tag:theconversation.com,2011:/us/topics/soes-24632/articlesSOEs – The Conversation2019-02-10T13:32:24Ztag:theconversation.com,2011:article/1115102019-02-10T13:32:24Z2019-02-10T13:32:24ZExplainer: why South Africa’s energy generator is in so much trouble<figure><img src="https://images.theconversation.com/files/258072/original/file-20190210-174861-bywlwy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There's no painless way for South Africans to deal with the power utility crisis.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Eskom is by far the largest of South Africa’s many state owned companies. This near monopoly power utility is in crisis. It’s the <a href="https://businesstech.co.za/news/finance/255015/eskom-is-the-single-biggest-risk-to-south-africas-economy/">single largest threat</a> to South Africa’s economy, according to a former minister of finance. The Conversation Africa spoke to Adjunct Professor Rod Crompton about why this is the case and what can be done. </p>
<h2>How is power generated and distributed in South Africa?</h2>
<p>Electricity markets in most countries consist of three parts: generation, transmission and distribution. Most electricity is generated by using heat to boil water to create steam which in turn spins a turbine that generates electricity.</p>
<p>South Africa’s cheap and abundant coal resources made coal generated electricity an obvious choice for many years. Initially, power stations were owned by municipalities and large mining and industrial concerns. But as the costs of recapitalisation emerged, government was persuaded to take over responsibility for power. </p>
<p>Eskom is <a href="http://www.dpe.gov.za/soc/Pages/Eskom.aspx">among the biggest</a> power utilities <a href="http://www.engineeringnews.co.za/article/how-power-utility-eskom-is-hobbling-south-africas-economy-2018-12-05">in the world</a>, famous for its ability to handle vast tonnages of low grade coal. Eskom accounts for <a href="http://www.dpe.gov.za/soc/Pages/Eskom.aspx">over 90% of power generating</a> capacity. Its power plants are mostly coal with one nuclear station and some pumped storage (water). Only a few minor power generators have remained outside Eskom’s fold. </p>
<p>More recently, international climate change pressure caused government to introduce renewable power generation through <a href="http://www.engineeringnews.co.za/article/south-africa-to-release-new-look-renewables-bid-window-in-november-2018-06-01">bidding rounds</a>. These private investors were given 20 year price guarantees underwritten by government – some at exorbitant prices. Nevertheless, as these technologies became more globally popular, some of them – solar (photo voltaic) and wind power – emerged as the lowest cost generators. </p>
<p>All power generation is tied into Eskom’s national transmission grid that moves electricity from generation stations to demand areas. Transmission is a natural monopoly. If you want to use the transmission grid you need Eskom’s permission. </p>
<p>Transmission lines end where high voltage power is stepped down to distribution networks until it reaches residential customers – at 220 volts. In many areas Eskom sells to municipal distributors.</p>
<p>So, Eskom is a vertically integrated near monopoly responsible for generation, transmission and distribution.</p>
<h2>Is this monopoly situation unusual in the 21st century?</h2>
<p>In many countries competition between power generators has been encouraged to drive down prices. Transmission, being a natural monopoly, remains just that; but like toll roads they are open to all who obey the “road rules” and pay the toll. The same goes for distribution to a lesser extent.</p>
<h2>What’s the trouble with Eskom?</h2>
<p>Eskom has two major problems. Its operating costs are too high and it can’t pay its debt. It owes over <a href="https://www.moneyweb.co.za/news/south-africa/eskom-needs-a-bailout/">R400 billion</a> and does not generate enough cash to pay even the interest on its debt. It’s reached the end of the road. </p>
