Why is it that the state seems happy to subcontract a core government function and its single biggest poverty alleviation programme, the payment of social grants, to a hyper-capitalist subsidiary of a foreign-listed financial services company but also insists that it must own an airline operating in a risky, competitive sector in which many rich country governments do not participate? For now, the obvious answer has to do with issues of state capture and rent-seeking by a coterie of the politically connected. By DIRK DE VOS.
Events at SAA should give us all pause. Somehow, SAA has to come up with R6.8-billion by the end of September to pay debtholders that are no longer willing to roll over its debt. This is on top of the R2.2-billion the government had to find last month to pay Standard and Chartered Bank. This funding was from an emergency fund administered by Treasury on the basis that had it not done so, SAA would have defaulted and hundreds of billions of cross-collateralised debt guaranteed by the government to other State-owned Enterprises (SoEs) would have become payable. Obviously, emergency funds should not be used in this way but, really, there was no choice. It was an emergency.
The government now needs to focus on how the R6.8-billion will be funded. We know that the Finance Minister, someone out of his depth in his present role, has approved a R10-billion bailout for SAA for 2017/2018. Most of it will be spent by the end of September this year but beyond that, another R7.8-billion in SAA debt matures between 2019 and 2022.
According to a leaked Cabinet memo, the R10-billion bailout is likely to be financed by the sale of the 39% the government still owns in Telkom. If the sale of that many shares does not collapse the Telkom share price, that stake is worth R13-billion. We are now told that selling out of Telkom is just one of the options but, frankly, there are no other options that do not blow up the national budget. The observation one can fairly make is that by the end of September, the state would have more or less exited the telecoms sector in its entirety.
Nobody disagrees that at this juncture, telecoms and access to telecoms has a major developmental role and is a key sector in the growth of a modern and competitive economy. This is not to say that the state should be actively invested in the telecoms sector or that by being invested, it can better drive some kind of policy agenda. Perhaps the telecoms sector and especially Telkom will be better off without the government as a major shareholder. But it does raise broader questions of what our SoEs are for and what we really want from them.
This is important because in the context of SAA’s never-ending bailouts, Finance Minister Malusi Gigaba has called upon South Africans “not to panic” and warns us against “any hysteria”. On an ideological level, the ANC remains wedded to the idea that the state must play a major role in the economy and that the SoEs are key in realising a pro-poor transformation agenda. This might, in future, include getting into banking, mining and so forth but certainly it is about expanding the role of SoEs. However, if policy-makers are honest about why we have the SoEs in the sectors we do, then the answer is that it was those that they inherited from the apartheid government in 1994. Putting it differently, had SAA been privatised as Sasol and Iscor were in the 1980s, would the state be in the airline business at all?
The sale of the Telkom stake will, in reality, be a fire sale concluded under huge pressure. SAA is not by any means the only SoE that will be needing a bailout. Many others are or will also need bailouts. It is hard to imagine that Eskom will not require future bailouts that will dwarf that of SAA. In the previous decade, SAA had received a cumulative R23-billion in bailouts. Eskom was bailed out with the same amount in 2015 alone and, in the same year, had a R60-billion loan written off.
Why is it that the state seems happy to subcontract a core government function and its single biggest poverty alleviation programme, the payment of social grants, to a hyper-capitalist subsidiary of a foreign-listed financial services company but also insists that it must own an airline operating in a risky, competitive sector in which many rich country governments do not participate? For now, the obvious answer has to do with issues of state capture and rent-seeking by a coterie of the politically connected, but in the longer term, these contradictions have to be resolved. In the short term even, if one type of state asset must be sold off to fund the losses of another, then surely it has to be more about what assets should remain in the hands of the state?
Of course, there is the option of introducing “prescribed assets” which would require pension funds to invest a percentage of their members’ savings in SoE or government debt, but this would be highly controversial and strongly resisted through the courts and elsewhere. Private pension funds would see a quick outflow of members who, rightly, would invest their savings directly. The words “panic” and “hysteria” come to mind. Besides, pension funds already have a reasonably high exposure to SoE debt, more particularly the government employees’ pension funds. Government pensioners, in any event, have defined benefit pensions that are guaranteed by the state. Shoehorning their savings into risky or non-performing debt simply moves the SoE’s funding problems on to the government’s own balance sheet.
By being wedded to slogan-based politics which commits the country to maintaining full state ownership of its SoEs come what may, we fail to recognise what is happening anyway in front of our eyes. Debt and equity (ownership through shares) are conceptually quite different. Ownership allows one to appoint the board, set policy to determine operational matters and much else. Debtholders only have the right to have their debts repaid on their terms. In real terms though, debtholders have something akin to veto rights and these grow into something stronger as debt levels increase and performance levels decline. Take the suspension of Eskom’s Gupta associated Financial Director Anoj Singh for example. The government wanted him to stay on but the debtholders, using the threat of pulling out, forced him to go and he is gone. Looking at Eskom’s balance sheet and any number of debt-based financial ratios it is clear that it is already partially privatised. It must seek the support of its debtholders to do a range of things. The recent change of attitude on the part of the Eskom board? It’s the debtholders who forced their hand.
