South Africa has 130 state-owned enterprises (SOEs) – not to be confused with parastatals. Parastatals are legal entities created by the government to undertake commercial activity on behalf of the government. The government is usually the sole owner of parastatals. SOEs on the other hand, are private companies in which the government is a major shareholder.
Some SOEs are heavily reliant on state funding, such as the Competition Commission or the Film and Publication Board, where others, such as Denel or Telkom, are able to generate their own revenues and operate as profit-making companies. SOEs in South Africa have a combined asset base of more than R1 trillion and collectively account for about 10 percent of gross domestic product. They are a significant force in spending and job creation in the local economy and the Department of Trade and Industry recently said it wanted SOEs to procure at least 70 percent of their products locally to boost growth.
On the surface it sounds like an excellent proposal. The more formal term to use for such a policy is “localisation”. This would replace the use of imported products in favour of locally produced goods, increasing domestic production. It would allow for more jobs to be created locally and would encourage higher investment into South African factories and supply chains. Localisation also decreases exposure to exchange rate risk, allowing SOEs to protect themselves from the volatility in the value of the rand and fluctuating input costs.
But there’s a reason things are imported. The necessary input products may simply not be available in South Africa. The computer software needed by the National Archives of South Africa, for example, may have to be sourced from a foreign company, because no South African company has created it yet.
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Or it may be a case of economies of scale – a South African company could write that software for the National Archives, but as they only have one customer the costs would be far higher than if the National Archives just bought it from a foreign company specialising in that product.
Specialised goods
Foreign companies also provide a larger selection of specialised goods, allowing an exact fit for the client’s needs. This will often be the case for PetroSA who can tap the global oil and gas market to find the right product rather than adapt to what the South African market can offer. The same applies to the quality of products.
Supply chain reliability is also a concern. For Denel, which runs highly sophisticated arms manufacturing plants, a delayed or incorrect delivery will cost millions per day in production revenues. As costs to SOEs are costs to the state, sacrificing on any point of efficiency will ultimately lead to less profitable SOEs and a higher burden on the taxpayer. From one point of view, asking SOEs to increase local procurement is asking the taxpayer to finance any extra costs that may accrue from this policy.
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But we need to look at this policy as part of a larger system and not just the silo of SOE operations. The taxpayer is already carrying the burden of chronic unemployment in the country. Any policy that can encourage job creation and skills development, increase local investment and diversify domestic industry, would relieve this burden and should be unpacked. Intervention in the markets is by its nature inefficient. But sometimes short-term inefficiencies can lead to substantial long-term gains, building a foundation for a time when interventionist policies will no longer be necessary.
SOEs have an opportunity to shift local industry in a way that the private sector can’t – private businesses will always choose to find the cheapest and most effective suppliers. But if SOEs can provide enough business to local suppliers, these suppliers may just reach the scale they need to become competitive companies that can then start to replace imported supply to the private sector.
The enforcement of 70 percent local procurement across the board is not going to work – Transnet’s requirements are very different to those of Cape Town International Airport – but an encouragement of localisation is a positive change to the role of SOEs.
Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein
BUSINESS REPORT