<p>Eskom has been getting steep tariff increases in recent years but these have driven some customers off-grid and shut others down. Eskom’s sales have been declining by about 1% per <a href="https://www.biznews.com/briefs/2018/07/23/eskom-loss-power-sales-drop-debt-slumps">annum</a>. The less it sells, the higher the tariff it wants, and the less it sells – the utility death spiral.</p>
<h2>How did it get here?</h2>
<p>The main cause of its troubles is its decision to build two of the biggest coal fired generating plants in the world, (<a href="http://www.eskom.co.za/Whatweredoing/NewBuild/MedupiPowerStation/Documents/NB_0002MedupiFactSheetSept2013.pdf">Medupi</a> and <a href="http://www.eskom.co.za/Whatweredoing/NewBuild/Pages/Kusile_Power_Station.aspx">Kusile</a>). These plants are running way behind schedule, they’re over budget and the bits that are complete don’t work properly. They are <a href="https://www.businesslive.co.za/bd/opinion/editorials/2018-06-20-editorial-keep-an-open-mind-on--energy/">probably</a> the single largest disaster in South Africa’s economic history.</p>
<p>“State capture” (patronage networks), corruption and poor management have led to over staffing and neglected maintenance, resulting in <a href="https://www.fin24.com/Economy/Eskom/corruption-state-capture-behind-eskoms-downfall-nersa-hears-20190114-2">constant breakdowns</a>. Electricity theft, a culture of non-payment and defaulting municipalities have deepened the <a href="https://www.fin24.com/Economy/how-eskoms-looming-death-spiral-is-menacing-sa-economy-20181206">crisis</a>. Eskom is owed over <a href="https://businesstech.co.za/news/energy/293980/why-youre-going-to-pay-more-for-eskoms-mistakes/">R30 billion</a>.</p>
<h2>What are the answers?</h2>
<p>Eskom needs to simultaneously reduce operating costs, increase tariffs and shed a big chunk of its debt. There is no painless way for South Africans to deal with their Eskom crisis. And it can’t wait until the national elections on 8 May 2019.</p>
<p>President Cyril Ramaphosa appointed a team of advisers and has announced that Eskom is to be split into three subsidiaries: generation, transmission and distribution. This has been a government policy since 1998. This should increase cost and debt transparency and may lead to increased efficiencies, especially if competition is allowed.</p>
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<a href="https://theconversation.com/why-south-africas-latest-plan-for-state-owned-power-giant-could-work-111480">Why South Africa's latest plan for state-owned power giant could work</a>
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<p>Ramaphosa hinted that Eskom will be allowed to invest in renewables, possibly to absorb surplus staff and avoid retrenchments that have been so <a href="https://www.moneyweb.co.za/news-fast-news/num-union-tells-ramaphosa-to-scrap-eskom-split-plan/">vehemently opposed</a> by the unions. Some think this is too little too late. He passed the debt hot potato to the minister of finance’s budget speech on 20 February 2018. </p>
<p>Energy Minister Jeff Radebe <a href="http://www.engineeringnews.co.za/article/prepare-for-greater-power-generation-competition-radebe-tells-eskom-2018-06-04">said</a> Eskom must prepare for increased competition, presumably in generation. The transmission network needs to be opened to allow this. The courts <a href="https://www.news24.com/SouthAfrica/News/court-prevents-eskom-from-cutting-off-musinas-electricity-20181120">have stopped</a> Eskom from switching off defaulting municipalities. Esokm’s crisis gets worse every day. Government will have to sort out municipal non-payment or allow towns and cities to go dark or let Eskom collapse. </p>
<p>Until the President’s statement, government seemed paralysed. Will words turn into the effective action that’s needed to save South Africa from its power utility?</p><img src="https://counter.theconversation.com/content/111510/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rod Crompton is the Director of the African Energy Leadership Centre at Wits Business School which receives funding from the CHIETA. He is a non-executive director of Eskom and a member of SANEA and the South African Association of Energy Economists.
