tag:theconversation.com,2011:/africa/topics/saa-30333/articlesSAA – The Conversation2020-02-27T11:13:26Ztag:theconversation.com,2011:article/1321322020-02-27T11:13:26Z2020-02-27T11:13:26ZWhat it will take to build a capable state in South Africa<figure><img src="https://images.theconversation.com/files/316471/original/file-20200220-92493-psnobm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">African National Congress top six leaders. The governing party's wishes are sometimes out of kilter with the dictates of statecraft. </span> <span class="attribution"><span class="source">AFP-GettyImages/Mujahid Safodien</span></span></figcaption></figure><p>A major factor that undermines South Africa’s social and economic progress is the deficit in the capabilities of the state. This gap was identified long ago by the National Planning Commission, first in its diagnostic report in 2011, and again when it issued its final <a href="https://nationalplanningcommission.wordpress.com/the-work-of-the-commission-2/">National Development Plan</a> in 2012. The plan is the country’s blueprint for fixing its problems.</p>
<p>I define a capable state as a system of government that functions with relative autonomy from narrow ideological interests. Its parts work in a coordinated fashion to achieve clearly defined goals. It conducts its work efficiently and is effective in delivering services and critical economic infrastructure. </p>
<p>The core function of a state is to mobilise resources to meet its developmental challenges and manage long-term social and economic change. A capable state, with autonomy from political factions, is best placed to respond to changes and harness opportunities for development. Such states value innovation, human capital and merit. They emphasise economic performance, education, health care and infrastructure.</p>
<p>Currently, the South African state works in a fragmented manner and with no shared vision. </p>
<p>The reason it can’t deliver on its social and economic obligations lies in poor political choices and defective political management. Part of the problem is the relationship between the political machinery of the governing African National Congress (ANC) and the bureaucratic machinery of the state.</p>
<p>Adding to the challenge is that the ANC governs through a <a href="https://omalley.nelsonmandela.org/omalley/index.php/site/q/03lv02424/04lv02730/05lv03161.htm">tripartite alliance</a> with the South African Communist Party and the Congress of South African Trade Unions. These seek to influence government policy and decisions. </p>
<p>It is impossible to build state capabilities in a sustained manner without overcoming these many tensions. This requires a solid nerve centre – essentially the presidency. President Cyril Ramaphosa has massive political capital that he is under-using.</p>
<p>He needs to mobilise resources across the state towards achieving a defined set of strategic objectives and priorities. And he needs to stare down factional and ideological interests that circle the state and its agencies. He should then use his executive authority to translate his strategic objectives into measurable outcomes that make a noticeable difference in the economy and society. </p>
<p>The process currently under way to <a href="https://www.enca.com/news/ramaphosa-to-sign-performance-agreements-with-ministers">sign performance agreements</a> with government ministers is a step in the right direction. But, without any system for cracking the whip, this may fall apart as it did under Ramaphosa’s predecessor Jacob Zuma.</p>
<h2>Capacity constraints</h2>
<p>The severity of capacity and resource constraints varies across different levels of government. Some of these relate to <a href="https://www.researchgate.net/publication/321223498_The_African_National_Congress_ANC_and_the_Cadre_Deployment_Policy_in_the_Postapartheid_South_Africa_A_Product_of_Democratic_Centralisation_or_a_Recipe_for_a_Constitutional_Crisis">substandard political appointees</a>. As is clear from the Auditor General’s reports over the years, at the local government level capacity deficiencies are largely due to the <a href="https://www.agsa.co.za/Portals/0/Reports/MFMA/2019.06.25/MFMA2017-18%20-%20Section%201%20-%20Executive%20summary.pdf">absence of technical skills and execution failures</a>. And municipalities routinely <a href="https://mg.co.za/article/2019-06-26-financial-state-of-municipalities-has-worsened-ag/">disregard recommendations</a>.</p>
<p>Skills shortages are found in key areas such as project management, procurement and contract management as well as financial management. The ability to execute mandates and deliver services to communities is weak too. </p>
<p>Political management also matters when it comes to building great institutions – the other half of the equation of a capable state. Weak political management is clear from the parlous situation of state-owned enterprises, such as the power utility <a href="https://theconversation.com/south-africas-energy-crisis-has-triggered-lots-of-ideas-why-most-are-wrong-130298">Eskom</a> and <a href="https://theconversation.com/south-africa-in-unfamiliar-terrain-as-national-carrier-goes-into-business-rescue-128868">South African Airways</a>. </p>
<p>It’s also evident in defects in the institutions responsible for maintaining rule of law. It contributes to the tortuously slow grind of the <a href="https://sastatecapture.org.za/">Zondo Commission</a> into grand corruption, which has yet to result in any prosecutions. There are also ambiguities in policy decisions in key economic sectors such as information and communications technology, energy and <a href="https://www.fin24.com/Companies/Mining/junior-miners-feel-undermined-by-regulation-policy-uncertainty-minerals-council-20200205">mining</a>.</p>
<p>The calibre of politicians who preside over the state determines the norms and standards by which the bureaucratic machinery of the state functions. As the founding father of modern Singapore, Lee Kuan Yew, <a href="https://www.goodreads.com/book/show/16248652-lee-kuan-yew">pointed out</a>:</p>
<blockquote>
<p>To get good government, you must have good people in charge of government. </p>
</blockquote>
<p>A country can have institutions and policies that look good. But if there are no capable and ethical politicians who protect them, they are doomed to be ineffectual and not reach their full potential. It is impossible to build a capable state outside an acceptable ethical framework, and the necessary range of human capabilities at a country’s disposal. At the moment South Africa suffers capability deficiencies and institutional stasis due to poor political management.</p>
<h2>What next</h2>
<p>For President Ramaphosa, the important lever of statecraft for creating results in a democratic society is to act decisively in getting things done. This requires awareness of his power and authority, skills to read the political mood, and a strong urge to act decisively.</p>
<p>As the nerve centre of the state, he needs to signify acceptable norms and be hard on errant public officials. This should start with members of the executive who are underperforming. At the municipal and provincial levels, the centre needs to use fiscal tools to stop wastage and poor performance. </p>
<p>Effective leaders in government who lead through moments of crisis should immediately grasp the purposes and uses of power. They can achieve a great deal more through astute political management and centralised decision-making. They should focus on getting results rather than fixating on long processes of consultation as is the case in South Africa.</p>
<p>Finally, there are areas where government can achieve quick wins through well-structured partnerships to fix capacity deficiencies. </p>
<p>It can tap into the resources in the private sector. A number of mining companies, for example, could help build capabilities at the local government level. This could help address constraints in areas where their workers live. Such shared value may help improve the reputation of those companies.</p>
<p>We should, however, be careful of private sector firms and business leaders that are only interested in pursuing their narrow interests through proximity to political leadership. Partnerships with the private sector should be based on resolving clearly defined and specific challenges.</p>
<p>Building capabilities is key to retooling the state for higher performance. The starting point should be to fix political management at the centre.</p><img src="https://counter.theconversation.com/content/132132/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mzukisi Qobo does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa suffers capability deficiencies and institutional stasis due to poor political management.Mzukisi Qobo, Head: Wits School of Governance (Designate), University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1284092019-12-05T13:57:21Z2019-12-05T13:57:21ZSouth African Airways is in business rescue: what it means, and what next<figure><img src="https://images.theconversation.com/files/305402/original/file-20191205-38984-196c94f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source"> Epa/Udo Weitz</span></span></figcaption></figure><p><em>South African President Cyril Ramaphosa has taken the decision to put South African Airways, the cash-strapped national flag carrier, into voluntary business rescue. Caroline Southey from the Conversation Africa asked Professor Marius Pretorius to explain how the process works.</em></p>
<p><strong>What is a business rescue?</strong></p>
<p>It’s what is known in the European Union as a pre-insolvency procedure – that means a process that’s designed to save a company from being shut down. All countries have their own version of the procedures that need to be applied when a business is in distress. One of the best known ones is the <a href="https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics">US’s Chapter 11</a>. </p>
<p>South Africa’s process is set out in Chapter 6 of the <a href="https://www.gov.za/sites/default/files/gcis_document/201409/321214210.pdf">Companies Act</a>, which came into effect in 2011. It indicates what needs to be applied when a business is in distress. </p>
<p><strong>What’s the aim?</strong></p>
<p>The aim is to address distress in a business, when it’s not performing. Distress is normally identified when a company is no longer profitable, when it’s not a going concern anymore, when it has major problems. Like a sick person. You have to see a doctor when you’re sick.</p>
<p>The aim is to institute a turnaround – to try to prevent the company from having to go into liquidation, or, in other words, shut down.</p>
<p>In South Africa, a company applies for business rescue under Chapter 6 of the Companies Act. It’s basically a last-ditch attempt to save a business. That’s why it’s called a pre-insolvency process.</p>
<p>It’s understandable that the government is trying to avoid liquidation: if SAA went the route of liquidation rather than rescue, the government would be forced to repay creditors. But in a rescue situation, a moratorium is put on relief payments. Creditors don’t have to be paid immediately. It gives a company a bit of a lifeline while the rescue practitioner works out a plan for the business.</p>
<p>SAA has accumulated unsustainable <a href="http://www.sabcnews.com/sabcnews/saa-has-outstanding-debt-of-over-r20-billion-kingston/">levels of debt.</a></p>
<p><strong>When should business rescue be sought?</strong></p>
<p>The act makes a provision for when a business is in financial distress. It’s then obliged to file for business rescue. This would arise, for example, if a company was unable to meet financial commitments due over the next six months. Under these circumstances, the company is obliged to file for voluntary business rescue. <a href="https://pmg.org.za/committee-meeting/21801/">Research</a> shows that company directors take the voluntary route 90% of the time. The reason for this is that if they don’t, they could face being delinquent directors, making them liable for the company’s debt.</p>
<p><strong>How is a company placed in business rescue?</strong></p>
<p>The directors file through a procedure under the <a href="http://www.cipc.co.za/za/">Companies and Intellectual Properties Commission</a>, which then <a href="http://www.sabcnews.com/sabcnews/les-matuson-appointed-saa-business-rescue-practitioner/">confirms the appointment of a rescue practitioner</a> and licences him or her. There is a full process of accreditation and set of requirements set by various professional bodies for practitioners. They are usually lawyers, accountants or business people. And there are conditions specifying how much experience they must have had, depending on whether they are senior or junior. </p>
