Solutions for SOE challenges could be right before us
PRETORIA – In the past I have always argued that some of the problems confronting state-owned entities (SOEs) are self-inflicted. As it is known, government is the largest consumer of goods and services in any economy. And in a place such as South Africa government participates in the economy through SOEs in providing certain goods and services to the public. The present situation means that the government can be simultaneously a provider and consumer of the services and goods it provides. This is already happening with Eskom selling electricity to municipalities and municipalities in turn providing energy to government departments and other institutions at cost.
At present municipalities and government departments owe Eskom billions of money. There are calls for the National Treasury to directly deduct this money from allocations of these entities. Unfortunately, this doesn’t really address the problem, and will therefore not change anything. The problem is much more deeper than that. Large metros like Tshwane, Johannesburg and eThekwini have huge budgets that tend to fizzle without really changing lives of people. Money goes to private companies and tenders, both which precipitate corruption and malfeasance.
The argument is therefore put forward that public funds need to be used to achieve socio-economic and political outcomes. There is a need for a deeper economic ecosystem between institutions of state where they trade among one another to effect social change. A preferential public procurement system which prioritizes SOEs can really save many state companies, preserve jobs and boost economic activity. The Public Finance Management Act and Preferential Procurement Policy Framework Act will never turn assist in turning around the economy in their present form. There needs to be a balanced between promoting the growth of new private enterprises and sustainable SOEs. Public procurement can play a critical role in helping SOEs to remain profitable and relevant to national development goals.
In an interview on PowerFM on Monday, 17 February 20202, the acting CEO of the South African Post Office Andrew Nongogo discussed media reports that purport that the organization “is losing at least R60 million a month from distributing social grants to millions of citizens.” This has become a common occurrence among key SOEs including South African Airways, Eskom, Denel, etc. in 2019, Eskom alone reported Eskom a net financial loss of R21 billion. The national airline reportedly incurred a total loss of about R18 billion between between 2012 and 2017. What has followed is one bailout after another to no end. And it doesn’t look anyone has an idea of how to solve what now appears to be a chronic problem.
The SA Post Office has been beset with financial challenges for a long time to date. A number of interventions such as taking over the distribution of old-age pensions and grants but without any necessary support it appears. The unmanageably high losses are said to be cash-in-transit and security fees. Besides a proposed turnaround strategy, Nongogo proposes that government should consider using the post office exclusively for sending and receiving parcels. In addition, he complained that government currently utilizes private companies and this literally kills the business of the post office.
Furthermore, the Postbank isn’t a preferred banker for government and it is not clear how the recent announcement for a state-owned will change the banking landscape in South Africa. If the new bank is not going to receive preference as a sole banker for all government levels, even it could become part of the statistics and unravel in the beginning. So, it would be interesting what the National Treasury and the South African Reserve Bank will decide. Professor Thandika Mkandawire of the London School of Economics once remarked that South Africa’s financial sector is way too powerful, so it would also be interesting to see how the country’s largest banks will react. They stand to lose business should the state bank enter the fray.
What the Post Office raises is quite pertinent nonetheless. The neo-liberal economic approach that currently underlies the manner in which government performs its operations. In terms of this perspective, the capacity of state institutions is either outsourced through incorporating private companies in value chains of departments and SOEs, or work is outrightly given to these companies. The state tender system and consultants fall under this space. The open trading system based on the rules of the World Trade Organization (WTO), which South Africa joined in 1995, encourages countries to open their markets to foreign competition as well as forbids any form of protectionism.
The main problem with this approach is that even in cases where the state has capacity to provide the goods and or services, it is required to create ‘fairness’ by distributing the cake to include the private sector. In simpler terms, the competition regime dictates that government entities have to compete with private sector in the provision of services and goods. In terms of this thinking, it doesn’t matter how this ‘openness’ negatively impacts local industries or sectors. Instead, large countries and their powerful corporations appear to be advantaged. It was only recently that the likes of the US, Japan and the European Union (EU) started to feel the pinch with the emergence of the mighty Chinese state-backed companies. The trade war between China and US centers around these complexities.
Taking this into a specific context, government departments are in Pretoria and parliament is in Cape Town. Politicians and officials shuttle between the joint capitals each day of the week, and every week of the year. Government has hundreds of municipalities and over 800 SOEs. According to its June 2014 Quarterly Employment Statistics (QES) survey, Statistics SA pointed out there were 455,701 national government employees, a further 1,118,748 at provincial authorities, 311,361 in local authorities as well as 275,851 employees worked for ‘other government institutions’ like libraries, parks, zoos and education and training authorities. In total, there were 2.161-million civil servants. There are over 160 South African diplomat missions abroad.
Even without a definite number of people employed by the state, it is apparent that there is a high movement between various locations; the travel budget of the state could be substantial. However, internal and international travel for state employees is not exclusively given to the South African Airways to help it boost its revenue and profitability. The national carrier is subjected to fierce competition from other locally-based airlines and international carriers, some which are heavily subsidized by their own governments like United Emirates, Ethiopian Airlines, Qatar Airways, Etihad, etc. It is quite contradictory that SAA is expected to outperform these airlines under present circumstances. But also the airline is also hamstrung by its procurement spend that is highly dominated by non-state enterprises. SAA could be a travel office for the state instead of all the travel agencies that are reaping government at the moment.