</span></em></p>There’s no easy way for Eskom to claw its way out of the crisis it’s in.Rod Crompton, Adjunct professor African Energy Leadership Centre Wits Business School, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1114802019-02-10T07:39:24Z2019-02-10T07:39:24ZWhy South Africa’s latest plan for state-owned power giant could work<figure><img src="https://images.theconversation.com/files/258048/original/file-20190209-174887-5um8of.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Is change finally on the horizon for South Africa's power utility?</span> <span class="attribution"><span class="source">Gavin Fordham/ flickr</span></span></figcaption></figure><p>South African President Cyril Ramaphosa has unveiled a new plan for the country’s beleaguered state owned power utility, Eskom. During his <a href="https://www.gov.za/speeches/president-cyril-ramaphosa-2019-state-nation-address-7-feb-2019-0000">State of the Nation Address</a> on 7 February, Ramaphosa announced that Eskom would be unbundled into “three separate entities – generation, transmission and distribution”. These would all be established “under Eskom Holdings”. </p>
<p>This announcement has been a long time coming. It was first proposed and formalised 20 years ago in the country’s <a href="http://www.energy.gov.za/files/policies/whitepaper_energypolicy_1998.pdf">1998 White Paper on Energy Policy</a>. Among other things, the policy sought to break Eskom into distinct smaller entities.</p>
<p>Ramaphosa’s speech was the seventh State of the Nation Address in which a president committed to structural reforms in the electricity sector. Former Presidents <a href="https://www.sahistory.org.za/archive/2001-president-mbeki-state-nation-address-9-february-2001">Thabo Mbeki</a> and <a href="https://www.sahistory.org.za/archive/2010-president-zuma-state-nation-address-11-february-2010-0">Jacob Zuma</a> made similar promises. Given that they never followed through, Ramaphosa’s announcement may sound all too familiar – and hollow – to some.</p>
<p>But we believe the unbundling will have far reaching consequences for South Africa’s energy sector. Ramaphosa offered a comprehensive outline of the plan. His commitment also comes at a time when <a href="https://www.parliament.gov.za/storage/app/media/Links/2018/November%202018/28-11-2018/Final%20Report%20-%20Eskom%20Inquiry%2028%20NOV.pdf">Eskom is mired in financial, operational and governance crises</a>. This time, it seems, an electricity reform may really be on the horizon.</p>
<h2>Unbundling explained</h2>
<p><a href="https://www.powerfutures.org/updates/2019/2/6/what-is-unbundling-understanding-electricity-sector-unbundling-in-sa">Unbundling</a> is a type of structural reform. In the electricity sector, vertical unbundling refers to the separation of a utility’s generation, transmission, distribution and (sometimes) retail functions. Horizontal unbundling refers to the creation or entry of multiple players into each of these functions. The players may compete against each other to deliver the same service. </p>
<p>South Africa is certainly not the first country to undergo this type of reform. It can learn from examples of similar processes in countries like <a href="https://elibrary.worldbank.org/doi/abs/10.1596/9780821395561_CH19">Kenya</a> and <a href="https://www.era.or.ug/index.php/sector-overview/uganda-electricity-sector">Uganda</a>. </p>
<p>There are a number of benefits associated with unbundling. These include: </p>
<ul>
<li><p>more efficiency, resilience and sustainability through a tighter focus and clearer incentives within each functional area; </p></li>
<li><p>More competition and diversification of players; </p></li>
<li><p>Clarity in costs and functions of unbundled entities, which increases accountability for the purposes of governance and oversight; and,</p></li>
<li><p>Low-cost procurement driven by effective planning, competition and transparency.</p></li>
</ul>
<p>Eskom currently operates as a vertically integrated monopoly. This means it performs the generation, transmission, distribution and retail functions. Its current structure and governance systems were cemented by apartheid’s internationally isolated security state. This outdated structure, which is characterised by a lack of transparency and accountability, has continued to shape the utility in the years since democracy.</p>
<p>There is a narrow window for municipalities and the private sector to play a role in distribution and retail, and generation, respectively. </p>
<p>But Eskom still generates approximately <a href="http://www.eskom.co.za/Whatweredoing/SupplyStatus/Pages/SupplyStatusT.aspx">90% of the country’s electricity</a>. It exercises tremendous power in controlling access to the national grid. It has used its dominance to oppose national energy policy by, for example, <a href="https://www.iol.co.za/business-report/energy/disagreement-over-benefit-of-ipp-projects-for-sa-14277850">refusing to sign power purchase agreements</a> with independent power producers.</p>