<p>The process of appointing the rescue practitioner can take up to five days. Once appointed, the person takes full charge of the company. That means they have the power to make all decisions, including running the company’s finances.</p>
<p>The main aim is for the rescue practitioner to investigate the affairs of the company and ultimately prepare a rescue plan. They have 25 days in which to do this. But normally the rescue practitioner would call a creditors meeting to inform them that he or she is applying for an extension to that time. The creditors must agree to this.</p>
<p>The rescue practitioner must also meet with the employees. </p>
<p>When the rescue practitioner has drawn up a plan for the business, it needs to be presented to the creditors for approval. They must vote on it. It can only go through if 75% are in favour of implementation. Alternatively, they can ask for revisions which the rescue practitioner is obliged to follow up. </p>
<p>If there’s no agreement, the business must go into liquidation, and be shut down. </p>
<p>But if the plan is agreed, the next task is implementation. There’s no particular timeline for this – it can take anything from, say, six months to four years.</p>
<p>Once the plan has been implemented, the company must apply to the Companies and Intellectual Properties Commission to have its status reversed to being a going concern.</p>
<p><strong>What happens to the directors during the process?</strong></p>
<p>Most of the time it’s the directors that got the business into trouble in the first place by making bad decisions. </p>
<p>They are obliged to support the rescue practitioner in whatever he or she requires. Their co-operation is very important. For example, they must supply him or her with information. But they no longer have any powers to make decisions. They will still be paid – though, depending on the plan, this is where cuts are usually made immediately. But this will depend on the rescue practitioner and the plan. </p>
<p><strong>And the employees?</strong></p>
<p>Employees are unfortunately very vulnerable during the process. Quite often you’ll find that the good employees leave because they can find other jobs. Nevertheless, they are also protected. If the company does go into liquidation they get preference and are the first of the unsecured creditors to be paid from the available money.</p>
<p><strong>The airline is a state-owned enterprise. Has one of these ever been put through this process before?</strong></p>
<p>Not that I know of. I believe that this is why there was so much hesitancy to do it. </p>
<p>In late November the trade union Solidarity, which represents mainly white, Afrikaans-speaking employees, <a href="http://www.capetalk.co.za/articles/367720/court-will-have-to-rule-if-saa-is-financially-distressed">asked</a> the Johannesburg High Court to place the airline under business rescue. The union argued that this was the only way to save the airline. </p>
<p>I think it’s doubtful that the airline can be saved. The question you have to ask is this: is there a business? </p>
<p>As soon as this process starts, the business takes a body blow. Nobody trusts it anymore. Nobody wants to take the risk and book tickets because there’s a high risk they will lose their money.</p><img src="https://counter.theconversation.com/content/128409/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Marius Pretorius does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Distress is normally identified when a company is no longer profitable, when it’s not a going concern anymore, when it has major problems.Marius Pretorius, Associate professor in strategy, leadership and turnaround, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1078112018-11-29T08:00:34Z2018-11-29T08:00:34ZSouth African taxpayers can’t keep bailing out broken airline<figure><img src="https://images.theconversation.com/files/247730/original/file-20181128-32197-jv769a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">SAA appears to be in a tail spin.</span> <span class="attribution"><span class="source">EPA/Udo Weitz</span></span></figcaption></figure><p><a href="https://www.dailymaverick.co.za/article/2018-11-28-saa-needs-r21-7bn-just-to-stay-in-the-air-until-mid-2109-failure-a-systemic-threat-to-south-africa/">R21 billion</a>: that’s how much South Africa’s beleaguered national carrier, South African Airways (SAA), says it needs to keep running.</p>
<p>SAA has reached this point in its financial crisis through persistent mismanagement and cronyism, with the SA government as main shareholder refusing to take tough decisions about the company. But such decisions can’t be delayed any longer.</p>
<p><a href="http://www.treasury.gov.za/documents/mtbps/2018/speech/speech.pdf">In theory</a>, it’s the South African government that supports SAA and bails it out in times of need. But in practice, it’s the country’s already struggling taxpayers who foot the bill. And they keep doing so, with no clear plan in sight to stem the airline’s financial haemorrhaging. The Free Market Foundation, an economic and policy think tank, estimates that SAA has already cost taxpayers <a href="https://businesstech.co.za/news/government/282900/government-has-plugged-r57-billion-into-saa-and-counting/">close to R60 billion</a> in the past 20 years.</p>
<p>I <a href="https://www.fin24.com/Budget/sell-saa-it-wont-fly-economist-20181031">have argued</a> for some time that SAA is nothing more than a government vanity project and should be sold. In March 2016, when I first said this, it might have been feasible; then, the airline was still financially viable. That moment has passed as the government kept SAA as a vanity project.</p>
<p>President Cyril Ramaphosa <a href="https://www.businesslive.co.za/bd/national/2018-11-07-cyril-ramaphosa-says-shutting-saa-could-destabilise-other-soes/">says</a> that closing SAA would destabilise other state-owned entities and the broader economy. </p>
<p>The country’s recently appointed finance minister Tito Mboweni disagrees. In his recent medium-term budget policy statement, Mboweni warned that failing state-owned entities are “<a href="http://www.treasury.gov.za/documents/mtbps/2018/speech/speech.pdf">no holy cows</a>” and would be expected to pull their financial weight.</p>
<p>South Africa can’t afford any more delays. Strong players in the continent are eating into the airline’s already weakened base. These include Ethiopia and Kenya’s national carriers as well as minnows like Namibia’s airline.</p>
<p>In the meantime, South Africans taxpayers are caught between a rock and a hard place. The country can’t afford SAA anymore – and can’t afford to close it down. What is the next step, then?</p>
<h2>The only option left for SAA</h2>
<p>I believe there is only one option: an independent cost-benefit analysis into SAA’s continued existence and the possible implications of its sale or closure. This should be an independent process; both SAA and the South African government have vested interests in the outcome.</p>
<p>This would be a first, and its successful completion could set a benchmark for judging the continued financial viability of other problematic state-owned entities like Denel and the South African Broadcasting Corporation.</p>
<p>This is urgent. SAA is not just asking for more money to keep itself airborne. Its chief executive, Vuyani Jarana, <a href="https://www.businesslive.co.za/bd/national/2018-11-27-saa-tells-mps-it-needs-nearly-r17bn-by-march/">has told</a> a parliamentary committee that the airline will not be profitable by 2020, as it initially announced. It now says it will be <a href="https://www.thesouthafrican.com/saa-government-bailout-blown-in-one-month/">profitable by 2021</a>. </p>
<p>One of the reasons it has fallen short is that SAA’s management got its oil price forecasts completely wrong. <a href="https://www.thesouthafrican.com/saa-government-bailout-blown-in-one-month/">It planned</a> for an average oil price of US$ 45 per barrel over. The actual average has turned out to be US$ 75 per barrel.</p>
<p>It does not take a lot of management competence to understand that a single oil price cannot be used in profitability forecasts for a company sensitive to oil price fluctuations, as is the case with an airline. </p>
<p>It has also emerged that senior managers at SAA are earning <a href="https://mg.co.za/article/2018-06-08-00-broke-saa-goes-on-spending-spree">enormous monthly salaries</a> (Jarana, for instance, earns R6.7 million a year). This fact, coupled with obviously chronic financial mismanagement – how else to explain that the airline spent its last government bailout of R5 billion in just one month? – is galling to taxpayers.</p>
<p>During its presentation to Parliament, SAA’s managers offered no alternative plans. It’s a government bailout – or bust. But this isn’t sustainable. An independent assessment is critical if SAA is to be saved from itself; and the country’s reeling taxpayers are to be saved from the airline’s excessive demands.</p><img src="https://counter.theconversation.com/content/107811/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw is an NRF-rated researcher and previously received funding from the NRF. On occasion, he is a passenger on SA Airways. </span></em></p>South Africa can’t afford its national airline anymore – nor can it afford to close it down. What’s the next step?Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/922452018-02-22T11:25:10Z2018-02-22T11:25:10ZEfforts to get South Africa’s economy moving are no more than a patch up job<figure><img src="https://images.theconversation.com/files/207463/original/file-20180222-152372-x8679p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South African finance minister Malusi Gigaba could have done better in his 2018 budget speech.</span> <span class="attribution"><span class="source">Reuters/Mike Hutchings</span></span></figcaption></figure><p>Its obvious that the South African government approached the <a href="http://www.treasury.gov.za/">2018 budget</a> from an extremely tight spot and with limited options. The country has been staring at the perfect storm of low economic growth and widening fiscal deficits set against huge expectations and needs. These include <a href="https://www.ujuh.co.za/south-africa-relies-on-new-taxes-to-fund-fee-free-higher-education/">fee-free higher education</a> for poor students, troubled state-owned enterprises and a growing base of the unemployed.</p>
<p>The saving grace may have been the recent <a href="https://theconversation.com/why-ramaphosas-moment-of-hope-is-built-on-a-fragile-foundation-92043">change in presidency</a> from the disastrous Jacob Zuma to the promising Cyril Ramaphosa. The new president has triggered a wave of optimism and there are signs that the economy is <a href="https://citizen.co.za/business/business-news/1829217/sas-economic-growth-forecast-revised-upward/">picking up</a>. This will be needed if Treasury is to find a way of closing a revenue gap of R48.2bn.</p>
<p>The focus by Malusi Gigaba, the minister of finance, on free education, developing industrialists and small to medium sized enterprises are to be welcomed. But one gets the sense that without the right policies in place, this is just more of the same. </p>
<p>Assuming that government is able to achieve the expenditure reduction of R85 billion, fund the R57 billion earmarked for higher education via increased <a href="https://theconversation.com/south-africas-finance-minister-played-the-tax-cards-he-had-left-wealth-and-vat-92230">Value Added Tax</a> (VAT) and marginal adjustments to personal income tax, the question remains; has it addressed the real reasons why the country has been limping along. It all sounds like a patch up job to me.</p>
<p>The increase in VAT from 14% to 15% is bad news, despite the promised offsets through social grants. VAT is generally known to be <a href="https://www.ujuh.co.za/south-africas-tax-system-and-the-reform-agenda-for-2015-and-beyond/">a regressive tax</a> which means it tends to hit the poor people the hardest.</p>
