Our State-owned Enterprises (SoEs) simply do not provide a suitable return on investment and their social returns are not particularly good either. This means that a restructuring of SoEs is now inevitable. By DIRK DE VOS.
President Ramaphosa’s inaugural State of the Nation Address made it clear that he intends to fix the growing problem of our State-owned Enterprises (
We should first understand the scope of the problem. A Presidential Review Committee (PRC) reported its own findings in 2012. There are various forms:
- State-owned entities are any public entity defined in the Public Finance Management Act (PFMA);
- State-owned Enterprises are those listed in Schedule 2 of the Public Finance Management Act and are also known as “government business enterprises”;
- A “state-owned company” refers to SoEs that are also governed by the Companies Act.
It is with these that urgent remedial action is required.
When the PRC submitted its report, it had developed a database of approximately 715 state-owned entities (including chapter 9 institutions) and this number was not the final tally.
As the PRC report noted, this large number calls into question the capability of the government to provide effective oversight for all of them. It also observed that there were no commonly agreed upon strategic sectors and priorities.
In respect of SoEs, the trade-offs between commercial and non-commercial objectives were not resolved. The PRC found the legislative framework for
The PRC also found that many
The PRC’s recommendations are worth revisiting. It recommended that the government should periodically review and balance the social, political and economic priorities of SoEs. It also recommended a transitional SoE reforms committee be established together with
On a formal legislative level, the PRC recommended: “Government should enact a single overarching law (‘State-owned Entities Act’) governing all SoEs” based on the General Shareholder Management (GSM) Bill. The purpose of this Bill would be to provide an overarching legislative framework for the governance and management of
Typically, for the Zuma administration, nothing much was done about that report. Its focus was on State Capture and now things have spiralled out of control. Our SoEs now present huge risks for the country. SoEs are expected to borrow around R90-billion this year and borrow around R80-billion each year until 2021. Eskom and Transnet alone account for 78% of the total borrowing requirement. Other large borrowers in the state sector include state-owned entities (not
Further, R368-billion earmarked to go towards upgrading economic infrastructure in the next three years is due to be spent by our SoEs. Eskom and Transnet account for 81% of this. Eskom and Transnet are also at the forefront of government’s plans to spend R834-billion on infrastructure development over the next three years.
The guiding (or at least the publicly disclosed) vision of the ANC is the pursuit of economic growth and development through the model of the “developmental state”. A development state can be contrasted with a “regulatory state” in that the government seeks to play an active role in the economy. Other developmental states (mostly Asian countries) have achieved success due to their ability to “plan, coordinate and implement steps to achieve a vision for economic development”.
SoEs present the advocates of the developmental state with a mechanism to direct and influence the process of economic development. In theory, they can invest or operate in areas of the economy that the private sector cannot do. However, as the PRC report observed, a developmental state is premised on state capacity.
Developmental states (mostly Asian countries) have achieved success due to their ability to plan,
Perhaps it is now time to review the developmental state idea and adjust it to the country we are and not the country that the ANC thinks we should be. In doing so, we should accept that our SoE sector is simply a legacy of the apartheid state. Professor Ben Fine argues that from the 1920s, state corporations in electricity, steel and transport combined with private mining conglomerates to build an economy based around the extraction of minerals using cheap forms of energy Professor Fine refers to this form of capital accumulation as the “minerals-energy complex”. To make it all work, apartheid policies ensured the supply of cheap and compliant black labour. This strategy was wrapped up in an over-arching programme of Afrikaner empowerment known as
More recently in a paper authored by Trudi Makhaya and Simon Roberts which tracks the development of state-led investments that facilitated South Africa’s industrialisation that supported the growth commercial agriculture, the rail infrastructure that facilitated the movement of goods in mining and agriculture and investments in technology in selected sectors. Eskom, the forerunners of Transnet, Iscor (now ArcelorMittal), Sasol and others all developed under this economic policy framework. But the context has changed.
As an Opinionista on these pages, Trudi Makhaya points out the dangers of a hankering for this type of development in a modern open economy context. She points out the cost of the market distortions that accompanied this growth model including state-sanctioned cartels in crucial input markets and, of course, the underlying assumptions of this type of economic development model, namely the imposition of apartheid geography and job reservation.
Instead we should be promoting growth and the optimisation of comparative advantage through entrepreneurial activity. Makhaya’s thinking is supported by a 2013 World Bank study which suggests that our economy needs increased competition through dismantling existing areas of excessive concentration. It also urged increased competition in the provision of infrastructure as government infrastructure monopolies do not necessarily lead to greater export success. In fact, the same study identifies state-owned monopolies in rail, ports, electricity and information communication as bottlenecks to
The other main problem with
Return on equity is an important measure to determine whether the SoEs add or subtract from the South African economy. In the 2015/16 financial year, South African SoEs had a combined return on equity of 0.8%. In the previous year (a year in which Eskom was partially recapitalised,) the sector’s return on equity was -3.7%. Using the R186 bond as a measure, the government’s own average cost of borrowing is 8%. If the government borrows at 8% and provides capital to
So, what to do now? Getting basic governance right is critical. Some will recall Futuregrowth’s decision to suspend lending to
Better governance only gets one so far. Our SoE sector will need to be extensively restructured. Where SoEs operate in competitive markets, parts of them could be privatised. Privatisation should strenuously avoid the establishment of private monopolies as was the case when Telkom was partially privatised in the 1990s. The disastrous effects of this approach are described in the Trudi Makhaya and Simon Roberts paper.
The deterioration in South Africa’s fiscal position means that the extent to which it can continue to fund (or provide additional guarantees) is now greatly constrained. Guarantees, normally a contingent liability, might start to be called in and there is a real risk of a full financial crisis due to the scale of pension fund money and particularly those pensions managed by the PIC.
Future credit rating downgrades will make the position even worse. However, even without these constraints, a prudent investor needs to ensure value for money. Our SoEs simply do not provide a suitable return on investment and their social returns are not particularly good either. This means that a restructuring of
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