<h2>South Africa is lagging behind</h2>
<p>This kind of monopolistic structure is unusual by international standards, in both developed and developing countries. And it often comes with operational inefficiencies, bloated costs and poor governance. </p>
<p>Eskom has experienced all of these maladies. This has been demonstrated by its conduct with independent power producers, its role in the <a href="https://www.fin24.com/Economy/Eskom/eskom-powers-ahead-with-nuclear-plans-report-shows-20171117">controversial nuclear deal</a>, which has now been put on ice, and endemic corruption exposed by the portfolio <a href="https://www.parliament.gov.za/storage/app/media/Links/2018/November%202018/28-11-2018/Final%20Report%20-%20Eskom%20Inquiry%2028%20NOV.pdf">committee on public enterprises’ inquiry</a> into allegations of state capture at the utility.</p>
<p>These challenges are not unique to South Africa. But the country is behind the curve when it comes to addressing the structural factors and ensuring that its energy sector is well positioned to benefit from technological developments and shifting investment trends.</p>
<h2>What Ramaphosa’s announcement means</h2>
<p>President Ramaphosa has committed to the full vertical unbundling of Eskom. Generation, transmission and distribution companies will have their own boards and executive structures. This process will take time to implement, probably in the region of <a href="https://www.powerfutures.org/updates/2019/2/6/what-is-unbundling-understanding-electricity-sector-unbundling-in-sa">five years</a>.</p>
<p>It will require legislative and possibly policy reform. Due to the urgent need for transformation in the sector, the president said immediate attention should be given to the establishment of an independent, state owned transmission grid company. </p>
<p>A good starting point for the unbundling process would be the establishment of an Eskom subsidiary with its own board. This subsidiary would oversee the migration of relevant assets and personnel. The intention would be to combine the transmission, system operation, power planning, procurement and buying functions. This separation is intended to leave the grid company free to contract independent power producers and Eskom generation without the conflict of interest that currently exists. As it stands, Eskom transmission is incentivised to give its own generation plants preference, blocking new technology and new entrants to bolster its own operations. </p>
<p>It’s not only the president’s explicit commitment to a comprehensive reform plan that makes this announcement different from those that came before. The sector is in a fundamentally different situation compared to the early 2000s and early 2010s. </p>
<p>Eskom is in the midst of extreme financial, operational and governance crises which it will not be able to solve alone, especially within the context of the complex <a href="https://irena.org/publications/2018/Apr/Global-Energy-Transition-A-Roadmap-to-2050">global energy transition</a>. </p>
<p>But, to ensure this plan doesn’t go the way of its predecessors, Ramaphosa must ensure meaningful consultation and dialogue with all key stakeholders, as well as credible and sustainable plans to address the needs of all those who may be affected. Without this, the president’s announcement will meet the same fate as previous South African energy policy reform pronouncements. Reform is a complex social and technical process. It is not without risk and costs. This time, however, failure of implementation is not something the country can afford. </p>
<p><em>Eskom provides 90% of South Africa’s energy. This article originally said it was 95%, a figure sourced from Eskom. <a href="https://africacheck.org/">Africa Check</a> notified us that this was incorrect. Eskom has corrected the figure, as have we.</em></p><img src="https://counter.theconversation.com/content/111480/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lauren Hermanus receives funding from UCT. She is the director of Adapt, a network-based sustainable development consultancy. </span></em></p><p class="fine-print"><em><span>Catrina Godinho receives funding from UCT. </span></em></p>South Africa’s president has committed to structural reforms in the energy sector.Lauren Hermanus, Research associate, University of Cape TownCatrina Godinho, Research associate, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/854062017-10-15T10:23:43Z2017-10-15T10:23:43ZCorruption in South Africa: business leader answers questions on how bad it is<figure><img src="https://images.theconversation.com/files/190147/original/file-20171013-11677-8cn7c1.