<p>On top of this, the budget just didn’t go far enough. Perhaps the finance minister was caught up in the euphoria of Ramaphosa’s widely welcomed <a href="https://theconversation.com/why-ramaphosas-moment-of-hope-is-built-on-a-fragile-foundation-92043">state of the nation address</a>. Gigaba’s speech didn’t do enough to highlight the consequences of not doing what needs to be done. He had a great opportunity to set the path, but there wasn’t an integrated outline as to what is needed, and how the changes proposed will be implemented in a way that makes sure they complement each other. </p>
<p>He had the chance to set the vision, but didn’t.</p>
<h2>Thin on detail</h2>
<p>The budget is very thin on detail. The power utility Eskom is clearly a great concern as reference to this was highlighted quite early on in the budget speech. The minister said:</p>
<blockquote>
<p>we have demonstrated our resolve by strengthening Eskom’s board and management with highly capable, ethical and credible leadership. </p>
</blockquote>
<p>Other than a brief mention of South African Airways (SAA), Gigaba made no reference to other stressed state owned enterprises such Passenger Rail Agency of South Africa and Denel. I was expecting more detail on how government plans to sort out the state owned enterprises mess.</p>
<p>The debt situation is frightening. The debt-service cost projections have gone up from R163.155 million in 2017/18 to R213.859 million in 2020/21. Even though he acknowledged that government debt is on an unsustainable path, he didn’t provide a clear outline about how the stabilisation of gross debt-to-GDP at 56.2% of GDP in 2022/23 will be achieved. This is just a case of kicking the can down the road.</p>
<h2>The fate of state owned enterprises</h2>
<p>Gigaba made a bold statement when he said:</p>
<blockquote>
<p>State-owned enterprises are expected to fund their own operations. </p>
</blockquote>
<p>The only clue as to how this will be achieved is that government would help them develop robust turnaround plans. </p>
<p>Gigaba also mentioned that non-core assets could be sold, strategic equity partners brought in or possible injections of direct capital. </p>
<p>This is all well and good. But the minster wasn’t clear about the time frame, who will drive the process or how it will be done. The lack of detail doesn’t inspire confidence that there is real political will to address the dire situation of state owned enterprises. </p>
<p>Gigaba did touch on the systemic issues like the unacceptably high levels of corruption. But he did not do so credibly enough. He didn’t demonstrate loudly and clearly that the government wouldn’t tolerate any more <a href="https://www.ujuh.co.za/state-of-capture-public-protectors-report/">transgressions</a> in the running of public funds. </p>
<p>The fact that he has a <a href="https://citizen.co.za/news/south-africa/1789778/gigaba-the-catalyst-behind-a-multibillion-rand-civil-claim-against-eskom-zuma-guptas/">cloud hanging over</a> his head does not help the situation. One can’t help but wonder if his proposals can be taken seriously. </p>
<p>What people want to see is the minster drawing a line in the sand and making it abundantly clear that it can no longer be crossed. As the person who controls the public purse, this message should have been loud and clear.</p>
<h2>Next steps</h2>
<p>Ramaphosa has the opportunity to assemble the most respected cabinet this country has ever known. The various summits that he is calling for – such as the one on jobs – and the social compact he’s intent on securing are absolutely essential to kick start South Africa on a growth path that is able to realise inclusive economy and socioeconomic transformation.</p><img src="https://counter.theconversation.com/content/92245/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Owen Skae does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s 2018 budget does not go far enough. Perhaps finance minister, Malusi Gigaba was caught up in the euphoria of the widely welcomed state of the nation address by Cyril Ramaphosa.Owen Skae, Associate Professor and Director of Rhodes Business School, Rhodes UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/922232018-02-21T16:55:44Z2018-02-21T16:55:44ZNo more mercy for bad behaviour at South Africa’s state owned companies<figure><img src="https://images.theconversation.com/files/207312/original/file-20180221-132680-xnoxi4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's Finance Minister Malusi Gigaba arrives to deliver his budget address.</span> <span class="attribution"><span class="source">Reuters/Mike Hutchings</span></span></figcaption></figure><p><em>South Africa’s <a href="http://www.treasury.gov.za/documents/national%20budget/2018/">2018 national budget</a> was presented amid growing concern about the financial sustainability of key state owned enterprises such as the power utility Eskom and South African Airways. Sibonelo Radebe asked Misheck Mutize and Sean Gossel to set out what the budget means for them.</em></p>
<p><strong>What is your general impression of the budget speech?</strong></p>
<p>Coming on the back of the <a href="https://theconversation.com/why-ramaphosas-moment-of-hope-is-built-on-a-fragile-foundation-92043">state of the nation address</a> presented by the new President Cyril Ramaphosa, the 2018 national budget has renewed hope about the future of the country’s economy. Combined with the pledge by Ramaphosa to root out the ills bedevilling state owned enterprises, there is optimism that South Africa’s economy is turning the corner.</p>
<p>There were signs of the rebound from the numbers presented by the minister – even though there’s still huge weakness in the economy. Last year’s economic growth projection has been revised, up from 0.7% to 1% and growth in 2018 is projected at 1.5% rising to 2.1% 2020. Of course the country needs much more robust growth than this. The hope is that things will improve with the interventions promised by the new president.</p>
<p>It was a tough budget, especially for the poor. But the tax hikes and other measures are necessary given the need to narrow a R42 billion revenue shortfall, which was widened by the need for a funding solution for fee free higher education. </p>
<p>Overall the budget presented a solid step towards arresting the fiscal deficit and stabilising government debt. Fiscal prudence is painful. But it’s necessary to save the country from further downgrades, and from sliding deeper into debt. </p>
<p><strong>What do you think about the treatment of state owned enterprises?</strong></p>
<p>Finance minister Malusi Gigaba underscored the commitment to dealing with patronage, corruption and incompetence in state owned enterprises. (This is rather <a href="https://www.news24.com/SouthAfrica/News/is-gigaba-mr-state-capture-20170528-2">ironic</a> as he has been fingered as one of the architects of state capture as the opposition vocally pointed out before the speech got underway). Nevertheless, this must be commended. The looting and mismanagement has caused a great deal of damage to the economy as well as business confidence.</p>
<p>The message is that there will be no mercy for misbehaviour in this space. Time has also run out for those who justified mediocrity in parastatals. Gigaba’s statement that state-owned companies are expected to fund their own operations must also be welcomed. Although similar calls have been made in the past, this time there may be political will.</p>
<p>This means that the government’s limited resources can now be allocated to other more important things. Hopefully the emphasis will shift towards finding long-term solutions to the country’s ills. </p>
<p><strong>What must happen to get state owned enterprises right?</strong></p>
<p>It is refreshing that the new president has indicated his commitment to appointing qualified and experienced people to lead state owned enterprises. This is a welcome substitute for the disastrous policy of cadre deployment – the practice of appointing people to state owned enterprises largely for their political connections.</p>
<p>But it’s also time the government actively reconsidered its interest in state owned enterprises. The cost of maintaining ownership has become too high. Over the past 24 years state owned monopolies have been the site of gross inefficiencies and high social costs which in turn have hampered the economy’s performance. The time is ripe for the government to begin unpacking monoliths such as Eskom, Transnet and the Passenger Rail Agency of South Africa in preparation for partial privatisation or public listings on the stock exchange. </p>
<p>The options would be to either partially privatise the entities, or to open up the space for private players to buy equity stakes. Government might in fact be considering these options given Gigaba’s comment that: </p>
<blockquote>
<p>In the coming year, government may be required to provide financial support to several state owned enterprises which could be done through a combination of disposing of non-core assets, strategic equity partners, or direct capital injections.</p>
</blockquote>
<p>It is good that the minister mentioned these refinancing options. But there’s still talk of government support and guarantees for several state owned enterprises. </p>
<p><strong>What general advice would you give to the new administration following this budget?</strong></p>
<p>As the government goes about meeting the spending cuts it announced (by R85.7 billion) over the next three years and increasing revenue by R36 billion this year, it urgently needs to wean state owned enterprises from the fiscus. Opening the public sector to participation by private players would be the optimal way to go about this. </p>
<p>Allowing these enterprises to continue operating as monopolies in key sectors will simply allow inefficiencies and market distortions to continue. We would argue that the unions and politicians that have campaigned against privatisation have exaggerated the negative impact on the poor. <a href="https://hbr.org/1991/11/does-privatization-serve-the-public-interest">Evidence</a> from other countries suggests that introducing private ownership doesn’t necessarily lead to massive job losses nor expensive services. </p>
<p>The new administration should depoliticise the issue and face the reality that state owned enterprises need an immediate and realistic response to save both the economy and the fiscus. Without that, the government will not be able to wean them from guarantees and bailouts, and their failure will be eminent.</p>
<p>We would also urge the government to follow up on the promise to hold corrupt public servants to account and to ensure tender processes aren’t abused by closing loopholes in public procurement.</p><img src="https://counter.theconversation.com/content/92223/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sean Gossel receives funding from the University of Cape Town.</span></em></p><p class="fine-print"><em><span>Misheck Mutize does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s 2018 national budget makes it clear that the slumber and corruption that has hampered state owned enterprises must come to an end.Sean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape TownMisheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, Graduate School of Business (GSB), University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/905482018-01-23T14:54:47Z2018-01-23T14:54:47ZWhy shaking up South Africa’s power utility matters for the economy<figure><img src="https://images.theconversation.com/files/203050/original/file-20180123-182973-1b61qkn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Cyril Ramaphosa, South Africa's deputy president who was recently elected as the leader of ruling party, is seen to be fighting corruption.</span> <span class="attribution"><span class="source">EPA</span></span></figcaption></figure><p><em>South Africa’s power utility Eskom has seen a remarkable leadership shake up in the past few days. Almost the entire board has been replaced with seasoned businessmen. And a well respected acting CEO has been put in place, too. The developments appear to reflect resolve by the country’s deputy president Cyril Ramaphosa, who was elected as president of the African National Congress in December. Sibonelo Radebe asked Jannie Rossouw to discuss what the changes at Eskom mean.</em></p>
<p><strong>What do you make of the shake up at Eskom?</strong></p>
<p>The announcement of a <a href="https://www.enca.com/south-africa/eskom-appoints-new-board">new board at Eskom</a> is welcome for a number of reasons. </p>
