tag:theconversation.com,2011:/au/topics/state-owned-enterprises-2425/articlesState owned enterprises – The Conversation2021-02-22T14:51:26Ztag:theconversation.com,2011:article/1550672021-02-22T14:51:26Z2021-02-22T14:51:26ZNigeria’s post-privatisation energy sector is a mess: here are some solutions<figure><img src="https://images.theconversation.com/files/384468/original/file-20210216-17-146gke5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Several protests have trailed the privatisation of the power sector in Nigeria.</span> <span class="attribution"><span class="source">Pius Utomi Ekpei/AFP via Getty Images</span></span></figcaption></figure><p>In the mid-1980s, most of the countries in sub-Saharan Africa made <a href="https://www.econstor.eu/bitstream/10419/140111/1/v23-i01-a06-BF02929964.pdf">structural changes</a> to their economies in return for funding from the World Bank. The role of the public sector in owning and managing economic assets was reduced. Policies such as <a href="https://www.oecd-ilibrary.org/development/privatisation-in-sub-saharan-africa_9789264020382-en">privatisation</a>, <a href="https://link.springer.com/article/10.1057/s41261-019-00097-x">deregulation</a> and commercialisation were encouraged – the idea was that market forces would allocate resources more efficiently.</p>
<p>Many of the previously state owned enterprises were <a href="https://gsdrc.org/document-library/privatization-in-africa-what-has-happened-what-is-to-be-done/">privatised</a>. This was supposed to expand the private sector, provide infrastructure and utilities more effectively, and attract investment. </p>
<p>Unfortunately, privatisation has not had the result of turning Africa’s state owned enterprises around. Some <a href="https://www.wider.unu.edu/publication/privatization-sub-saharan-africa">successes</a> have been reported among small and medium firms producing tradeable goods and the service sectors in some countries. But large utilities and infrastructure enterprises in the rail and power sectors and the large natural resource producers are tougher cases. </p>
<p>The political and economic challenges facing the sale of these gargantuan state assets often led to faulty privatisation. And in many instances, the process of privatising them was never completed. </p>
<p>The Nigerian <a href="http://eprints.covenantuniversity.edu.ng/11283/#.YCqKLnmxVPY">National Electricity Power Authority</a>, later the <a href="http://www.phcnpins.com/">Power Holding Company of Nigeria</a>, was privatised for a period lasting over a decade. Eleven distribution companies and seven generating companies were sold to different private companies. The management of the single <a href="https://www.tcn.org.ng/page_about_us.php">Transmission Company</a> was concessioned to a Canadian firm (though that concession has expired and it is back with the Nigerian government). </p>
<p>It was a bold initiative, but the effort has left a host of post-privatisation challenges. Several years after the breakup of the power authority and the eventual sale of the power firms, citizens and industries still don’t have a reliable power supply. Although the country has an installed capacity of <a href="https://www.usaid.gov/powerafrica/nigeria">12,522 MW</a>, it is only able to generate around <a href="https://guardian.ng/energy/nigerias-struggle-to-go-beyond-4000mw-decades-after-independence/">4,000 MW</a>, which is insufficient for the population of <a href="https://www.worldometers.info/world-population/nigeria-population/">200 million</a>. Added to that are price hikes, a variety of tariffs and estimated billing.</p>
<p><a href="https://dailytrust.com/buhari-reverse-sale-of-phcn-now">Many Nigerians</a>, including the leadership of the <a href="https://guardian.ng/saturday-magazine/cover/privatisation-of-power-sector-and-calls-for-reversal/">National Assembly</a>, have mooted the idea the government should take back the power firms and manage them or re-privatise them. That would mean withdrawing the licences of current operators and starting a new privatisation process. There are no laws backing such moves at the moment. </p>
<p>Our recent <a href="https://www.tandfonline.com/doi/full/10.1080/02589001.2020.1825647">research</a> suggests that this would not be a solution. We examined the various policy options available to the Nigerian government to achieve an efficient power sector. Our main finding was that the sector suffered the same challenges after privatisation as it had before – and more. So we don’t recommend that the government should take over again. Rather, it should collaborate with the new owners and managers.</p>
<p>The Nigerian experience could also inform other countries that have privatised state owned enterprises. </p>
<h2>What we found</h2>
<p>We identified a number of challenges for Nigeria’s privatised power sector.</p>
<p>One was that the new owners and managers had to operate in an unstable macro-economic environment. Nigeria’s currency continues to <a href="https://www.bloomberg.com/news/articles/2020-12-31/nigeria-weakens-the-naira-to-record-low-in-year-end-trade">depreciate</a> against the US dollar, making it expensive to buy inputs, most of which have to be imported. </p>
<p>Also, the power infrastructure was old and poorly maintained. This created bottlenecks in transmission. Bringing the system up to speed requires huge capital investment.</p>
<p>Most of the investors who bought the power firms borrowed huge sums from banks to buy the assets. Lacking appropriate financing, they are trying to pay back their loans rather than investing to revitalise infrastructure.</p>
<p>The debt of gas and power suppliers is growing. And criminals frequently vandalise gas pipelines that supply power generating plants.</p>
<p>Even when power is generated, distribution companies can’t distribute it, because of the decayed infrastructure. So they don’t purchase it and consumers don’t get it. </p>
<p>There are also problems of power theft, inadequate customer metering and estimated billing. Consumption and payment are often out of tune.</p>
<h2>What to do</h2>
<p>If the government took over the power sector again, it would face all these challenges. It would have to take over employees and their salaries. State resources are already stretched. </p>
<p>If the sector were to be re-privatised, there is no guarantee that political, economic and <a href="https://core.ac.uk/download/pdf/234650635.pdf">social problems</a> that occurred during the first attempt would not be repeated. These include corruption, surreptitious and unadvertised sales, lack of consultation with stakeholders, hidden fees or charges, undervaluation, extension of payment deadlines and sudden changes of preferred bidders. </p>
<p>Post-privatisation challenges call for the collaboration of government and the private sector.</p>
<p>In our paper we considered the model of third party government, which holds that citizens benefit when the government and the private sector work together. It includes funding assistance. The government need not own and manage utilities but could use an array of tools in collaboration with the private sector to strengthen key sectors of the economy. These tools include loans, loan guarantees, grants, contracts, social regulation, economic regulation, insurance, tax expenditures, vouchers and many more.</p>
<p>Many of the post-privatisation challenges in Nigeria’s power sector require the attention of the government. They include gas supply and dealing with vandalism, providing a regulatory environment that gives investors confidence, and providing long-term guarantees for loans, price subsidies and other support. </p>
<p>These steps would likely increase the budgets of government and weaken some of the economic benefits of privatisation, at least in the short term. Yet, without them, the private sector may be unable to turn a privatised public enterprise around, especially in the monopoly service sector. That would leave only short routes for companies to recover their investment and make profits at the expense of social benefits. </p>
<p>There has already been some <a href="https://www.worldbank.org/en/news/press-release/2020/06/23/nigeria-to-keep-the-lights-on-and-power-its-economy">collaboration</a> like this in Nigeria.</p>
<p>In the final analysis <a href="https://www.tandfonline.com/doi/full/10.1080/02589001.2020.1825647">our research</a> revealed that privatisation cannot be seen as a one-off concluded programme in which the government is absolved from all responsibilities and liabilities. It has to collaborate with the new owners and managers to ensure the consolidation and success of privatisation. </p>
<p>This has a better chance of success than re-nationalisation – which has never delivered efficiency – or re-privatisation amid political and economic shortcomings.</p><img src="https://counter.theconversation.com/content/155067/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Okechukwu Marcellus Ikeanyibe 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>Nigeria’s attempt at privatising its power infrastructure hasn’t been without challenges but they are not insurmountable.Okechukwu Marcellus Ikeanyibe, Professor of Public Administration and Local Government, University of NigeriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1300642020-02-14T03:56:28Z2020-02-14T03:56:28ZEthical leadership is needed to restore the integrity of Indonesian SOEs<figure><img src="https://images.theconversation.com/files/310642/original/file-20200117-118359-zyyxa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Pertamina tankers at Kertosono train station.</span> <span class="attribution"><a class="source" href="https://flickr.com/photos/ikhlasulamal/201831311/in/photolist-iQrqc-2gwMLNe-4EjyfT-vmGJx4-cxkZi9-7xqTnX-cxkZBb-uJtJXX-cxkYZ5-cxkYTU-cxm4Vh-cxmaLj-cxkZbN-e3wdev-aWjvqM-e3BSus-5gzfba-5gzfaZ-Zead5F-Z49xqB-2gHdNiU-BiCM1F-vR3ia5-5owDuP-wvz9Wg-2gLMJMB-2gLMJJv-2gLMJLj-2gMJtm6-2gMKdg5-2bWVW1U-2gMJtoA-4av3Q5-qqBffm-NTvq5K-dmh62d-5wxNru-5wxNry-5wxNrw-Bsiy3S-5ZHbji-bKQrEZ-2baNGGL-Gh1Fvn-iQrqd-8ygP8v-PWNXaP-NBndZm-M7JABL-iBR2wu">ikhlasulamal/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Indonesia’s President Joko “Jokowi” Widodo dubbed the country’s state-owned companies as ‘agents of development’. State-owned enterprises (SOEs) are involved in 40% of the country’s infrastructure projects, a priority of Jokowi’s presidency.</p>
<p>But while SOEs play a vital role in providing goods and services in the largest economy in Southeast Asia, corrupt practices still occur within the sector. The newly appointed State-Owned Enterprises Minister Erik Thohir faces a <a href="http://intosaijournal.org/site/wp-content/uploads/2019/04/Eradicating-Corruption-and-SDG16_INTOSAI-Journal-Spring-2019.pdf">challenging task to eradicate corruption and build integrity within state-owned companies</a>. </p>
<p>Last year, no less than <a href="https://www.cnbcindonesia.com/news/20191003185044-4-104308/ini-8-direksi-bumn-di-zaman-rini-soemarno-yang-terjerat-kpk">eight SOE directors have been accused of bribery</a> by the Corruption Eradication Commission (KPK). </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/310644/original/file-20200117-118319-tnkdiq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/310644/original/file-20200117-118319-tnkdiq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/310644/original/file-20200117-118319-tnkdiq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/310644/original/file-20200117-118319-tnkdiq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/310644/original/file-20200117-118319-tnkdiq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/310644/original/file-20200117-118319-tnkdiq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/310644/original/file-20200117-118319-tnkdiq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Basuki</span>
<span class="attribution"><a class="source" href="https://flickr.com/photos/kedubesaustralia/25469541946/in/photolist-ENE4ty-EGKNtn-ENDLQJ-ENDWpJ-DTeQ5o-EGL9u4-EGKJKk-DTeXSN-ioPax9-P7yiNk-MAVHfi-JHBHyV-hzH6Nm-hzJJni-hwp7x9-em3XN5-fzARnw-hwpbDg-hvUz78-NSnc3w-cLwCZh-nfa4cz-hufQuq-Cc6RLy-JmGEj9-V51t6u-P7JTJB-S5A2jC-iZFUsW-P7HnWT-PeCFd9-P7LVwk-EGFo5H-fDAkYw-GXtYmn-MQLQhR-P7yh86-FvXwst-FtE1JN-P8JuuL-EGFoBe-Myg4F9-P55tFL-BSpFS2-GQeFYs-NNKKYb-BShz2d-HGZLu5-SWetjx-GQeFTC">kedubesaustralia/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>The entrenched corruption within SOEs can hamper Jokowi’s ambition for these companies to be ‘agents of development’. As of 2019, Indonesia has a total of 142 SOEs. However, only <a href="https://www.cnbcindonesia.com/news/20191202131212-4-119556/ri-punya-142-bumn-tapi-cuma-15-yang-sumbang-besar-ke-negara">15 contributed significantly to the state coffers.</a> </p>
<p>But it’s possible for a public organisation in a corrupt political-economic environment to build integrity. Our recent <a href="https://www.tandfonline.com/doi/full/10.1080/23276665.2018.1515392">research</a> showed that this could be done through the concept of ethical leadership. </p>
<p>Thohir seems to be trying to imbue this concept in the SOE sector through his new appointments of commissioners in a number of state-owned companies. But finding leaders that have a clean record and free from controversy is not easy. </p>
<h2>Ethical leadership</h2>
<p><a href="https://www.victoria.ac.nz/__data/assets/pdf_file/0003/1719471/FC0412_Brian-Picot-%20Chair_FINAL_web.pdf">Ethical leadership</a> refers to the character, behaviour, and decision-making that a leader demonstrates using role modelling, reinforcement, and communication to motivate employees to make decisions and behave by relevant moral values, norms, and rules.</p>
<p><a href="https://doi.org/10.1080/23276665.2018.1515392">Within and beyond the organisation it</a> plays an important role in fostering and maintaining high organisational integrity. </p>
<p>Ethical leadership is paramount for leading the way to sustainable change in a challenging political and socio-cultural environment like Indonesia, but its guarantee remains an almost impossible undertaking.</p>
<p>Findings and lessons from academic research confirm <a href="https://erl.ucc.edu.gh/jspui/bitstream/123456789/2973/1/%5BAlan_Lawton%2C_Julie_Rayner%2C_Karin_Lasthuizen%5D_Ethi%28BookZZ.org%29.pdf">the importance of ethical leadership for the ethics and integrity of organisations</a>. </p>
<p>To cultivate integrity throughout the organisation, there must be executive managers within it who <a href="https://doi.org/10.1080/23276665.2018.1515392">lead by example and show constant commitment to its integrity program</a>. </p>
<p>Leaders need autonomy to develop and implement integrity programs for their organisation’s, and they need to have the moral courage to persevere in doing this despite stakeholder pressure. </p>
<p><a href="https://doi.org/10.1080/23276665.2018.1515392">Political leadership must support and protect organisations</a> that take integrity seriously to break the cycle of conflicts of interest and the resulting corruption. </p>
<p>SOEs are part of wider networks with opportunistic political, public and private stakeholders. Therefore organisational leaders must get political backing from the highest levels in government, including the Ministry of SOE, to be able to become the desired ‘agents of development’. </p>
<p>For an SOE to be able to function with high integrity and effective achievement of its objectives, ethical leadership needs to be in place on all three levels, <a href="https://doi.org/10.1080/23276665.2018.1515392">i.e. political backing, autonomous leadership at the chief executive level, and ethical commitment on the executive management level so leaders can lead by example</a>. Only when the public can see better ethical performance of public institutions, public trust can be regained.</p>
<h2>Thohir’s choices</h2>
<p>To improve good corporate governance and ethical management practices, Thohir recently appointed individuals who are generally perceived as ‘leaders of anti-corruption’ as commissioners in SOEs. </p>
<p>He appointed former Jakarta governor Basuki “Ahok” Tjahaja Purnama, also known as BTP, a recipient of <a href="https://www.thejakartapost.com/news/2013/10/16/ahok-gets-2013-bung-hatta-anti-corruption-award.html">the Bung Hatta Anti-Corruption Award (BHACA) in 2013</a> as president commissioner of the state oil and gas company (Pertamina). </p>
<p>He also appointed former Corruption Eradication Agency commissioners Chandra Hamzah and Amien Sunaryadi as president commissioner of the State Savings Bank (Bank Tabungan Negara) and the state electricity company (PLN) respectively. </p>
<h2>Controversy</h2>
<p>However, Thohir’s appointments are not free from some controversy. </p>
<p>For instance, While BTP he was governor of Jakarta, he had been accused of involvement in cases such as <a href="https://en.tempo.co/read/761887/ahok-fulfills-kpk-summons-over-sumber-waras-case">alleged corruption in the acquisition of land for a hospital in Jakarta</a> and has been questioned by the police over possible maladministration of <a href="https://www.thejakartapost.com/news/2018/02/26/ahok-questioned-over-reclamation-project.html">Jakarta Bay reclamation project</a>.</p>
<p>Additionally, some people consider BTP for being vulgar in his use of language and consider him arrogant and rude. Some believe that this led to his two-year imprisonment for blasphemy. His supporters believe it was <a href="https://www.nbcnews.com/news/world/jakarta-governor-ahok-jailed-blasphemy-over-viral-video-n756711">a character assassination</a> of a clean governor just before election time. </p>
<p>Chandra once became <a href="https://nasional.kompas.com/read/2014/01/29/1615315/Bela.Tersangka.Korupsi.Hak.Chandra.M.Hamzah">a lawyer for a suspect for corruption</a> in a power plant project after he stepped down from KPK.</p>
<p>The controversy surrounding the new SOE commissioners show that it’s not easy to find ethical leaders. Even the ones with a track record in anti-corruption leadership seem to be struggling with conflicts of interest around them. </p>
<p>It’s still early to see if either BTP, Chandra or Amien can succeed in cultivating integrity within the organisations they are embedded. But with these roles, they have been given a second chance to prove their ethical leadership skills.</p><img src="https://counter.theconversation.com/content/130064/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dedy Eryanto sedang menempuh Pendidikan Program Doktoral di School of Business and Government, Victoria University of Wellington - New Zealand atas beasiswa dari Lembaga Pengelola Dana Pendidikan (LPDP), Kementerian Keuangan Republik Indonesia</span></em></p><p class="fine-print"><em><span>Iris van Eeden Jones dan Karin Lasthuizen tidak bekerja, menjadi konsultan, memiliki saham, atau menerima dana dari perusahaan atau organisasi mana pun yang akan mengambil untung dari artikel ini, dan telah mengungkapkan bahwa ia tidak memiliki afiliasi selain yang telah disebut di atas.</span></em></p>The new SOE Minister is trying to put ethical leaders into SOEs, but finding leaders that have a clean record and free from controversy is not easy.Iris van Eeden Jones, Research associate Brian Picot Chair in Ethical Leadership, Te Herenga Waka — Victoria University of WellingtonDedy Eryanto, Te Herenga Waka — Victoria University of WellingtonKarin Lasthuizen, Professor, Brian Picot Chair in Ethical Leadership, Te Herenga Waka — Victoria University of WellingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1284702019-12-10T07:24:50Z2019-12-10T07:24:50ZSouth African Airways saga puts spotlight on role of directors<figure><img src="https://images.theconversation.com/files/305642/original/file-20191206-90562-152m1go.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>The board of South Africa’s national airlines recently took a unanimous decision to go into voluntary business rescue. The step removes the threat of the directors being sued by creditors for reckless trading – for now, at least.</p>
<p>The <a href="https://www.timeslive.co.za/news/south-africa/2019-11-22-we-are-unable-to-fulfil-salary-obligations-on-time-saa-to-staff/">airline told its staff two weeks ago</a> that it wouldn’t be able to pay staff salaries. It had become increasingly clear that the airline was in <a href="https://www.moneyweb.co.za/news/south-africa/its-probably-too-late-to-save-saa/">deep financial trouble</a>. From available evidence – including <a href="https://press-admin.voteda.org/wp-content/uploads/2019/12/Annexure-C-%E2%80%93-Roadmap-to-finalise-Annual-Financial-Statements-AFS-241120192.pdf">information passed to the parliament’s standing committee on public accounts</a> – the airline continued to trade even though it was technically insolvent and unable to pay its creditors. </p>