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Business Leadership South Africa new CEO, Bonang Mohale, is leading a brave fight against corruption. </span> <span class="attribution"><span class="source">Supplied by BLSA</span></span></figcaption></figure><p><em>Business Leadership South Africa, the biggest business lobby group in the country, has become increasingly <a href="https://www.ujuh.co.za/bonang-mohale-becomes-blsa-ceo-what-does-it-mean/">vocal</a> about rising levels of corruption and mismanagement of public assets. <a href="https://theconversation.com/why-patronage-and-state-capture-spell-trouble-for-south-africa-64704">Concerns</a> have been growing in the country that corrupt practices, particularly the looting of state assets, has become embedded in the way business is done. As the organisation – which represents large businesses and multinationals in South Africa – takes on a new political posture, Steven Friedman put questions to its CEO <a href="https://www.blsa.org.za/news-and-articles/media-statements/blsa-appoints-bonang-mohale-as-ceo/">Bonang Mohale</a>.</em></p>
<p><strong>How representative is Business Leadership South Africa of the country’s private sector?</strong></p>
<p>The organisation represents around 75% of the largest businesses in South Africa. Clearly their interests are not identical to those of smaller businesses. Big business, for example, is able to adapt to onerous government edicts which drive up the cost of business much easier.</p>
<p>But what we have in common is much greater than what separates us – namely the desire to have growth-fostering economic policies under the rule of law. Right now business confidence in South Africa is at a 30-year low due to factors beyond our control but also due to actions that we can control, such as government bringing more policy certainty in areas such as mining for example– this is disastrous for large and small business alike.</p>
<p>BLSA has committed its members to changing practices which might impede economic growth and inclusion. </p>
<p><strong>Are your members buying the change agenda? How do you plan to ensure that they endorse it?</strong></p>
<p>Yes they are. Business Leadership South Africa has taken a much more active role over the last year in terms of getting the voice of business better heard, shaping government policy and speaking out against corruption. We have requested significant resources to achieve this and our members have backed us. </p>
<p>They understand the critical importance of the issues we are dealing with – achieving a policy backdrop that will allow us to grow the economy, create jobs and deliver transformation. </p>
<p>In terms of endorsement, we have set out our vision in a <a href="https://www.blsa.org.za/business-believes/our-contract-with-south-africa/">Contract with South Africa</a>, and our <a href="https://www.blsa.org.za/business-believes/integrity-pledge/">integrity pledge</a>, which establishes our business values. We expect our members to honour these. If they are in breach, they cannot be members. We showcased our commitment to the contract and the pledge through the <a href="https://www.ujuh.co.za/blsa-suspends-eskom-and-transnet-membership-it-needs-to-be-consistent/">suspension</a> of three major corporations KPMG, Eskom and Transnet. </p>
<p><strong>You’ve suspended Eskom and Transnet due to what you say is behaviour at odds with the organisation’s values. What do you mean by this?</strong></p>
<p>The integrity pledge makes clear that we have a zero-tolerance policy on corruption. There is a lot of <a href="http://www.huffingtonpost.co.za/2017/06/01/the-new-gupta-emails-are-a-lot-heres-what-they-say-in-5-quick_a_22120706/">prima facie evidence</a> that both of these organisations have been involved in corrupt conduct. They were not able to satisfy us that they recognised the seriousness of the charges and were determined to address them. So the suspension of their membership was appropriate.</p>
<p><strong>There is a view that Business Leadership South Africa is tougher on public sector corruption and lenient where the private sector is concerned. What’s your view?</strong></p>
<p>This is not true. Where there have been instances of bad behaviour in the private sector, accountability has followed. For example, construction industry executives involved in rigging bids around the World Cup are no longer in office. More recently there’s been the case of KPMG. The executives responsible for the decisions that landed the firm in trouble have <a href="http://ewn.co.za/2017/09/15/kpmg-sa-ceo-chair-and-6-top-staff-resign-over-gupta-scandal">left</a>. And it’s been <a href="https://mg.co.za/article/2017-09-22-blsa-hits-out-at-kpmg">suspended</a> from BLSA. </p>
<p>By contrast, in government and state owned enterprises there is no accountability. Executives behave with impunity. And while corruption is wrong wherever it occurs, we must resist the spurious symmetry of discussing public and private sector corruption as though South Africa is facing a problem of equal gravity in both. Unfortunately, we now have a government that is corrupt from top to bottom. By contrast we have a private sector that is overwhelmingly law abiding. That is a very significant difference.</p>