<p>Firstly, the previous board and top executive layer proved to be incompetent if not downright destructive. Secondly, the power utility had sunk into dire <a href="https://www.fin24.com/Economy/Eskom/eskom-could-collapse-sa-economy-warns-gigaba-20180118">financial difficulties</a> on their watch. Recent reports suggested that the power utility has <a href="https://www.fin24.com/Economy/Eskom/exclusive-eskoms-cash-dries-up-20171113-2">run out of funds</a> and wouldn’t be able to meet its obligations unless government stepped in with another huge bailout. This, after the government <a href="https://www.ujuh.co.za/brian-molefe-the-ceo-of-south-africas-power-utility-is-overrated/">injected</a> R23 billion in equity and and wrote off about R60 billion over the past five years.</p>
<p>Over the past five years or so, Eskom has been hit by a series of corporate governance breaches of the worst kind. These included the former CEO Brian Molefe trying to secure a <a href="http://www.702.co.za/articles/265740/public-protector-to-probe-brian-molefe-s-r30-million-pension-pay-out">R30 million payout</a> for only 18 months at the helm.</p>
<p>And it’s become clear from the <a href="http://amabhungane.co.za/article/2017-06-09-guptaleaks-how-eskom-was-captured">Gupta leaks</a> that the power utility had come to play a central role in a raft of activities related to state capture. It appears to have served as <a href="https://www.ujuh.co.za/state-of-capture-public-protectors-report/">a conduit to transfer government resources</a> to well-connected and corrupt individuals and families in South Africa.</p>
<p>Given the damage that’s been done, the previous board at Eskom simply could not continue. It had <a href="http://ewn.co.za/2018/01/18/gigaba-treasury-can-t-afford-more-eskom-bailouts">no plan</a> to turn the company around or stop corruption. Its only strategy was to lean on the South African government for more financial assistance.</p>
<p>The Eskom shake up is also significant because it’s a signal that the new president of the ANC Cyril Ramaphosa is committed to fighting <a href="http://ewn.co.za/2018/01/19/ramaphosa-we-re-dead-serious-about-addressing-corruption">corruption</a> in both the public and private sectors.</p>
<p><strong>Why does Eskom matter?</strong> </p>
<p>Eskom is arguably South Africa’s most important state owned enterprise. The South African economy depends on continuous and uninterrupted power supply. This puts Eskom in a different league to other embattled state owned enterprises like the national airline, South African Airways (SAA).</p>
<p>SAA is also dependent on government <a href="https://www.fin24.com/Economy/live-out-of-cash-saa-faces-parliament-20170804">bailouts</a>, but the South African economy will continue to function without it. Eskom, on the other hand, is a monopoly power supplier. All South Africans depend on it for power. </p>
<p><strong>There seems to have been an urgency to make changes. Why?</strong></p>
<p>It seems that Ramaphosa moved quickly to wrap up the Eskom shake up before he left for the World Economic Forum in Davos. It’s not difficult to understand why. South Africa has had some very bad headlines over the past few years, including downgrades by international rating agencies, and its economy is in the doldrums. </p>
<p>A significant portion of South Africa’s economic pressure originates from declining confidence of local and international investors in the country’s economy. This is evident from the South African <a href="https://tradingeconomics.com/south-africa/business-confidence">business confidence index</a>, which has plummeted. Since 2013 business confidence has been on a declining trend from above 50 to a current level below 35.</p>
<p>Replacing the Eskom board before the Davos meeting was a smart and necessary move. Davos is a rare occasion to showcase South Africa as an investment destination of choice for international investors. One condition for attracting international investment is a clear commitment to addressing corruption and instilling sound management in government enterprises.</p>
<p><strong>What in your view is the long term solution around Eskom?</strong></p>
<p>The long term solution to the problems at Eskom and other troubled state owned enterprises is a rethink of their role in the South African economy. </p>
<p>Some, such as South African Airways, are really unimportant and their disposal or even their closure would have little impact on the domestic economy. Disposal or closure are necessary options as these entities add an unnecessary burden on the national fiscus.</p>
<p>But others, like Eskom, are more strategic and matter enormously and the government should retain them. </p>
<p>It has also become necessary for South Africa to rethink the <a href="https://businesstech.co.za/news/wealth/194164/ceo-vs-employee-salaries-at-eskom-saa-and-other-state-companies/">remuneration policies</a> for executives of state owned enterprises. They earn salaries that aren’t commensurate with the risks they face. The consequences of failure are much more severe for executives in the private sector. Executives of state owned enterprises simply apply for bailouts when they’re in trouble. </p>
<p>So there’s no justification for exorbitant remuneration at state owned enterprises. And no executive at any state owned enterprise should get a bonus: how can a bonus be justified when the South African government provides the bailout in the event of financial difficulty?</p>
<p>The new Eskom board should urgently revise the company’s remuneration policy to restore some sanity in the level of remuneration. The board should also review business practices to ensure that Eskom remains financially viable without any financial assistance from the government.</p>
<p>It is also important that the South African government and the board of Eskom should make it clear to the general public and to investors that the proposed <a href="https://awethu.amandla.mobi/petitions/campaign-for-a-just-energy-future?gclid=EAIaIQobChMI58iX0pnu2AIVzr_tCh3WcwUoEAAYASAAEgLYwfD_BwE">nuclear procurement project</a> plan will not go ahead: neither the South African fiscus nor Eskom can afford such a project.</p><img src="https://counter.theconversation.com/content/90548/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw is a NRF C3-rated researcher and receives funding from the NRF. </span></em></p>The shake up at South Africa’s power utility, Eskom, sends a good signal about where Cyril Ramaphosa is taking the country.Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/863672017-10-26T17:46:48Z2017-10-26T17:46:48ZSouth Africa’s finance minister fails to come up with the goods<figure><img src="https://images.theconversation.com/files/192112/original/file-20171026-13378-1284fyq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">EPA/Stringer</span></span></figcaption></figure><p><em>Given the gloomy political and economic environment in South Africa a great deal was expected from Finance Minister Malusi Gigaba’s first <a href="http://www.treasury.gov.za/documents/MTBPS/2017/">budgetary statement</a>. The Conversation’s Sibonelo Radebe asked Owen Skae to rate the medium term budget statement</em></p>
<p><strong>What are your general impressions of the speech?</strong></p>
<p>The minister’s opening remarks were encouraging but in the final analysis, nothing profound came out of his speech. </p>
<p>The reference to a famous line Ben Okri’s poem was inspiring: </p>
<blockquote>
<p>You can’t remake the world without remaking yourself. </p>
</blockquote>
<p>By quoting the line the minister gave the impression that he and his team have been through a thorough introspection which is sorely needed given the <a href="https://theconversation.com/britains-labour-party-and-south-africas-anc-why-the-stark-contrast-of-fortunes-85000">state and direction</a> of the ruling African National Congress (ANC) and the country. Corruption is steadily and surely eating away the future of South Africa.</p>
<p>Some say the minister did do some <a href="https://theconversation.com/gigaba-lays-bare-south-africas-economic-woes-will-it-be-enough-to-trigger-change-86374">introspection</a>. But his speech was vague and lacked the critical elements of taking responsibility and offering solutions. He offered little detail about how the country will get on the path to the kind of sustainable economic growth it so sorely needs.</p>
<p><strong>What are the biggest challenges facing the country coming out of the speech?</strong></p>
<p>South Africa’s problems are well known. Economic exclusion and unemployment tops the list. They can only be solved by significantly growing the economy. But I couldn’t find any detail about how the country is going to address these critical areas.</p>
<p>Growth prospects remain gloomy as captured in the minister’s own words. He revised 2017 economic growth downwards from 1.3% to 0.7%. And his projection shows growth remaining below the 2% mark over the next three years. This is far below the required growth of about 6% for the country to push back poverty and unemployment.</p>
<p>Poor economic performance is obviously symptomatic of deeper issues. But he didn’t tackle them. For example, there was a lack of urgency to deal with allegations of state capture, which has involved attempts by powerful individuals and groups to shape South Africa’s political and economic landscape through corrupt relationships and deals to benefit their own private interests. He also resurfaced the nuclear power deal. This will just make the rating agencies nervous.</p>
<p>His rhetoric around state owned enterprises is not convincing. We’ve heard it before. I’m afraid the old mantra ‘seeing is believing’ will guide many when it comes to his promise of fixing these troubled enterprises.</p>
<p>The minister did speak of a Youth Employment Service and a R1.5 billion small to medium enterprise development fund. But frankly speaking this doesn’t even begin to touch sides of what needs to be done. </p>
<p>He also faces the dual problem of declining revenue and increasing expenditure. This medium term budget projected a R50.8 billion tax revenue shortfall for the 2017/18 period which was described as “the largest downward revision since the 2009 recession”.</p>
<p>And he’s already dipped into the contingency reserves to recapitalise troubled state owned enterprises, South African Airways and the South African Post Office. And he faces an ever increasing demands for social expenditure.</p>
<p>So, there is talk of the disposal of assets. But why partially sell the crown jewels of Telkom and leave the problematic entities like power utility Eskom and South African Airways to further burden the taxpayer. That just fuels the view of cynics who believe government isn’t really committed to making the tough decisions the minister alluded to.</p>
<p><strong>What do you think of the handling of educational funding matters?</strong> </p>
<p>I was half expecting the minister to announce something significant around the funding of education given the developments of the past few years. But he said almost nothing that will change the destructive course that the country’s education system finds itself in.</p>
<p>There was the routine statement about how allocation to the education sector is “the fastest growing element of expenditure over the medium term”. The allocation moves from R77 billion this year to R97 billion for the 2020/21 financial year. This increase looks significant but it doesn’t even begin to address the problems at hand – in particular the funding of higher education against a mass of students who can’t afford to pay their fees. </p>
<p>The problem has escalated because of a <a href="https://www.timeslive.co.za/news/south-africa/2017-10-24-two-years-and-counting-university-fees-frustration-mounts/">lack of leadership</a> with government pussy footing around the issue. One can only conclude that government has no way of handling this hot political potato and has resorted to the poor tactic of kicking the can down the road.</p>
<p>All the minister said was that further announcements would be made in the 2018 Budget.</p>
<p>But this is no comfort for higher education institutions. They now have to approach next year with no idea about how they’re going to address the growing gaps in their financial forecasts. </p>
