At the end of March last year, the state of South Africa’s perilous public finances could be best summed up by three entities — Eskom, the South African National Roads Agency (Sanral) and the Road Accident Fund (RAF). Their collective debts at that stage amounted to more than R900-billion. The RAF accounted for R330-billion, Eskom for R480-billion and Sanral for R130-billion.
The three companies are the best illustration of the heavy dilemma of trying to balance social expectations with economic realities.
For some people, such state-owned entities are things you consider mothballing before they cripple your entire fiscus. But it isn’t as simple as that.
From the moment Eskom was founded almost 100 years ago, its role as the electric utility has been fundamental to the national development story. In the early days, when the mining tycoons of the early 20th century decided that electrification was a necessary business cost, and governments of all persuasions acknowledged it as a necessary social investment, the role of Eskom as the entity to drive the electrification mandate has been indisputable.
The obvious problem with the electrical infrastructure build 100 years ago was the simple possibility that big industrial companies and mining houses would only do it to serve their own operations. Under such a model, the companies would be operating as electricity islands in an otherwise dark country.
The cost associated with the build, expensive and impractical for anyone outside the big conglomerates, would always lead to a product that could be afforded by only a few people. Such a market failure is the basis for government intervention.
The introduction of public utilities seeking to facilitate mass rollout is something governments have a unique appetite to entertain. Although individual businesses are constrained by the question of how much capital they have and how patient the providers of that capital are, governments have far greater latitude regarding the investment question.
Rather than considering whether they can borrow in the immediate term, governments are able to influence public policy to make things happen. Whether this is done through a tax model or a levy system, the ability to make it happen is much stronger than the capacity of individuals and companies to do the same. The unavoidable trade-off is that if the cost of infrastructure is indeed so prohibitive that only a state can countenance it, the number of entities set up to achieve this purpose is likely to gravitate towards just one — and hence the prevalence of utilities that operate as monopolies.
Over the years, as South Africa’s historical patterns of exclusion left some parts of the country out of the infrastructure net, the need to correct this became a fundamental mission for the democratic government. Getting more people connected to the grid and providing more people with greater proximity to water infrastructure required not only the mission to be financed properly but also the resource constraints — premised on the definition of who is a citizen worthy of getting electricity and water — to be drastically revisited.
And as it turned out, the ability of the state to work out how to scale up infrastructure capacity to meet the demands of universal access remained elusive and has now left us with a supply deficit that has been haunting us for years.
The cost of trying to address this — captured by the billions of rand allocated to building new capacity primarily through Kusile and Medupi — has left us with a financial liability as huge as the power deficit itself. At the end of March last year, Eskom’s debt burden was over more than R480-billion and the state’s ability to service it remained poor.
Across the road at Sanral, the mandate to ensure adequate road infrastructure across the country has left the entity with the type of debt headache that Eskom can relate to. The key question of how to finance the infrastructure programme has become the eternal political ping-pong of our time. The use of a levy system has been mooted as the least disruptive and administratively practical option. Under such a model, the fuel levy would presumably increase to cater for the additional cents required to fund Sanral’s costs.
Administratively, because none of us ever quibble about the price charged at the pump, our capacity for resistance evaporates.
Under the current approach, however, Sanral and the government have opted for a parallel model that seeks to collect directly from road users rather than through the levy system.
The obvious limitation is the question of compliance and the vexing question of what exactly can Sanral do if all road users refuse to pay. The various options adopted — from coercion, persuasion and aggression — have so far refused to alter the culture of resistance. As a result, Sanral’s financial statements of March last year indicated that it had a liability of R130-billion that, on the face of it, is unlikely to be sorted out by even an about-turn in public perception about e-tolls.
Although the levy model has its benefits, the evidence from the Road Accident Fund indicates that it’s not always a perfect solution. From the moment it was founded with the mission to compensate victims of accidents, the RAF has operated itself into financial obscurity.
The unique business model of the fund — collecting levies and then hoping that the sum of legitimate claims lodged are less than the levy itself — has not kept up with reality. For a fund reliant on a single source of income, the primary risk has been whether it can limit its primary costs — claims payouts — to match its income. It hasn’t managed that.
Then the big dilemma relating the administration of claims — involving legal and medical experts — has led to the fund spending a disproportionate amount of its income on administration — to the detriment of affected claimants. The liability, which stood at more than R330-billion last year, is the country’s second-highest financial exposure after Eskom.
Core to the quantum of the liability, is the fact that the RAF has been using the insurance accounting model approach to measure its liabilities. Under the model, the fund caters for claims lodged and those that might be lodged based on historical estimates. Whether such claims will ever be settled when the annual income of the fund is just a fraction of the claims received each year is a matter that various boards have sought to address — with limited success.
This week, the minister of transport, Fikile Mbalula, announced that the fund had turned a corner and generated a surplus in its latest financial year. The source of the surplus is apparently the shift in the operating model that has seen fewer legal fees being paid than before. To achieve this, the RAF entered into a war of attrition with its panel of attorneys who had, for a long time, been the beneficiaries of the litigation-based model.
Such a change will only be sustainable if the fund is able to deliver on the mandate to address claims. That would be a big win.
But the bigger story relates to the announcement that even the huge liability of R330-billion has essentially disappeared as a result of the shift towards a social benefits model. Under such a model, the fund is not required to account for current and prospective claims but rather deal with confirmed and approved claims.
In the words of the chief executive, Collins Letsoalo, a number of the claims in the R330-billion calculation have incomplete data. Such data gaps mean that under the social benefits model, claims of that nature would not be accounted for as valid claims and would not require the fund to account for them.
The unresolved problem is what happens when the documentation for those claims is provided. The huge liability that has recently been quashed will simply re-emerge as a new headache for the fund.
Until that happens, the state may indeed breathe a sigh of relief that it can ignore this potential liability of R330-billion — subject to the concurrence of the auditor general. Unfortunately for the state — and the rest of us — this breathing space is more temporary than substantive.
And with that reality, the perilous state of public finances is guaranteed to linger on for a while yet, especially for state-owned entities where the need to balance social benefits and economic viability remains central to the mandate.