<p>If it is found that the airline continued to trade in insolvent circumstances, South African Airways could be guilty of reckless or fraudulent trading <a href="https://www.justice.gov.za/legislation/acts/2008-071amended.pdf">under the Companies Act</a>. Fraudulent trading is when a company continues to trade and incurs debts when its directors know there is no chance of it ever being able to pay its debts. This is both a criminal offence and a civil matter. </p>
<p>Reckless trading is where the directors do not know, but should reasonably have known, that the company was unable to pay its creditors. Reckless trading is a civil offence. </p>
<p>These laws apply to state owned enterprises too. Even though the government, as the shareholder of the airline, would have had a say over the board, it is the board that is legally accountable for the solvency of the company. </p>
<p>Breaches of company law have potentially serious legal consequences for the board of directors. Trading in insolvent circumstances means that the directors could be personally liable for the losses sustained by the airline. They could also, at worst, find themselves behind bars if they are found by a court to have traded fraudulently. </p>
<p>But there could perhaps be mitigating factors for the South African Airways board. For instance, there was some uncertainty about whether loan guarantees and additional financial <a href="https://businesstech.co.za/new/business/359039/saa-in-limbo-as-government-considers-bailout/">support</a> from government would be made available to the airline. </p>
<p>Nevertheless, the Companies Act stipulates that the ultimate responsibility for ensuring that a company is solvent falls squarely on the directors – regardless of whether it is state-owned. </p>
<p>The South African Airways saga serves as a warning to directors of other state-owned entities, such as the <a href="https://www.fin24.com/Economy/Eskom/eskom-gets-bailout-funding-now-it-needs-a-rescue-plan-20190726">power utility Eskom</a> and the <a href="https://www.businesslive.co.za/bd/national/2019-10-06-how-bailout-gives-sabc-a-chance-to-get-its-act-together/">South African Broadcasting Corporation</a>, to be as mindful as directors of private companies or public companies of their fiduciary responsibilities. </p>
<p>There are four ways in which directors can be held responsible for reckless or fraudulent trading.</p>
<h2>Four ways directors can be held liable</h2>
<p>First, the directors can be held personally liable for any losses or debts sustained by a company as a consequence of their reckless trading. This means that they are at risk of having to compensate the company out of their own pockets. </p>
<p>In <a href="https://juta.co.za/catalogue/new-derivative-action-under-the-companies-act-the_24068/">my book</a> on company law remedies I explained that the directors could be sued for this compensation <a href="https://journals.co.za/content/journal/10520/EJC-c85af6eb0">by trade unions</a>, or by other stakeholders. They could do this by using what is called the derivative action on the company’s behalf. This a powerful weapon for stakeholders. It empowers them to sue the directors on behalf of the company to recover compensation for the company itself. </p>
<p>Stakeholders may, for example, use the derivative action when the directors are not complying with their legal duties to the company. </p>
<p>For example, the <a href="https://www.businesslive.co.za/fm/fm-fox/2016-06-03-lewis-directors-under-fire/">Lewis Group</a>, a large South African furniture retailer, was recently subjected to derivative proceedings brought against it by a shareholder, David Woollam. He sought to bring the derivative action to hold the Lewis directors accountable for lack of corporate governance and various other matters. He was unsuccessful in his efforts, but the case underscored the potential use of the mechanism.</p>
<p>The derivative action is available in a wide range of countries, including the United Kingdom, the United States, Canada, Australia and New Zealand.</p>
<p>The second way in which directors can be held accountable is by having criminal charges laid against them for fraudulent trading under the Companies Act. The act makes provision for directors to be fined or imprisoned for as long as ten years if they are found to have traded fraudulently. </p>
<p>Thirdly, the Companies Act requires the court to declare directors delinquent if they trade recklessly or fraudulently. A delinquency order has severe consequences. It bars a person from being a director for at least seven years, or even for a lifetime. </p>
<p>Fourthly, creditors can hold the board of directors personally responsible for the company’s debts. They could claim the amounts that the company owes to them from the directors personally. </p>
<h2>Business rescue</h2>
<p>The board of South African Airways has gained some valuable breathing space by passing a resolution to put the airline under business rescue. This could serve to protect the directors from being sued for reckless or fraudulent trading. And it will protect the airline from any attempts by creditors to liquidate the company. </p>
<p>But the initiation of business rescue does not necessarily mean that the airline’s board is free of the consequences if it is found to have violated the Companies Act. This will only become clear as the business rescue attempt unfolds.</p>
<p>If the business rescue is successful, the directors are likely to avoid personal responsibility for trading recklessly or fraudulently. But if the attempts at rescuing the business fail, and the airline has to be put into liquidation, there is a risk that the directors would be held personally liable for the airline’s debts. </p>
<p>Likewise, resignation does not free directors from liability for any reckless trading that took place while they were on the board. </p>
<p>This all shows that the boards of all companies – including state-owned entities – must be careful, and must not allow the company to trade in insolvent circumstances.</p><img src="https://counter.theconversation.com/content/128470/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Maleka Femida Cassim 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>There are at least four ways in which directors can be responsible for reckless or fraudulent trading.Maleka Femida Cassim, Professor of Company Law, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1235722019-09-24T12:58:42Z2019-09-24T12:58:42ZSouth Africa is planning more regulators: this is a bad idea<figure><img src="https://images.theconversation.com/files/293544/original/file-20190923-54759-1kttft7.jpg?ixlib=rb-1.1.0&rect=0%2C88%2C664%2C397&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's energy regulator failed to assure a stable pricing path for electricity and is partly to blame for energy provider Eskom's troubles.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>There are a host of reasons why a country’s economy must be regulated. One of the main ones is to ensure that dominant firms, whether public or private, don’t abuse their market power. When it comes to state-owned enterprises, government has a further obligation – to ensure that they perform in the public interest.</p>
<p>Since state-owned enterprises are owned by government, one option is to hold them directly accountable to a political and administrative head. A popular alternative in recent decades has been to establish economic regulators, mandated to operate at arms-length from the government which acts as shareholder on behalf of society.</p>
<p>South Africa followed this trend after 1994, creating the National Energy Regulator, which regulates electricity and other energy sources. The other regulators are the National Ports Authority and the Independent Communications Authority. Proposals to expand this approach to transport and water have now been endorsed in the draft policy document recently <a href="http://www.treasury.gov.za/comm_media/press/2019/Towards%20an%20Economic%20Strategy%20for%20SA.pdf">released by the National Treasury</a>.</p>
<p>However, the model has failed dramatically to achieve its objectives in both the energy and communications sectors. In our view, it has also been a wasteful use of scarce expert capacity and institutional resources. This is our conclusion based on an analysis of independent regulation as applied <a href="https://static1.squarespace.com/static/52246331e4b0a46e5f1b8ce5/t/5d245da812c9e000010e3093/1562664362134/ACER+Week+2019_Conference+Programme+Draft.pdf">in South Africa</a>.</p>
<p>An important example is how the energy regulator failed to assure a stable pricing path for electricity. This is it’s most basic function. And in trying to perform its function, it is now <a href="https://www.businesslive.co.za/bd/national/2019-04-08-energy-regulator-nersa-wipes-out-eskoms-r69bn-bailout/">hindering</a> the resolution of the crisis at the state-owned power utility Eskom by awarding tariffs that offset support from the Treasury
– at a time when the country faces serious <a href="https://theconversation.com/south-africas-finances-are-in-bad-shape-its-running-out-of-time-to-fix-them-121464">fiscal</a> and <a href="https://theconversation.com/why-restructuring-south-africas-power-utility-wont-end-the-blackouts-114333">energy</a> threats.</p>
<h2>What’s not working</h2>
<p>South Africa’s state-owned enterprises are supposed to provide a foundation for the country’s development. Yet many are performing badly, or not at all. In some cases they are doing actual harm by, for example, draining public resources. </p>
<p>Existing independent regulators are supposed to:</p>
<ul>
<li><p>set fair prices to ensure that users are not ripped off; </p></li>
<li><p>ensure that the performance of enterprises meets minimum standards, and ideally keeps improving;</p></li>
<li><p>make decisions that reflect government policy goals; and,</p></li>
<li><p>at the same time, avoid short-term or otherwise inappropriate political pressures.</p></li>
</ul>
<p>There are four main reasons why South African economic regulators are failing to achieve these objectives.</p>
<p>First is policy incoherence. Independent regulators are supposed to protect enterprises from the short-termism, opportunism and the fickleness of politics. But they cannot do that effectively if state owned enterprises must give effect to government policy that is still in flux.</p>
<p>Second is a lack of government support. Regulators can never be entirely free from political influence precisely because they need supportive decisions and actions by the state. And that support often hasn’t been forthcoming. </p>
<p>The National Ports Regulator is a good example. The regulator wanted the Minister of Transport to separate port services from the rest of Transnet’s operations as envisaged by the relevant legislation. But that hasn’t happened because Transnet has been lobbying government to retain the revenue from the profitable port business. And government itself is disinclined to tackle the financial challenges that would arise if the Ports Regulator was allowed to do its job and reduce bloated tariffs.</p>
<p>Third is the issue of performance. Most state owned enterprises are performing badly but in many sectors the primary challenge is poor performance at municipal level that results from weak governance. Whether in the local supply of electricity, water, or sanitation services, municipal failure can either compound the failure of state enterprises, or diminish any benefits they might bring.</p>
<p>In such instances, national-level economic regulation will have limited impact if service delivery mechanisms fail. Fiddling with pricing decisions is of little significance to citizens and firms that don’t have reliable access to water, electricity or transport services.</p>
<p>Part of the problem is that independent regulation was often <a href="https://www.tandfonline.com/doi/abs/10.1080/0376835X.2013.830558">promoted as a pathway to privatisation</a>. But that has not happened. And in many instances the case for privatisation has not been convincing, meaning that it might just replace public dysfunction with notional accountability mechanisms for private dysfunction with little accountability. If privatisation is not the way forward, at least for now, these entities should be managed differently with a focus on public performance. </p>
<h2>Technical capacity</h2>
<p>The final practical consideration is that independent regulation needs substantial technical capacity. There are various parts to this.</p>
<ul>
<li><p>The regulator must have the staff who can evaluate enterprises, challenge them where appropriate but not intervene unnecessarily. </p></li>
<li><p>The regulated enterprise must employ people to engage with their regulator. </p></li>
<li><p>Government must have the capacity to set up and support the regulator. If more than one department is involved, all must have appropriate capacity.</p></li>
<li><p>Policy makers must provide clear policy expectations and resolve uncertainty quickly. </p></li>
</ul>
<p>Ideally, other parts of society also need to be able to engage with regulatory issues. Civil society needs to have a voice as do companies that use the services of the state-owned enterprise. And courts need to be capable of dealing with these specialised issues.</p>
<h2>Alternatives</h2>
<p>The question then is whether further proliferation of regulatory capacity is possible, or even desirable.</p>
<p>We believe the answer is no. And argue that there is a radical, but simple, alternative. </p>
<p>It’s a given that political decision-making will guide the oversight of state enterprises – that’s because the government wants to use them to promote broader development policy. This means that the focus should be on building government’s capacity to guide the process. That way, political heads will be clearly accountable and failures cannot be blamed on other parties.</p>
<p>The water sector has been cited as one where a new regulator might be introduced. But it actually serves as a case study of how public entities can deliver well without an independent regulator. Bulk water prices <a href="http://www.dwa.gov.za/IO/Docs/Water%20Resource%20Finance/Pricing%20Strategy.pdf">are set</a> by the national government department, using criteria legislated 20 years ago. The department calculates the tariffs and consults with major stakeholders. These include municipalities, big users such as Eskom and Sasol as well as organised agriculture. Price increases greater than inflation have to be justified.</p>
<p>Unlike the electricity case, this system has worked reasonably well and <a href="http://www.hsrc.ac.za/en/research-outputs/ktree-doc/1388">tariffs have increased</a> smoothly and predictably. User participation keeps government honest in its calculations. </p>
<p>That’s not to say that the water department doesn’t <a href="http://pmg-assets.s3-website-eu-west-1.amazonaws.com/180327AGSA-Challenges_Water_Sanitation.pdf">have challenges</a>. But a <a href="http://www.dwa.gov.za/Projects/PERR/documents/Economic%20Regulator%20Review%2029%20June%202012.pdf">2012 study</a> found little evidence that a formal independent regulator could contribute greatly to fixing these. </p>
<p>Some organisations <a href="https://outa.co.za/projects/water-and-environment/independent-water-regulator">still argue</a> that a regulator would reduce mismanagement. But this ignores the lessons of experience and is based on a superficial notion of democratic accountability. </p>
<p>By contrast, in energy a <a href="https://www.gsb.uct.ac.za/files/SAEconomicRegulatorsConference.pdf">former regulator and sector expert acknowledged</a> that the regulatory agency’s price setting had produced huge fluctuations in the tariff which caused uncertainty. Yet, Treasury inexplicably wants to replace a relatively successful model (in water) with a failed one (in energy). </p>
<h2>The way forward</h2>
<p>We believe that ending dependence on failed independent regulators will ensure that there’s much more direct accountability. It will also lead to a focused effort to improve governance in both government departments as well as state-owned enterprises. And limited capacity can be integrated from disparate departments, entities and regulators. </p>
<p>There is no getting round the fact that tough action needs to be taken, and soon. If government doesn’t get oversight of public enterprises right, a different form of “regulation” will be imposed on the country by international financial institutions and other lenders. But their focus will be on what’s needed to ensure debt repayment, not the broader national interest.</p><img src="https://counter.theconversation.com/content/123572/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller receives funding from a European Union-funded project, "Putting People back in Parliament", led by the Dullah Omar Institute (University of the Western Cape), in collaboration with the Parliamentary Monitoring Group, Public Service Accountability Monitor (Rhodes) and Heinrich Boell Foundation (South Africa). He is affiliated with the Public and Environmental Economics Research Centre (University of Johannesburg), regularly making inputs to Parliament oversight of the national budget, advising civil society groups on public finance matters and consulting for private sector organisations on an ad hoc basis. He previously advised parliamentarians on the financing of state-owned enterprises while at the South African Parliamentary Budget Office, from which he resigned in 2016. The views expressed are his own.</span></em></p><p class="fine-print"><em><span>Mike Muller has received funding from the Financial and Fiscal Commission for a review of the funding of the water sector and has been engaged on an advisory basis by a range of government and other organisations. He recently presented to AGRISA on agriculture’s current predicament - managing uncertain climates, both weather and politics</span></em></p>South Africa’s independent regulators have failed. Instead of introducing new ones, alternatives need to be found.Seán Mfundza Muller, Senior Lecturer in Economics and Research Associate at the Public and Environmental Economics Research Centre (PEERC), University of JohannesburgMike Muller, Visiting Adjunct Professor, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1090922018-12-19T12:34:34Z2018-12-19T12:34:34ZPakistan’s privatisation dilemma as it seeks IMF bailout<p>Reluctantly <a href="https://www.apnews.com/318721da4dca4d6bb0388758662b474c">seeking an IMF bailout</a> for its balance-of-payments crisis, Imran Khan’s nascent government in Pakistan has already devalued its currency, hiked utility rates and imposed new taxes in an effort to be “ready” for IMF reforms. As if these measures were not enough to make the government sufficiently unpopular, it now faces demands to immediately <a href="https://arynews.tv/en/imf-team-briefed-on-privatization-strategy-of-loss-making-state-entities/">privatise large loss-making state-owned enterprises</a>.</p>
<p>For a few reasons, the government has so far been reluctant to sell these off. Two reasons stand out in particular. First, selling of these state-owned enterprises is likely to generate significant unemployment. Politically speaking, this would be a highly unpopular move, as Khan’s new government <a href="https://en.dailypakistan.com.pk/headline/10-million-jobs-5-million-homes-pti-unveils-100-day-plan-ahead-of-general-elections-2018/">promised</a> to create millions of jobs within five years. Second, given the outstanding debts of Pakistan’s state-owned enterprises, there will be few takers unless the government clears up the balance sheets first. </p>
<p>Whichever course the government takes, it would be foolish to ignore the lessons from Pakistan’s troubled history of previous privatisations – three spring to mind.</p>
<h2>1. Telecoms and homegrown talent</h2>
<p>First, do not sell a state-owned enterprise because you are getting a good price. The 2005 privatisation of Pakistan Telecommunication (PTCL), the national telecoms operator, <a href="https://tribune.com.pk/story/349491/privatisation-of-ptcl-a-lesson-for-policymakers/">is illustrative in this regard</a>. </p>
<p>After painting the highly profitable corporation as an inefficient, incompetent, out-of-date behemoth, the government sold off a 26% stake (along with full management control) to Dubai-based Etisalat for US$2.6 billion. Yet at the time of its privatisation, PTCL was technologically one of the strongest telecoms players in South Asia with a number of technology firsts in the region. Financially, the company had just posted annual revenues of US$1.4 billion with a net profit of US$452m. </p>