<p>In my view this should be South Africa’s greatest priority, especially as the student voices are being raised about this. I’m not getting the sense that government appreciates the gravity of the situation.</p><img src="https://counter.theconversation.com/content/86367/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Owen Skae does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s finance minister Malusi Gigaba failed to impress when presenting the eagerly awaited 2017 medium term budget.Owen Skae, Associate Professor and Director of Rhodes Business School, Rhodes UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/840782017-09-18T16:20:11Z2017-09-18T16:20:11ZState owned enterprises shouldn’t be used as pawns in South African politics<figure><img src="https://images.theconversation.com/files/186178/original/file-20170915-8071-ce6kx6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's finance minister, Malusi Gigaba, has had to look towards selling off state owned assets to plug a fiscal hole</span> <span class="attribution"><span class="source">REUTERS/Rogan Ward</span></span></figcaption></figure><p>State owned enterprises are vital to many economies, but are particularly vital to those seeking economic development.</p>
<p>This is true in South Africa too. Which makes it odd that the South African government – and much of the policy debate – never sees any value in trying to work out what role they should play in growth and development.</p>
<p>Finance Minister Malusi Gigaba’s interest in <a href="http://www.fin24.com/Companies/Industrial/gigaba-could-target-pics-r14bn-telkom-stake-for-massive-saa-bailout-20170721">selling off</a> government shares in telecommunications group Telkom, to bail out South African Airways is the latest example of a trend in which state owned enterprises are seen as useful pawns in government plans but not as national assets whose use should be thought through carefully.</p>
<p>The importance of South African state owned enterprises was spelled out in a 2015 Organisation for Economic Cooperation and Development <a href="https://www.oecd.org/corporate/south-africa-state-owned-enterprise-reform.pdf">policy brief</a>. It estimated that their revenues correspond to 8.7% of the country’s gross domestic product. They also, it found, play a vital role in providing services:</p>
<blockquote>
<p>The population’s access to water, electricity, sanitation and transportation is almost entirely dependent on the state, operating through corporate vehicles. They are concentrated in strategic sectors – infrastructure, transport, energy and water – and are “among the main sources of employment” in cities.</p>
</blockquote>
<p>The Organisation for Economic Cooperation and Development might also have mentioned that State owned enterprises are also a key source of racial change. According to the <a href="http://www.labour.gov.za/DOL/documents/annual-reports/Commission%20for%20Employment%20Equity%20Report/2016-2017/commission-for-employment-equity-report-2016-2017">2016/17 report</a> of the Commission for Employment Equity, black people occupy just under 75% of top management jobs in state owned enterprises – black Africans 57%. In the private sector, the figure is 24.5 % - only 10.8% are black African.</p>
<p>Given this, one might expect that the government would make it a priority to work out what the most appropriate role for parastatals is in the economy’s development. But it isn’t a priority – nor has it ever been. </p>
<h2>Rule of short termism</h2>
<p>State owned enterprises have been seen as a route to private investment, enrichment for the connected or a site for political battles but never as a key element in the development mix. </p>
<p>In fairness, private interests have shown no great interest in debating the role of state owned enterprises either. They have preferred taking sweeping positions for or against privatisation. But, given state owned enterprise’s role in governance, government should take the lead in thinking through what State owned enterprises should do.</p>
<p>The reality is different. Gigaba’s interest in selling off government holdings in state owned enterprises has much more to do with pressures for patronage than placing privatisation back on the agenda some 15 years after president Thabo Mbeki was forced to <a href="http://ewn.co.za/2016/03/21/Mbeki-GEAR-programme-was-meant-to-save-SA-from-debt">ditch</a> it. It would be a strange turn if appeasing demands for public money revives a market friendly option which Mbeki had to abandon. And it certainly would not suggest a government committed to finding a development role for state owned enterprises.</p>
<p>It seems that the Mbeki government wanted to sell off shares in state owned enterprises not because it had a considered view that this would achieve the goals parastatals were designed to serve. The <a href="http://ewn.co.za/2016/03/21/Mbeki-GEAR-programme-was-meant-to-save-SA-from-debt">motive</a>, rather, seemed to be to enhance private investor confidence and state revenues. Many might support these goals. But neither has to do with a long-term view on the contribution these enterprises could make to the economy.</p>
<h2>A balancing act</h2>
<p>Nor has Gigaba revived privatisation because he and his advisors have thought through the role for state owned enterprises which his predecessors ignored. He is, rather, trying to balance the two pressures he has faced since he became minister earlier this year. </p>
<p>On the one hand, he does not want to become the latest finance minister to face <a href="http://www.fin24.com/Economy/live-can-dudu-myeni-legally-be-allowed-to-be-saa-chair-20170913">pressure</a> for not giving a state owned enterprise what it needs. On the other, he does not want to preside over a second round of rating <a href="https://theconversation.com/public-enterprises-played-a-big-part-in-south-africas-credit-ratings-downgrade-75745">downgrades</a> because he spent money the government did not have. The only way to square the circle is to sell off shares in one state owned enterprise (Telkom) to pay for the bailout in another, South African Airways. The government’s stake in Telkom is over <a href="https://www.moneyweb.co.za/news/companies-and-deals/telkom-cautions-shareholders-over-government-sale-talk/">39%</a>.</p>
<p>It’s hard to see how this strategy is sustainable. The South African Airways <a href="http://www.fin24.com/Economy/live-can-dudu-myeni-legally-be-allowed-to-be-saa-chair-20170913">bailout</a> request will not be the last. And it’s clearly not workable to keep on selling off national assets whenever state owned enterprises want cash injections. </p>
<p>Nor is this likely to protect the minister from political flak. There is sure to be principled opposition to the strategy and patronage politicians will also notice that the prospective piggy bank is being sold off and will rebel.</p>
<p>But even if Gigaba does manage to bring off the trick, it’s obvious that this move has everything to do with balancing political pressures and nothing to do with a development strategy. </p>
<p>Between Mbeki’s strategic retreat and Gigaba’s strategic balancing act, state owned enterprises have not been quiet backwaters. They have been, and still are, key battlegrounds in the war between the ruling party factions as officials and politicians in its patronage group try to turn them into vehicles for making deals and accumulating goodies while their opponents try to stop them. </p>
<p>Lately, this battle has been played out in parliament – first over the <a href="http://www.news24.com/SouthAfrica/News/sabc-inquiry-adopts-final-report-20170224">South African Broadcasting Corporation</a>, now over state owned power utility <a href="https://businesstech.co.za/news/government/178243/leaked-emails-show-exactly-how-the-guptas-captured-eskom-report/">Eskom</a>. South African Airways has been a battleground throughout and other state owned enterprises have been quieter sites of <a href="https://theconversation.com/corrupt-state-owned-enterprises-lie-at-the-heart-of-south-africas-economic-woes-79135">conflict</a>. </p>
<h2>Economy pays the price</h2>
<p>This trench warfare, in which both factions seeking control of the ANC make gains after pitched battles but neither ever wins the war, may shape the future of the ANC and government’s role in the economy. But again, the issue here is a political fight for power, not considered positions on the role of state owned enterprises.</p>
<p>The economy pays an obvious price for this failure to care about their development role – missed opportunities for growth and the exclusion of many who go without wages and salaries. But, given the factionalised nature of politics, which is likely to continue, it is unrealistic to expect serious thinking from the politicians on the role that state owned enterprises can play in growth and inclusion.</p>
<p>This makes it urgent that private interests take this issue much more seriously, replacing the stereotyped debate with considered proposals for change. State owned enterprises are too important to be relegated to pieces on a chessboard. But nothing is likely to change until everyone with an interest in the economy’s future develops ideas on how state owned enterprises fit in and presses politicians to take notice.</p><img src="https://counter.theconversation.com/content/84078/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Friedman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Privatisation talk in South Africa shows how state owned enterprises are being used as tools for enrichment by the connected and less as key elements of development.Steven Friedman, Professor of Political Studies, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/791352017-06-19T20:12:08Z2017-06-19T20:12:08ZCorrupt state owned enterprises lie at the heart of South Africa’s economic woes<figure><img src="https://images.theconversation.com/files/174008/original/file-20170615-23574-zce0hl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Demonstrators march against corruption in South Africa.</span> <span class="attribution"><span class="source">Reuters/Mike Hutchings</span></span></figcaption></figure><p>The prevailing economic crisis sweeping through South Africa is a direct result of economic mismanagement largely shaped by the looting of state owned enterprises. </p>
<p>Many are in deep <a href="https://www.dailymaverick.co.za/article/2015-08-06-state-owned-enterprises-chaos-inside-a-mess-wrapped-in-politics/#.WT_1gOuGPIU">trouble</a>. Sheer incompetence and corruption has pushed entities like South African Airways and the South African Broadcasting Corporation closer to <a href="https://www.businesslive.co.za/rdm/business/2017-03-24-sinking-fast-the-perilous-state-of-sas-six-big-state-owned-companies/">financial collapse</a>. Serious questions are being asked about the legality of multi-billion <a href="http://www.timeslive.co.za/politics/2017/06/09/Malema-lays-charges-in-alleged-R17-billion-Transnet-locomotive-tender-corruption">rand procurements at Transnet</a> and the state power utility <a href="http://amabhungane.co.za/article/2017-04-22-r10bn-in-15-days-another-massive-eskom-boost-for-the-guptas">Eskom</a>. </p>
<p>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: <a href="https://www.dailymaverick.co.za/article/2017-05-26-betrayal-of-the-promise-the-anatomy-of-state-capture/">Betrayal of the Promise</a>. The second was the leaking of 200 000 emails which point to dubious links between the <a href="http://www.huffingtonpost.co.za/2017/06/01/the-new-gupta-emails-are-a-lot-heres-what-they-say-in-5-quick_a_22120706/">Gupta family</a>, senior politicians and officials.</p>
<p>The country stands to slip deeper into crisis unless the lust for loot is stopped. The economy is already in deep trouble. It’s <a href="http://www.enca.com/south-africa/south-africa-slips-into-recession-as-economy-shrinks">in recession</a>, and worse is to come. The second quarter GDP figures will reflect that a third rating agency has downgraded the <a href="http://www.stanlib.com/EconomicFocus/Pages/MoodysdowngradeSAscreditrating.aspx">country’s credit rating.</a></p>
<p>There are some indications that the <a href="https://theconversation.com/the-battle-for-control-of-south-africas-state-isnt-just-about-personalities-79131">tide may be turning</a> 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.</p>
<p>Unfortunately the severely <a href="http://www.heraldlive.co.za/news/2017/03/24/anc-fractured-core-says-chief-whip/">fractured</a> 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.</p>
<h2>Unaffordable</h2>
