strengthened. The packages need to be competitive, but the performance of the executives should be evaluated and where this is not satisfactory decisive actions should be taken including dismissals.

PF: Performance based bonuses until now have not been considered but the 13th cheque has been paid willy nilly regardless of whether the enterprise has been performing or not. What impact has this had on the organisation and the Government?

JM: There is a saying which goes along the lines of “you get what you pay for”. The idea with a bonus, especially at a management level, is that it should encourage increased effort and results from the executives. With a 13th cheque, this has the opposite effect – if you receive a 13th cheque irrespective of your effort or importantly the result achieved, then this payment should be considered to be part of your remuneration package. My experience is that processes and structures relating to performance management and evaluation of executives at most SOEs need to be strengthened, but what is more important is that there should be clear consequences for non-performance.

PF: Comment on the level of fraudulent cases in the country and unethical conduct by managers in the business sector

JM: Generally, I think that there is a need to see significant improvements in the capacity of the legal and justice sectors, there is a need for them to be able to understand, investigate and prosecute complex fraud incidences and a need for more ‘teeth’ to be able to bring transgressors demonstrably to book. Failure to enforce legislation with appropriate penalties, coupled with seemingly successful circumvention of rules and regulations will seriously undermine any attempt to implement proper corporate governance.

PF: Other countries like Zimbabwe and South Africa have ministries playing the role of policing agent for SOE’s, how does this compare to Namibia?

JM: As I said earlier, internationally, most countries have central co-ordination and monitoring of SOEs, which was different in Namibia before the establishment of the SOEGC. In South-Africa, this coordinating role is performed by the Department of Public Enterprises, I believe therefore that the establishment of the SOEGC and the centralization of the coordinating activities under this institution is in keeping up with this international practice.

PF: The judgment passed in July about Road Fund Administration. Can you comment on this, do you think is it a positive way forward or did it create frictions.

JM: Being a legal question, I would not want to comment on the judgement per se. But I believe that the judgement confirmed one of the tenets of good governance, that the Board should have the power and authority to direct, govern and control the company.

PF: Are there any aspects of the SOE Act that undermines good governance?

JM: There are certain provisions in the SOE Act which may need review to move towards enhanced governance, for example the issue of section 27 requiring SOEs to obtain approval of the portfolio and finance minister before making investments, which goes against the empowerment of the board to take these kind of decisions.

PF: What lessons if any, would you like to share from international experiences in relation to corporate governance?

JM: The Governance Council and Secretariat was established for the purpose of coordinating the processes and principles of SOE governance to ensure consistency and transparency, in line with international practices. I believe that this central co-ordination and overseer function is essential in the long-term to stem the current inconsistencies in governance practices and the uncertainties about the roles, mandates and expectations from the respective SOEs. It is important to have a national framework to clarify roles, duties, procedures, principles, expectations, and the rules of engagement between the various key stakeholders.

It is further necessary that Government clarifies it’s interest in and expectations of SOEs are. There is a need to separate the State’s various interests in an SOE. For example, the shareholding Ministry, which would have a shareholder/investee relationship needs to be separated from the role of the “line minister” having mostly a sectoral policy interest. In my view, it will make most sense if the respective Ministries only had sectoral policy interest in their respective SOEs, and that all shareholder interest roles are co-ordinated via the SOEGC. PF