Corrupt state owned enterprises lie at the heart of South Africa's economic woes

Demonstrators march against corruption in South Africa.
Reuters/Mike Hutchings

The prevailing economic crisis sweeping through South Africa is a direct result of economic mismanagement largely shaped by the looting of state owned enterprises.

Many are in deep trouble. Sheer incompetence and corruption has pushed entities like South African Airways and the South African Broadcasting Corporation closer to financial collapse. Serious questions are being asked about the legality of multi-billion rand procurements at Transnet and the state power utility Eskom.

The scale of the problem has been brought into sharp relief in recent weeks by two developments that show corruption in state owned enterprises has been unfolding for years. The first was the release of a report written by academics: Betrayal of the Promise. The second was the leaking of 200 000 emails which point to dubious links between the Gupta family, senior politicians and officials.

The country stands to slip deeper into crisis unless the lust for loot is stopped. The economy is already in deep trouble. It’s in recession, and worse is to come. The second quarter GDP figures will reflect that a third rating agency has downgraded the country’s credit rating.

There are some indications that the tide may be turning but the job of reforming the state owned enterprises will have to go beyond just replacing board members. It must also focus on ensuring greater accountability financial responsibility, and performance management.

Unfortunately the severely fractured African National Congress (ANC) is incapable of reversing the slide. Instead, it’s more concerned with outsmarting the growing opposition to President Jacob Zuma’s rule suppressing internal rebellion, and maintaining the crumbling patronage network.

Unaffordable

The increasing inefficiency in state owned enterprises continues to put pressure on the country’s fiscus. This is not something it can afford. Ratings agencies have made it clear that they’re monitoring continuous bailouts and government guarantees. This is because they pose a serious threat to government’s fiscal balances and policy priorities.

Government guarantees to state owned enterprises stood at R467 billion at the end of 2015/16. Standard & Poor’s forecasts they will swell to over R500 billion by 2020 – 10% of South Africa’s current GDP. This is more than twice the government contingents in year 2015/2016.

These bailouts have weighed on the fiscus, pushing government debt into dangerous territory. Even before the downgrades South Africa’s debt burden was higher than other emerging markets. Moody’s forecasts that total government debt will reach 55% of GDP by 2018 and will continue to rise after that.

The reason government continues to bail out state owned enterprises is purely due to the fact that they are being managed badly.

The recent board and management scandals at the Passenger Rail Agency of South Africa, South African Broadcast Corporation, South African Airways and Eskom indicate that there has been little commitment to improve governance and address operational deficiencies. Instead some senior ANC officials claim that a call for reforms is anti-transformation.

The financial markets are increasingly unwilling to tolerate such excuses. This can be seen by the recent subscription failure of Transnet’s bond auction. And some private asset managers have become extremely cautious about lending money to public entities.

The way forward

The new Finance Minister Malusi Gigaba has so far failed to inspire confidence. Allegations that he is deeply mired in the web of scandals are not helping the situation.

Gigaba recently declared that state owned enterprises are functioning well and doing “great work”. This is surprising given the rot being revealed on a daily basis.

Nevertheless, the patronage network that stands accused of milking state owned enterprises has started to crumble. This includes the axing of Hlaudi Motsoeneng from the South African Broadcasting Corporation and Molefe from Eskom. Ben Ngubane has resigned as chairperson of the Eskom board.

There are also signs that public and private pressure is forcing some government ministers to take responsibility for their departments. Examples include Minister of Public Enterprises Lynne Brown, Communications Minister Ayanda Dlodlo and the Minister of Police Fikile Mbalula.

Nevertheless, the key implication of the Gupta emails is that reversing the deep damage inflicted on the country must start with reforming state owned enterprises. Reversing the rot will take decades. It should begin by ensuring that measures agreed last year are implemented.

These include:

• holding the corrupt public servants to account,
• closing loopholes in public procurement to ensure that history isn’t repeated, and
• appointing suitably qualified and experienced technocrats rather than unqualified politically connected individuals.

Finally, some state owned enterprises will need to be privatised. This is because they operate as monopolies in key sectors which is perpetuating gross inefficiencies. Only privatisation will end these distortions.

For many years, government has claimed that South Africa’s many challenges could be overcome by adopting policies of a “developmental state”. This would entail active state involvement in economic activity and using its resources to tackle poverty and expand economic opportunities.

But the ongoing revelations show that even before South Africa can consider becoming a developmental state, it will first have to root out the ingrained predatory state. Only then can investor confidence begin to be restored, recovery restarted and rating downgrades reversed.

Misheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, specializing in Finance, University of Cape Town and Sean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape Town

This article was originally published on The Conversation.