<p>Within four years of its privatisation, thanks to the incoming, highly inexperienced management, the company’s market value had declined by 75% – resulting in a loss of around US$3 billion for the Pakistan government (the majority shareholder). On top of that, Etisalat today still owes the government more than US$800m (from the acquisition price), which would be twice the value now. Ironically, rather than recovering this amount, the government is now asking for loans from the UAE. </p>
<p>PTCL’s privatisation not only destroyed a treasure trove of technological capabilities that the enterprise had nurtured over decades, but it also deprived Pakistan of a chance to turn a national champion into a regional, South Asian one. </p>
<h2>2. Energy sector and competition</h2>
<p>The privatisation of Pakistan’s energy sector has single-handedly <a href="https://www.epw.in/journal/2012/25/commentary/pakistans-power-politics.html">crippled the entire economy</a>. It illustrates the importance of ensuring the new entity competes fairly to earn a profit.</p>
<p>From 1994 onwards, investors were invited to set up power plants in exchange for a guaranteed US dollar-based internal rate of return of 15–18%. This was further backed by sovereign guarantees from the government of Pakistan (which meant an extremely high return with zero risk and zero competition). </p>
<p>The plants were reimbursed for all the fixed costs of the power plant including debt servicing, and handed the highly lucrative equity return on top. These payments were to be made irrespective of whether or not the independent power producer was asked to produce electricity. Plus, the investors were reimbursed for all variable costs of production, regardless of the type of fuel used and its market price. </p>
<p>The privatisation landed Pakistan in a vicious debt cycle. Energy prices have only gone up, which is unsurprising given the independent power producers face no competition. The state has been unable to keep up with the exorbitant bills it is presented with by investors, and has had to start borrowing in international and domestic markets to honour the contracts. As well as racking up huge debts, Pakistan has suffered from severe and prolonged power outages. </p>
<h2>3. Banks and profitability</h2>
<p>The third lesson comes from the <a href="https://www.epw.in/journal/2013/47/perspectives/pakistans-post-reforms-banking-sector.html">privatisation of Pakistan’s banks</a>. They became more profitable after privatisation in the early 2000s. But a closer look at their performance once privatised shows that much of this profitability came from lending to the government. Lending to the private sector actually declined. This shows the importance of not privatising when an state-owned enterprise can do the same job more cheaply.</p>
<p>There is little point having private banks if all they do is lend to the government, which could easily own those banks and lend to itself without having to factor in an equity return. The allocation of credit to different sectors of the economy did not improve either. Manufacturing, agriculture, and small businesses – the sectors which were supposed to benefit from privatisation – continued to be deprived of credit. </p>
<p>But, consistent with the general history of privatisation in Pakistan, banking privatisation was great for the new owners. Many got bargain basement deals – while doing little for the cause of national economic development.</p>
<p>Above all, the government should realise that in the absence of a broader national development policy, privatisations are not going to yield the desired benefits. Before contemplating any sell off, the government needs to first figure out the roles it needs various institutions to play and devise appropriate regulatory and monitoring frameworks. </p>
<p>Goals such as maximising the value of an enterprise before its sale or enhancing its profitability, should be supplanted by aims that are in line with a larger development plan. In order to avoid the mistakes of previous governments, longer-term goals must be prioritised.</p><img src="https://counter.theconversation.com/content/109092/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kamal A Munir 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>Three important lessons from three recent privatisations.Kamal A Munir, Associate Professor of Strategy and Policy, Cambridge Judge Business SchoolLicensed 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/1009752018-08-14T13:06:32Z2018-08-14T13:06:32ZEnough promises: it’s time the ANC acted on South Africa’s big economic issue<figure><img src="https://images.theconversation.com/files/231492/original/file-20180810-2909-k5wva1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Lacklustre economic activity has rendered millions of South Africans unemployed and poor.</span> <span class="attribution"><span class="source">EPA/Nic Bothma</span></span></figcaption></figure><p>South Africa’s president, Cyril Ramaphosa, has made another impassioned <a href="https://www.news24.com/Columnists/GuestColumn/read-president-cyril-ramaphosas-full-speech-here-20180731">promise to fix the country’s ailing economy</a>, this time around with an official word from his party, the ruling African National Congress (ANC). </p>
<p>In a recent statement Ramaphosa noted:</p>
<blockquote>
<p>Our economy is facing serious challenges. The recently released figures on unemployment are worrying. Given this economic environment, the (ANC) Lekgotla directed government to move with urgency to develop and implement a stimulus package to ignite economic growth that will lead to the creation of jobs, especially for young people and women.</p>
</blockquote>
<p>He added that this stimulus package should focus on rural communities and townships. And that it will be based on existing budgetary resources and efforts to generate new investments.</p>
<p>If anything, the statement demonstrates that Ramaphosa appreciates the gravity of a situation that’s becoming more desperate by the day in ways that threaten the <a href="https://www.fin24.com/Economy/economic-status-quo-threatens-sas-stability-dlamini-zuma-20170829">political stability</a> of the country. The unemployed and poor are getting more impatient with the promises for a better future that never materialise.</p>
<p>The key issue is <a href="https://www.fin24.com/Economy/youth-jobless-rate-double-that-of-over-40s-stats-sa-20180731">joblessness</a> which stands at 27.2%, (6.1 million people). If discouraged job seekers are included in the numbers, the unemployment rate is closer to the 40% which translates to 9.6 million people. Youth unemployment is particularly alarming. It has risen to more than 50%. </p>
<p>Clearly an urgent intervention is required.</p>
<p>But it’s becoming increasingly difficult to take the ANC seriously when it talks about economic reform. And it’s hard to judge just yet whether Ramaphosa’s latest statement is simply another to add to a pile of empty economic promises made by the ANC in recent years. Even Ramaphosa has made some bold promises over the <a href="https://www.investec.com/en_za/welcome-to-investec/news-and-views/insights/markets-and-economy/ramaphosas-sona-2018-promises.html">past six months</a> that have yet to bear fruit.</p>
<p>Ramaphosa will need to move at great speed and take drastic measures to convince the market that he’s serious, and that he’s capable of taking action. This has to involve going beyond a simple stimulus package by tackling some of the country’s more intractable problems. Top of this list is the huge <a href="https://theconversation.com/corrupt-state-owned-enterprises-lie-at-the-heart-of-south-africas-economic-woes-79135">burden</a> of state owned enterprises and wrestling down <a href="https://theconversation.com/why-the-dominance-of-big-players-is-bad-for-south-africas-economy-92058">monopolies</a> in key sectors such as telecoms and the banking sector.</p>
<h2>Economic growth</h2>
<p>It has been long established that the South African economy needs to grow at levels above <a href="https://nationalplanningcommission.wordpress.com/the-national-development-plan/">6%</a> to significantly affect its challenges of poverty, high unemployment and inequality. But it’s performed dismally against this target over the past 25 years.</p>
<p>The country’s economy has been struggling to pick up significant positive growth ever since it reached its all-time high of 7.6% in the fourth quarter of 1994 under <a href="https://tradingeconomics.com/south-africa/gdp-growth">Nelson Mandela’s administration</a>. Since then, growth has been through a series of marginal seasonal fluctuations, with the negative growth sometimes reversing previous positive gains.</p>
<p>The 2008 global recession didn’t help the situation. The following year South Africa’s economy shrank by 6.1% – the <a href="https://tradingeconomics.com/south-africa/gdp-growth">largest contraction ever</a>.
Since then, the country has reported sluggish economic growth far below the rest of the <a href="http://www.worldbank.org/en/news/press-release/2018/04/18/economic-growth-in-africa-rebounds-but-not-fast-enough">continent’s average of 3.6%</a>. </p>
<p>This picture says successive governments have failed to tackle the country’s structural economic problems such as the widening inequality, lack of skills, high unemployment, corruption and crime. And none of the country’s administrations since 1994 has taken decisive steps to reform areas like seriously fixing highly indebted and <a href="https://theconversation.com/corrupt-state-owned-enterprises-lie-at-the-heart-of-south-africas-economic-woes-79135">badly run</a> state owned enterprises as well as highly uncompetitive sectors. </p>
<h2>Economic growth stimulus package</h2>
<p>Ramaphosa’s stimulus package includes:</p>
<ul>
<li><p>increasing investment in public infrastructure, </p></li>
<li><p>increasing support for small and medium business entrepreneurship,</p></li>
<li><p>trade support measures for sectors affected by big import surges,</p></li>
<li><p>localisation of procurement and youth training. </p></li>
</ul>
<p>These economic measures all depend on government spending money. But the government would have to increase borrowing if it wants to spend more, something the country can <a href="https://theconversation.com/latest-budget-underscores-desperate-state-of-south-africas-finances-86362">ill afford</a>. The policy is also not likely to ignite growth. </p>
<p>To be effective, other supplementary action needs to be taken to encourage private and public sector spending. This includes monetary measures such as interest rate cuts, as well as fiscal policy initiatives such as tax rebates and export incentives. </p>
<p>But even this won’t be enough. The current economic status needs much bolder steps. </p>
<h2>Some of the structural reforms needed</h2>
<p>The South African government needs to focus on <a href="https://theconversation.com/why-the-dominance-of-big-players-is-bad-for-south-africas-economy-92058">opening up</a> key economic sectors to more competition. These include sectors like telecommunication, energy, financial services and transport. All are currently dominated by a few players and creating serious economic bottlenecks.</p>
<p>And the Ramaphosa administration needs to sort out state owned enterprises. It must – once and for all – face the reality that it needs to <a href="https://theconversation.com/south-africa-must-free-itself-from-the-burden-of-owning-a-national-airline-64004">get rid</a> of non-essential state owned enterprises and consider partial privatisation of mainstream state firms. This would reduce the government’s debt burden and give it some financial slack. Those that aren’t sold off or partially privatised must have sustainable funding models to allow the government to reduce the level of debt guarantees. </p>
<p>In addition, Ramaphosa must come up with a credible initiative to support the country’s manufacturing base which is being <a href="https://www.thesouthafrican.com/south-africa-manufacturing-market/">eroded</a> by imports.</p>
<p>Although it’s necessary to address the <a href="https://theconversation.com/south-africans-differ-on-land-reform-but-there-needs-to-be-a-meeting-of-minds-101129">land reform issue</a>, Ramaphosa will need to the tackle the uncertainties that come with pursuing a policy of expropriation without compensation. The consideration is viewed by many in the business sector as a threat to property rights. As such it erodes business confidence.</p>
<p>The government should have decisive economic policy rather than just tilting towards a populist direction.</p><img src="https://counter.theconversation.com/content/100975/count.gif" alt="The Conversation" width="1" height="1" />
<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>It’s becoming increasingly difficult to take South Africa’s ruling party seriously when it talks about economic reform.Misheck Mutize, Lecturer of Finance, Graduate School of Business (GSB), University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/990872018-07-02T15:48:11Z2018-07-02T15:48:11ZTo fix South Africa’s dysfunctional state, ditch its colonial heritage<figure><img src="https://images.theconversation.com/files/225339/original/file-20180628-117430-1sh6sxa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's Union Buildings in Pretoria.</span> <span class="attribution"><span class="source">Paul Saad/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>South African President Cyril Ramaphosa recently made an astonishing statement: that the country’s <a href="https://m.news24.com/SouthAfrica/News/governance-is-collapsing-in-sa-ramaphosa-20180616">governance is collapsing</a>. It takes extraordinary courage for a head of state and of the national executive to be so candid.</p>
<p>Ramaphosa’s statement followed the release of damning data about the state of governance in the country. For example, the most recent report from the Auditor General Kimi Makwetu showed that only 7% of the country’s <a href="https://www.news24.com/SouthAfrica/News/55-municipalities-are-dysfunctional-Mkhize-20180320">municipalities</a> are discharging their constitutional mandate. And only 8% were given a clean audit in the last financial year. </p>
<p>Hot on the heels of this report were parliamentary briefings which painted a gloomy picture of the <a href="https://www.youtube.com/watch?v=CpiTnPTjiNs">state of</a> public service. Added to this is the fact that a number of <a href="https://www.news24.com/SouthAfrica/News/download-the-full-state-of-capture-pdf-20161102">state owned enterprises</a> have gained notoriety as conduits for patronage.</p>
<p>Does this suggest that South Africa is at the tipping point? I’m asking the question because an important determinant of a functioning state is its administration. As the British political scientist <a href="https://www.macmillanihe.com//companion/Heywood-Politics-4e/Chapter-13-notes/">Andrew Heywood</a> argues:</p>
<blockquote>
<p>Political systems can operate without constitutions, assemblies, judiciaries, and even parties, but cannot survive without an executive branch to formulate government policy and ensure that it is implemented.</p>
</blockquote>
<p>The administration of the state is key. A political system can be optimised or vitiated by the way in which public affairs are managed. Politics decides a system of government while the administration of the state institutionalises how these objectives are realised. In a democracy this is about enhancing the quality of citizens’ life.</p>
<p>To understand what’s behind the appalling state of governance in South Africa it’s more useful to look at causes, rather than just the problems. <a href="https://utamu.ac.ug/docs/research/publications/journals/JOPA%20Vol%2046%20No%201.pdf%202012-PARADIGMS.pdf">I argue</a> the main driver is that South Africa’s democracy has been sacrificed at the altar of neo-liberalism - <a href="http://www.google.co.za/amp/s/theconversation.com/amp/what-exactly-is-neoliberalism-84755">a system</a> of organising society in which the markets are left unbridled and their principles thrust into various aspects of human life.</p>
<h2>The rise of neoliberalism</h2>
<p>The collapse of communism in Eastern Europe in the 1980s gave the neo-liberalism arsenal an unfettered edge. It was peddled as the panacea by international financial institutions and liberal scholars. Audaciously, an American political scientist and economist Francis Fukuyama proclaimed in his book <a href="https://g.co/kgs/V9TcEK">The End of History and the Last Man</a> that the market economy and a democratic political system were the only means to achieve sustained growth and development. </p>
<p>The post-apartheid state was created just as these views were becoming more prevalent. This meant that the new state didn’t deconstruct the colonial architecture of its administration.</p>
<p>The African National Congress (ANC) also took over running the state with zero experience behind it. </p>
<p>In other words, the ANC ran into government in 1994 completely unprepared. As a result, it often embraced the <a href="http://www.power987.co.za/wp-content/uploads/2017/06/170630-0705-FINAL-Diagnostic-Organisational-Report-National-Policy-Conference.doc">colonial</a> apartheid governance model. </p>
<p>The intersection of a neo-liberal approach and a colonial edifice eroded the state’s capacity to fulfil the mission of the liberation struggle. <a href="http://www.sahistory.org.za/archive/strategy-and-tactics-anc-building-national-democratic-society-revised-draft-anc-30-august-20">This was about </a>“uplifting the quality of life of all South Africans, especially the poor, the majority of whom are African and female.” </p>
<p>In a neo-liberal framework, the people’s sovereignty is replaced by the market. The public good is <a href="https://journals.co.za/content/jpad/50/2/EJC183286">commodified</a>. State and the citizens assume a transactional relationship in which citizens are characterised as customers. </p>
<h2>New public management</h2>
<p>During the 1980s a template began to emerge for state reform along <a href="http://journals.sagepub.com/doi/abs/10.1080/0042098042000226957">neo-liberal</a> lines. It was called new public management. It remoulded the administration of the state according to private sector principles and practices, which saw the state becoming more service ensurer than service provider.</p>
<p>The approach dominated the 1980s but waned in the 1990s. South Africa embraced it anyway, and used it to frame the <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1754-7121.1995.tb01147.x">post-apartheid model</a> for state administration.</p>
<p>The new public management approach became a staple diet in the education of students of government. They were taught that the performance of the state was the function of the economic value of efficiency, largely derived from privatisation cuts in public expenditure. The key is to maximise output with minimum input costs. It’s not about the “social effectiveness” of the state’s action - enhancing the wellbeing of the citizens. </p>
<p>This approach spawned inequality. Society is stratified along socio-economic lines. The hardest hit are the poor while the business, political and bureaucratic elites rich live lavishly.</p>
<p>As <a href="https://utamu.ac.ug/docs/research/publications/journals/JOPA%20Vol%2046%20No%201.pdf%202012-PARADIGMS.pdf">I have argued elsewhere</a>, “democracy in conditions characterised by inequities in socio-economic gains is not sustainable, particularly in South Africa with the history of many decades systematic marginalisation” of other races.</p>
<h2>Can governance be fixed?</h2>
<p>South Africa’s governance challenge can’t simply be fixed by reorganising the structure of government, such as by reducing the size of the public service. It requires rethinking the ideological edifice that frames it, and daring to decolonise the administration of the state. </p>
<p>To get there, the idea that government should be run like a business has to be jettisoned and the idea that it should be like a democracy embraced. This should be linked to the concept of the public good, where democracy should be given a <a href="https://epdf.tips/the-new-public-service-serving-not-steering.html">human face</a>.</p>
<p>Iain McLean, a British professor of politics at Oxford University, offers this conception of the <a href="http://www.oxfordreference.com/view/10.1093/acref/9780199207800.001.0001/acref-9780199207800">public good</a>:</p>
<blockquote>
<p>any good that, if supplied to anybody, is necessarily supplied to everybody, and from whose benefits it is impossible or impracticable to exclude anybody. </p>
</blockquote>
