Twelve months ago, drones attacked oil facilities in Saudi Arabia. The attack — claimed by the Houthi rebels from Yemen — created the type of geopolitical chaos that has become common cause in all matters involving oil, rebels and Middle-East superpowers. Mike Pompeo, the United States secretary of state, immediately blamed Iran for the attacks. Donald Trump offered support to the government of Saudi Arabia. But the man most wounded by the attack was the Saudi crown prince, Mohammed Bin Salman (MBS).
The attack came three years after MBS had unveiled his economic blueprint for diversifying Saudi Arabia’s economy away from its dependency on oil. Central to his 2030 vision was to list the world’s most valuable company, Saudi Aramco, on stock markets. In 2019, when its financial affairs were made public, it had a net income of $111-billion in 2018, far ahead of the most profitable public company in the world — Apple ($59.5-billion).
MBS expected that listing Aramco would attract a valuation of $2-trillion. His ambition was tempered twice. First, he was implicated in the murder of journalist Jamal Khashoggi in Turkey, which made him temporarily undesirable as a business partner. Then the oilfield strike occurred. The investment bankers suddenly indicated that the true value of Aramco may be closer to $1.2-trillion than $2-trillion.
The driver of Aramco’s value is the sense of fortune associated with owning the most valuable heritage asset in the world — the oil fields. As its production costs remained stable but the world’s appetite for its oil sent the prices skyrocketing, Aramco became a company whose profitability was guaranteed. Its position in the market allows it to influence supply and prices in alliance with Opec in a way that makes its business model resilient to interruptions.
But Aramco’s other relevance in the world is the fact that it is an economic outlier. As a profitable state-owned entity, Aramco has thrived in an age where the tides of capitalism have gravitated towards private enterprise. State involvement in business is a point of contention between politicians, business, society and common sense. Hardliners of free markets insist the role of the state is a matter of regulation and oversight rather than participation.
On the other side of the spectrum the inherent limitations in capitalism are seen as the evils that can only be cured by state control of the fundamental economic levers. But the rise of democracy as a governance system and the fluidity of social and economic borders has dominated recent history. The question of finding the right balance in this spectrum of the state’s role in business has remained unresolved.
Each nation has to answer the question from the context of its social dynamics, natural and intellectual endowments and political choices. Opening up the economy to private players driven by profit may not make sense for a society bedevilled by low income and development levels. Alternatively, suffocating business through state bureaucracy may stifle innovation and leave a society lagging behind its peers at a significant economic and social cost.
Evidence from around the world shows mixed trends. The Organisation for Economic Co-operation and Development defines a spectrum of state ownership model structures that range from centralised (China and Finland) and dual or twin track models (accountable to more than one ministry) to decentralised. Wherever a country wishes to place itself in this spectrum, the ability to understand benefits and limitations is important. This requires the underlying objectives of an ownership model to be understood by all stakeholders. This is even more important for governments with limited resources where the process of resource allocation requires trade-offs.
The South African government suffers from a paralysis when confronted with the question of state ownership. At the heart of the paralysis is the question of purpose and possibility.
The idea of a state bank was recently revived by some in the state. Such a bank — in the eyes of those whose commitments to political party resolutions is absolute — is necessary for no other reason except that it was decreed at an ANC conference.
In his 2020 budget speech, Finance Minister Tito Mboweni reiterated that the government would go ahead with its plan to set up a retail bank “operating on commercial principles”. His deputy, David Masondo, is the nominated champion for the cause.
Masondo indicated that the state wants to consolidate “quasi” banks such as Postbank into a single deposit-taking institution. The problem is that ideological conviction isn’t a sufficient condition to embark on such a venture in this day and age. State involvement in business exists in the fluid continuum of regulation, oversight and participation.
There are many instances where state participation is warranted and even preferred. In the early 1920s, mining tycoons could easily install electrical infrastructure to serve their enterprises and exclude the rest of society. The state intervened and created the electricity supply company called Eskom.
Many years later, as the quest to connect society became a national imperative, the state rolling out telecommunications infrastructure through Telkom bridged the communication gap. Creating the road and railway infrastructure that connects cities and rural areas, economic hubs and social deserts, is the type of task that only governments have an appetite to undertake.
Leaving these tasks to private enterprise would have delayed the national rollout and imposed a unit cost that would have left many citizens unable to use them anyway.
In cases where the market is unable to deliver a product efficiently, the state — with a dual commitment to social and economic returns, coupled with a much greater tolerance for delayed financial reward — must legitimately step in. This is evident in industries where the capital outlays are prohibitive for private sector market players to deliver at a cost that makes it feasible for the enterprise and society.
The key feature is that governments are critical in kickstarting industries that would otherwise fail to materialise. The investments made by US citizens in research and development through public institutions become the templates and blueprints that technology companies use as the basis for innovation. The data collected through public healthcare systems feeds into the developments of new drugs under the auspices of private enterprise.
A more difficult proposition occurs when the government seeks to intervene in an established market with multiple players already in existence. In such a case, the obligation to prove the business case for state involvement is unavoidable. If market failure is evident in a market, then the state’s instinctive reaction should be correction through regulation and oversight rather than participation.
There is no shortage of banks in South Africa. In relation to social imperatives, the transformation of the sector seems to be on par with what the government is willing to tolerate and accept from the banking market.
In any case, should the view be that such measures are lagging or inadequate, it is the state that has the power to create and enforce rules as it deems appropriate.
It is therefore unclear what the business case for state participation is. In Masondo’s proposition, consolidation of existing quasi-bank agencies seems to be the motivation. If that is the case, then the government has a point.
The use of multiple entities to achieve the same outcomes is structurally inefficient. Financially, as the cost of running a financial services entity in the age of cyber threats and consumer choice becomes ever more challenging, housing entities with a similar focus under one umbrella cuts down the delivery cost of getting the product — in whichever form — to the end-user.
The problem with the South African government is its persistent conviction that conflicting choices can be reconciled by the magical wisdom of a conference resolution. A key element of cost-cutting in the consolidation of all financing agencies would be removing duplicate roles across all levels.
Although one may doubt the government’s capacity to deliver on so many promises, its resolute commitment to placating unions and preserving jobs remains unshaken. The problem with that is the one aspect that may provide credibility to the business case for a state bank — cost-savings — is guaranteed to be stillborn under the practices of this government. As we can see from the SAA fiasco, such facts won’t stop governments from undertaking ill-conceived courses of action.
Khaya Sithole is a chartered accountant, academic and activist who writes regularly for the Mail & Guardian and discusses the issues raised in his columns on his Kaya FM show, On The Agenda, every Monday from 8pm to 9pm.