Oct 23

Step Aside And Let The Private Sector In!

An Article By Ian Kilbride.

It’s time for the government to step aside and let the private sector run some of the key state-owned enterprises that drain the fiscus and are failing the people of South Africa, specifically the poor.  

The current list of SoEs is a veritable who’s who of failure, corruption and ineptitude on a grand scale. Eskom, Transnet, SAA, Denel, Alexkor, SAFCOL and SA Express constitute expensive dinosaurs distinguished only by their inefficiency, waste and poor governance. There is simply no economic or social justification for the state to own a diamond mining company, a timber plantation or a regional airline. They are owned and held purely for political and ideological reasons. Indeed, SAA, SA Express, Alexkor and SAFCOL are all vanity projects that have no place in a country facing a deep fiscal crisis.

These smaller SOEs are relatively low hanging fruit and are relatively easy to liquidate or hive off. So, let’s start there, which would not only yield revenue and budgetary savings, but would also send a clear signal of intent.

Eskom and Transnet, however, constitute an entirely different order of problem. Examining this brace of monsters, state-owned enterprises can only be justified on three non-ideological grounds: (a) To generate revenue for the state, (b) To deliver basic services cost-effectively to the populace, or (c) To provide economic goods and services in the absence of private sector capability and investment.

Some of the major state-owned energy companies such as Saudi Arabia’s Aramco, Norway’s Statoil, or Russia’s Gazprom fall into the first category. These are massive resource-based state-owned companies that provide huge revenues for the state. Their operations are highly professional and employ leading edge technology and considerable managerial expertise. By contrast, public enterprises in South Africa are a massive net cost to the state and cannot be justified on commercial grounds. The second justification is the provision of cost-effective basic services. Leaving aside the fact that diamond mining companies, airlines, forestry companies and weapons manufacturers are hardly basic services, what then of the big SOEs, Eskom and Transnet?

Again, these huge white elephants fail the second litmus test of providing much-needed basic services at a cost-effective and affordable price. In addition to Eskom’s debt now exceeding R500 billion, the state-owned power utility has proved incapable of providing a consistent and regular supply of electricity since 2008. For the poor, without the option of going solar or off-grid, the absence of reliable cost-effective electricity is not merely an inconvenience and expensive, but life threatening. 

The financial chickens are finally coming home to roost at Transnet too. The failure of this state-owned utility is estimated to be costing the economy some R500 billion and blocking the export of the country’s vital mineral resources. Beyond the dire financial impact this is having on fiscal revenues and the crippling of our world class mining houses, the collapse of rail and rolling stock infrastructure adds a further cost and transport burden to the stretched consumer, and again, specifically the poor.

With respect to the third criterion of SoEs operating in the absence of private sector investment and operational skills, again, this is far from the case in South Africa. On the contrary, the South African private sector is well-capitalised, adequately capacitated and has a proven ability to raise capital internationally for projects meeting sound investment criteria. Indeed, there is pent-up private capital waiting to be deployed into the local economy if and when the right investment environment emerges and opportunities arise. With respect to the skills base of the South African private sector, this is world class, but is being lost to countries and foreign companies offering better opportunities for career development.

But there is some good news ahead. The first is the grudging acceptance by the government that, despite its ideological disposition, the state is incapable of providing the basic services mandated by the constitution. This has led to the private sector successfully stepping into the health, education, security and now energy sectors at scale. The second positive indicator is the recent publication of the National State Enterprises Bill, which, while perversely seeking to create yet another overarching state investment company, if passed into law, the Bill will inevitably lead to the closure of the Department of Public Enterprises, the liquidation of failed SoEs and the formation of public private partnerships with those entities that are salvageable and can be turned around on economically sustainable grounds.

Paradoxically, the third reason to be more optimistic about the future is the government’s reluctant acknowledgement that the state is facing a fiscal and unsustainable crisis that leaves further financial support for failing SoEs untenable and unsustainable. The reported desire of the Presidency for the private sector to step in urgently to rehabilitate the rail and port infrastructure that has collapsed in recent years under incompetent and corrupt leadership is encouraging. The rapid succession of high-profile leadership resignations within Transnet and other SoEs is the clearest indicator that the writing is on the wall for failed SoEs, and the days of profligate waste, unaccountability and rampant corruption may be numbered.

A warning though! Trade unions, party apparatchiks, ‘tendrepreneurs’ and corrupt procurement syndicates will all oppose these radical reforms, but without the wholesale restructuring of SoEs, South Africa cannot achieve its developmental imperatives. Success will require exceptional political will from the President, his Minister of Finance and Cabinet, but this could also be the turning point our country has been searching for.