<p>So how can this begin to happen in South Africa? As a crucial first step, governance requires new narratives. These must transcend neo-liberal prescriptions and colonial-apartheid entrapment, replacing them with the notion of the public good.</p><img src="https://counter.theconversation.com/content/99087/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mashupye Herbert Maserumule received funding from the National Research Foundation(NRF) for his postgraduate studies. He is affiliated with the South African Association of Public Administration and Management(SAAPAM). He is the Chief Editor of this learned soceity. </span></em></p>South Africa’s governance challenge can’t simply be fixed by reorganising the structure of government.Mashupye Herbert Maserumule, Professor of Public Affairs, Tshwane University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/979662018-06-14T14:07:37Z2018-06-14T14:07:37ZWhat to look for when assessing South Africa’s president, Ramaphosa<figure><img src="https://images.theconversation.com/files/222594/original/file-20180611-191965-euyqze.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's President, Cyril Ramaphosa, has a tough job of fixing the damage caused during Jacob Zuma's era.</span> <span class="attribution"><span class="source">GCIS</span></span></figcaption></figure><p>Now that Cyril Ramaphosa has served as South Africa’s president for more than three months, many pundits and ordinary citizens are assessing his performance. Some have argued that he’s doing a <a href="https://theconversation.com/ramaphosas-to-do-list-seven-economic-policy-areas-that-will-shift-the-dial-94352">great job</a> others are <a href="https://theconversation.com/patience-with-ramaphosas-presidency-is-waning-among-south-africans-97467">less impressed</a>.</p>
<p>Whatever one’s view, perhaps the most important element to take into consideration when assessing Ramaphosa’s work so far is that he took the country’s reins under circumstances that were far from ideal. He stepped into the role <a href="https://theconversation.com/ramaphosas-new-dawn-much-better-but-not-nearly-enough-96803">vacated by President Jacob Zuma</a> when he had to be recalled by his own party in order to allow Ramaphosa a greater latitude as a leader. </p>
<p>Since Ramaphosa was elected to the position by parliament rather than in a national poll, he will be hoping to secure his own full-term, and with good margins for his party, after the 2019 general elections. So far he has taken an <a href="https://www.ujuh.co.za/cyril-ramaphosas-new-cabinet-a-balancing-game-with-key-victories/">inclusive approach</a> to keep the ship steady towards the 2019 general elections. </p>
<p>He is treading a delicate balance between expressing his own distinct leadership and cultivating cohesion within his party. This is not without difficulty, as fissures deepen in the <a href="https://www.timeslive.co.za/politics/2018-06-08-mantashe-booed-at-anc-kzn-conference/">ANC’s KwaZulu-Natal province</a> despite Ramaphosa’s quest to achieve unity. He has also failed to assert his will in <a href="https://www.dailymaverick.co.za/article/2018-06-10-kzn-and-north-west-ancs-ticking-clockwork-oranges/#.Wx5_fkiFM2w">the North West province</a>, where his party is also riven by tensions. </p>
<p>And yet, Ramaphosa needs to be firm if he’s to reverse Zuma’s legacy that left behind a deeply damaged economy and state institutions. </p>
<p>He will not succeed if he becomes a teddy bear within his party, especially given its chaotic state. This is even important given the fact that the pro-Zuma faction is not giving up and will possibly <a href="https://www.news24.com/SouthAfrica/News/zuma-fuels-anc-war-20180610-3">mobilise against Ramaphosa</a> at the 2022 elective conference of the African National Congress. </p>
<p>Ramaphosa should bear in mind that he does not have much time at the helm of government, since there is no South African president under democracy who has completed two terms in office.</p>
<h2>Need for better focus</h2>
<p>In his hastily delivered state of the nation address a day after he replaced Zuma, Ramaphosa presented a <a href="https://www.fin24.com/Economy/ramaphosas-10-point-plan-to-revive-sas-economy-20180216">10-point plan</a> that emphasised the economy, renewal, and unity as the centrepieces of his presidency.</p>
<p>He’s come up with many ad-hoc initiatives and ideas. These include the jobs summit, the investment conference and the special investment envoy. He’s also been talking about reviving manufacturing, supporting black industrialists, boosting youth employment, growing the tourism sector, and a digital industrial revolution commission, among others. </p>
<p>These are all sensible and promising programmes. What they need to succeed is better rationalisation, clearer focus, and technocratic finesse. They will also need sound indicators to measure success. Otherwise they run the risk of gathering dust in filing cabinets.</p>
<h2>Some good moves</h2>
<p>There are some commendable practical steps Ramaphosa has taken so far, which will need a strong push to bear results. On the political front, Ramaphosa has managed to exercise influence over the core of the economic cluster in government. Agencies such as Treasury, Trade and Industry, Economic Development, and Mineral Resources are now <a href="https://www.ujuh.co.za/cyril-ramaphosas-new-cabinet-a-balancing-game-with-key-victories/">steered</a> by figures that enjoy credibility with the public and the private sector.</p>
<p>At the institutional level, he has taken little time to get on the work of <a href="https://www.ujuh.co.za/major-shakeup-at-transnet-eskom-denel-sa-express-list-of-the-new-faces/">overhauling</a> leadership in struggling state owned enterprises. Boards at Eskom, Denel, Transnet and SAA Express were replaced with fresh blood and individuals that have experience and integrity. New leadership <a href="http://ewn.co.za/2018/03/29/police-minister-bheki-cele-announces-new-appointments">appointments</a> have been made in the security cluster.</p>
<p>The head of the South African Revenue Services Tom Moyane, a known Zuma ally, has been <a href="https://m.news24.com/SouthAfrica/News/sars-tom-moyane-suspended-with-immediate-effect-20180319">suspended</a> and is likely to be dispatched to the wilderness before his contract comes to an end.</p>
<p>Law enforcement agencies were quickly on the <a href="https://city-press.news24.com/News/explosive-indictment-in-vrede-dairy-farm-case-implicates-zwane-magashule-20180215">heels</a> of those implicated in acts of corruption. Among those feeling the heat are the Gupta family which had been untouchable due to its closeness to Zuma and their allies like the former minister of mineral resources <a href="https://city-press.news24.com/News/explosive-indictment-in-vrede-dairy-farm-case-implicates-zwane-magashule-20180215">Mosebenzi Zwane</a>. Even the ANC general secretary <a href="https://www.businesslive.co.za/bd/national/2018-01-26-hawks-are-raiding-ace-magashules-office-in-estina-investigation/">Ace Magashule</a> is feeling the pressure.</p>
<p>Ramaphosa’s short tenure has, no doubt, brought a sense of urgency in cleaning up government and other state institutions. This is something to be encouraged. However, the road ahead requires much more.</p>
<h2>Beyond slogans</h2>
<p>Beyond a set of programmes and short-term plans, Ramaphosa needs to develop strong signature themes that define his leadership, and not just piecemeal programmes. He needs to express a clearly discernible mission beyond the feel-good slogan, “<a href="https://probonomatters.co.za/2018/05/cyril-ramaphosa-on-thuma-mina-and-the-spirit-of-nelson-mandela/">Thuma Mina</a>”, a campaign to galvanise citizen activism in addressing the country’s challenges. </p>
<p>Whatever people think of former South African leaders such as <a href="https://www.ujuh.co.za/nelson-mandela-greatest-statesman-of-all-time-has-passed-on/">Nelson Mandela</a>and <a href="http://www.sahistory.org.za/archive/african-renaissance-statement-deputy-president-thabo-mbeki-sabc-gallagher-estate-13-august-1">Thabo Mbeki</a>, their leadership had strong imprints that were felt early on. Whether it was <a href="http://www.sahistory.org.za/dated-event/president-nelson-mandela-announces-his-intentions-promote-national-unity">reconciliation and nation-building</a>, in the case of Mandela, or <a href="http://www.sahistory.org.za/archive/african-renaissance-statement-deputy-president-thabo-mbeki-sabc-gallagher-estate-13-august-1">African renaissance</a>, in the case of Mbeki, what their presidency stood for was clear. Ramaphosa is yet to show his leadership identity.</p>
<p>However Ramaphosa’s record is assessed, people should not lose focus on the responsibility of citizens to keep leaders accountable. They should not allow themselves to be reduced to applauding spectators. Leaders are here today and gone tomorrow. </p>
<p>Positive efforts should by all means be supported but citizens must avoid complacency at all costs. They can play a critical part in contributing meaningfully to consolidate the country’s democracy and promoting social change by getting involved in initiatives that seek to address social ills.</p>
<p><em>Matlala Setlhalogile coauthored this article. He lectures politics at the University of Johannesburg.</em></p><img src="https://counter.theconversation.com/content/97966/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 African President Cyril Ramaphosa has to show that he’s a decisive leader who can take unpopular decisions.Mzukisi Qobo, Deputy Chair: SA Research Chair on African Diplomacy and Foreign Policy, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/974672018-06-05T13:45:11Z2018-06-05T13:45:11ZPatience with Ramaphosa’s presidency is waning among South Africans<figure><img src="https://images.theconversation.com/files/221584/original/file-20180604-175407-tuldp2.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Patience might be running out for South African President Cyril Ramaphosa.</span> <span class="attribution"><span class="source">GCIS</span></span></figcaption></figure><p>South Africa’s new president, Cyril Ramaphosa, has just crossed <a href="http://www.thepresidency.gov.za/speeches/address-president-cyril-ramaphosa-occasion-presidency-budget-vote-debate%2C-national-assembly">100 days</a> in office with increasing signs that his honeymoon period is already over. The economic realities are hitting home. And the accompanying impatience which seemed suspended since he took over in February is reemerging.</p>
<p>Ramaphosa’s tenure came with renewed hopes about the future of the <a href="https://www.huffingtonpost.co.za/2018/02/21/ramaphosa-takes-charge-of-the-economy_a_23367836/">country’s economy</a>. His state of the nation address, followed by the national budget, <a href="https://mg.co.za/article/2018-02-16-rampahosas-sona-stokes-hope-of-economic-revival">raised optimism</a> that the economy would soon rebound. This followed President Jacob Zuma’s rule which wrecked the economy through a series of <a href="https://www.news24.com/SouthAfrica/News/flashback-5-of-zumas-biggest-scandals-20180213">corruption scandals</a> and <a href="https://www.telegraph.co.uk/news/2017/03/31/south-african-currency-plunges-jacob-zuma-fires-finance-minister/">destructive economic decisions</a>.</p>
<p>Given the depths to which Zuma had taken the country, it was easy for the Ramaphosa euphoria to emerge. A couple of speeches promising a “<a href="http://www.thepresidency.gov.za/speeches/address-president-cyril-ramaphosa-occasion-presidency-budget-vote-debate%2C-national-assembly">new dawn</a>” did the trick. The people ululated and the <a href="https://www.businesslive.co.za/bd/markets/2017-12-19-jse-rallies-to-two-week-high-as-investors-cheer-ramaphosa-victory/">markets cheered</a>.</p>
<p>But it would seem that the honeymoon is over. Patience is waning and giving way to protests against long standing grievances. The failure by the ANC government to deliver basic services and endemic corruption is driving <a href="http://www.ngopulse.org/article/service-delivery-protests-people-need-services">people to the streets</a>.</p>
<p>Many celebrated the decision by one of the top three credit rating agencies to leave South Africa’s rating unchanged. What they missed was it’s long list of warnings. </p>
<p>I believe that this all adds up to the need to be extremely cautious about the country’s immediate future. The real test for Ramaphosa’s presidency is how he will respond to the immediate pressing needs. The people, markets and rating agencies will stand waiting to judge. The latest economic growth figures, showing a <a href="https://www.fin24.com/Economy/South-Africa/sas-first-quarter-gdp-takes-a-knock-shrinks-by-22-20180605">2.2% dip in gross domestic product</a> (GDP) during the first quarter of this year, is not a good sign.</p>
<h2>A closer reading of S&Ps decision</h2>
<p>S&P <a href="https://www.ft.com/content/c9328624-d194-11e7-b781-794ce08b24dc">downgraded South Africa’s</a> sovereign rating to sub-investment grade towards the end of last year, warning that further downgrades were possible. The country’s economy was in a perilous state and faced the possibility of slipping deeper into sub-investment grade. </p>
<p>Against this backdrop, <a href="https://www.fin24.com/Economy/breaking-sp-keeps-sa-sovereign-credit-rating-unchanged-20180525">S&P’s most recent decision</a>, not to downgrade South Africa further, was greeted with delight. But its decision can be interpreted from two perspectives. </p>
<p>On the one hand, the decision was a sign that the rating agency was impressed that the country’s position has not deteriorated further since its last downgrade in November 2017. </p>
<p>The other view is that S&P acknowledged that the country has not done much to improve its fiscal position which remains significantly weak. By keeping the country’s outlook stable, the rating agency is anticipating the economy could improve modestly in the near future if certain reforms are undertaken. But it’s also a warning that should there be deterioration it will be forced to do another downgrade.</p>
<h2>What’s been done, and not done</h2>
<p>Ramaphosa’s government has largely focused on saving key institutions ravaged by the patronage of the Zuma era. This include the <a href="https://www.dailymaverick.co.za/opinionista/2018-05-30-ramaphosa-and-the-dark-side-of-the-dawn/#.WxDbDn34nIU">police and prosecuting agencies</a> and <a href="https://www.timeslive.co.za/news/south-africa/2018-05-31-state-owned-enterprises-are-sewers-of-corruption-ramaphosa/">state-owned enterprises</a>. </p>
<p>There have been <a href="https://www.ujuh.co.za/major-shakeup-at-transnet-eskom-denel-sa-express-list-of-the-new-faces/">big changes</a> in the management of key state-owned enterprises such as the power utility <a href="https://www.businesslive.co.za/fm/fm-fox/2018-02-01-new-management-takes-charge-of-eskom-crisis/">Eskom</a>, regional airline <a href="https://www.iol.co.za/business-report/companies/saa-appoints-turnaround-specialist-bob-head-as-new-cfo-14400380">SA Express</a>, defence company <a href="http://ewn.co.za/2018/04/11/denel-interim-board-gives-staff-management-new-hope">Denel</a> and transport and logistics enterprise <a href="https://www.fin24.com/Companies/Industrial/meet-transnets-six-new-board-members-20180524">Transnet</a>. </p>
<p>This shows that Ramaphosa’s government is committed to rooting out corruption and improving service of these enterprises.</p>
<p>But a number of issues remain problematic. First, the country’s economic growth figures remain subdued and are likely to stay that way for a while. That’s because government is still not showing any firm commitment to undertake structural reforms that are required to jump-start growth. </p>
<p>Secondly, unemployment remains <a href="https://tradingeconomics.com/south-africa/unemployment-rate">significantly high</a> with no practical solution in sight besides a proposed job summit. South Africa’s unemployment stands at 26.7%. The rate is much higher, <a href="https://www.fin24.com/Economy/youth-unemployment-in-sa-a-national-crisis-economists-20170807">around 36%</a>- if disgruntled work seekers are included. Youth unemployment stands at more <a href="https://tradingeconomics.com/south-africa/youth-unemployment-rate">than 52%</a>. Something drastic is required to tackle this problem. Nothing from the prevailing talk fits the bill.</p>
<p>Thirdly, government’s debt burden continues to rise. This is on the back of low growth and a rising social service bill. The bloated civil service and cabinet are not helping the situation. Ramaphosa had a chance to review the cabinet size when he <a href="https://www.news24.com/SouthAfrica/News/ramaphosa-reshuffles-cabinet-20180227">reshuffled</a> it in February but he let it slip presumably for fear of unsettling political support. The continued power balance within the ruling party means that he will shy away from taking hard decisions like rationalising the civil service.</p>
<p>There is also the lingering financial burden posed by state owned enterprises. Besides improvements in their governance, many are run on fundamentally unviable funding models, making it impossible for them to be weaned from government support. </p>
<p>And finally there are the disturbing <a href="https://www.fin24.com/Finweek/Business-and-economy/land-expropriation-farmers-stuck-in-limbo-as-investor-uncertainty-mounts-20180319">uncertainties</a> around the ANC’s move to undertake expropriation of land without compensation. This is undermining the pledge to restore policy certainty and improve economic growth.</p>
<h2>Possible solutions</h2>
<p>Ramaphosa has inherited a ruling party and government faced with a tricky overriding challenge. The ANC is getting increasingly pressured by its voter base to deal with poverty and inequality. And the noise coming from populist groups like the Economic Freedom Fighters (EFF) is piling up the pressure. Arguably, it is this dynamic which led to the adoption of the land expropriation without compensation resolution at the <a href="https://www.cnbcafrica.com/zdnl-mc/2017/12/20/anc-resolutions/">ANC conference</a> in December last year.</p>
<p>And so the government finds itself trying to strike a balance between addressing poverty and inequality while maintaining property rights and ensuring food security.</p>
<p>The main priority of the government should be centred on growing the economy to create jobs and reduce poverty. This could be achieved with structural economic reforms. These could include liberalising the labour market by making changes to the employment laws to lower the costs of hiring and firing workers in order to improve the ability of companies to respond to market shocks.</p>
<p>Economic reforms should include the removal of bottlenecks in the product and service markets to allow establishment and sustenance of small businesses. In addition, the reforms must aim at improving the country’s delicate taxation system through broadening the tax base with targets to reduce social spending in the medium to long-term.</p><img src="https://counter.theconversation.com/content/97467/count.gif" alt="The Conversation" width="1" height="1" />
<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>The positive energy that’s greeted the new South African President, Cyril Ramaphosa, will turn to protest if economic challenges are not addressed quickly.Misheck 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/966662018-05-15T14:19:31Z2018-05-15T14:19:31ZHow a deal with provincial strongmen is haunting South Africa’s ruling party<figure><img src="https://images.theconversation.com/files/219027/original/file-20180515-195315-e0638.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">North West Premier Supra Mahumapelo (centre) before the announcement that his province is being taken over by national government.</span> <span class="attribution"><span class="source"> EPA-EFE/STR</span></span></figcaption></figure><p>Last year South Africa’s governing African National Congress (ANC) <a href="https://theconversation.com/why-ramaphosas-moment-of-hope-is-built-on-a-fragile-foundation-92043">elected a new leadership</a> which was the result of a hard boiled deal between the party’s factions. South Africans can now see how the deal which produced a new governing party leadership last year is meant to work. It may keep the ANC together and is unlikely to worry people in the major cities much. But it could make an already <a href="https://theconversation.com/south-africa-needs-a-fresh-approach-to-its-stubbornly-high-levels-of-inequality-87215">serious inequality problem</a> worse.</p>
<p>The nature of the deal is revealed by events in North West province where Supra Mahumapelo, an unpopular provincial premier, seems set on remaining in power despite voter <a href="https://www.news24.com/SouthAfrica/News/live-mahumapelo-addresses-vocal-supporters-trying-to-gatecrash-pec-meeting-20180509">rejection</a> and demonstrations calling for his head. He has so far been able to do this because he controls the provincial ANC structures. </p>
