A recent survey by RMB Morgan Stanley asked households what reforms were needed to increase their confidence in the economy. Almost 80% of households cited the need to investigate and prosecute officials suspected of corruption.
In a recent speech, President Cyril Ramaphosa estimated that corruption has cost South Africa between R500bn to R1trillion over the last decade. Action in this area is required to improve confidence in the country, boost investment and ultimately growth. The country is tired of waiting for those responsible to be punished.
Between February 2018 and February 2019, the quantum of government guarantees projected to be utilised by state-owned companies by end March 2020 increased from R446bn to R552bn. That R106bn increase in the forecast in a twelve-month period reveals the degradation of state-owned company balance sheets under the Zuma years. Aside from money being stolen, it was also wasted.
Prosecuting the wrong-doers will boost confidence in the short term. Halting corruption and improving the management of state-owned enterprises will increase the productivity and competitiveness of South Africa and support confidence over the long term. A plethora of IMF research finds that reforms deliver more meaningful benefits in countries that have effective governance. For example, reforms in the domestic financial sector yield twice the benefits to output and growth in countries with strong governance compared to countries with median governance. Similarly, reforms in the product market (where final goods or services are sold) result in four times the benefit to output growth in countries with strong governance compared to countries with median governance. Therefore, good governance is a key pillar to boosting South Africa’s growth – in the short term and the long term.
President Ramaphosa appears confident that those guilty of corruption will be brought to account. In his speech he acknowledged that “People are asking when are you going to arrest people? When are you going to put people into jail?” He pointed out that it was his role to “strengthen the institutions that must do their work” and then step back. Given the recent announcement that the NPA has been provided with budget to hire four senior advocates to help with prosecutions, there does seem to be progress in this area. It is easy to forget the current National Director of Prosecutions, Shamila Batohi, only took up office in February 2019. She has had less than nine months to fix a broken institution.
The impact of corruption extends well beyond state-owned companies. On releasing its latest results, local technology company EOH noted that they have to date found a total of R655m where the company issued fictitious invoices as no work was done. Their investigations have implicated 16 of their employees and they have found evidence to implicate 12 government employees. They are hoping that all of these will face prosecution.
While EOH is the poster child for a company taking on corruption, it was encouraging this week to see another South African company demonstrating the willingness to deal with mis-management. Sasol announced that their co-CEOs would be departing as part of “consequence management” due to their part in the ballooning costs of the lake Charles Chemicals Project in Louisiana, where the initial cost of US$8.1bn has now settled at US$13bn. More worrying than the cost over-runs has been the poor information flow from management, who have communicated several large increases in costs and delays in timing to full operation in the last year. Either the co-CEOs had very little grasp on the developments in this critical project or they were hiding information from the market, hoping they could improve conditions.
South Africa’s state companies have seen similar moves – with executives replaced at a number of key entities. Both EOH and Sasol have found plausible CEOs to lead them through the next few years. Aside from prosecuting those responsible for corruption at government entities, what is now needed is leadership. A great first step will be an Eskom CEO that has a deep understanding of the institution and a track record for dealing effectively with the difficulties the entity is facing.