<p><strong>How far are you prepared to take your anti-corruption mission? Some of your members have been found guilty of abusing vulnerable consumers. Will you act against them?</strong></p>
<p>Business Leadership South Africa will act against any member whose behaviour is against its own values and damages the reputation of business. These values are encapsulated in the organisation’s integrity pledge and the contract with South Africa. Taken together, these outline a zero tolerance attitude to corruption, a belief that business should behave with courage, integrity and consistency, and a strong belief that business can be a force for good.</p>
<p>Sometimes business will make mistakes and that can be accepted provided the organisation takes suitable action to address the problem.</p>
<p><strong>Do you accept that business itself needs to change its ways of doing business if it’s going to win public confidence in its mission against corruption?</strong></p>
<p>Yes, we do. There is clearly a large “trust gap” between parts of the public and business. Some of this is down to ignorance. Some of it can be explained by the deliberate misinformation as seen in the toxic <a href="https://theconversation.com/white-monopoly-capital-an-excuse-to-avoid-south-africas-real-problems-75143">White Monopoly Capital</a> campaign. As we now know this was a highly racialist narrative that sought to blame everything that’s gone wrong in South Africa on an imaginary lily white private sector. We believe this particular line of attack is being used to detract attention away from the real issue - which is increasing corruption.</p>
<p>And some of the mistrust is rooted in <a href="http://www.justice.gov.za/trc/media%5C1997%5C9711/s971110b.htm">history</a>, with business still regarded by many as having collaborated with the apartheid system and furthering its legacies. </p>
<p>But some of it is also attributable to business’s own behaviour including <a href="http://www.engineeringnews.co.za/article/construction-majors-fined-r146bn-for-collusion-2013-06-24">collusive conduct</a> in certain industries and <a href="https://www2.deloitte.com/za/en/pages/human-capital/articles/executive-compensation-report.html">inflated executive compensation</a>. </p>
<p>But business is a national asset, not the problem. So it is in everybody’s interest that the South African public improves its understanding of business, and its overall reputation. </p>
<p>Business needs to explain and demonstrate that it is part of society and does not stand apart. That it shares the same vision and goals, notably of combating the scourges of unemployment, inequality and poverty.</p>
<p>Business also needs to help society understand that the major problems the country is facing don’t just lie at its doorstep. Certainly, there are things business can do better, but the much larger problem is the havoc being wreaked by <a href="https://theconversation.com/why-patronage-and-state-capture-spell-trouble-for-south-africa-64704">state capture</a> and poor policy development and execution. </p>
<p><em>This is part of a series called Face-to-face that The Conversation Africa is running in which leading academics interview prominent individuals in the public, private and not for profit sectors.</em></p><img src="https://counter.theconversation.com/content/85406/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>Business Leadership South Africa has in the recent past assumed a stinging position against public sector corruption. Bonang Mohale explains the stance taken by the lobby group.Steven Friedman, Professor of Political Studies, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/791352017-06-19T20:12:08Z2017-06-19T20:12:08ZCorrupt state owned enterprises lie at the heart of South Africa’s economic woes<figure><img src="https://images.theconversation.com/files/174008/original/file-20170615-23574-zce0hl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Demonstrators march against corruption in South Africa.</span> <span class="attribution"><span class="source">Reuters/Mike Hutchings</span></span></figcaption></figure><p>The prevailing economic crisis sweeping through South Africa is a direct result of economic mismanagement largely shaped by the looting of state owned enterprises. </p>
<p>Many are in deep <a href="https://www.dailymaverick.co.za/article/2015-08-06-state-owned-enterprises-chaos-inside-a-mess-wrapped-in-politics/#.WT_1gOuGPIU">trouble</a>. Sheer incompetence and corruption has pushed entities like South African Airways and the South African Broadcasting Corporation closer to <a href="https://www.businesslive.co.za/rdm/business/2017-03-24-sinking-fast-the-perilous-state-of-sas-six-big-state-owned-companies/">financial collapse</a>. Serious questions are being asked about the legality of multi-billion <a href="http://www.timeslive.co.za/politics/2017/06/09/Malema-lays-charges-in-alleged-R17-billion-Transnet-locomotive-tender-corruption">rand procurements at Transnet</a> and the state power utility <a href="http://amabhungane.co.za/article/2017-04-22-r10bn-in-15-days-another-massive-eskom-boost-for-the-guptas">Eskom</a>. </p>