<p>The increasing inefficiency in state owned enterprises continues to put pressure on the <a href="http://www.treasury.gov.za/documents/national%20budget/2017/review/Chapter%208.pdf">country’s fiscus</a>. This is not something it can afford. <a href="http://www.sowetanlive.co.za/business/2017/04/06/public-enterprises-played-a-big-part-in-south-africas-credit-ratings-downgrade">Ratings agencies</a> 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.</p>
<p>Government guarantees to state owned enterprises stood at <a href="http://af.reuters.com/article/investingNews/idAFKCN0VX1DN">R467 billion</a> at the end of 2015/16. Standard & Poor’s forecasts they will swell to over R500 billion by 2020 – 10% of <a href="https://www.thesouthafrican.com/south-africa-beyond-the-2017-budget/">South Africa’s current GDP</a>. This is more than twice the government <a href="https://www.moneyweb.co.za/news/economy/sp-government-guaranteed-debt-contingent-liabilities-a-risk-to-sa-rating/">contingents in year 2015/2016</a>. </p>
<p>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 <a href="http://www.fin24.com/Economy/sas-debt-to-gdp-highest-among-emerging-market-peers-report-20160926">emerging markets</a>. Moody’s forecasts that total government debt will reach 55% of GDP by 2018 and will <a href="https://www.cnbcafrica.com/trending/sa-downgrade/2017/06/09/moodys-rates-sa/Link">continue to rise</a> after that.</p>
<p>The reason government continues to bail out state owned enterprises is purely due to the fact that they are being managed badly.</p>
<p>The recent board and management scandals at the <a href="http://www.biznews.com/leadership/2017/03/13/prasa-popo-molefe-dipuo-peters/">Passenger Rail Agency of South Africa</a>, <a href="http://www.iol.co.za/dailynews/news/sabc-board-under-fire-amid-scandal-2072625">South African Broadcast Corporation</a>, <a href="http://weeklyxpose.co.za/2017/05/22/r13m-tender-scandal-at-saa-tip-of-the-iceberg-report/">South African Airways</a> and <a href="http://ewn.co.za/2017/05/12/eskom-says-thorough-board-discussion-went-on-over-molefe-s-comeback-move">Eskom</a> 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 <a href="http://www.anc.org.za/sites/default/files/National%20Policy%20Conference%202017%20Economic%20Transformation_1.pdf">anti-transformation</a>. </p>
<p>The financial markets are increasingly unwilling to tolerate such excuses. This can be seen by the recent <a href="https://www.moneyweb.co.za/news/markets/transnet-bond-auction-fails-to-entice/">subscription failure</a> of Transnet’s bond auction. And some private asset managers have become extremely <a href="http://www.enca.com/south-africa/sas-asset-manager-stops-lending-state-companies-money">cautious</a> about lending money to public entities.</p>
<h2>The way forward</h2>
<p>The new Finance Minister Malusi Gigaba has so far failed to inspire confidence. Allegations that he is deeply mired in the <a href="https://www.dailymaverick.co.za/article/2017-06-13-analysis-being-malusi-gigaba/">web of scandals</a> are not helping the situation. </p>
<p>Gigaba recently declared that state owned enterprises are <a href="http://www.fin24.com/Economy/gigaba-praises-south-africas-soes-20170605">functioning well and doing “great work”</a>. This is surprising given the rot being revealed on a daily basis. </p>
<p>Nevertheless, the <a href="https://theconversation.com/south-africas-power-utility-so-many-red-flags-its-hard-to-know-where-to-start-79155">patronage network</a> that stands accused of milking state owned enterprises has <a href="https://www.businesslive.co.za/rdm/politics/2017-06-13-the-gupta-dominoes-are-tumbling-fast/">started to crumble</a>. This includes the axing of <a href="http://ewn.co.za/2017/06/14/no-golden-handshake-for-sacked-hlaudi-motsoeneng-when-he-leaves-sabc">Hlaudi Motsoeneng</a> from the South African Broadcasting Corporation and <a href="http://www.iol.co.za/news/politics/eskom-officially-fires-brianmolefe-9506271">Molefe</a> from Eskom. <a href="https://mg.co.za/article/2017-06-13-lights-out-eskom-board-chair-ben-ngubane-resigns-with-immediate-effect">Ben Ngubane</a> has resigned as chairperson of the Eskom board. </p>
<p>There are also signs that <a href="http://www.fin24.com/Economy/Eskom/outa-lays-criminal-charges-against-ngubane-20170613">public and private pressure</a> is forcing some government ministers to take responsibility for their departments. Examples include Minister of Public Enterprises <a href="http://ewn.co.za/2017/05/31/brown-inter-ministerial-committee-has-reached-agreement-on-molefe">Lynne Brown</a>, Communications Minister <a href="http://ewn.co.za/2017/04/01/communications-minister-dlodlo-aware-of-turmoil-at-the-sabc">Ayanda Dlodlo</a> and the Minister of Police <a href="http://www.sowetanlive.co.za/news/2017/04/16/mbalula-orders-former-hawks-boss-ntlemeza-to-vacate-his-office-immediately">Fikile Mbalula</a>.</p>
<p>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 <a href="http://www.fin24.com/Economy/cabinet-approves-measures-to-improve-soes-20161103">measures agreed last year</a> are implemented.</p>
<p>These include:</p>
<ul>
<li><p>holding the corrupt public servants to account,</p></li>
<li><p>closing loopholes in public procurement to ensure that history isn’t repeated, and</p></li>
<li><p>appointing suitably qualified and experienced technocrats rather than unqualified politically connected individuals.</p></li>
</ul>
<p>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. </p>
<p>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. </p>
<p>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.</p><img src="https://counter.theconversation.com/content/79135/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sean Gossel receives funding from the University of Cape Town. </span></em></p><p class="fine-print"><em><span>Misheck Mutize does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Reforming South Africa’s state owned enterprises should start with greater accountability and financial responsibility.Misheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, specializing in Finance, University of Cape TownSean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/791552017-06-13T16:02:07Z2017-06-13T16:02:07ZSouth Africa’s power utility: so many red flags it’s hard to know where to start<figure><img src="https://images.theconversation.com/files/173598/original/file-20170613-25879-o5e7c7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In happier days. Former Eskom CEO (right) shakes hands with President Jacob Zuma.</span> <span class="attribution"><span class="source">Flickr/GCIS</span></span></figcaption></figure><p><em>South Africa’s state owned enterprises have been hit by one scandal after another signalling serious political and corporate governance failures. The largest of these, the power utility Eskom, has seen its CEO <a href="https://theconversation.com/eskom-ceo-saga-highlights-massive-systems-failure-in-south-africa-78432">Brian Molefe</a> resign, then return, and then be <a href="http://www.iol.co.za/news/politics/brianmolefe-fired-again-9448206">fired</a> – all in the space of seven months. This was followed by the unexpected <a href="http://www.news24.com/SouthAfrica/News/eskom-board-chair-resigns-20170612">resignation</a> of Eskom Chairperson Ben Ngubane. The Conversation Africa’s Sibonelo Radebe asked Owen Skae to make sense of it all.</em></p>
<p><strong>What do you make of what’s happening at Eskom?</strong></p>
<p>It’s an unholy mess. The entire basis of the departure, reappointment and subsequent firing of the Eskom CEO raises so many red flags it’s hard to know where to start. And, to cap it all, the chairman has resigned with immediate effect. That means Eskom is without a CEO and now has a <a href="http://www.news24.com/SouthAfrica/News/eskom-board-chair-resigns-20170612">stand-in chairperson</a>.</p>
<p>One thing is clear. The board, the chairperson Ben Ngubane, the minister of public enterprises Lynne Brown, and Molefe failed in their duties to serve Eskom. They failed South Africa’s taxpayers who are the indirect shareholders of Eskom. And they failed the country. </p>
<p>To understand their duties, one has to consider the basic principles of governing state owned enterprises. Eskom is a <a href="http://www.eskom.co.za/OurCompany/CompanyInformation/Pages/Legislation.aspx">public company</a> and its sole shareholder is the government. The shareholder representative is the ministry of public enterprises. A <a href="http://www.eskom.co.za/OurCompany/CompanyInformation/Pages/Legislation.aspx">shareholder compact</a> guides the relationship between the board, the executives and the minister. </p>
<p>The shareholder compact is an annual agreement between Eskom’s leadership and the minister. It documents the power utility’s mandate, as well as key performance measures. It also sets out what’s expected from a good governance perspective. It’s meant to avoid the kind of mess that has visited Eskom over the past few months.</p>
<p><strong>What went wrong?</strong></p>
<p>A number of things.</p>
<p>The main one is that corporate governance rules designed to manage conflicts of interest were totally disregarded. </p>
<p>The country’s <a href="http://www.iodsa.co.za/?Companiesact">Companies Act</a> spells out what a director may or may not do if they have a personal financial interest in a matter. These rules apply as much to state owned enterprises as they do to publicly listed ones. The Eskom situation suggests that directors, and Molefe in particular, disregarded this principle. </p>
<p>This is highlighted in the former public protector Thuli Madonsela’s “<a href="https://www.ujuh.co.za/state-of-capture-public-protectors-report/">State of Capture</a>” report which suggested that Molefe had had an improper relationship with the Guptas, a family of businessmen with close ties to President Jacob Zuma. Among other things, the report questioned the way in which the Eskom leaders collaborated with the Guptas to buy, some say <a href="https://www.businesslive.co.za/bd/companies/energy/2017-05-16-brian-molefe-helped-the-guptas-hijack-a-mine-says-ngoako-ramatlhodi/">hijack</a>, a mine supplying power utility with coal.</p>
<p>The Eskom board and the minister also failed to apply their minds properly around Molefe’s controversial <a href="https://mg.co.za/article/2017-05-22-now-eskoms-molefe-was-on-unpaid-leave">departure and return</a>. This includes a deal to give him a pension payout of <a href="https://mg.co.za/article/2017-05-12-lynne-brown-paying-brian-molefe-r30-million-is-the-only-solution">R30 million</a> just 18 months in the job and 13 years before he is due to reach <a href="https://www.moneyweb.co.za/news/south-africa/brian-molefe-50-too-young-for-early-retirement/">retirement age</a>.</p>
<p>A good understanding of the act, as well as the <a href="http://www.iodsa.co.za/?kingIII">codes</a> of good corporate governance that have been developed in the country, make it clear that the board should have:</p>
<ul>
<li><p>called a special meeting to consider Molefe’s departure</p></li>
<li><p>applied its mind to the circumstances of his departure</p></li>
<li><p>ensured that the necessary legal, risk and reputation issues were addressed.</p></li>
</ul>
<p>Another big area of failure was the role of the board’s chairperson. Even though he has resigned, he should still be held accountable for not providing the necessary oversight at such a momentous time.</p>
<p>As the only shareholder, the government is also complicit. As the shareholder representative the minister of public enterprises had the responsibility of asking the board questions as part of a consultative process that’s set out in the shareholder compact.</p>
<p>Either the minister wasn’t <a href="https://www.ujuh.co.za/lynne-brown-brian-molefes-return-to-eskom-is-better-than-r30m-payout/">properly informed</a> or didn’t ask the questions she was entitled to ask, or a mixture of both. This raises red flags about her level of commitment to the shareholder compact.</p>
<p><strong>What does it tell us about the broader political environment?</strong></p>
<p>There’s just too much interference – for nefarious reasons – from outsiders in the running of state owned enterprises. Excessive power and authority is vested in too few people. I often use the analogy of being a sports coach. Imagine a situation where the coach is called to account for his actions every day, where he has no say in who is picked and is told to change the game plan. The situation becomes unmanageable. </p>
<p>Interference undermines the way things should be, erodes confidence and allows conflicts of interest to flourish. This is particularly true when the interference is from people who aren’t acting in the best interests of the team. </p>