<p>The national leadership has placed the province <a href="http://ewn.co.za/2018/05/13/report-ramaphosa-takes-over-troubled-nw">under the administration</a> of central government. But that is more an admission of defeat than a solution. It’s an acknowledgement that central government could not solve the problem politically and so it’s been forced to use administrative measures.</p>
<p>To understand these events, we need to go back to the ANC’s December conference at which its current leadership, with Cyril Ramaphosa as President, was elected. The choice of leaders was the product of a <a href="http://ewn.co.za/2018/05/13/report-ramaphosa-takes-over-troubled-nw">deal</a> which saw the leadership group divided equally between supporters and opponents of former president Jacob Zuma. </p>
<p>It was also a compromise between two types of politics – one which uses the state’s resources for enrichment and patronage and one rooted in the market which opposes government behaviour that might weaken its ability to create wealth.</p>
<h2>The deal</h2>
<p>Since the election, the ANC’s national leadership has been behaving largely as if no deal was done and they alone are in charge. It has removed Zuma and has appointed an <a href="https://www.timeslive.co.za/politics/2018-01-25-in-full--state-capture-inquiry-to-probe-guptas-zuma-and-ministers/">inquiry</a> into the “state capture” of which his faction is accused. It has also <a href="https://theconversation.com/ramaphosas-to-do-list-seven-economic-policy-areas-that-will-shift-the-dial-94352">replaced the boards</a> and senior managers of state owned enterprises which were seen to aid the capture of public resources by connected people. </p>
<p>Ramaphosa’s first <a href="https://www.news24.com/SouthAfrica/News/ramaphosa-reshuffles-cabinet-20180227">cabinet</a> included members of the Zuma faction, but the key positions are held by his group. </p>
<p>This begged an obvious question: what was the pro-Zuma faction getting out of the deal? Why were they falling in line with the anti-state capture agenda which pulled the rug from under them?</p>
<p>North West provides the answer. At the core of the Zuma faction’s campaign, which relied on electing his ex-wife Nkosazana Dlamini-Zuma president, were the so-called <a href="https://www.huffingtonpost.co.za/2017/12/19/the-rise-of-the-premier-league-and-their-failed-bid-to-install-ndz_a_23310554/">Premier League</a>, provincial premiers in three mainly rural provinces. </p>
<p>Mahumapelo was one but he did not ascend to national office. The other two, David Mabuza and Ace Magashule, are now deputy president (of both the ANC and the country) and ANC secretary general respectively. While there are differences between them – Mabuza struck the deal which got Ramaphosa elected – all three are regional strongmen whose power relies on controlling their provinces. </p>
<p>They seem to have decided not to challenge Ramaphosa’s faction on national issues. But all three are set on retaining their power base in their provinces; Mabuza and Magashule have been replaced by premiers who are likely to defer to them and Mahumapelo is <a href="https://www.news24.com/SouthAfrica/News/live-mahumapelo-addresses-vocal-supporters-trying-to-gatecrash-pec-meeting-20180509">determined</a> to hold onto the North West ANC. They seem to remain strong enough in their provincial ANCs to allow them to do this.</p>
<h2>Back to Bantustans</h2>
<p>If they succeed, people in the cities will be largely unaffected. The battle against national state capture will continue. But those in rural areas, most of which were <a href="http://www.sahistory.org.za/article/homelands">Bantustans</a> under apartheid – rural dumping grounds where local power holders controlled residents on behalf of the apartheid state – will remain firmly in the grip of the patronage politics and state capture from which the cities will be at least partly free.</p>
<p>This will not only entrench inequality. It will keep alive the apartheid patterns which democracy was meant to end because millions of people in the former Bantustans will remain under the control of leaders who are not interested in serving them. They will be at best partly free and will continue to live in poverty.</p>
<p>Whether this is allowed to happen will depend less on ANC politicians, including Ramaphosa, than on citizens. The ANC national leadership is trying to intervene in North West but it has shown no interest in changing the way Free State and Mpumalanga are governed. It seems to understand the deal to mean that they cannot be touched. If Zuma’s ally Sihle Zikalala wins control of KwaZulu-Natal, he too might gain a free pass to govern that province as he pleases.</p>
<p>The only reason the ANC leadership is intervening in the North West is that citizens have made it clear that they want Mahumapelo and his style of governing gone. Besides the damaging street demonstrations, the ANC <a href="https://businesstech.co.za/news/government/195876/new-poll-shows-anc-is-losing-support-below-50/">may lose North West</a> to the opposition in next year’s general election. </p>
<p>While it has lost ground at the polls in the other Premier League provinces, the damage is not enough to persuade national leaders that they need to do anything about these areas. That would no doubt change if the ANC vote in those provinces also started dipping under 50%.</p>
<p>The ANC deal seems set to condemn people living where apartheid’s Bantustans once reigned to much the same sort of governance as they endured then. But they have a weapon now which they lacked then: a vote, which might yet bring them the same freedoms people in the cities enjoy.</p><img src="https://counter.theconversation.com/content/96666/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>The chaos visiting South Africa’s North-West province shows that ordinary people in rural areas have got a raw deal from ruling party.Steven Friedman, Professor of Political Studies, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/943522018-04-05T13:05:29Z2018-04-05T13:05:29ZRamaphosa’s to do list: seven economic policy areas that will shift the dial<figure><img src="https://images.theconversation.com/files/213394/original/file-20180405-189816-1rxfzr1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa faces many economic challenges.</span> <span class="attribution"><span class="source">GCIS</span></span></figcaption></figure><p>South Africa’s new President, Cyril Ramaphosa, seems to have a lot going for him. His early new broom sweeps clean gestures have been incisive and the market indicators are responding well. A plethora of good news has come his way in the weeks since he was sworn in. </p>
<p>The rand has remained strong, and with it the steadying of the inflation rate – at 4% the <a href="https://www.businessinsider.co.za/inflation-slowed-down-to-a-mere-41-for-february-as-the-sa-economy-claws-out-of-political-paralysis-2018-3">lowest it’s been in three years</a>. This in turn allowed the South African Reserve Bank to cut interest rates by 25 basis points. Few things benefit a feel good effect better than downward movement in interest rates.</p>
<p>And <a href="https://www.iol.co.za/business-report/economy/sas-business-confidence-retreats-from-2-12-year-high-13638534">business confidence</a> is looking up. This could mean that companies use their high cash balances to invest.</p>
<p>Most critically, global credit rating agency <a href="https://www.thesouthafrican.com/moodys-credit-sa-avoids-junk-status/">Moody’s</a> maintained South Africa’s investment grade rating and upgraded the outlook of the country’s sovereign debt to stable. And while one of the other top three rating agencies, S&P, didn’t upgrade its sub-investment grading, it doubled its growth <a href="https://www.cnbcafrica.com/insights/sa-downgrade/2018/03/27/sp-raises-growth-outlook-south-africa/">forecast</a> for 2018 from 1% to 2%.</p>
<p>Also auspicious is the trajectory of the global economy, if <a href="https://www.fin24.com/Markets/Currencies/trumps-trade-war-could-hit-rand-through-oil-price-20180405">Trump’s trade war </a> can be contained. The <a href="http://www.worldbank.org/en/region/afr/brief/global-economic-prospects-sub-saharan-africa-2018">prospect</a> of continued economic growth across Africa and the huge improvement in the southern African environment with new leaders in Zimbabwe, Angola, Mozambique and South Africa, are also positive.</p>
<p>But Ramaphosa will have to do much more to rekindle growth, address deep inequalities and tackle corruption in the private and public sectors. Above all he must address policy uncertainty. This is affecting a range of key sectors from energy to telecoms, water mining and land.</p>
<p>The Ramaphosa government can’t do everything at once. There are seven key areas that South African’s new president should focus on to make some headway.</p>
<h2>The to do list</h2>
<p><strong>Fiscal stability:</strong></p>
<p>One critical challenge is maintaining macroeconomic stability – that means keeping the budget deficit within reasonable bounds and yet supporting economic expansion. So, he needs to be sure that any increases in government expenditure support growth and development.</p>
<p>But this won’t be easy given that the government has landed itself with a massive <a href="https://www.moneyweb.co.za/news/south-africa/sas-whale-sized-public-sector-wage-bill-approaches-a-cliff/">public sector wage bill</a>. Costs have gone up dramatically as a result of higher wage settlements as well as employment going up from 2.5 million go 3.2 million under Jacob Zuma.</p>
<p>It will be hard for Ramaphosa to bring this back under control given that he also needs to win over the labour movement in his mission to build a new social contract between government, labour and business.</p>
<p>At the same time, government has to attract capable professionals to deliver on its promises to replace talent lost during the frustrating Zuma years. Ramaphosa and his team will need to work hard to make public service an admired career proposition.</p>
<p><strong>Re-industrialisation:</strong></p>
<p>Ramaphosa has promised to getting industry going in South Africa again. This requires three key conditions: </p>
<ul>
<li><p>A relatively competitive currency (the rand should not get so strong that imports are favoured against domestic products). </p></li>
<li><p>interest rates must be low enough to encourage investment, especially by small firms.</p></li>
<li><p>Real wage rates must be linked to productivity increases – if wage increases run ahead of productivity growth, domestic producers will lose out to international competition.</p></li>
</ul>
<p>Ramaphosa might run into some difficulty here too given that he’s promised to forge a “social pact” with labour and industry. Striking deals between competing interests might get in the way of delivering these three key drivers.</p>
<p>But if he does, South Africa would have taken a real step towards a democratic developmental state, as <a href="http://www.jforcs.com/research-development-emerging-countries-case-study-mauritius-singapore/">Mauritius</a> did in the early 1970s and <a href="https://www.emeraldinsight.com/doi/full/10.1108/03068290610689714">Ireland</a> in the late 1980s. Both countries made social pacts in which government supported investment, business committed to investment, and labour agreed to limit wage demands to increases no greater than productivity increases. The result was sustained growth over several decades.</p>
<p><strong>State owned enterprises:</strong>
Ramaphosa has already made some bold moves by firing executives from key entities such as the state power utility Eskom and South African Airways. But tougher decisions will have to be taken. Operations will have to be rationalised and policies overhauled in key sectors such as energy, information and communication technologies, water and transport.</p>
<p><strong>Urban land:</strong>
Reallocating land in urban areas could reduce inequality and erode the spatial legacy of apartheid. Poor workers and their families continue to live great distances from places of work. Better located, safe and secure homes for workers and their families, and better public transport will improve livelihoods and lower employment costs. Access to suitable and secure urban homes would be a massive step forward for many, and a huge contribution to the reduction of inequality. </p>
<p><strong>Small business:</strong>
Government needs to act in a far more consistent, committed and coordinated way to support the small business sector. Currently responsibilities are split over several ministries. It also needs to ensure that the dead hand
of state monopolies and private oligopolies are lifted. Underpinning this should be a stronger commitment to supporting investment in new research and development.</p>
<p><strong>Skills:</strong>
Education – and skills – should be a central focus. </p>
<p>The greatest intervention to support skills development and reduce inequality in the longer term would be to take early childhood development funding seriously.</p>
<p>Secondly, the general quality of basic education is failing the country. This needs to be addressed. And the World Economic Forum has <a href="https://mybroadband.co.za/news/technology/171141-south-africa-finishes-last-in-wefs-2016-mathematics-and-science-education-ranking.html">downgraded</a> South Africa’s competitiveness ranking for the relatively low number of university graduates it produces. This needs to be reversed. </p>
<p>The commitment to free higher education for capable students from poor backgrounds is a bold step forward, but the universities need more and smarter investment in their capacity. </p>
<p>The skills training environment remains deficient, and needs a better relationship between the demand and supply (employers and training institutions) to get it to work efficiently. And a wiser policy on the skilled immigrants would help a great deal in the interim. </p>
<p><strong>Policy certainty:</strong>
More certainty is needed about policies on mining, land and black economic empowerment to encourage new investment. </p>
<h2>Tough road</h2>
<p>Ramaphosa has started brilliantly, in spite of the terrible state of the African National Congress (ANC) and the weakness of too many government institutions. Getting to serious, inclusive growth is going to demand a great deal of work by skilled policy makers working within effective social partnership agreements. </p>
<p>In view of the limited resources available to the government and considering the fragility of the ANC, he will need to prioritise and move systematically through the issues, all the while ensuring that his government maintains sufficient support.</p><img src="https://counter.theconversation.com/content/94352/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Hirsch 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 President, Cyril Ramaphosa, needs to quickly address key challenges to restart the economy.Alan Hirsch, Professor and Director of the Graduate School of Development Policy, University of Cape TownLicensed 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/920432018-02-19T12:13:17Z2018-02-19T12:13:17ZWhy Ramaphosa’s moment of hope is built on a fragile foundation<figure><img src="https://images.theconversation.com/files/206958/original/file-20180219-75967-1jt4sj5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's new president, Cyril Ramaphosa has in his state of the nation speech inspired hope.</span> <span class="attribution"><span class="source">Reuters/Ruvan Boshoff</span></span></figcaption></figure><p>Coming after the extended period of uncertainty in South Africa resulting from Jacob Zuma’s <a href="https://www.iol.co.za/news/politics/zuma-refuses-to-resign-13255893">reluctance</a> to resign, Cyril Ramaphosa’s first state of the nation <a href="http://www.thepresidency.gov.za/speeches/state-nation-address-president-republic-south-africa%2C-mr-cyril-ramaphosa">speech</a> restored dignity and decorum to parliament, and pressed all the right buttons. </p>
<p>He was gracious to all (even giving thanks to Zuma for facilitating what the African National Congress (ANC) has termed “the transition”), before launching into the delivery of a peroration which proclaimed the breaking of a new dawn. South Africa’s <a href="https://www.newstatesman.com/world/africa/2018/01/do-south-africa-and-zimbabwe-s-new-leaders-represent-moment-hope">“moment of hope”</a>, which was to be founded on the legacy of Nelson Mandela, had returned. </p>
<p>Ramaphosa combined extensive tribute to the heroes of the ANC’s liberation struggle with the gospel of social inclusion according to the Holy Writ of the <a href="https://www.ujuh.co.za/remember-the-freedom-charter-what-it-actually-says/">Freedom Charter</a>. This was time to move beyond the recent period of discord, disunity and disillusionment. </p>
<p>The speech was delivered with panache and confidence. It had style, declaring to the nation and the world that he, Cyril Ramaphosa, was in charge. </p>
<p>But along with the style, there was the solid substance. The overall impression was that Ramaphosa intends to impose a new coherence and efficiency on government. Although acknowledging the calamity of the dismally low rate of economic growth, he was upbeat about the future, about the reviving fortunes of the commodities market, and the upturn in the markets.</p>
<p>Deservedly, Ramaphosa was to be allowed to enjoy the applause, as opposition members rose to their feet alongside the ANC MPs to give him a standing ovation which went far beyond ceremonial ritual. After the disaster of Zuma, it would seem to have given a massive fillip to South African pride and confidence. </p>
<p>It also gave the opposition parties a problem. With Zuma gone and a credible ANC president in place, they are facing an uphill electoral battle.</p>
<h2>The substance</h2>
<p>The new President committed to ensuring ethical behaviour and leadership, and to a refusal to tolerate the plunder of resources by public employees or theft and exploitation by private businesses. Critically, this would entail a transformation in the way that state-owned enterprises such as the power utility Eskom would be run. </p>
<p>There would be a new beginning at state-owned enterprises. They would no longer be allowed to borrow their way out of their financial difficulties. Competent people would be appointed to their boards, and there would be an appropriate distancing of their strategic role from operational management. And board members would be barred from any involvement in procurement. </p>
<p>This would be all part and parcel of a much wider reconfiguration of government, presumably a code for the reduction in the number of departments and a reduction in the size of ministerial ranks. </p>
<p>Ramaphosa also committed to hands-on government, promising that he would be visiting each department over the forthcoming year.</p>
<p>The forging of a social compact between government, business and labour would define the new era. A part of it would come from a new presidential economic advisory council. There would be summits for jobs and investment; convening of a youth working group to promote youth enterprise and employment and a summit for the social sector to forge a new consensus with NGOs and civil society. </p>
<p>This would add up to the construction of a “capable state” to foster much needed economic recovery. There would be concerted efforts to promote and aid small and medium business and revive manufacturing. Stress was laid on the importance of arriving at <a href="http://ewn.co.za/2018/02/19/ramaphosa-says-committed-to-holding-talks-on-mining-charter">consensus around a mining charter</a>, a document designed to guide transformation in this industry. </p>
<p>Due reference was made to preparing South Africa to embrace the fourth and fifth industrial revolutions and the encouragement of scientific innovation and new technology. And there was an explicit undertaking from Ramaphosa that he would take personal responsibility to ensure that social grants would get paid. And “no individual person in government” would be allowed to obstruct social grants delivery, a brutal albeit indirect put down of the minister concerned. </p>
<p>The one aspect of the speech which would have raised eyebrows among the Davos crowd was Ramaphosa’s re-iteration of the ANC government’s commitment to the expropriation of land without compensation as part of <a href="https://theconversation.com/is-south-africas-anc-bent-on-radical-policies-heres-why-the-answer-is-no-89801">radical economic transformation</a>. This highlighted the ANC’s proposed change to the constitution adopted at its recent national conference. </p>