<p>The scale of the problem has been brought into sharp relief in recent weeks by two developments that show corruption in state owned enterprises has been unfolding for years. The first was the release of a report written by academics: <a href="https://www.dailymaverick.co.za/article/2017-05-26-betrayal-of-the-promise-the-anatomy-of-state-capture/">Betrayal of the Promise</a>. The second was the leaking of 200 000 emails which point to dubious links between the <a href="http://www.huffingtonpost.co.za/2017/06/01/the-new-gupta-emails-are-a-lot-heres-what-they-say-in-5-quick_a_22120706/">Gupta family</a>, senior politicians and officials.</p>
<p>The country stands to slip deeper into crisis unless the lust for loot is stopped. The economy is already in deep trouble. It’s <a href="http://www.enca.com/south-africa/south-africa-slips-into-recession-as-economy-shrinks">in recession</a>, and worse is to come. The second quarter GDP figures will reflect that a third rating agency has downgraded the <a href="http://www.stanlib.com/EconomicFocus/Pages/MoodysdowngradeSAscreditrating.aspx">country’s credit rating.</a></p>
<p>There are some indications that the <a href="https://theconversation.com/the-battle-for-control-of-south-africas-state-isnt-just-about-personalities-79131">tide may be turning</a> but the job of reforming the state owned enterprises will have to go beyond just replacing board members. It must also focus on ensuring greater accountability financial responsibility, and performance management.</p>
<p>Unfortunately the severely <a href="http://www.heraldlive.co.za/news/2017/03/24/anc-fractured-core-says-chief-whip/">fractured</a> African National Congress (ANC) is incapable of reversing the slide. Instead, it’s more concerned with outsmarting the growing opposition to President Jacob Zuma’s rule suppressing internal rebellion, and maintaining the crumbling patronage network.</p>
<h2>Unaffordable</h2>
<p>The increasing inefficiency in state owned enterprises continues to put pressure on the <a href="http://www.treasury.gov.za/documents/national%20budget/2017/review/Chapter%208.pdf">country’s fiscus</a>. This is not something it can afford. <a href="http://www.sowetanlive.co.za/business/2017/04/06/public-enterprises-played-a-big-part-in-south-africas-credit-ratings-downgrade">Ratings agencies</a> have made it clear that they’re monitoring continuous bailouts and government guarantees. This is because they pose a serious threat to government’s fiscal balances and policy priorities.</p>
<p>Government guarantees to state owned enterprises stood at <a href="http://af.reuters.com/article/investingNews/idAFKCN0VX1DN">R467 billion</a> at the end of 2015/16. Standard & Poor’s forecasts they will swell to over R500 billion by 2020 – 10% of <a href="https://www.thesouthafrican.com/south-africa-beyond-the-2017-budget/">South Africa’s current GDP</a>. This is more than twice the government <a href="https://www.moneyweb.co.za/news/economy/sp-government-guaranteed-debt-contingent-liabilities-a-risk-to-sa-rating/">contingents in year 2015/2016</a>. </p>
<p>These bailouts have weighed on the fiscus, pushing government debt into dangerous territory. Even before the downgrades South Africa’s debt burden was higher than other <a href="http://www.fin24.com/Economy/sas-debt-to-gdp-highest-among-emerging-market-peers-report-20160926">emerging markets</a>. Moody’s forecasts that total government debt will reach 55% of GDP by 2018 and will <a href="https://www.cnbcafrica.com/trending/sa-downgrade/2017/06/09/moodys-rates-sa/Link">continue to rise</a> after that.</p>
<p>The reason government continues to bail out state owned enterprises is purely due to the fact that they are being managed badly.</p>
<p>The recent board and management scandals at the <a href="http://www.biznews.com/leadership/2017/03/13/prasa-popo-molefe-dipuo-peters/">Passenger Rail Agency of South Africa</a>, <a href="http://www.iol.co.za/dailynews/news/sabc-board-under-fire-amid-scandal-2072625">South African Broadcast Corporation</a>, <a href="http://weeklyxpose.co.za/2017/05/22/r13m-tender-scandal-at-saa-tip-of-the-iceberg-report/">South African Airways</a> and <a href="http://ewn.co.za/2017/05/12/eskom-says-thorough-board-discussion-went-on-over-molefe-s-comeback-move">Eskom</a> indicate that there has been little commitment to improve governance and address operational deficiencies. Instead some senior ANC officials claim that a call for reforms is <a href="http://www.anc.org.za/sites/default/files/National%20Policy%20Conference%202017%20Economic%20Transformation_1.pdf">anti-transformation</a>. </p>
