One issue that will be keenly watched in this afternoon’s Budget Speech as a sign of government resolve will be whether the Minister of Finance, Enoch Godongwana, sticks to his plans not to give further bailouts to state-owned enterprises (SOEs).
Some R3.5 billion might be required to get SAA flying as a new public-private entity and there might be other urgent needs.
Disaster area
SOEs remain a disaster area. The financial problems of SOEs remain unclear, as their end-of-year financial accounts are very often late and qualified by auditors, indicating a dire lack of reliability in what they show. These lapses in financial reporting would be grounds for delisting a company on the Johannesburg Stock Exchange.
The SOEs went through a terrible period of state capture, but their problems go well beyond that. Their costs remain out of control, partly because empowerment procurement regulations often place another layer of intermediary in the way of a purchase, and public sector remuneration is on average above that in the private sector. Their financial controls and project management skills are poor. There are lapses in security around power cables, and rail lines have long been a serious problem. Much of this comes down to poor management, bowing to vested interests, and the multiple agencies to which SOEs must report.
The bigger problem is that the pitiful performance of state-owned enterprises is increasingly exacting wider damage on the economy. Longer periods of power cuts and big increases in Eskom tariffs chase investors away, cause chaos for factories and drops in output, and thereby damage growth. Rail lines have been ripped up by crime syndicates. That means no service on some routes, an impediment to growth. In the Cape there is no longer a passenger rail service from Simonstown to Cape Town, although there are still rails on the track. Denel was once exporting cutting-edge missiles, but no longer. Some Denel divisions have been unable, at times, to meet payroll and are losing contracts. There are no bailouts for some SOEs and seemingly no plans, leading to further economic damage as assets go unused. Many engineers leave Eskom and Denel because of poor promotion prospects and their nervousness about the future.
Large role
Much of the damage to the economy due to failing SOEs is because they play such a large role in the country, are in so many sectors, and provide essential key inputs. According to the International Monetary Fund (IMF), SOEs account for around 13 percent of gross capital formation in the country – made up mainly of machinery, equipment, and buildings. Much of their massive amount of debt is guaranteed by the state, and should they go bankrupt the state would have a sudden liability to bond holders to repay the equivalent of over 10 percent of GDP. And bailouts of 1.6 percent of GDP last financial year and an average of one percent of GDP over the previous five years are a drain on the budget and amount to throwing good money after bad.
The evidence that the failing SOEs are damaging growth is solid. A study released earlier this month by a team that includes a Harvard economics Professor, Ricardo Hausmann, on the reasons for South Africa’s poor performance from 2007 to 2020, identifies the poor performance of SOEs as the primary reason for the country’s low growth rate.
After 2007, investment by public enterprises grew rapidly but with a deterioration in its quality. At the same time state capture gained pace under President Jacob Zuma, and many experienced staff left the state enterprises. Coinciding with this was a decline in the contribution of private investment due to nervousness about the political environment. The result was a decline in total factor productivity, the rise in productivity not due to a rise in inputs of labour and investment, but the magic potion that arises from good management, experience, design, research, and education. Both the study by the Harvard team and the IMF agree that growth faltered due to negative total factor productivity that arose with an increase in public sector investment.
No real urgency
Despite the cost to the economy, there seems to be no real urgency to deal with the problems of SOEs. If this is not the result of sheer government inertia, it has to be due to SOEs providing a source of patronage and a bastion of vested union and tenderpreneur interests.
Over the years there has been lots of talk from the government about how it will turn around Eskom. Back in 2019, then Finance Minister Tito Mboweni came out with a paper about how big network industries, such as power generation, rail, and water would be turned around. However, there has been minimal action. Immense amounts have been spent on international consultants and bankers to give advice on getting out of the mess, but the SOEs have sunk deeper into the mire.
In the State of the Nation Address earlier this month President Cyril Ramaphosa spoke again about plans to turn around the SOEs. The Presidential State-Owned Enterprises Council that he appointed more than 18 months ago is preparing recommendations on which state-owned enterprises will be retained, consolidated, or eliminated.
So far, the Council has recommended that the state-owned enterprises be insulated from political interference with the establishment of a state-owned Holding Company to exercise oversight over them. But even with this, it is hard to expect that the public sector will not be subject to continuing interference. The institutional separation does not necessarily mean independence in practice, and given ANC tentacles, the company would probably lack credibility.
Why the Council are taking so long to come up with a turnaround plan is unclear. Many businesses are confronted with similar sorts of issues and make decisions on such matters in months, if not weeks. South Africa’s SOEs are mired in a complex web of legal, regulatory, and political control, making it difficult for them to set goals and incentives, but the slow pace shows nothing but the absence of political will.
There has been only minimal progress on turning around Eskom, by far the largest and most vital SOE. Eskom is now separated into divisions for generation, transmission, and distribution, but a decision must still be made on how to deal with its unsustainable debt. Despite the billions poured into Eskom, further bailouts are still not conditional on reducing costs and increasing revenue. And Eskom must still deal with its growing municipal arrears problem.
In its most recent report on the South African economy, the IMF notes that experience from other emerging markets on turning around SOEs shows that a favourable political climate is key. Reforms must be desirable to the leadership and its constituencies, the government must have the means to implement change, withstand opposition and compensate losers, and the changes must be credible to investors. We don’t have any of those necessary conditions in place yet.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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