Modeling SOE's to Support Corporatization & Commercialization in Emerging Economies

By Ken Wright,
Managing Partner,
Wright Consultancy International

"It must be remembered that there is nothing more difficult to plan, more uncertain of success or more dangerous to manage than the creation of a new order of things"
- Nicolo Machiavelli

Abstract

This article examines the practical actions that can be undertaken to support the corporatization and commercialization of State Owned Enterprises (SOEs) in emerging economies. Building on the author's experience with change management in SOEs throughout the Middle East, Sub-Saharan Africa, Southasia and the Caribbean Region, it extracts lessons learned that can be employed to support the desired level of change in other emerging economies around the world.

I. Introduction

Throughout the world, governments and the public-at-large are pressing for changes within SOEs in order to enhance their efficiency and improve their accountability. As a result, many SOEs are moving towards adopting more enlightened and effective management practices. In some cases, this will be accomplished through the introduction of the private sector via a public-private partnership (PPP), and in others, through the corporatization or commercialization of the publicly owned utility. Regardless of the approach, if undertaken properly, the process of change management can lead to improved stability, growth and positive contributions to the local economy.

In a recent training program I taught on 'Corporatization & Commercialization of SOEs', one participant remarked, "Ken, if we did all you were asking of us, we would not need PPP or privatization". This is the very point. Since there is so much that can be done to support SOEs and their development, then why is it SOEs often appear to operate in a time warp, waiting for change to be imposed upon them? Unfortunately, experience has shown that very often interventions by the State are born out of a crisis. The result is often an unplanned flurry of activity such as:

• Injections of short-term funding to meet cash flows (often insufficient to support serious reinvestment)
• Dismissal of the Chief Executive Officer or Managing Director
• Reductions in the labor force, and/or
• A mad rush to restructure internal management and finances or even sell or seek strategic investors to take over the SOE

To be fair, many SOEs and the Ministries they report to are victims of the governmental system in which they operate. Often, they are staffed by politically appointed bureaucrats who are not qualified to implement the needed changes. In other cases, the status quo - even when characterized by poor quality of service and inefficient operations - is seen as the norm and therefore goes unchallenged. Commercial approaches to management may be seen as inappropriate for publicly owned companies. And even in relatively sophisticated economies the problem may be due more to Government interference or policymaking than the day-to-day management of the SOEs themselves.

II. Changing the Role of Government: Performance Monitoring of SOEs

Despite pressure from donor agencies and evidence from international best practices, some governments remain resistant to change. Many simply choose to ignore the basic principles of good corporate governance in favour of direct control over SOEs. Some senior government officials exercise control over SOEs through 'politically-motivated' Board appointments rather than the appointment of independent expert members. Others gain control through their interference in or involvement with utility regulators. And still others prefer to 'have their cake and eat it too' by controlling the regulatory body and the utility Board of Directors. Such interference inevitably prevents SOE managers from running their companies in the most efficient manner and can result in cronyism, inequalities in service, and a lack of accountability.

A better approach is to separate the three key functions of policymaking, regulation, and service provision. There are a variety of ways that this can be accomplished. One way to separate the government as policymaker from the SOE as service providers is through the drafting of legislation and guidelines that set out minimum standards of qualification for members of SOE Boards of Directors and other specialist positions within the utility. Jordan (which has issued regulations) and Swaziland (which is working on draft proposals) are two examples of countries that have taken a proactive approach in this regard. Another way is to develop policies and guidelines that define the governance structures of SOEs. A good example of this is Swaziland's draft privatization policy. This policy requires the following of SOEs:

• To meet stakeholder expectations;
• To be transparent, independent, accountable, responsible, fair and socially responsible;
• To consider merit and professional ability in the appointment to Public Enterprise Boards;
• Regarding the composition of boards:

1. A unitary board is more favourable
2. There should be a balance of executive and non-executive directors
3. There should preferably be a majority of non-executive directors
4. There should be sufficient independent non-executive directors, and
5. The Board should have an appropriate gender and ethnic mix;

• Board membership to be screened by independent selection procedure before being forwarded to the Minister or Cabinet for appointment; and
• The board, not the Minister, will elect the Chairperson, who will have the appropriate corporate experience.

With the separation of the policymaking and service provision functions comes the need to create systems that hold the service provider accountable for its performance. Often, the only time when SOEs are held accountable is when they send an Annual Report to the Minister's office. This is very often ineffective, and may only be a measure of the SOE's ability to produce a high quality report. A better solution is to boost accountability by requiring that the SOE Board report to a broad constituency of stakeholders. Every time I suggest in an emerging economy that the SOE Board should report to a 'Public Accounts Committee' of Parliament, eyes roll as if all faith has been lost in the ability of public representatives to demonstrate good governance. Perhaps this idea reflects a western management view, but I cannot see why sound technical advice and support cannot be provided to build the capacity of such a body to oversee SOE operations.