<p>But being untouchable is also a recipe for disaster. So we have to find a middle ground. The rules of the game must be established and the parties must carry them out with integrity, competence, responsibility, accountability, fairness and transparency.</p>
<p>These rules of the game are clearly set out in the South African context. Nobody can claim they don’t know what they are. In the case of Eskom they’ve simply been flouted.</p>
<p><strong>What do the events at Eskom tell us about state owned enterprises in South Africa?</strong></p>
<p>Sadly, state owned enterprises are seen as instruments to serve an elite few rather than fulfilling their broader mandate. </p>
<p>On top of this they aren’t financially viable which means they’ll continue to be a drain on the fiscus. The government must consider partnerships with the private sector. This can be done by selling minority stakes as <a href="https://www.moneyweb.co.za/news-fast-news/finance-minister-says-like-saa-minority-equity-partner/">suggested</a> by former finance minister Pravin Gordhan.</p>
<p>The success of the partly privatised telecommunications entity Telkom supports this view. The company has just posted <a href="https://techfinancials.co.za/2017/06/05/sas-telkom-earnings-lifted-by-mobile-business/">handsome profits</a>, suggesting it’s a model that could be used to turn around other state owned enterprises, including Eskom.</p><img src="https://counter.theconversation.com/content/79155/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Owen Skae does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The scandals surrounding South Africa’s power utility, Eskom, were caused by the neglect of corporate governance rules by the board, the executive authority, and the public enterprises minister.Owen Skae, Associate Professor and Director of Rhodes Business School, Rhodes UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/757452017-04-05T08:34:21Z2017-04-05T08:34:21ZPublic enterprises played a big part in South Africa’s credit ratings downgrade<figure><img src="https://images.theconversation.com/files/164044/original/image-20170405-11362-hdwogb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>With the broader implications of last week’s cabinet reshuffle in South Africa still being digested, capital markets have been quick to react. It took only a few days for S&P to formally report on its rating action in which it <a href="http://www.fin24.com/Economy/breaking-sp-downgrades-sa-to-junk-status-20170403">downgraded</a> South Africa’s foreign currency government debt to sub-investment grade status. </p>
<p>S&P cited as its concerns changes in the country’s executive leadership. It believes this has put policy continuity at risk which in turn increases the likelihood that economic growth and fiscal outcomes could suffer.</p>
<p>Not to be lost in this chain of events is the significant role played by South Africa’s state owned enterprises. </p>
<p>S&P highlighted this in its note on the downgrade. Its main worry is that plans to improve the underlying financial positions of parastatals such as Eskom, South Africa’s massive power utility, may not be fully implemented. This is critical, as S&P has forecast government guarantees used to underwrite public enterprise liabilities reaching R500bn by 2020. That’s roughly 10% of South Africa’s current GDP. </p>
<p>No doubt S&P had in mind the continued investment in expensive state sponsored power generation programmes. These are contracted to Eskom for off-take, but must be underwritten by government guarantees to secure financing. Even more troubling is the fact that existing low-cost facilities are to be retired ahead of schedule. This is to make room for the new found excess in power generating capacity. </p>
<h2>Regulations are being ignored</h2>
<p>It’s important to keep in mind that the overhang of government guarantees by itself wouldn’t necessarily have led to a ratings downgrade. With the right governance structures and regulatory frameworks in place, state owned enterprises could be transformed from a liability to an asset. They could then support relatively high levels of debt for investments done on a prudent and value adding basis. </p>
<p>But there’s been little evidence of positive movement in this area. And it should come as no surprise that, at the moment, S&P sees state owned enterprises as risks — not enablers. </p>
<p>As a glaring example, take the National Energy Regulator South Africa decision on tariffs for Eskom. The North Gauteng High Court found that the regulator had deviated from its own set of regulatory rules in setting the tariffs. The regulator has since been granted leave to appeal that decision, arguing that the deviation had <a href="http://www.ee.co.za/wp-content/uploads/2016/10/NERSA-application-to-appeal-6-Sep-2016-1.pdf">little practical effect</a>. In effect it argued that the end justified the means. </p>
<p>While the argument put forward by the regulator may have some factual basis, the real issue is that it has shown little real concern over the general lack of procedural fairness and transparency applied to its decision making process. It will be interesting to see how the Supreme Court of Appeal views the matter on review.</p>
<p>The <a href="https://theconversation.com/south-africas-airports-company-faces-a-hard-landing-why-this-is-bad-news-for-the-country-72115">decision over airports tariffs</a> is another disturbing example of poor regulatory processes. In December last year Airports Company of South Africa, which regulates the sector, called for a 35.5% decrease in airport charges. Despite concerns previously raised by credit rating agencies over the lack of transparency in setting airports tariffs, the regulator is yet to publish the basis of its decision, or any of the underlying analysis that would have informed its tariff order. </p>
<h2>Perception or reality?</h2>
<p>S&P’s downgrade decision doesn’t represent a consensus view of the global rating agencies. Importantly, Moody’s has so far stopped short of issuing a downgrade. Instead, it’s opted to place South Africa on review to determine if recent events signal a fundamental weakening of the country’s institutional, economic and fiscal strength. </p>
<p>The newly appointed Minister of Finance Malusi Gigaba was <a href="http://www.sabc.co.za/news/a/ab2e1d8040a8b726ad60fdd9ce9b621f/Gigabaundefinedurgesundefinedcountryundefinedtoundefinedreigniteundefinedeconomicundefinedgrowth-20170404">quick to respond</a> to these concerns. Importantly he’s recognised the value of putting forward the case for South Africa cogently and systematically. </p>
<p>He also highlighted the fact that National Treasury will be focused on reversing the triple challenges of poverty, unemployment, and inequality. </p>
<p>Rating agencies would no doubt support these aims, and recognise the fundamental importance of achieving them. </p>
<p>What’s been lost in stating the case for South Africa is a tangible plan for strengthening governance and regulation of its state owned enterprises. With the public sector playing a huge role in the nation’s overall economy, well designed regulatory frameworks need to be articulated by government, implemented by its officials, and embraced by those entities to which they apply. This isn’t overly difficult or costly - it only takes the policy appetite to do so.</p><img src="https://counter.theconversation.com/content/75745/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr Stephen Labson has previously acted as a regulatory adviser to South African state owned enterprises. He has not received any payment or other benefits for writing this article. </span></em></p>What has been lost in stating the case for South Africa’s credit rating is a tangible plan for strengthening governance and regulation of its state owned enterprises.Stephen Labson, Director, Trans African Energy, and Senior Research Fellow, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/649132016-09-08T20:45:16Z2016-09-08T20:45:16ZState companies can’t help development if the state is a partisan player<figure><img src="https://images.theconversation.com/files/137029/original/image-20160908-25231-7ufpto.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Reuters/Mike Hutchings </span></span></figcaption></figure><p>State-owned enterprises are legal entities required to take on commercial and development activities for the government. They tend to be hybrid by nature in that they have a business mandate with a profit aim combined with a development, social or service delivery mandate.</p>
<p>In South Africa’s case there is a particular emphasis on state-owned enterprises contributing to the goals of a <a href="http://www.thepresidency.gov.za/electronicreport/downloads/volume_1/volume_1.pdf">developmental state</a>. This development mandate is not unique to South Africa. Governments worldwide use state-owned companies as catalysts for growth, development and employment. The enterprises are also becoming increasingly influential in the global market. China’s state companies are <a href="https://www.pwc.com/gx/en/psrc/publications/assets/pwc-state-owned-enterprise-psrc.pdf">notable examples</a>.</p>
<p>State-owned enterprises, also known as parastatals, generally have one shareholder: the state. In South Africa, the respective cabinet ministers act as shareholders on behalf of the state, thus maintaining political oversight of them. The shareholding minister is, in turn, accountable to parliament. </p>
<p>Parastatals are funded from the public purse. As an indirect shareholder, the public has a legitimate interest in their workings. That’s why the relevant minister needs to be cognisant that he or she <a href="http://www.thepresidency.gov.za/ElectronicReport/downloads/volume_2/volume_2.pdf">“promotes the public interest”</a>.</p>
<p>But South Africa’s parastatals are in a dire state. Instead of being the mandated sites of development and profitability, they are costing the country and the public purse <a href="http://city-press.news24.com/Business/zumas-odd-grab-for-soes-20160828">billions</a>. In the 2014/2015 financial year, they made a combined loss of R15,5 billion. </p>
<p>Some of South Africa’s state-owned enterprises are being <a href="https://theconversation.com/how-ancs-path-to-corruption-was-set-in-south-africas-1994-transition-64774">used for personal ends</a> by individuals within the ruling African National Congress. The root of the problem is that the principle of impartiality has been transgressed. Instead, the state is being used as a partisan role player, notably in the distribution of patronage. </p>
<h2>Political interference</h2>
<p>Two tangible examples illustrate this: the South African Broadcasting Corporation (SABC) and South African Airways (SAA). After disentangling the chaos, dismal performances, financial mismanagement and blatant lack of accountability at these entities, links to President Jacob Zuma become clear. </p>
<p>Mismanagement has left the public broadcaster in <a href="http://www.financialmail.co.za/features/2016/07/15/sabc-in-financial-meltdown?platform=hootsuite">financial trouble</a>. This has been blamed on the fact that its controversial Chief Operations Officer, Hlaudi Motsoeneng, enjoys political protection. </p>
<p>In 2014 Public Protector Thuli Madonsela made adverse findings <a href="http://www.pprotect.org/library/investigation_report/2013-14/WHEN%20GOVERNANCE%20FAILS%20REPORT%20EXEC%20SUMMARY.pdf">against Motsoeneng</a>. Despite this, he was <a href="http://www.bdlive.co.za/national/media/2014/07/09/motsoeneng-made-permanent-chief-operations-officer-of-sabc">appointed permanently</a> to the post of chief operations officer by communications minister Faith Muthambi. </p>
<p>Motsoeneng has undermined the central role of the SABC - that is, to be a public broadcaster. For example, he has instructed journalists that 70% of the broadcaster’s news output must be <a href="http://city-press.news24.com/Voices/editorial-no-news-isnt-good-news-20160529">“positive”</a>. He has also insisted that Zuma be given <a href="http://city-press.news24.com/News/hlaudi-zuma-is-special-20160716">special treatment</a>. </p>
