The country can no longer afford this astonishing record of failure. From Moneyweb.
The ANC government was only too happy to inherit key state-owned monopolies that the National Party put in place during the apartheid years, from electricity generation to rail transport, port management, passenger rail, the SABC and municipal services.
What it has done with these monopolies has been nothing short of a disaster for the country.
More than R330 billion was spent on bailouts to state-owned enterprises (SOEs) between 2008 and 2021, and that excludes the transfer of R254 billion in debt from Eskom to the state.
A Harvard University study led by Professor Ricardo Hausmann suggests SA missed out on R2 trillion in output between 2011 and 2020 due solely to declining productivity in network industries such as power and transportation. That figure is now probably closer to R4 trillion.
A new study by the Centre for Development and Enterprise (CDE) lays out the challenges facing SOEs, and then proposes some fixes.
A snapshot of SOE failure
The CDE study, entitled Solve the SOE Challenge, identifies the alarming rate of collapse in the SOE sector.
Here are just a few:
- The energy availability factor at Eskom has fallen from 90% in the early 2000s to 55% in 2023, though it has since recovered somewhat;
- The cost of load shedding to the economy was estimated at R899 million a day, according to the SA Reserve Bank in 2023.
- The passenger rail system under the Passenger Rail Agency of SA (Prasa) has all but collapsed, with rail trips per month falling from 54 million in 2008 to 1.7 million in 2022;
- The World Bank’s 2023 Container Port Performance Index ranks SA’s ports – managed by Transnet – among the worst in the world, with Cape Town coming dead last out of 405 ports surveyed.
This does not include the R1 billion a day cost to the economy caused by inefficiencies at Transnet, mostly through lost sales of coal and iron ore. A study by the Gain Group estimated this alone wiped nearly 5% off GDP in 2023.
Read:
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Then there’s the staggering cost of state capture, reckoned by the Zondo Commission to be around R57 billion, 97% of it from Transnet and Eskom.
Mandate confusion
One of the problems identified by the CDE is the confusion over SOE mandates and the conflicts of interest embedded therein.
For example, what is Eskom’s role in relation to independent power producers and facilitating a green and just energy transition? How will Transnet weigh its role in the new and supposedly independent National Ports Authority, intended to referee competition in port services, with its own corporate mandate to maximise its own income and profit? Why does the Post Office get a monopoly on handling packages under one kilogram, other than to subsidise its other functions?
It’s not hard to see how monopoly privileges will be difficult to prise from the hands of SOEs.
This leads to all sorts of perverse commercial behaviour. SAA continued flying unprofitable international routes supposedly to promote tourism in SA, but those loss-making routes were subsidised by other more profitable routes. The result was higher airfares for everybody, but even that wasn’t enough. SAA received R38 billion in bailouts from taxpayers between 2018 and March 2023.
It is staggering that disgraced former SAA chair Dudu Myeni was allowed to preside for so long over this catastrophe without anyone showing her the door.
Read:
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Government resisted rationalising Post Office branches in rural areas on the grounds that these were essential for delivery of services. Eventually, commercial reality bumped up against government conceit, forcing the closure of hundreds of branches.
This is a consequence of pursuing unfunded mandates.
Non-payment for services
Then there’s the lack of enforcement against those who do not pay for services.
In February, it was reported that municipalities owed Eskom over R74 billion, while vast amounts of electricity were stolen by households illegally connected to the grid.
Over-spend on capital projects is another feature of SOE monopoly power.
Eskom’s Medupi and Kusile power stations were delivered eight years late and R300 billion over budget, and even then they were not fully functional.
Eskom’s electricity tariffs have increased 16X since 2000, orders of magnitude higher than inflation. There seems little appetite for reining in out-of-control spending so SOEs can deliver services at commercially sustainable levels.
Take Transnet for example. Its maintenance underspend was R30 billion over the last 11 years, while spending on salaries went up R5 billion.
Crime and apathy
There’s a creeping apathy about the impacts of crime on public services, though Transnet and Eskom appear to have made some headway in tackling cable theft. The economic impacts of crime are beyond alarming.
The World Bank conservatively estimates 10% of GDP, about R700 billion, is lost to crime in SA.
The Zondo Commission into state capture zoomed in on tender irregularities, and it became clear that SOEs were a prime target for the Guptas and their cronies. One notorious example is the Eskom-funded transfer of ownership of Optimum Coal to Gupta-owned Tegeta. The Guptas were close to then-president Jacob Zuma and his son, Duduzane.
Political interference
Government interference in the running of SOE boards is another hidden cost of having the state as your shareholder.
Former energy minister Jeff Radebe’s disastrous tenure in this key portfolio resulted in the axing of key board members of the SA Nuclear Energy Corporation (Necsa). The National Education, Health and Allied Workers’ Union (Nehawu) reckoned this ministerial interference cost Necsa R500 million.
Read: Court issues damning judgment against Jeff Radebe
The late Pravin Gordhan, former public enterprises minister, was blamed for the exodus of top management in Transnet and Eskom in 2023 due to interference.
Minister in the Presidency Khumbudzo Ntshavheni was accused in 2023 of meddling in the selection of the SABC board in an effort to block the appointment of a former SABC head of news.
“By undermining the board and executive management, such interventions make it harder for SOEs to attract skilled and experienced board members and senior staff, who may be disinclined to work in an environment in which corporate governance norms are violated,” says the CDE report.
Regulatory failure
The National Energy Regulator of South Africa (Nersa) has the unenviable role of balancing Eskom’s need to recover its cost of power generation with a public fed up with out-of-control tariff hikes.
That balance has been tested several times in court, with the high court recently ruling that tariff hikes it wanted to impose were unlawful because they were determined without the necessary cost-of-supply studies.
The same challenges are likely to appear with the imminent appointment of independent regulators in the transport sector, such as the rail infrastructure manager and the National Ports Authority.
Competition as the solution
What needs to be recognised is that bad governance is enabled by the SOEs’ status as protected monopolies, and the consequent absence of the disciplinary effects of firms having to compete for business, says the CDE report.
National Treasury has issued new public-private partnership (PPP) regulations that allow for unsolicited bids (previously prohibited) and an easier pathway for private bidders, facilitated by a PPP Advisory Unit.
The government of national unity (GNU) is in the process of shutting down the Department of Public Enterprises and transferring the seven entities it administered to their respective line departments. There’s also an effort to establish a state holding company under the National State Enterprises Bill.
Recommendations
The CDE recommends 10 steps to fix state-owned companies, among them:
- Make public the strategic and operation review of SOEs commissioned by the Presidential State-Owned Enterprises Council;
- Appoint a high-level team led by business leaders to review the financial position of SOEs and make recommendations to address the most pressing challenges;
- Place SOEs under National Treasury rather than policy departments, then review their boards and management, taking active steps to replace poorly functioning personnel;
- Effective boards populated with skilled and independent experts should review all large capital projects as to whether they are fit for purpose and optimised for costs and delivery;
- Strengthen the PPP framework to make it less complicated;
- Address regulatory weaknesses, and ensure that regulators are strong and independent;
- Develop an over-arching competition policy for SOEs; and
- Implement additional reforms that promote decentralisation and competition, such as removing Transnet from the management and operation of the ports.
“The economy will never be able to grow quickly unless fundamental reforms ensure access to reliable and affordable energy, and logistics constraints – especially for freight rail and the ports – are eased so that exports can grow,” says CDE executive director Ann Bernstein.