Pravin Gordhan is getting it dangerously wrong with SOEs
Public enterprises minister Pravin Gordhan is a man of integrity. He stood against the brazen corruption of the Jacob Zuma mafia, though, like the rest of his group, admittedly too late to spare the country a crisis.
This notwithstanding, Gordhan is also profoundly unrealistic when it comes to his portfolio. He remains attached to a model of public ownership that is unfounded in economics, profoundly non-performing, can only lead to vast corruption, and is ruinous to the Treasury and country. Faced with the systemic failure of the majority of state-owned enterprises (SOEs), he is unwilling, and perhaps unable, to truly reckon with the causes and consequences of the terminal crisis he is now tasked with solving. The bare-knuckled truth is that he is failing, at grave cost to SA.
Gordhan seems convinced that better governance is key to saving the parastatals. He is dead wrong, for two reasons.
First, it is simply too late for that — the financial position of most SOEs can only be resolved through debt restructuring and recapitalisation, but the state as shareholder cannot afford this. The solution that has so far been applied in cases where the SOE is a monopoly has been raising prices ad infinitum, thus extorting funds from hapless and struggling consumers. This has either failed to solve the financial crisis (Eskom), come at the expense of the consumer and the economy (Transnet), or both (Eskom). There is simply no case left to be made that the current SOE policy is growth generative, unemployment reducing or poverty alleviating.
Second, parastatals are saddled by design with an almost unsolvable incentive problem. Because of state ownership, they suffer from a grave set of agency conflicts, are generally captured by contested vested interests (politicians, bureaucrats, board members, executives, unions, employees and contractors) and leave their customers and the citizens on behalf of whom they supposedly exist dead last. No amount of good governance can solve this, unless they are run, like Ethiopian Airways, in a quasi militaristic fashion that is clearly not an option in a democratic SA where ministers, senior public servants and unions constantly interfere with management.
The situation of SAA, over which Gordhan and finance minister Tito Mboweni appear to be locked in a debilitating but perhaps necessary feud, shows him up. This is an airline that is de facto no longer a going concern. It offers no upside to the economy, nor to the government. It devours scarce fiscal space, hobbles the commercial aviation sector by occupying airport slots and travel routes, and in the end subsidises those who can afford air travel. Most critically, it would be replaced almost immediately by private sector alternatives at no long-term cost to the Treasury or the economy, provided competition is enforced by a regulator with teeth.
There is no evidence that SAA is developmental. It does not provide a strategic service to the country that others cannot provide better and cheaper. It does not alleviate poverty, and on balance probably does the opposite. Its contribution to jobs is inefficient and most likely negative. Letting SAA go, in an orderly fashion through an urgent downsizing, disposal of its non-performing divisions and privatisation of its performing ones, would release scarce resources the government could allocate to more urgent tasks, including improving the situation at Eskom, a far more serious and urgent emergency also created by the state.
So why is Gordhan not doing the right thing? Why is he not letting go of the patently wasteful SOEs so he can immediately turn his time and resources to sorting out the critical SOEs? His approach defies logic: it is doomed to fail, it has catastrophic consequences, it is unnecessary, and it will eventually lead to the SOEs disappearing after further waste and economic damage. And it is entirely reversible from a governance standpoint: all it would take to undermine his good governance drive is for a new minister with a different agenda to reverse his strategy. Such a prospect is not just plausible but, within less than five years, likely.
Perhaps the cause of his persistence is that he knows no other way, has no other model at his disposal, and continues to exist locked in a paradigm that forbids him to see the world as it is rather than as he wants it to be.
CORRECTION: December 4 2019
A previous version of this article incorrectly stated that Pravin Gordhan was a member of the SACP.
• Baissac is CEO of Eunomix, an advisory firm that focuses on sustainable development, strategy and risk in resource-rich countries.