Corrupt SOEs lie at the heart of SA’s economic woes
The prevailing economic crisis sweeping through SA is a direct result of economic mismanagement, largely shaped by the looting of state-owned enterprises (SOEs).
Many are in deep trouble. Sheer incompetence and corruption has pushed entities such as South African Airways (SAA) and the South African Broadcasting Corporation (SABC) closer to financial collapse. Serious questions are being asked about the legality of multi-billion rand procurements at Transnet and the state power utility Eskom.
The scale of the problem has been brought into sharp relief in recent weeks by two developments that show corruption in SOEs has been unfolding for years. The first was the release of a report written by academics: Betrayal of the Promise. The second was the leaking of 200,000 e-mails that point to dubious links between the Gupta family, senior politicians and officials.
The country stands to slip deeper into crisis unless the lust for loot is stopped. The economy is already in deep trouble. It’s in recession, and worse is to come. The second quarter GDP figures will reflect that a third rating agency has downgraded the country’s credit rating.
There are some indications that the tide may be turning but the job of reforming the SOEs will have to go beyond just replacing board members. It must also focus on ensuring greater accountability financial responsibility, and performance management.
Unfortunately, the severely fractured ANC is incapable of reversing the slide. Instead, it’s more concerned with outsmarting the growing opposition to President Jacob Zuma’s rule, suppressing internal rebellion, and maintaining the crumbling patronage network.
The increasing inefficiency in SOEs continues to put pressure on the country’s fiscus. This is not something it can afford. Ratings agencies have made it clear that they’re monitoring continuous bailouts and government guarantees. This is because they pose a serious threat to the government’s fiscal balances and policy priorities.
Government guarantees to SOEs stood at R467bn at the end of 2015-16. S&P Global Ratings forecasts they will swell to more than R500bn by 2020 — 10% of SA’s current GDP. This is more than twice the government contingents in year 2015-16.
These bailouts have weighed on the fiscus, pushing government debt into dangerous territory. Even before the downgrades, SA’s debt burden was higher than other emerging markets. Moody’s forecasts that total government debt will reach 55% of GDP by 2018 and will continue to rise after that.
The reason the government continues to bail out SOEs is purely due to the fact they are being managed badly. The recent board and management scandals at the Passenger Rail Agency of SA, SABC, SAA and Eskom indicate there has been little commitment to improve governance and address operational deficiencies. Instead, some senior ANC officials claim that a call for reforms is anti-transformation.
The financial markets are increasingly unwilling to tolerate such excuses. This can be seen by the recent subscription failure of Transnet’s bond auction. And some private asset managers have become extremely cautious about lending money to public entities.
The way forwardThe new Finance Minister Malusi Gigaba has, so far, failed to inspire confidence. Allegations that he is deeply mired in the web of scandals are not helping the situation.
Gigaba recently declared that SOEs are functioning well and doing "great work". This is surprising given the rot being revealed on a daily basis. Nevertheless, the patronage network that stands accused of milking SOEs has started to crumble. This includes the axing of Hlaudi Motsoeneng from the SABC and Molefe from Eskom. Ben Ngubane has resigned as chairperson of the Eskom board.
There are also signs that public and private pressure is forcing some government ministers to take responsibility for their departments. Examples include Minister of Public Enterprises Lynne Brown, Communications Minister Ayanda Dlodlo and Police Minister Fikile Mbalula.
Nevertheless, the key implication of the Gupta e-mails is that reversing the deep damage inflicted on the country must start with reforming SOEs. Reversing the rot will take decades. It should begin by ensuring that measures agreed last year are implemented.
These include holding the corrupt public servants to account; closing loopholes in public procurement to ensure that history isn’t repeated; and appointing suitably qualified and experienced technocrats rather than unqualified, politically connected individuals.
Finally, some SOEs will need to be privatised. This is because they operate as monopolies in key sectors, which is perpetuating gross inefficiencies. Only privatisation will end these distortions.
For many years, the government has claimed that SA’s many challenges can be overcome by adopting policies of a "developmental state". This would entail active state involvement in economic activity and using state resources to tackle poverty and expand economic opportunities. But the ongoing revelations show that before SA can consider becoming a developmental state, it will first have to root out the ingrained predatory state. Only then can investor confidence begin to be restored, recovery restarted and rating downgrades reversed.
This article first appeared in The Conversation