<p>But that commitment was also <a href="https://theconversation.com/is-south-africas-anc-bent-on-radical-policies-heres-why-the-answer-is-no-89801">fudged</a> by linking any expropriation to ensuring agricultural production and food security. Cynics may argue that this was simply a form of words. In the context of Ramaphosa’s general investment seeking demeanour, agricultural capital and international business are unlikely to be unduly alarmed. But if they are wise, they will take it as a warning to come to the party of “social transformation”.</p>
<h2>A long game</h2>
<p>Ramaphosa has played a long game since he was <a href="https://www.news24.com/Books/book-extract-ramaphosa-and-the-massacre-at-marikana-20171126-2">passed over for president</a> in the mid-90s in favour of Thabo Mbeki. After playing a key role in crafting the constitution, he left politics, made a lot of money by spearheading the first round of black economic empowerment, and then returned to politics to play what must at times have been a mortifying role as deputy president under Zuma. He suffered a great deal of criticism for being complicit in the Zuma-era corruption because of his silence – silence he would have reckoned was necessary to secure his rise to the top.</p>
<p>Clearly, Ramaphosa is not above criticism. He is no saint. He lives in the shadow of the massacre of miners at <a href="https://www.news24.com/Books/book-extract-ramaphosa-and-the-massacre-at-marikana-20171126-2">Marikana</a>. Only towards the end of the ANC leadership race did he let fly against corruption and state capture. </p>
<p>Yet it could so easily have been so different. What would the mood have been now if Nkosazana Dlamini-Zuma had won the ANC leadership? Few would have been convinced that she would have been able or willing to leave the legacy of the corruption of the Zuma years behind. In contrast, although there is extensive acknowledgement that Ramaphosa will meet considerable opposition from within the ANC patronage machine if he is to realise his ambitions, he has indeed provided hope.</p>
<p>Yet the irony is that we need to pay due deference to David Mabuza, Premier of the province of Mpumalanga. If it had not been for his last moment tactic of throwing his provincial delegates’ votes behind Ramaphosa at the ANC conference to thwart a Dlamini-Zuma victory at the ANC national conference, South Africa would be having to face a very different future. </p>
<p>In true ANC style, the irony is that the moment of hope was facilitated by someone who has been portrayed, even from within the party, as <a href="https://www.dailymaverick.co.za/opinionista/2017-12-28-mpumalanga-a-thin-line-between-democracy-and-fascism/">a political hoodlum</a>.</p><img src="https://counter.theconversation.com/content/92043/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Roger Southall receives funding from the National Research Foundation</span></em></p>The speech was delivered with panache and confidence. It had style, declaring to the nation and the world that he, Cyril Ramaphosa, was in charge.Roger Southall, Professor of Sociology, University of the WitwatersrandLicensed 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/877772017-11-30T17:02:23Z2017-11-30T17:02:23ZSouth Africa should prepare for the worst case scenario: seeking help from the IMF<figure><img src="https://images.theconversation.com/files/196902/original/file-20171129-29143-lhq89b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">IMF Managing Director Christine Lagarde at the "G20: Compact With Africa".</span> <span class="attribution"><span class="source">Reuters/Mike Theiler</span></span></figcaption></figure><p>Prudence teaches that societies experiencing difficult and uncertain times should hope for the best but prepare for the worst.</p>
<p>South Africa should take this lesson seriously. It is facing a serious crisis. South Africa’s economy is <a href="https://theconversation.com/whats-at-stake-in-south-africas-new-finance-ministers-first-budget-85643">growing too slowly</a> to address its profound <a href="https://theconversation.com/a-shift-in-thinking-is-needed-to-counter-south-africas-startling-rise-in-poverty-83462">challenges</a> of poverty, inequality and unemployment. Social tensions are rising. Business is not transforming quickly enough. The <a href="https://theconversation.com/how-corruption-is-fraying-south-africas-social-and-economic-fabric-80690">governance and solvency</a> of key state-owned enterprises (SOEs) are collapsing. Government finances are deteriorating. <a href="https://www.iol.co.za/business-report/slip-in-south-african-credit-ratings-calls-for-reform-12168661">Credit downgrades</a> may limit government access to finance. The <a href="https://theconversation.com/eskom-ceo-saga-highlights-massive-systems-failure-in-south-africa-78432">institutions of governance</a> are decaying. The complex political situation is paralysing policymaking. </p>
<p>Countries facing analogous crises of confidence like Nigeria, Poland and Turkey have had to seek IMF support.</p>
<p>South Africa can hope that the situation will improve. But it should also plan for the possibility that it will not and that confidence in the government’s ability to manage its deteriorating financial situation will evaporate. This will lead to both higher borrowing costs and reduced access to financing for the government and state owned enterprises. It could also lead to state owned enterprises defaulting on their debts and their creditors calling in their government guarantees. As government loses the ability to fund its operations, it will be forced to turn to the IMF. It is the one organisation that can help it regain access to financing – on condition that South Africa agrees to implement an IMF approved set of reforms. </p>
<p>No-one wants an IMF programme for South Africa. First, it means the government accepting an outsider, dominated by rich countries, overseeing its economic policies. Second, IMF support will be conditioned on the country agreeing to painful reforms such as:</p>
<ul>
<li><p>Reducing the government’s budget deficit and the current account deficit so that it can meet its financial obligations</p></li>
<li><p>Deregulation and labour market reforms designed to encourage investment. </p></li>
</ul>
<p>But if South Africa begins preparing for this possibility it may be able to mitigate its worst effects and be ready to exploit whatever opportunities it creates. </p>
<h2>Negotiating with the IMF</h2>
<p>The South African government has considerable experience dealing with the IMF, which regularly visits each of its member states to consult about the state of its economy— the most recent <a href="http://www.imf.org/en/News/Articles/2017/11/08/pr17428-southafrica-imf-staff-concludes-visit">IMF mission visited South Africa</a> in early November. However, it is over <a href="https://theconversation.com/why-south-africa-shouldnt-turn-to-the-imf-for-help-82027">20 years</a> since South Africa negotiated a financing arrangement with the IMF. </p>
<p>Unless challenged, the IMF is likely to condition its financial support on a standard recipe of reforms. However, over time the IMF has become more amenable to supporting the programmes proposed by its member states. It has learned that, while there are similarities between macro-economic crises in different countries, there is more than one strategy for resolving such crises. In fact, the optimal solution depends on each country’s institutional arrangements, history, and particular economic, social, environmental and political characteristics. It also depends on the impact of macro-economic policies on such social factors as gender, equity and environmental and social sustainability. </p>
<p>Yanis Varoufakis, former Greek finance minister, reports in his <a href="https://www.ft.com/content/3d1a3470-f720-11e5-803c-d27c7117d132">book</a> on his experiences negotiating with Greece’s creditors that countries like Poland, through careful planning and shrewd negotiations, were able to convince the IMF to follow their plan rather than the IMF’s standard approach. His book also shows that the cost of failing to prepare adequately for negotiations like these can be very high indeed. </p>
<p>So what should South Africa do to ensure that it gets the best possible deal?</p>
<p>First, South Africa must establish clear and realistic objectives for the plan that it wants the IMF to support. Second, it must get its diplomatic ducks in a row so that it can strike the best possible deal.</p>
<h2>Fixing the budget</h2>
<p>As a priority South Africa should focus on restoring a sustainable budget situation. This will require government to make some painful policy choices about levels of expenditures as well as the purposes for which funds are allocated. </p>
<p>The government can build confidence in these choices if it can show that:</p>
<ul>
<li><p>the benefits exceed the costs and that the costs are being equitably shared. </p></li>
<li><p>Policy choices are based on both the human rights imperatives stipulated in the South African Constitution and on promoting growth.</p></li>
<li><p>it’s serious about addressing the governance problems in state owned enterprises and government departments. </p></li>
<li><p>it is complying with the legal procedures applicable to government finances and the open budgeting processes that it used in the past. </p></li>
</ul>
<p>Finally, government must encourage other social actors – such as business and labour who have contributed to the crisis – to help mitigate the pain. A demonstration of broad support would help convince the IMF to support the government’s strategy. </p>
<h2>Diplomacy</h2>
<p>As Varoufakis’ experience shows, the cost of under-estimating the impact of international economic diplomacy on the outcomes of complex international financial negotiations can be unacceptably high. </p>
<p>The South African government must therefore prepare to sell its programme to the IMF. This requires it to appoint negotiators who have a good understanding of both the IMF as an institution and global financial diplomacy. They can make the South African case in the way that is most likely to convince the IMF staff and Board of Executive Directors to support the South African programme. </p>
<p>These negotiators should also seek to exploit all the benefits that South Africa can harvest from its membership in the institutions of global economic governance. For example, they can tap the experience and expertise of groups like the G24, a lobby group for the interests of IMF developing member states in which South Africa participates, to help it prepare for these negotiations. </p>
<p>They can also draw on the stores of information in international organisations like the IMF, the World Bank and the African Development Bank that have had extensive experience dealing with developing countries facing macro-economic crises. Access to this information should be a benefit of membership. The executive directors that represent South Africa at these institutions can help the government gain access to this information and, if appropriate, identify the relevant experts to consult.</p><img src="https://counter.theconversation.com/content/87777/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Danny Bradlow's SARCHI Chair is supported by the National Research Foundation. </span></em></p>South Africa will be well advised to start preparing itself for an International Monetary Fund programme as the country faces a deepening economic crisis.Danny Bradlow, SARCHI Professor of International Development Law and African Economic Relations, University of PretoriaLicensed 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/863622017-10-25T17:13:52Z2017-10-25T17:13:52ZLatest budget underscores desperate state of South Africa’s finances<figure><img src="https://images.theconversation.com/files/191868/original/file-20171025-25544-mk8ea5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Running out of options. Finance Minister Malusi Gigaba speaks after delivering his medium term budget.</span> <span class="attribution"><span class="source">REUTERS/Sumaya Hisham</span></span></figcaption></figure><p>South Africa’s 2017 medium-term budget policy <a href="http://www.treasury.gov.za/documents/MTBPS/2017/">statement</a> represents a watershed moment in the post-apartheid economic and fiscal position. The best thing that can be said about it, is that it was at least frankly honest about the situation the country is facing. Arguably, there was no choice. The country has reached a situation where it’s no longer possible to spin the notion that public debt is under control.</p>
<p>In <a href="http://www.treasury.gov.za/documents/MTBPS/2016/default.aspx">recent years</a>, South Africa’s National Treasury has desperately, and creatively, tried to avoid making deep cuts to government expenditure, or imposing drastic revenue raising measures on citizens. It did this while still convincing investors and credit ratings agencies that public finances would stabilise.</p>
<p>But the 2017 medium term budget makes it clear that the project has essentially reached the end of the road. The notion that national debt will stabilise has now effectively had to be abandoned. South Africa’s latest finance minister, Malusi Gigaba, effectively gave up on the debt targets set out by Pravin Gordhan a year ago when he stated that net national debt as a percent of GDP should stabilise at 47.9% by 2019/20. Gigaba announced yesterday that this is expected to be 49.1% by the end of this fiscal year, increasing to 53.9% by 2019/20. </p>
<p>This is a clear sign that any attempt to stabilise debt has failed. A further ratings downgrade is now highly likely. And it will be worse than the last one which only affected foreign currency debt. Gigaba’s budget proposals are likely to lead to a downgrade of the country’s local denominated debt, which will increase government borrowing costs and could lead to significant capital outflows. Even without a downgrade the medium term budget reveals that debt service costs are expected to increase from 11% of total expenditure to 15% over the next few years.</p>
<p>Without higher revenue, that means less money to spend on government’s constitutional obligations and policy commitments. Unfortunately, the gloomy story is largely driven by a massive shortfall in revenue collection of R50.8 billion. So attempting to avoid these consequences through taxation is not looking like a feasible option. </p>
<p>In the current political environment, even the best case scenario is grim. In fact the country’s finances could worsen even further if the outcome of the governing party’s elective conference in December doesn’t see a return to good governance and responsible fiscal management.</p>
<h2>Slippery slope since 2008</h2>
<p>In the years since the global <a href="https://www.economist.com/news/schoolsbrief/21584534-effects-financial-crisis-are-still-being-felt-five-years-article">financial crisis</a> that started in 2008, the government allowed expenditure to increase faster than growth and revenue. This was done with the hope of offsetting the short-term effects of the crisis and getting the country back onto a stable path of significant economic growth. </p>
<p>That led to a rapid increase in national debt relative to the size of the economy. But the failure of the economy to recover – due in part to political instability, bad decision making and poor governance – meant that this approach became unsustainable. </p>
<p>In the last few years successive national budgets have walked a tightrope in trying to contain the growth in debt. Planned spending has been reduced, while some tax rates have been increased and new tax instruments introduced. Amid all these manoeuvres, dramatic cuts to government expenditure, or wide-reaching increases in taxes, have been avoided. </p>
<p>Efforts to arrest fiscal decline were sabotaged by the <a href="https://theconversation.com/south-africas-jacob-zuma-is-fast-running-out-of-political-lives-80009">removal</a> of Gordhan in March this year. His removal meant that the institutional reputation of the finance ministry was compromised and, since it was this that had kept the country’s credit ratings intact despite increasing fiscal pressure, the country’s foreign denominated debt was <a href="https://theconversation.com/what-a-downgrade-means-for-south-africa-and-what-it-can-do-about-it-75704">downgraded</a> to “junk” (sub-investment grade).</p>
<h2>Storm clouds on the horizon</h2>
<p>As if the picture wasn’t gloomy enough, numerous risks to the fiscal projections and proposals loom on the horizon. South Africa’s president Jacob Zuma continues to sit on the higher education funding report, causing further instability at universities. That leaves open the possibility that more money for university students may be needed at short notice. </p>
<p>And the finances of various state owned enterprises are teetering, requiring increasing government support to prop them up. Since Gigaba took over the ministry he has taken R5.2 billion from the R6 billion “contingency reserve” – which is meant to be used for emergencies, or other unforeseeable events, such as natural disasters – to prop-up South African Airways. This broke with commitments to fund bailouts using revenue from asset sales. The medium term budget cements this breach – funds used to prop up the airline will not be replaced with funds from asset sales.</p>
<p>But the most menacing risk is the power utility Eskom, which is propped up by R350 billion in debt guarantees, but faces rising infrastructure costs, stagnant electricity demand and successive corruption scandals linked to state capture. Due to the scale of the commitments to Eskom, it will be impossible to contain the negative consequences if its lenders start refusing to rollover its debt. </p>
<h2>No political will</h2>
<p>Reading between the lines of the medium term budget, there is evidently no political will at the highest levels – the president and his cabinet – to do the right thing. The only reduction in planned expenditure is a cut to the contingency reserve. But responding to rising debt by reducing money for future emergencies is emblematic of the reluctance to take braver decisions like cutting the bloated, pointless ministries seemingly introduced by Zuma to employ his political cronies and their associates.</p>
<p>South Africa’s public finances are in dangerous territory and very difficult decisions will have to be taken before the 2018 budget if the situation is going to be stabilised. This will require politicians and civil servants who are competent and dedicated to the public interest to make bold decisions. Without such leadership the resultant trajectory will undermine the ideals and objectives of the post-apartheid era for many years to come.</p><img src="https://counter.theconversation.com/content/86362/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller received support from the Heinrich Boell Foundation to attend the Medium Term Budget Policy Statement, and provides advice to various civil society organisations and initiatives on public finance issues.</span></em></p>South Africa’s 2017 medium term budget reveals a growing gap between revenue and expenditure which places the country in a highly vulnerable financial state.Seán Mfundza Muller, Senior Lecturer in Economics, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/856432017-10-18T15:05:18Z2017-10-18T15:05:18ZWhat’s at stake in South Africa’s new finance minister’s first budget<figure><img src="https://images.theconversation.com/files/190602/original/file-20171017-30394-eijha0.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</span></span></figcaption></figure><p><em>There’s a great deal hanging on South Africa’s 2017 medium term budget policy <a href="http://www.treasury.gov.za/comm_media/press/2017/2017091801%20Media%20Advisory%20MTBPS%202017.pdf">statement</a>. Three factors are at play: there is political turmoil around the governing African National Congress, the country’s economy is performing poorly and this is the first budgetary statement from the new Finance Minister Malusi Gigaba. The Conversation Africa’s Sibonelo Radebe asked Jannie Rossouw to layout his expectations.</em></p>
<p><strong>What keeps you up at night in relation to this medium term budget?</strong></p>