South Africa is a good example of a country that has taken ambitious steps to address SOE accountability through legislation that contains detailed reporting requirements. Under South African laws promulgated in 1999, all SOEs must prepare a three-year rolling Corporate/ Business Plan, Borrowing and Financial Needs Assessment and an Annual Report. This has taken some time to implement under the authority of the Department of Public Enterprise and the National Treasury. Both these Departments are now benchmarking and appointing specialists to undertake the performance monitoring and risk assessment roles. This process appears to be on the right track of good corporate governance, and if successful, could be a model for many other countries.

There are three things that must be in place to make a "performance monitoring/reporting" approach effective:

• Competitive benchmarking;
• Challenging yet achievable performance targets for SOEs; and
• Effective monitoring and compliance mechanisms that are representative of stakeholders.

Unfortunately, most countries are not as far advanced as South Africa in implementing such changes. In a 2003 survey of ten SOEs in one Middle Eastern country, only four had presented a Business Plan, with two under consideration. Six had prepared an Annual Report. Five had a performance appraisal system, with two in the process of introducing a system. One indicated it had a performance appraisal in place, but it was not used. Only four had a training plan, with four others in the process of developing such a plan and two felt it was not relevant. Overall, I would regard this country as a maturing economy with relatively good levels of sophistication in its SOE business strategies. Nonetheless, the situation is representative of that in many countries around the world. In fact, I would suggest that the non-application of appraisal systems is the most common situation in many emerging and developed economies.

III. Internal Structuring & Action for Change

To successfully implement improved corporate governance practices, it is imperative for the Management Teams of each SOE to understand the changes that must take place, and to have the ability to affect change in a way that aligns the SOE's structure, processes, and people skills with its overall organizational goals. Below, I describe an approach to change management that may seem simple to those organizations already undertaking similar good governance activities. However, there are so many SOEs who seem to muddle through without a serious attempt to address internal performance, planning, monitoring and re-evaluation. This approach is built upon three building blocks that support the improved performance of SOEs:

• Performance management systems;
• Core skills and competency framework to deliver strategy and change; and
• Monitoring and compliance to keep change strategy on track.

This approach is summarized in Figure 1 below.

Figure 1: SOE Development Building Blocks

Performance Management Systems

The simple act of having the Management Team write and prepare a Corporate Business Plan is a very revealing exercise and tests the strategic planning capacity of the team. I have seen many SOEs and Ministries writing Annual Reports on their performance without first having presented an Annual Business Plan. This can reduce the Annual Report to a retroactive report on a series of half planned and often unrelated events.

I agree with the minimum standard established in the South African reporting requirements of a three-year rolling Corporate/ Business Plan, Borrowing and Financial Needs Assessment and Annual Report. But the development of these documents is not enough. In addition, SOEs must focus on personnel considerations such as developing a change management culture and strategy, performance management and core organisational competencies. It is not my intention to go into these areas in detail in a short article, but it is sufficient to say that these internal human resource issues often receive little attention outside of the Personnel Department. But these issues are too important to be left entirely in the hands of the Personnel or Human Resources (HR) Departments. When peoples' performance is failing, the blame is often shifted to the HR Department and not to the management of the SOE, which must ultimately be responsible.

In establishing performance objectives for SOEs, I recommend the use of the "OTI" approach. This approach sets performance objectives at three interrelated levels:

• Organizational
• Team / Department
• Individual

Most performance systems in emerging economies are designed to evaluate individual performance in undertaking tasks, and very few begin by setting objectives. The majority of appraisal/ performance systems are out of date, and completely divorced from the organization's overall objectives.

Core Skills and Competency Framework to Deliver Strategy and Change

This problem is compounded by the lack of a strategic approach to staff development and training. Very often, SOE training plans look more like 'travel wish lists' than staff development strategies. A better approach would be to begin by simply identifying the top five core organizational competencies needed by the SOE to meet its mandate. With core competencies defined, it is then possible to measure where each individual is in his or her development needs. Examples of simple organizational competencies are:

• Planning processes,
• Project management,
• Communications,
• IT information systems and analysis/ decision-making processes

These are in addition to the technical competencies required for key specialist posts.

Monitoring and Compliance to Keep Change Strategy on Track

This is simple process that keeps a handle on the 'big' picture elements of the organisation. The best approach is to first establish the basic 'benchmarking' measures that should be applied to the SOE. These can be identified using international comparisons. It is critical that those monitoring the SOE externally and the SOE itself are committed to the same benchmarks, stretched goals and timeframes.

IV. Conclusion

There is a need to have a planned approach for change that will benefit the SOE and will reduce the level of interference by the State in its day-to-day management. The tools of change are all around us and need to be brought in focus by the both the political and the SOE management, in order to build good sustainable and commercial models. The recommended tools of change are tried and tested, and if consistently applied, over time, will bring results.

For comments or questions, you may reach Ken Wright at: ken@consultwright.com

Copyright ©2005 Institute for Public-Private Partnerships, Inc. All rights reserved