State-owned enterprises (SOEs) are once again making headlines for all the wrong reasons. The current state of affairs is increasingly hard to believe, especially given the incredible sums of money being wasted in a country that desperately needs to address rampant poverty. There are however also success stories and it is certain that SOEs have a significant role to play with respect to “radical economic transformation” – and not the type that serves to justify state capture, but rather the type that serves to fundamentally transform the fortunes of our people.
The recent SAA bailout takes their tally to no less than R23-billion in bailouts during the past decade, whilst Eskom managed to hit the same incredible amount in a single year. Government guarantees, bailouts, and debt servicing costs for SOEs are massively detrimental to our economy and severely constrain much-needed growth. In 2015/16, borrowing by the six largest SOEs reached R128-billion and the staggering projected borrowing for these companies until 2019/20 amounts to an additional R409.7-billion. Leveraging such substantial amounts of money successfully is vital to the health of our national economy, however, the 16 largest SOEs only managed a paltry 0.8 percent return on equity in 2015/16. Considering government’s average cost of borrowing is 8 percent when using the R186 bond as a proxy, and as much as 13 percent in the instance of some SOEs, it becomes shockingly clear the extent to which public financial value is being eroded.
The level of investment into our SOEs demand a far greater return for our public funds. These companies have a substantial role to play with respect to our economic growth, and while we cannot expect all SOEs to focus solely on profitability, we can certainly demand higher social returns. SOEs need to be a hotbed of job creation, skills development, and entrepreneurial opportunity.
It’s interesting to note that most of our current SOEs were inherited from the Apartheid regime. When one considers the link to artisanal training and skills development, a model emerges where artisanal training centres and technical colleges were established in white communities to produce the skilled workforce that was employed by the SOEs. This model was used very effectively to drive economic opportunity and prosperity for the white minority. Sadly, we have failed to provide the same opportunity to our black majority under our new democracy, despite massively escalated levels of public investment and expenditure on SOEs under the new regime. Instead, most of that value has been squandered and looted, whilst nearly 70 percent of our youth remain unemployed and unskilled.
State-owned companies also have a significant role to play with respect to SME growth and development. Greater entrepreneurial activity has long been considered the route to inclusive economic growth, but in order to achieve this, entrepreneurs need access to market opportunities. These opportunities need to be structured in a manner that allows for easier participation of emerging suppliers, by removing barriers to entry associated with financial constraints, or differentials resulting from economies of scale. Procurement practice at SOEs tend to favour large, often foreign-owned, suppliers but we need to leverage our investment in SOEs far more effectively and deliberately to grow our own suppliers and manufacturing capabilities. Enterprise and Supplier Development (ESD) has become a key strategic imperative for most SA corporates, perhaps it is time for government to accept responsibility for implementing similar initiatives at SOEs.
Given the poor performance of our state-owned enterprises, it is not unreasonable to question why government needs to be involved in so many diverse sectors. A strong case could be made for privatisation of many of the worst performers. It’s easy to understand why the state would see value in owning Eskom, SANRAL, PRASA, or even the Land Bank as these all have significant social benefits; but why is our government in the airline business when many far wealthier nations have exited this risky sector with its extremely tight margins, and why do we continually try to revive the Post Office in an age of increasing digital communication?
Political interference, lack of accountability, and rampant corruption are factors that contribute considerably to the current state of our SOEs, and these are all indicative of poor governance. Sound corporate governance, the system by which companies are directed and controlled, is globally recognised as a critical requirement for successful growth and development. South Africa’s King Code of Corporate Governance, now in its fourth revision, is world leading and regarded as one of the most comprehensive approaches to governance worldwide. If we hope to have SOEs that contribute to economic transformation rather than constrain it, that manage their finances responsibly, and that are led by competent and honest people, then we need to improve their levels of corporate governance.