Even in terms of local competition for SAA, South African skies are open to the likes of British Airways and others. This is notwithstanding the fact that most countries would never allow a foreign airliner to operate internally - that space is reserved for local players. Visiting large countries such as Brazil, China, Germany and the US, it is just national airlines. To travel from, say, San Diego to Atlanta only local lines operate. But a foreign company can fly directly to any of the US airports. Also, when it comes to carrying state employees SAA receives no preference for local and international trips. So, it means that SAA potentially loses revenue that it could potentially generate from millions of trips that state employees make each day.
The state appears not keen to change its operating model but it focuses on the wage bill. Pay for employees has been said to be unaffordable and thus a proposal for retrenchments. In October 2019, the National Treasury stated that the salaries for civil servants had grown by about 40% in real terms between 2008 and 2019. This has been the focus of the finance minister Tito Mboweni, who is adamant that the wage bill of public servants has to be drastically reduced. Government is set to spend R2 trillion during the 2020-21 financial year at national level alone. Yet there is no indication how much money is going to be channeled to private entities at the expense of SOEs, who are a subject of ridicule under the tight operating environment created by ‘soft privatization’ of state functions and institutions.
The problem lies in the open competition policy that state departments and entities are subjected to. The worry should be about attempts to privatize the SOEs and outsourcing of services which started a long time ago. South Africa is paying a huge price now. The argument advance here is that there is absolutely nothing wrong with state-to-state business transactions to boost economic activity and to preserve jobs. Bailouts could be a waste of time, as outright preferential treatment of SOEs could strengthen the fiscus since there will be little or nor money thrown away. The endless bailouts that the National Treasury extend to SOEs could be arguably looked at as subsidies of a kind. Call them bailouts or subsidies, there is little or no difference.
George Washington University’s Cheryl D. Block argues, “Bailouts and general government subsidies are members of the same conceptual family and have some overlapping characteristics, but they differ largely as a matter of degree.” What is preposterous is that government also provides bailouts to private companies like Edcon in the name of saving jobs. And nobody complains as much as when funds are given to either Eskom or SAA. Edcon may not survive long in any way and a whopping R2.7 billion will lost without trace. Block adds that governments provides bailouts to both state and private companies, and other levels of government such as municipalities in times of crisis. Subsidies and bailouts involve lots of cash. A case is therefore made for preferential treatment of SOEs in public procurement, which doesn’t necessarily include the cash option.
It doesn’t look like South Africa would be doing itself any good by getting rid of SOEs as it is suggested by a number experts politicians and public commentators. The PWC report ‘State-Owned Enterprises Catalysts for public value creation?’ suggests that SOEs are “an influential and growing force globally.” In this regard, the proportion of SOEs among the Fortune Global 500 has grown from 9% in 2005 to 23% in 2014. This is driven particularly by the growth of Chinese SOEs as already alluded to above. The rest of Asia and Europe also have a sizable number of state enterprises. Thus, creating a conducive environment for the SOEs would make them to thrive and to hopefully challenge big foreign companies, not just in South Africa but also abroad.
Another reality about SOEs is that they have a significant presence in international trade. A list of top eight countries with highest shares, e.g. China, United Arab Emirates, Russia, Indonesia, Malaysia, Saudi Arabia, India and Brazil, account for over 20% of world trade in recent years. In its ‘World in 2050 Report’, the PWC predicts an increased role of the SOEs and they could also tilt scales in the global economy with China becoming the world’s largest economy by 2030. And the likes of Mexico and Nigeria could bumped out Great Britain and France from the top ten. The picture becomes even more interesting when the sovereign wealth funds are considered. Sovereign wealth funds “have grown in number and size and are now larger than the private equity and hedge funds industries combined, with over US$5 trillion under management.” South Africa wants to create a sovereign wealth fund while it wants to sell the likes of SAA, and is letting the SA Post Office to struggle.
It is therefore possible that erosion of the value of SOEs originates not so much from the problems that are often cited in the media (corruption and maladministration). But the bigger problem could be that the country is increasingly becoming unclear on its motivations behind state ownership. Generally, the SOEs serve a narrow but very important objectives such as developing strategic sectors and boosting the national economy, as well as fiscal, political and social considerations. As things stand, it is unclear what purpose many SOEs serve, hence corruption and sluggish economic performance. My view is that the SOEs can be part of the solution that South Africa and the region yearns for as regards to their economies.
In addition to some of the objectives already stated, the OECD and World Bank provides a number of reasons why countries have SOEs. These include improving labour relations in strategic sectors, limit private and foreign control in the domestic economy, generate public funds, increase access to public services, encourage economic development and industrialization, etc. Lessons from the Singaporean experience are worth serious consideration.
The SOEs can be saved with the right policy interventions and right management. And this will definitely change the face of the South African economy going forward. Desperate situations call for extreme measures, even it means setting aside WTO rules.
Si ya yi banga le economy!
Siyabonga Hadebe is an independent commentator on socio-economic, politics and global matters based in Pretoria.