According to Treasury, there are 130 SoEs but many of them are incorporated regulatory bodies such as the Ports Authority. Many of the big ones that run like actual businesses such as SAA, Eskom, Prasa, SABC and PetroSA are in deep financial trouble and are completely dependent on raising debt on the back of government guarantees. At present, the government has issued guarantees to these entities amounting R775-billion and are seen as a major risk factor to further credit rating downgrades of the country itself. If these SoE’s drag South Africa’s domestic credit rating to below investment grade, debt service costs to our R2-trillion national debt will balloon.
The massive mismanagement, incompetence and outright theft at our SoEs coax those committed to maintaining them in their present form to believe that if only management were to be cleaned up and accountability established, they could all be turned around. Not so. A global analysis of the performance of SoEs shows massive underperformance due mostly to misallocations of capital. That – than state capture and corruption – explains the present state of Eskom, our largest SoE.
There are several arguments, in theory, that favour SoEs. In looking at these, one should distinguish between government department functions such as education/schools and SoEs which are incorporated like any other private company but with the state as the major or only shareholder. One of them is that without private shareholders, SoEs are not bound to deliver investment returns and can do things that would otherwise not necessarily make commercial sense. SoEs ought to have the characteristic of patient capital. Long-term investing with modest returns on the far time horizon ought to be possible. If they undertake several activities (like an airliner flying several routes), they can cross-subsidise loss-making routes with those that lose money but might be strategic. By being backed by the government, they ought to have a lower cost of funding – they can borrow on the open market for less than the private sector can.
There is little evidence that we get any of these benefits. Take Telkom. It has been somewhat of a star performer under the management of the very capable Sipho Maseko since 2013 but in no respect was this because of the role of the government shareholder. Indeed, one of Maseko’s many achievements has been his ability to get government out of the way. Competition in the telecoms sector from the cellphone companies forced Telkom to focus on its core infrastructure advantages and operate on a pure commercial basis. Still, with a market cap of about R32-billion, Telkom is a tenth as valuable as Vodacom. Providing Telkom’s government-owned stake is not sold to any of its competitors, reducing competition, the government’s exit should make no difference. On this basis that sort of value should be used by government to invest in, say, new classrooms. Bailing out SAA is like flushing this money down the toilet.
SAA, as an SoE, doesn’t do anything for anyone. There is no convincing answer for why it exists as an SoE. Whatever happens in September, it will remain under huge financial pressure. The turnaround strategy, we are led to understand, means focusing on profitable routes and cutting the unprofitable ones. So, like any other commercial airliner then? If the government wanted a sub-commercial route to remain open, it would be much cheaper to subsidise the tickets of passengers or goods flying on them. Any commercial outfit would paint the national flag on the tail of the aircraft flying this route as a no-cost extra.
PetroSA, it appears, does nothing more than make bad investments in a very poor legacy asset based in Mossel Bay. One almost has sympathy for its management’s pathetic attempts to move way, way downstream into petrol retailing. Why one needs an SoE in the over-traded and over-regulated petrol retail sector is a mystery.
The full extent of Eskom’s deep financial troubles is fast emerging. What we do know is that Eskom’s perilous financial position means that its debt servicing costs are out of control and getting worse. Despite being government guaranteed, it borrows at 5% more than the government itself. With long-term debt at near R400-billion, South Africans have to fork out tens of billions more for electricity every year just to pay the difference in interest charges due to Eskom’s poor credit rating. There are other consequences. Eskom is holding a successful renewable energy procurement programme hostage, causing a loss of much needed investment, perhaps as much as R200-billion, and putting the brakes on the inevitable energy transition to a cleaner and more environmentally sustainable energy system under way in the rest of the world while building new coal-fired stations at a cost no one can afford.
The only large SoE that appears financially sustainable is Transnet. Yet that too comes at a cost.
Transnet’s profits derive from monopoly rents. Transnet is the only integrated port, rail and pipeline monopoly in the world. Our own Ports Authority’s studies on the matter show that several different port charges levied by Transnet are the highest in the world. This when growth requires South Africa to produce and export. Transnet’s apparent sound financials have a price. They significantly add to the cost of doing business in this country.
One can go down the list. Why, for instance, do we still have Denel, the arms manufacturing company? If the Post Office doesn’t pay social grants, does it have a role as a stand-alone entity in an era of mostly electronic communications?
Over the years, there have been endless policy papers and discussions on the role of SoEs. Some of them, particularly those produced by National Treasury, have been thorough pieces of work, yet here we are, stuck with various degrees of dysfunction that drag us further down. There is no point in any more of these policy papers. The politics we have prevents us from getting to grips with a complex world, and makes it impossible to produce a coherent or workable policy.
However, South Africa itself, like any other over-indebted entity with limited future prospects, has ceded some determination of our fate over to our creditors. How much more we want to cede over is dependent on what we do with our SoEs. Not being fully in control any more means that over the next decade at least we will have to respond quickly to calls (or vetos) made by others such as in the case of SAA. Just how we respond requires some clear idea of what SoEs we are prepared to sell off or close without creating monstrous privately owned monopolies in our core infrastructure. Panic and hysteria should be avoided, but surely, how this all plays out can’t only be determined by whichever SoE’s debt obligations mature first? DM
Photo: SAA’s first A340-600 comes in to land at Johannesburg International on its maiden flight from France, 15 March 2o13. Picture: Shayne Robinson/SAPA
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