<p>The single most worrying factor is the lack of economic growth South Africa faces. Growth has <a href="https://tradingeconomics.com/south-africa/gdp-growth-annual">slowed down</a> significantly in recent years and the economy flirted with <a href="https://mg.co.za/article/2017-06-07-sas-in-a-recession-heres-what-that-means">recession</a> after shrinking during the last quarter of last year and the first quarter of this year. The economy did <a href="https://www.iol.co.za/business-report/breaking-news-south-africa-moves-out-of-recession-11086750">bounce back</a> into positive growth during the second quarter but the outlook remains unimpressive. Only 0.5% growth is expected for 2017 and less than 2% over the medium term. </p>
<p>Owing to this lack of growth, <a href="https://theconversation.com/the-lesser-known-and-scarier-facts-about-unemployment-in-south-africa-83055">unemployment</a> is on the increase – it now stands at a staggering 27% – while government revenue is under pressure. It also implies that the government’s burden on the economy (for instance total government debt as percentage of gross domestic product, or<a href="http://www.treasury.gov.za/documents/mtbps/2016/mtbps/MTBPS%202016%20Full%20Document.pdf">Debt/GDP ratio</a>) will increase. </p>
<p>Government’s debt to GDP ratio is currently <a href="http://www.treasury.gov.za/documents/mtbps/2016/mtbps/MTBPS%202016%20Full%20Document.pdf">budgeted</a> to level out around 50%. This is to be welcomed because any increase in the ratio increases the interest burden. </p>
<p>But if slow growth and revenue shortfalls persist, government debt will increase. The debt to GDP ratio will be on its way to 65% of GDP in the medium term. </p>
<p>And should the combination of low growth and growing government expenditure continue after the period of this medium term statement (2017/18 - 2020/21), the debt/GDP ratio might be on its way to 100%. This projection really stresses one of the most worrying factors that has to be addressed in this statement: Limiting the level of government debt before it reaches this level. </p>
<p>In other countries where this level has been exceeded, severe adjustments had to be forced on their economies. Take the <a href="https://tradingeconomics.com/ireland/government-debt-to-gdp">Irish Republic case</a>. Remuneration levels and employment numbers in the civil service had to be cut dramatically to deal with the <a href="http://cpsu.ie/the-cuts/">Irish government debt crisis</a>.</p>
<p><strong>There is a new finance minister in place and he comes with shifting political dynamics. How do you rate him and what do you expect from him?</strong></p>
<p>It is difficult to rate the new minster, given that he’s only been in the job since April and the fact that he has not yet tabled his first budgetary statement. The only statement against which his performance can really be assessed is the <a href="http://www.huffingtonpost.co.za/2017/07/13/governments-economic-growth-action-plan-gigabas-speech-in-f_a_23027748/">14-point plan</a> he announced in July 2017.</p>
<p>We’ll be watching the medium term statement for his report back on progress in implementing it.</p>
<p>But Gigaba comes with worrying political dynamics, including accusations that he is party to <a href="http://www.fin24.com/Opinion/connecting-the-dots-on-gigabas-state-capture-project-20171009">corruption</a>. </p>
<p>And its difficult to separate him from the history of bad policy options of the African National Congress which has delivered the prevailing lacklustre economic performance. The fiscal crisis facing South Africa is a direct result of these policies. </p>
<p><strong>How significant is the medium term budget policy statement?</strong></p>
<p>It’s very important as it provides an overview of government’s plans for expenditure and for raising revenue over the next three years. A three year view is significant because it provides insight into planned government expenditure and indicates expected tax increases that South African taxpayers have to face. It also informs decisions of the credit rating agencies about South Africa’s fiscal stability.</p>
<p>The statement forms the basis of the <a href="http://www.treasury.gov.za/documents/national%20budget/default.aspx">annual budget</a> of government revenue and expenditure that is tabled in Parliament in February each year. </p>
<p>The statement is the first formal opportunity after the tabling of the annual budget where the government reports on the actual performance of revenue raised in comparison to budgeted revenue and of actual expenditure in comparison to budgeted expenditure.</p>
<p>This reporting by government gives an early indication of expectations for the main budget in February. For instance, if government revenue is underperforming, the expectation is that taxes will be increased the following February. Indeed a tax increase might materialise in this medium term statement.</p>
<p><strong>What in you view will be key focus areas in this medium term statement?</strong></p>
<p>As South Africa’s economic growth is currently lower than the forecast used for the <a href="http://www.treasury.gov.za/documents/national%20budget/default.aspx">2017/18 fiscal year</a>, tax collection has come under pressure. A <a href="http://www.fin24.com/Economy/gigaba-faces-r50-billion-budget-shortfall-economist-20170901">revenue shortfall</a> is expected for this fiscal year. The medium term statement is when the size of the shortfall will be formally disclosed.</p>
<p>Given expectations of a substantial shortfall, South Africans should brace themselves for substantial tax increases in the main budget in February 2018. The fiscal crisis might even be so serious that the government might decide to divert from previous practice and announce tax increases in this medium term statement.</p>
<p>Like any other government in the world, it raises revenue through taxes and use this revenue to fund its expenditure. If expenditure exceeds revenue, the difference must be borrowed, which adds to the level of government debt, or expenditure must be cut. </p>
<p><strong>One of the biggest budgetary headaches is the ailing state owned enterprises. What should be done?</strong></p>
<p>Government is really throwing good money after bad by using public money to bailout <a href="https://www.businesslive.co.za/bd/companies/transport-and-tourism/2017-08-23-secret-gigaba-plan-to-rescue-bankrupt-saa-exposed">ailing</a> state owned enterprises. I have said a long time ago that South African Airways should simply be <a href="https://theconversation.com/south-africa-must-free-itself-from-the-burden-of-owning-a-national-airline-64004">given away</a>. This is a much cheaper option for the taxpayer instead of never ending bailouts. The South African government should reassess its holding of state owned enterprises and close, sell or give away those that are no longer financially viable. Such action will remove a large financial burden on the South African taxpayer.</p><img src="https://counter.theconversation.com/content/85643/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw is a C3-rated researcher and receives funding from the National Research Foundation (NRF). He is also a concerned South African taxpayer. </span></em></p>South Africa waits with bated breath for the 2017 medium term budget policy statement from new Finance Minister Malusi Gigaba, as it might reveal key signals of where economic policy is headed.Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed 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/838222017-09-11T19:59:17Z2017-09-11T19:59:17ZSouth Africa needs to sober up to save itself from sickly state-owned enterprises<figure><img src="https://images.theconversation.com/files/185465/original/file-20170911-1336-jvnh8u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa needs to decide if it will continue to waste public money on its national carrier, or incur the costs of letting SAA go bankrupt.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>The South African government is said to be seriously considering selling its stake in telecommunication firm, Telkom, <a href="https://www.businesslive.co.za/bd/companies/transport-and-tourism/2017-08-23-secret-gigaba-plan-to-rescue-bankrupt-saa-exposed/">in order to save the troubled South African Airways (SAA)</a>. This has brought back debates about what is the right thing to do around the country’s state owned enterprises. Sibonelo Radebe asked Seán Muller to weigh up the options.</em></p>
<p><strong>What does financial support to SAA actually involve?</strong></p>
<p>There are two basic forms of assistance government has provided to <a href="https://theconversation.com/south-africa-must-free-itself-from-the-burden-of-owning-a-national-airline-64004">SAA</a>. The first “government guarantees”, in which the Treasury provides a guarantee to support SAA’s borrowing from private lenders. These guarantees mean that if SAA is unable to pay its debt costs or repay the full loan when required, the Treasury must pay. As of February 2017, SAA held <a href="https://www.timeslive.co.za/sunday-times/business/2017-08-07-gigabas-bid-to-stall-repayment-of-r69bn-saa-loans/">R19.1 billion</a> in government guarantees. These pose a risk to public finances, but strictly speaking do not require any funds immediately.</p>
<p>The second type is a “cash injection”, where Treasury directly transfers cash to SAA. This is what is more commonly known as a “bailout”. </p>
<p>In the current case the lines between these two forms of support are blurred. One of Treasury’s reasons for giving SAA cash is apparently to prevent it defaulting on all debt that is called in by SAA’s creditors.</p>
<p><strong>Is selling a Telkom stake and redirecting the money towards saving SAA a good idea?</strong></p>
<p>There are two aspects to this question. First, is injecting more public money into SAA a good idea? Second, is selling government’s stake in Telkom a good idea? </p>
<p>It is hard to see the case for putting further public money in SAA. At various points it may have made sense to do this in order to stabilise SAA as a public enterprise, or prepare it for large scale privatisation. However, this scenario has been repeated so many times that the argument is no longer credible. </p>
<p>Of course, the government has an obligation to prevent the harm that would result from a state-owned enterprise going bankrupt. The direct effects via SAA’s operations, and indirect effects on the economy and investor sentiment in relation to state owned enterprises, could be severe. The <a href="https://theconversation.com/south-africa-must-free-itself-from-the-burden-of-owning-a-national-airline-64004">failure</a> to implement a successful turnaround strategy at SAA, which appears to be linked to the determination to keep <a href="https://citizen.co.za/news/south-africa/1426649/gordhan-to-fire-saa-chair-dudu-myeni-today/">Dudu Myeni</a> as board chair, has placed South Africans in a bind: either the country wastes public money, or it incurs the costs of letting SAA go bankrupt.</p>
<p>With regards to Telkom, it is useful to remember that government previously committed to only bailout state-owned enterprises using funds raised through the <a href="https://www.ujuh.co.za/nene-2015-medium-term-budget-policy-statement/">sale of state assets</a>. There are two advantages of this approach. First, it focuses minds on the consequences of state owned enterprises failure – as is happening in the case of SAA. Second, it means that the main national budget is not affected, so Treasury can still meet its commitments like the planned budget deficit.</p>
<p>But there is no good case for bailing out SAA. At best, it is simply to avoid an even worse scenario in which SAA’s guarantees are called in by creditors. Wherever the money comes from, the social cost is significant and arguably unjustified.</p>
<p>Some have suggested that there are additional costs because Telkom is now a <a href="https://www.businesslive.co.za/bd/companies/telecoms-and-technology/2017-06-05-telkom-rewards-shareholders-as-net-profit-jumps/">profitable</a> enterprise and represents a government success story, but this is <a href="https://mybroadband.co.za/news/business-telecoms/209176-telkoms-adsl-monopoly-crippled-ecommerce-in-south-africa.html">debatable</a>. South Africa’s ICT development has been unsatisfactorily slow and arguably one reason is that government’s stake in Telkom meant that it ended up protecting a firm with monopoly power in fixed line infrastructure. </p>
<p>Contrary to an increasingly popular narrative, the fact that Telkom has become profitable by moving into the mobile space and slashing employment does not make it either a privatisation, or a state ownership, success story. From this perspective, government selling its stake could be a good thing for ICT development in the medium to long run.</p>
<p><strong>What does the consideration say about ANC’s attitude towards privatisation?</strong></p>
<p>There is an obvious tension between the claim that SAA cannot be privatised, while effectively privatising government’s remaining stake in Telkom. Such <a href="http://www.politicsweb.co.za/documents/economic-transformation-anc-discussion-document-20">inconsistencies</a> are characteristic of ANC policy in the last two decades. This is partly due to differences within the alliance and partly the result of policy incoherence, along with a failure to act on advice and implement decisions. </p>
<p><a href="https://www.gov.za/sites/www.gov.za/files/Executive%20Summary-NDP%202030%20-%20Our%20future%20-%20make%20it%20work.pdf">The National Development Plan</a> and the Presidential <a href="https://www.gov.za/documents/report-presidential-review-committee-prc-state-owned-entities-soes">Review</a> Committee on State-Owned Entities both provided fairly clear direction, but many recommendations appear to be inconvenient for the president and those around him – who appear to see state owned enterprises as vehicles for personal enrichment rather than economic development.</p>
<p><strong>Clearly the Telkom model works. Should it be replicated?</strong></p>
<p>It is actually not at all clear that the Telkom model “works” in the sense of advancing economic growth and development in the broader public interest. It was <a href="http://www.sciencedirect.com/science/article/pii/S0308596105000467">arguably the wrong model</a> for the country’s ICT sector. </p>
<p>However, even if it had been the right model for that sector, simply replicating it would be a bad idea. State ownership, privatisation and regulation strategies need to take into account the characteristics of particular sectors. What works for telecoms will be different to what works for energy or for airlines.</p>
<p><strong>And what do you make of the state of Eskom?</strong></p>
<p>The state of <a href="http://www.eskom.co.za/IR2017/Pages/default.aspx">Eskom</a> is of grave concern. Load shedding and price increases, combined with more energy efficiency options for businesses and consumers, have led to much lower electricity demand than originally forecast. </p>
<p>Meanwhile, Eskom is bringing <a href="https://www.dailymaverick.co.za/article/2016-07-07-medupi-kusile-and-the-massive-costtime-overrun/">massive</a> new coal power stations online that have vastly exceeded their original budgets. The result is that Eskom faces a “<a href="http://www.heraldlive.co.za/business/2017/07/17/eskom-denies-facing-funding-crisis/">death spiral</a>” where it needs to increase prices to prop up revenue and bolster its finances, but doing so leads to customers reducing demand (through increased efficiency and implementing alternative options like decentralised solar power). </p>
<p>Eskom holds up to <a href="http://www.treasury.gov.za/documents/national%20budget/2017/">R350 billion in government guarantees</a> and is in an increasingly precarious situation. If one adds the lingering possibility of an unnecessary and ill-advised nuclear deal into the mix, the fear is that Eskom could end up in a similar state to SAA now. </p>
<p>SAA may be a waste of public funds, but the threat it poses can probably be contained. That would not be true of Eskom. The main debate between many analysts now is not whether a crisis is looming but whether there remains any chance of avoiding it, given repeated failures to make and implement critical policy decisions.</p>
<p><strong>And so, what should happen to SAA and Eskom?</strong></p>
<p>In the absence of a clear developmental mandate for SAA, and it being repeatedly bailed out with public money that could be better used elsewhere, the objective must be to minimise the cost of SAA to citizens: if privatisation is the best option then so be it. Eskom is a much more strategically critical enterprise and its problems are more complex, so privatisation would just create a range of different problems. Each state owned enterprises requires tailor-made solutions but one thing they all require is basic good governance, which is not currently in place.</p><img src="https://counter.theconversation.com/content/83822/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller previously worked for the Parliamentary Budget Office, during which time he conducted analysis of, and provided advice to members of parliament on, the financing of state-owned enterprises.</span></em></p>There is no good case for bailing out South African Airways, it’s simply a matter of avoiding a potentially catastrophic debt default.Seán Mfundza Muller, Senior Lecturer in Economics, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/821792017-08-09T17:08:26Z2017-08-09T17:08:26ZSouth Africa’s economic recovery plan has a bit of everything - but no vision<figure><img src="https://images.theconversation.com/files/181351/original/file-20170808-22965-1qvsg4b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The country needs a new economic strategy that puts small businesses at the core of the development strategy</span> <span class="attribution"><span class="source">REUTERS/Siphiwe Sibeko</span></span></figcaption></figure><p><em>South Africa’s new finance minister Malusi Gigaba has unveiled a <a href="http://www.treasury.gov.za/">14 point plan</a> designed to help the country fix its declining economic fortunes. Sibonelo Radebe of The Conversation Africa asked Lorenzo Fioramonti to weigh up the plan.</em></p>
<p><strong>How do you rate the recovery plan?</strong></p>
<p>The minister’s plan seems to want to include a bit of everything, from private sector’s involvement in struggling state owned enterprises to bringing down banking costs. </p>
<p>But unfortunately the plan has no vision. It’s a set of bullet points for day-to-day management of the status quo, which has been improperly presented as a ‘recovery plan’. Rather than having so many short-term action points that are unlikely to change the current economic predicament, I would like government to be much more outspoken about the structural conditions that are undermining sustainable and equitable development. </p>
<p>The plan looks a bit like a shopping list, lacking a coherent vision for the country. They seem mostly motivated by the short-term imperative of avoiding further credit downgrades and reducing the risk of skyrocketing deficit.</p>
<p><strong>What are the most encouraging points of this plan?</strong></p>
<p>I think it’s positive that government intends to tackle state owned enterprises and I’m sympathetic to the idea of leveraging public procurement to support small, medium and micro-enterprises (SMMEs). </p>
<p>I also welcome the indication of clear deadlines to achieve certain targets, but I’m very doubtful most of them will be met, especially given the volatility of the current political scene as well as the scale of corruption. </p>
<p>The emphasis placed on reforming state owned enterprises (SOEs) is a positive factor. But reforming SOEs means more than recapitalising them at every turn: it means establishing new governance rules for government and powerful economic interests. That’s much harder to achieve. </p>
<p><strong>What are the most critical things that are missing from it?</strong></p>
<p>The first priority is to support SMMEs not only through better procurement policies, but also by levelling the playing field in an economy that has been traditionally designed to support large corporate conglomerates, whether in mining, banking and or retail. </p>
<p>SMMEs must be better integrated into value chains. But if these remain dominated by big business, then small companies will only receive marginal profits, even when they are actually responsible for most of the production. To complement this value chain integration, we need policies that prioritise SMMEs in accessing public tenders directly and play a more leading role in delivering services on their own or through collaborative networks with other small businesses, thus outcompeting large corporations in some areas. </p>
<p>It is relatively easy to support the creation of black-owned big businesses, as our Black Economic Empowerment policies have done. But this will not transform the economy, let alone generate the kind of growth government keeps promising. </p>
