South Africa is grappling with the possibility of a sovereign downgrade by global credit rating agencies. This will bring unnecessary economic costs if it happens.
The health of the country’s state-owned enterprises is a key factor in determining credit ratings, because how they are managed has an impact on the fiscus. It makes the prevailing political noise around the country’s state-owned enterprises all the more pertinent.
Throughout modern history and around the world, state-owned enterprises have played a critical role in shaping successful paths for developing economies.
The typical developmental state models are usually thought of as those of Japan, the Asian Tigers, or China, where the state actively guides and participates in the economy. The approach worked well in these countries because government departments worked closely with the private sector to create and require businesses to be internationally competitive.
State-owned enterprises can serve South Africa’s development state ambitions. But sound policies and governance practices are needed to ensure they stand as value creators and do not become financial burdens to the public purse. The key consideration currently is to prevent the abuse of these enterprises by corrupt politicians and their cronies.
The good and the bad
When private companies make big mistakes the public doesn’t fret because the private shareholders pay the price. But when state-owned enterprises make losses taxpayers have to pay for their mistakes.
First, let’s be clear that state-owned enterprises are not inherently bad and can be very good. They offer value especially when they supply public goods or fill a natural monopoly. No-one complains that the government spends taxpayer money on public education, national defence or the roads system.
But there is a case for answering the question: why does the government need to own transport companies, military equipment manufacturers, airlines, mining companies or other “commercially oriented enterprises”?
If commercially oriented state-owned enterprises were managed on a commercial basis they would present less of a financial threat to the government and there would be a level playing field in the commercial sector. But the governing African National Congress maintains that state-owned enterprises are not about making a profit.
That may be roughly true about non-commercial state-owned enterprises that produce a net social welfare benefit, but it is no excuse for inefficiency, over-staffing, and high salaries.
When evaluating the use of subsidies to government owned enterprises (that is, they would make a loss otherwise), we need to assess the overall social welfare benefit against the social and economic costs.
The public may be tolerant of giving subsidies to the post office, which delivers benefits to a broad cross-section of the population. But should taxpayers be tolerant of subsidising an inefficient airline that services the affluent?
Flashing red lights
There have been danger signals from the state-owned enterprises space for some time. A Presidential Review Committee in 2010 concluded that: “The need for another round of large-scale restructuring of public enterprises is definitely eminent in South Africa.”
But little has happened in the way of restructuring proposals.
Instead, the space is dominated by news and allegations of state capture. These include reports that the former finance minister Nhlanhla Nene was fired after refusing to finance new airplanes for South African Airways through a questionable third-party agent.
There are also reports that the current finance minister, Pravin Gordhan, is under pressure for similar reasons.
In light of this, President Jacob Zuma’s move to take control of the special committee that oversees state-owned enterprises has raised eyebrows.
Zuma has justified the move on the grounds that it will ensure that state-owned enterprises are properly governed. But how will he achieve this when his policies and relationships with certain individuals are being called into question?
The private sector is beginning to show concern. This is reflected in a decision by Futuregrowth Asset Managers to suspend funding to state-owned enterprises. Other banks and lenders may follow suit.
This doesn’t mean the state-owned enterprises are in imminent danger. But it does appear that their future financial viability is in question. This is because of government interference in their management in form of cronyism is weakening them.
The developmental state
The majority of the South African economy looks similar to other market economies where a majority of the ownership of the means of production is in private hands.
In a typical market economy, the role of the government is to be the regulator, to guarantee fair play, and to provide a social safety net for those unintended casualties of market dynamics.
South Africa is not far from this model – except that the government has higher than average public ownership of the means of production and worse than average public sector governance. An OECD study of 53 countries placed South Africa as having the 11th largest public sector, and rated it the 15th lowest on quality of governance of state-owned enterprises.
The ANC’s 2007 conference declared its intent to pursue policies that would make South Africa into a developmental state. Its means of achieving this would be through the use the state-owned enterprises to lead and drive economic development.
The Asian model of a developmental state tended to follow a high investment, export-led growth strategy, initially based on low-wage competitiveness. The governments of these countries gave subsidies and protection to big businesses (not labour) in return for their investment to become a global competitor.
Many also consider the Scandinavian economies as developmental states, although they follow a welfare state model of high wages, high productivity and high state social transfers. The Scandinavian economies are already wealthy and tend to be more capital-intensive, whereas the Asian economies are labour-intensive.
The South African government appears to want the impossible solution of living like a Scandinavian welfare state and growing like an Asian developmental state.
This is the unique ANC Developmental Welfare State – but it can’t work now. We want to keep the social welfare net, but the government has to grow the economy, create jobs, and create more wealth. This requires more encouragement and flexibility for the private sector. Why not partially privatise the commercially oriented state-owned enterprises and make them more efficient and competitive?