<p>SAA has a similarly sad tale. The national airline incurred a R2,5 billion loss in the <a href="http://businesstech.co.za/news/business/132084/leaked-report-shows-saa-post-a-massive-r1-4-billion-loss-for-the-first-quarter/">2013/14 financial year</a>. It has failed to submit financial statements for the past two years and is <a href="http://hsf.org.za/resource-centre/hsf-briefs/ethiopian-airways-2013-how-a-state-owned-enterprise-can-succeed">technically insolvent</a>. Although several of its board members laid complaints against its chairperson Dudu Myeni, no action has been taken against her. Instead, they were summarily removed from <a href="http://mg.co.za/article/2016-09-02-00-saas-ms-untouchable-dudu-myeni-what-her-close-friend-ubaba-says-goes">their positions</a>. And Myeni has been reappointed chairperson. </p>
<p>Myeni is close to Zuma and serves as chairperson of his charity, the <a href="http://mg.co.za/article/2014-11-06-jacob-zuma-links-to-untouchable-saa-boss">Jacob Zuma Foundation</a>.</p>
<h2>Tensions between state and government</h2>
<p>The fair distribution of, and access to, public goods in the public interest requires an autonomous or impartial state. Impartiality disqualifies corruption, cronyism, patronage, nepotism, political favouritism and discrimination. </p>
<p>There is considerable tension between the notion of an impartial state – a core value embedded in South Africa’s <a href="http://www.gov.za/documents/constitution/Constitution-Republic-South-Africa-1996-1">1996 constitution</a> – and the political use of the state for partisan ends, or in the case of the state-owned enterprises, for personal ends. </p>
<p>Impartiality means being unmoved by considerations such as special relationships and personal preferences. </p>
<p>A crucial part of ensuring impartiality is to maintain the distinction and jurisdictional boundary between the state and government. The political administration of government can change as a result of elections while the state machinery is a distinct set of supportive institutions. These institutions need to continue to operate regardless of changes in political administration. </p>
<p>Governments come and go, while the state remains. It is essential for there to be state autonomy - a precondition for state agencies and personnel acting in the public interest. When state-government lines become blurred the state loses its autonomy, and so its neutrality. When the state becomes “captured” it can be used for partisan ends – serving the purposes or whims of the governing party or its leaders.</p>
<h2>The ultimate irony</h2>
<p>Even though the recent Presidential Review of <a href="http://www.thepresidency.gov.za/ElectronicReport/downloads/volume_1/volume_1.pdf">state-owned entities</a> acknowledged the need for “neutrality” and “independent autonomy”, Zuma has been named as chairperson of a new coordinating committee that will oversee South Africa’s <a href="http://www.bdlive.co.za/economy/2016/08/23/zuma-to-oversee-parastatal-strategy">parastatals</a>. </p>
<p>The move is possibly a strategy to undermine Deputy President Cyril Ramaphosa, who has since 2014 had <a href="http://city-press.news24.com/Business/zumas-odd-grab-for-soes-20160828">political oversight</a> over state companies. This could also be part of the ongoing factional divisions within the ANC. More pertinently though, it will give Zuma more say in the bailing out of parastatals and a closer eye over his personal interests.</p>
<p>If South Africa’s parastatals are to fulfil their developmental mandate and be good stewards of the public purse, they must stop being used for partisan ends – even the president’s.</p>
<p>The long-term trajectory of not abiding by the principle of impartiality is that state institutions and resources are used for partisan ends. This makes the political contest for governing power a zero-sum game. Access to the political administration becomes tantamount to access to resources for partisan gain, as opposed to being stewards of public resources for the public interest.</p><img src="https://counter.theconversation.com/content/64913/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nicola de Jager receives funding from the National Research Foundation. </span></em></p>South Africa’s parastatals are in a dire state. Instead of being the mandated sites of development and profitability, they are costing the public purse billions and have been abused.Nicola de Jager, Senior Lecturer in Political Science, Stellenbosch UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/640042016-08-17T18:59:53Z2016-08-17T18:59:53ZSouth Africa must free itself from the burden of owning a national airline<figure><img src="https://images.theconversation.com/files/134397/original/image-20160817-3578-6sot4l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South African Airways is undoubtedly in crisis.</span> <span class="attribution"><span class="source">EPA/Udo Weitz</span></span></figcaption></figure><p>South Africa needs to accept the <a href="http://www.economist.com/blogs/economist-explains/2014/02/economist-explains-5">reality</a> that the time when national airlines flew as carriers of national pride is a thing of the past. Some national carriers – South African Airways (SAA) as <a href="http://www.financialmail.co.za/coverstory/2015/03/19/sa-airways-mission-impossible">a prime example</a> – have become major liabilities. They must be cut loose to protect the pride of the nation.</p>
<p>Across the globe the feature of national airlines as a natural property of nation states has been in <a href="http://www.economist.com/news/business/21612190-why-governments-are-so-keen-keep-their-loss-making-airlines-aloft-flags-inconvenience">decline</a>. Entrepreneurs have invaded the market and the success of a few national carriers, like Ethiopian Airlines, Emirates and Singapore Airlines is a function of <a href="http://www.economist.com/news/business/21612190-why-governments-are-so-keen-keep-their-loss-making-airlines-aloft-flags-inconvenience">some special features</a>.</p>
<p>With a few exceptions, the situation in developing countries is particularly bad. They can’t afford the huge financial burden that comes with failing national carriers. South Africa, which is <a href="https://theconversation.com/south-africa-can-expect-zero-growth-its-problems-are-largely-homemade-62943">facing economic difficulties</a>, is such a case. In raising the alarm over the country’s credit rating, the international agency <a href="http://www.bdlive.co.za/economy/2016/06/03/in-depth-credit-rating-affirmed-but-sp-sends-warnings">Standard and Poor</a> warned that the government faced risks from public enterprises with weak balance sheets. It included SAA on its list. The country narrowly missed being downgraded to junk status.</p>
<p>SAA is currently kept in the air on the basis of financial <a href="http://www.bdlive.co.za/companies/2016/01/11/saa-could-run-out-of-cash-in-weeks">guarantees</a> from the government amounting to R14 billion. This is coming out of over-stretched government coffers. And it must be stressed that it is taxpayers who have provided SAA with these costly guarantees. </p>
<p>This is not the first time the airline has been in trouble. It has a long history as a failed state owned enterprise. Yet it manages to stay afloat by asking for government bailouts and by using every available means to shut down competitors.</p>
<h2>Dubious uncompetitive behaviour</h2>
<p>The airline has once again been in the news for all the wrong reasons. This time it is making news headlines because of its role in the <a href="http://www.moneyweb.co.za/news/south-africa/saa-to-pay-huge-damages-to-nationwide">demise of Nationwide Airlines</a>, one of the few competitors it faced on domestic routes. </p>
<p>The state-owned airline has driven Nationwide out of the market and put another one (Comair) under pressure. This has ensured that there is limited competition in the domestic airline market. This, in turn, has prejudiced customers in a big way.</p>
<p>On August 9 2016 the South Gauteng High Court ruled that SAA must pay liquidated Nationwide Airlines a fine of some R104 million. </p>
<p>Nationwide was liquidated as it could not compete with SAA. The court found that <a href="http://www.moneyweb.co.za/news/south-africa/saa-to-pay-huge-damages-to-nationwide">SAA’s abuse of market dominance</a> from 2001 to 2006 contributed to the liquidation.</p>
<p>If interest is added to the damages awarded to Nationwide, the amount can double to some R200 million. SAA seemingly does not have the money to pay this claim. This is obvious from the fact that even before the court case it had asked the government (read: South African taxpayer) for a <a href="https://www.da.org.za/2015/11/da-rejects-r5-billion-saa-bailout/">further guarantee</a> of R5 billion.</p>
<p>There can be little doubt that SAA will attempt to take the court ruling on appeal. After all, when taxpayers “underwrite” failed business ventures such as SAA, appeal is always an easy option. It is expensive, but somebody else carries the cost.</p>
<p>But more is to come. Comair has brought a <a href="http://www.moneyweb.co.za/news/south-africa/ill-have-saa-liquidated-if-they-dont-pay-former-nationwide-ceo/">court application</a> similar to the one brought by Nationwide. In this case the claimed damages amount to R875 million. If interest is added in this instance, the claim amounts to some R1,5 billion. Again this is money that SAA does not have.</p>
<h2>Badly managed</h2>
<p>That South Africa’s national airline is in a parlous state is no longer in dispute. </p>
<p>It has <a href="http://www.sabreakingnews.co.za/2016/07/26/da-slams-request-for-another-saa-financials-delay">delayed</a> releasing its financial statements four times over the past 10 months. No convincing reasons have been provided for the delays.</p>
<p>The failure to issue financial statements on time is partly a reflection of the incompetent leadership that has led the airline astray in recent years. To be sure, the airline has been rocked by boardroom shenanigans for some time. It has over the past 10 years or so experienced <a href="http://www.bdlive.co.za/business/transport/2016/06/10/a-strong-leader-can-fix-saa-soapie-says-nico-bezuidenhout">unprecedented leadership volatility</a> with frequent changes to the board and the CEO post. </p>
<p>The tenure of the current board chairperson, Dudu Myeni, has taken things to a new level of scandalous corporate governance. It is clear that Myeni is <a href="http://mg.co.za/article/2015-11-26-zumas-favourite-is-wrecking-saa">unqualified</a> for the post of chairing the SAA board and has only survived due to her close <a href="http://www.news24.com/SouthAfrica/News/zuma-defends-myeni-quashing-rumours-of-a-romantic-relationship-20151212">relationship</a> with President Jacob Zuma. </p>
<p>The unceremonious and expensive firing of former finance minister, Nhlanhla Nene, came after <a href="http://www.fin24.com/Opinion/dudu-myeni-nenes-saa-nemesis-20151125">he crossed swords with Myeni</a>. And she appears to remain untouchable for the returning finance minister Pravin Gordhan. He has correctly called for the <a href="http://ewn.co.za/2016/07/28/Gordhan-adamant-a-new-SAA-board-can-bring-positive-change">revamp of the airline’s board</a> before advancing new bailout funds. His call has gone unheeded.</p>
<h2>Ordinary citizens are the losers</h2>
<p>Customers are indeed the losers in all of this. Many are also taxpayers, and it is their hard-earned tax contributions that provide guarantees to SAA, thus giving it the power to squeeze competitors. This action increases the cost of airfares to the detriment of the very same group of people that funds SAA by means of guarantees.</p>
<p>This is clearly an untenable position. There is only one solution. The South African government must simply give SAA away. This is, if anybody is interested in taking it.</p>
<p>SAA clearly has no value. It is not necessary to do any expensive due diligences to ascertain this. The mere fact that it is kept in the air on the back of a guarantee of R14 billion and has asked for another R5 billion confirms the matter.</p>
<p>The South African government can no longer afford to keep its national airline afloat. Neither should South African taxpayers be expected to.</p><img src="https://counter.theconversation.com/content/64004/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw receives funding from the National Research Foundation (NDR) as a C2-rated researcher. </span></em></p>The costs to South Africa of maintaining the ownership of a national airline are proving to be unbearably expensive. It’s time to let the struggling carrier go.Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.