<p>To do that, the country needs a new economic strategy that puts small businesses and especially artisanal production at the core of the development strategy, including building the necessary skills and entrepreneurial capacity. <a href="https://www.oecd.org/cfe/smes/2090740.pdf">Research</a> shows that SMMEs are the main drivers of growth and the best creators of jobs across the globe. </p>
<p>South Africa needs fewer shopping malls and more local markets. It needs more <a href="https://www.gibs.co.za/programmes/the-centre-for-leadership-and-dialogue/pages/social-entrepreneurship-programme.aspx">social entrepreneurs</a> and fewer CEOs. It needs less mining of natural deposits, which generates enormous <a href="https://cer.org.za/news/harvard-report-highlights-human-rights-costs-of-south-african-gold-mining">costs for society and the environment</a> to the advantage of large mining conglomerates, and more collection of metals and minerals lying in our landfills (the so-called e-waste), which can be effectively performed by SMMEs and artisans.</p>
<p>Against this backdrop, it’s high time we ask whether some state owned enterprises shouldn’t be completely overhauled rather than partially privatised. In fact, privatisation will simply replace a form of state-led monopoly with one driven by the private sector. </p>
<p>What the country needs is the end of monopolies, at least whenever possible. The state power utility Eskom is a case in point. The future is about <a href="https://mg.co.za/article/2016-07-29-00-aab-inaugurates-microgrid-in-south-africa-boosting-renewables-and-power-reliability">distributed energy systems</a>, whereby each and every firm and household can produce energy through renewable sources and exchange it through the grid. </p>
<p>In such a context, South Africa will no longer need a giant power utility. It will need an agile managing organisation facilitating exchanges across society, just like the Internet, which is managed by a <a href="https://www.icann.org/resources/pages/welcome-2012-02-25-en">non-profit</a> as a public good and no private or public entities own it – hence the concept of <a href="http://www.internetsociety.org/policybriefs/networkneutrality?gclid=Cj0KCQjw5arMBRDzARIsAAqmJezTm0o3hq9m2O9XKKswBfVEGejyi0wQeB0ryZIfDu5qxN7nwLxzJlgaAvOqEALw_wcB">‘net neutrality’</a>. </p>
<p><strong>How should key stakeholders, business, labour, civil society relate to it?</strong></p>
<p>I think many people are extremely suspicious of this government’s intentions. This is a pity because the country desperately needs cooperation in its development policy.</p>
<p>The lack of an overarching vision means that key stakeholders will probably continue promoting their sectoral interests, rather than uniting for a new social and economic ‘compact’. What the country needs is a nation-wide debate on where it wants the economy to go. </p>
<p>Does South Africa simply want to go back to the previous years, during which high economic growth co-existed with all sorts of social ills, from the AIDS pandemic to rampant inequality? Or does it want to move forward to a different economy, which can increase not only private profits but also social and environmental wellbeing, as I describe in my book _<a href="http://panmacmillan.co.za/catalogue/wellbeing-economy/">Wellbeing Economy: Success in a World Without Growth</a>? </p>
<p><strong>How do you see the chances of economic recovery going forward?</strong></p>
<p>I have indicated many times that <a href="https://theconversation.com/growth-is-dying-as-the-silver-bullet-for-success-why-this-may-be-good-thing-78427">low growth is the new normal</a>. We will not experience high growth rates in the next decade or so. </p>
<p>Potentially, this new normal will last for the entire century. So, any promise that growth is around the corner is simply delaying our capacity to innovate.</p>
<p>Rather than thinking about ‘big’ costly infrastructure, South Africa needs an integrated focus on how to optimise the use of resources it already has and minimise those forms of production and consumption that wreak havoc with the environment, ultimately costing so much money to the state and society.</p>
<p>Supporting small businesses and artisans requires fewer funds than subsidising large corporations. Small-scale interventions can bring more lasting benefits and activate positive feedback loops. </p>
<p>South Africa needs a new approach to service delivery founded on <a href="http://neweconomics.org/2008/07/co-production/">‘co-production’</a>, involving communities directly, thus creating opportunities to develop much needed artisanal jobs at the local level. </p>
<p>For this to happen, however, the country needs leadership. And I don’t see any of that coming out of the ruling party at present. To be honest, I don’t see much of that in the opposition parties either. Perhaps it will be happening at the local level, through some new initiatives by mayors, local businesses and civil society.</p><img src="https://counter.theconversation.com/content/82179/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lorenzo Fioramonti 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 14 point plan to achieve economic recovery lacks detail and vision of how the country is going to get itself out the prevailing economic crisis.Lorenzo Fioramonti, Full Professor of Political Economy, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/817012017-07-31T15:40:26Z2017-07-31T15:40:26ZSouth Africa should consider help from the IMF to fix its economy<figure><img src="https://images.theconversation.com/files/180185/original/file-20170728-23805-rg43no.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">shutterstock</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The prognosis that the <a href="https://theconversation.com/south-africas-in-a-recession-heres-what-that-means-78953">South African economy</a> is in dire straits is pretty obvious even to the untrained eye. The solution to the country’s present predicament is also pretty much understood. The International Monetary Fund (IMF) has recently produced a comprehensive <a href="http://www.imf.org/en/Publications/WEO/Issues/2017/07/07/world-economic-outlook-update-july-2017">view</a> which deserves to be considered.</p>
<p>The IMF identifies three key ailments as causes of the country’s <a href="https://theconversation.com/south-africa-can-expect-zero-growth-its-problems-are-largely-homemade-62943">anaemic economic growth</a>. These are low consumer and investor <a href="https://tradingeconomics.com/south-africa/business-confidence">confidence</a> and policy uncertainty. </p>
<p>Continued slow growth should be a matter of grave concern and ought to be treated as an emergency. </p>
<p>Thus far the short and medium term <a href="http://www.imf.org/en/Publications/WEO/Issues/2017/07/07/world-economic-outlook-update-july-2017">outlook</a> suggests that growth outcomes will continue to be pedestrian. What is even more worrying is that over the past four years global economic growth has gained momentum, suggesting that the solution to South Africa’s vanishing growth lies in the country. </p>
<p>The new minister of finance, Malusi Gigaba, recently hinted that South Africa may be compelled to seek <a href="https://www.timeslive.co.za/sunday-times/business/2017-06-30-gigaba-may-need-to-seek-outside-help-to-get-economy-going/">assistance</a> from the IMF. I think the conditions are right for serious consideration of the proposal even though IMF programmes are not very popular with politicians. </p>
<p>There are a number of reasons for this. Requests for IMF assistance suggest that those who manage the domestic economy have failed. The fund’s programmes also come with clearly defined milestones, often described as “conditionalities”. But in most instances, these are well-intentioned and aimed at success. </p>
<p>It’s better to enter an IMF programme early before the situation becomes frantic. As medical doctors might argue, it is easier to deal with an ailment in the earlier stages before it reaches an advanced stage.</p>
<h2>Desperate situation</h2>
<p>The alternative to asking for help now would be continued poor growth outcomes which would have serious social and economic costs. </p>
<p>The country’s poor economic growth record spawned a number of problems. </p>
<p>A shrinking economy means tax revenue shortfalls. The fiscal policy response would be higher taxes or bigger budget deficits.</p>
<p>And then again, interest payments, the fastest growing government expenditure item, would grow even faster. Already, about 11 cents out of every rand goes into <a href="http://www.treasury.gov.za/documents/national%20budget/2017/review/FullBR.pdf">servicing public debt</a>.</p>
<p>As the economy shrinks, more and more income would have to be spent on interest payments. Government’s ability to provide a social safety net in the form of social grants and other services, like education and health care, would be much more constrained. The service delivery <a href="http://ewn.co.za/2017/05/19/opinion-protesters-echo-global-cry-democracy-isn-t-making-lives-better">protests</a> that have become increasingly the norm would become even more widespread as the fiscus comes under serious strain. </p>
<p>Ultimately, the brigade of the unemployed would bear the brunt. Of course, the employed would also suffer because slow growth affects incomes.</p>
<p>Low and anaemic growth dries out consumer confidence. Job losses and subdued growth in incomes as a result of poor growth outcomes and prospects chips away at consumer confidence. </p>
<p>South Africa’s growth performance post 2008 has been very low. Over the past 10 years, the economy recorded an average of <a href="http://data.worldbank.org/country/south-africa">2% growth per year</a>. If this continues it will take more than 30 years to double average incomes in South Africa. </p>
<p>But if the country can increase growth to 5% as projected by the <a href="http://www.gov.za/ISSUES/NATIONAL-DEVELOPMENT-PLAN-2030">National Development Plan</a>, it would take only 14 years to double average income. The higher the growth rate the shorter the time required to double incomes and bring people out of poverty. </p>
<h2>Investor confidence deficit</h2>
<p>The investor confidence deficit is largely as a result of ever increasing political risk, policy uncertainty and <a href="https://theconversation.com/south-africas-jacob-zuma-is-fast-running-out-of-political-lives-80009">wrangling</a> in the ruling party and lately revelations of alleged <a href="https://theconversation.com/how-corruption-is-fraying-south-africas-social-and-economic-fabric-80690">looting</a> of public funds by the political elite. </p>
<p>But not everything’s broken. The performance of the country’s <a href="https://www.brandsouthafrica.com/south-africa-fast-facts/news-facts/wef_global_competitiveness">monetary authorities</a> in the management of monetary policy is admirable. </p>
<p>Where there appear to be lapses is the asset and liability management of the National Treasury. And here, the <a href="https://theconversation.com/corrupt-state-owned-enterprises-lie-at-the-heart-of-south-africas-economic-woes-79135">massive losses</a> of state owned enterprises readily come to the fore. </p>
<p>This is a blot on the canvas of fiscal policy management. And the much touted structural reforms that are required haven’t been forthcoming because the government lacks the capacity to formulate and implement the appropriate policies. In fact, even if it designed the correct ones, the investor community has little faith in its ability to carry them through. </p>
<p>Hence, the need for an IMF programme. </p>
<h2>The IMF has the solution</h2>
<p>An arrangement would achieve a number of objectives.</p>
<p>Firstly, the fund could help the country formulate policies that would unblock the problems that continue to inhibit economic growth and job creation. The mere adoption of an IMF programme would help address the question of policy uncertainty. </p>
<p>Secondly, the IMF is well placed to provide foreign exchange loans, bringing stability in the rand foreign exchange rate market. This in turn would improve investor confidence, leading to more investment in the country. Economic growth would pick up and there’d be an improvement in consumer confidence. </p>
<p>An IMF programme would send a clear and unassailable signal to investors that the country was committed to pursuing a given set of policy options. And it would make the commitment appear credible.</p><img src="https://counter.theconversation.com/content/81701/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matthew Kofi Ocran receives funding from the NRF. He is also affiliated with Nelson Mandela University as a Research Associate.</span></em></p>The International Monetary Fund’s view of how to fix South Africa’s economy deserves to be seriously considered.Matthew Kofi Ocran, Professor of Economics, University of the Western CapeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/806902017-07-12T14:19:23Z2017-07-12T14:19:23ZHow corruption is fraying South Africa’s social and economic fabric<figure><img src="https://images.theconversation.com/files/177495/original/file-20170710-29712-1pi12q7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Protests escalate as corruption and public sector incompetence in South Africa hamper the provision of basic services. </span> <span class="attribution"><span class="source">EPA/Kim Ludbrook</span></span></figcaption></figure><p>South Africans are not happy. According to the recent Bloomberg’s Misery Index, South Africa is <a href="http://www.huffingtonpost.co.za/2017/03/07/south-africa-is-the-second-most-miserable-country-on-earth_a_21875054/">the second-most miserable country on earth</a>. Venezuela tops the list of emerging countries. </p>
<p>This isn’t too surprising considering that the country is embroiled in multifaceted crises. It also has among the <a href="https://africacheck.org/factsheets/factsheet-unemployment-statistics-in-south-africa-explained/">highest unemployment</a> and <a href="https://www.businesslive.co.za/bd/national/2017-01-16-sas-rich-poor-gap-is-far-worse-than-feared-says-oxfam-inequality-report/">inequality levels</a> in the world. </p>
<p>Unfortunately, recent credit rating agency <a href="https://theconversation.com/what-a-downgrade-means-for-south-africa-and-what-it-can-do-about-it-75704">downgrades</a> as well as the fact that the country is in recession mean that these horrid conditions are unlikely to reverse soon.</p>
<p>Consequently, the poor in South Africa have little chance of improving their lives. They will therefore be even more reliant on the provision of state services. They will also increasingly be on the receiving end of the two extractive systems that are deeply embedded in country’s socio-political and economic systems.</p>
<p>The first is the patronage and state capture machinery as recently documented <a href="http://citizen.co.za/news/news-national/1525127/read-damning-new-academic-state-capture-report/">in a report</a> by leading academics. The effect of this corruption is that the capital allocated for service delivery is wasted, the private sector is crowded out, and the monopolising positions of dysfunctional state owned enterprises distort the economy.</p>
<p>The second is where state capture merges with patronage politics at local government level. This is accomplished by managing and staffing municipalities with unqualified party loyalists – or close associates – who disseminate services inefficiently from a shrinking pool of capital, while further extracting rents through a sub-layer of corruption.</p>
<p>The effect is that the poor must pay an additional tax in the form of bribes for access to mispriced and inefficient state services. In addition, as the looting via state capture and <a href="http://www.municipaliq.co.za/index.php?site_page=press.php">municipal corruption intensifies</a>, service provision and delivery declines. This means that the poor are then subject to bribe inflation to gain access to shrinking capacity. <a href="https://issafrica.org/iss-today/the-reasons-behind-service-delivery-protests-in-south-africa">Violent service delivery protests</a> inevitably escalate.</p>
<h2>Demographics and education</h2>
<p>South Africa’s five year average economic growth rate declined from 4.8% over the 2004-2008 period to 1.9% over the 2009-2013 period. Between 2014 and 2016 it averaged 1.1%. At the same time irregular, wasteful, and <a href="https://www.agsa.co.za/Portals/0/MFMA%202014-15/Section%201-9%20MFMA%202014-2015/FINAL%20MEDIA%20RELEASE%20(MFMA%202016)%20FN.pdf">unauthorised expenditure ballooned</a>. It’s therefore not surprising that the number of violent protests increased from an average of 21 a year between 2004 and 2008 to 164 a year between 2014 and 2016. </p>
<p>Unfortunately, South Africa’s demographics and education statistics don’t suggest that this trend is likely to reverse soon.</p>
<p>South Africa’s <a href="http://www.iol.co.za/business-report/economy/the-grim-situation-facing-sas-youth-1878239">youth statistics are depressing</a>. Young people between the ages of 15 to 35 <a href="https://www.statssa.gov.za/publications/P02114.2/P02114.22015.pdf">comprise 55%</a> of the country’s 36 million working age population. Of the 19.7 million youths, only 6.2 million are employed while 3.6 million are unemployed but still actively looking for work, and 1.53 million have stopped looking for work. The remaining 8.4 million are at school, tertiary education, or are homemakers.</p>
<p>Youth unemployment is 36.9%. This is nearly double the unemployment rate among adults. Among black youth, 40% are unemployed compared to 11% of white youth.</p>
<p>Taking the level of education into consideration, <a href="https://equaleducation.org.za/2017/01/09/matric-results-and-south-africas-youth-unemployment-crisis/">2011 data</a> show that the unemployment rate for 25 to 35 year olds who had less than a matric was 47%, compared to 33% for those that had a matric, and 20% for those with a diploma or post-school certificate. But if one looks at the younger group of 20 to 24 year-olds, 16% are in school, 12% are in post-schooling education, 21% are employed, and 51% are unemployed and not in any education or training.</p>
<p>Considering that the percentage of black professional, managerial and technical workers in the 25 to 35 age bracket dropped by 2% over the past 20 years (meaning that this generation is less skilled than their parents), the statistics in the 20 to 24 age bracket indicates that this trend is likely to worsen.</p>
<p>Worryingly, studies show that countries, such as South Africa, that have a <a href="http://www.un.org/esa/population/publications/expertpapers/Urdal_Expert%20Paper.pdf">youth bulge and poor education attainment</a> are likely to suffer <a href="http://www.sciencedirect.com/science/article/pii/S0176268016303470?via%3Dihub">from political instability</a>. This is because if the demographic transition occurs in a stagnant economy with a high level of corruption then the low opportunity costs <a href="https://www.dailymaverick.co.za/article/2016-04-18-the-great-reversal-stats-sa-claims-black-youth-are-less-skilled-than-their-parents/#.WVZNFIR97IV">increase the likelihood</a> of political violence by poorly educated young men.</p>
<h2>Fixing systemic failures</h2>
<p>South Africa’s current crisis is a systemic failure extending across national and local government. Although it’s possible that the political cost of corruption is now reaching unacceptable levels, reversing the effects of state decay on the poor will take short-run and long-run interventions. </p>
<p>Short-run measures will need to include holding public officials to account, reforming state owned enterprises and reversing the numerous institutional weaknesses at all levels of government.</p>
<p>But public and private stakeholders will also need to formulate long-run policies that will improve the quality and through-put of the country’s junior and secondary education systems, and entrench youth employment incentive schemes. In addition, skills training will need to be reformed and reinvigorated, and the technical vocational educational system will need to be reconstructed.</p>
<p>If South Africa is to recover, then the country’s badly frayed socio-economic fabric will need to be restitched, not just patched.</p><img src="https://counter.theconversation.com/content/80690/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>The political cost of corruption is reaching unacceptable levels in South Africa. Reversing the effects of state decay on the poor will take short and long term interventions.Sean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.