<p>The financial markets are increasingly unwilling to tolerate such excuses. This can be seen by the recent <a href="https://www.moneyweb.co.za/news/markets/transnet-bond-auction-fails-to-entice/">subscription failure</a> of Transnet’s bond auction. And some private asset managers have become extremely <a href="http://www.enca.com/south-africa/sas-asset-manager-stops-lending-state-companies-money">cautious</a> about lending money to public entities.</p>
<h2>The way forward</h2>
<p>The new Finance Minister Malusi Gigaba has so far failed to inspire confidence. Allegations that he is deeply mired in the <a href="https://www.dailymaverick.co.za/article/2017-06-13-analysis-being-malusi-gigaba/">web of scandals</a> are not helping the situation. </p>
<p>Gigaba recently declared that state owned enterprises are <a href="http://www.fin24.com/Economy/gigaba-praises-south-africas-soes-20170605">functioning well and doing “great work”</a>. This is surprising given the rot being revealed on a daily basis. </p>
<p>Nevertheless, the <a href="https://theconversation.com/south-africas-power-utility-so-many-red-flags-its-hard-to-know-where-to-start-79155">patronage network</a> that stands accused of milking state owned enterprises has <a href="https://www.businesslive.co.za/rdm/politics/2017-06-13-the-gupta-dominoes-are-tumbling-fast/">started to crumble</a>. This includes the axing of <a href="http://ewn.co.za/2017/06/14/no-golden-handshake-for-sacked-hlaudi-motsoeneng-when-he-leaves-sabc">Hlaudi Motsoeneng</a> from the South African Broadcasting Corporation and <a href="http://www.iol.co.za/news/politics/eskom-officially-fires-brianmolefe-9506271">Molefe</a> from Eskom. <a href="https://mg.co.za/article/2017-06-13-lights-out-eskom-board-chair-ben-ngubane-resigns-with-immediate-effect">Ben Ngubane</a> has resigned as chairperson of the Eskom board. </p>
<p>There are also signs that <a href="http://www.fin24.com/Economy/Eskom/outa-lays-criminal-charges-against-ngubane-20170613">public and private pressure</a> is forcing some government ministers to take responsibility for their departments. Examples include Minister of Public Enterprises <a href="http://ewn.co.za/2017/05/31/brown-inter-ministerial-committee-has-reached-agreement-on-molefe">Lynne Brown</a>, Communications Minister <a href="http://ewn.co.za/2017/04/01/communications-minister-dlodlo-aware-of-turmoil-at-the-sabc">Ayanda Dlodlo</a> and the Minister of Police <a href="http://www.sowetanlive.co.za/news/2017/04/16/mbalula-orders-former-hawks-boss-ntlemeza-to-vacate-his-office-immediately">Fikile Mbalula</a>.</p>
<p>Nevertheless, the key implication of the Gupta emails is that reversing the deep damage inflicted on the country must start with reforming state owned enterprises. Reversing the rot will take decades. It should begin by ensuring that <a href="http://www.fin24.com/Economy/cabinet-approves-measures-to-improve-soes-20161103">measures agreed last year</a> are implemented.</p>
<p>These include:</p>
<ul>
<li><p>holding the corrupt public servants to account,</p></li>
<li><p>closing loopholes in public procurement to ensure that history isn’t repeated, and</p></li>
<li><p>appointing suitably qualified and experienced technocrats rather than unqualified politically connected individuals.</p></li>
</ul>
<p>Finally, some state owned enterprises will need to be privatised. This is because they operate as monopolies in key sectors which is perpetuating gross inefficiencies. Only privatisation will end these distortions. </p>
<p>For many years, government has claimed that South Africa’s many challenges could be overcome by adopting policies of a “developmental state”. This would entail active state involvement in economic activity and using its resources to tackle poverty and expand economic opportunities. </p>
<p>But the ongoing revelations show that even before South Africa can consider becoming a developmental state, it will first have to root out the ingrained predatory state. Only then can investor confidence begin to be restored, recovery restarted and rating downgrades reversed.</p><img src="https://counter.theconversation.com/content/79135/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sean Gossel receives funding from the University of Cape Town. </span></em></p><p class="fine-print"><em><span>Misheck Mutize does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Reforming South Africa’s state owned enterprises should start with greater accountability and financial responsibility.Misheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, specializing in Finance, University of Cape TownSean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/791552017-06-13T16:02:07Z2017-06-13T16:02:07ZSouth Africa’s power utility: so many red flags it’s hard to know where to start<figure><img src="https://images.theconversation.com/files/173598/original/file-20170613-25879-o5e7c7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In happier days. Former Eskom CEO (right) shakes hands with President Jacob Zuma.</span> <span class="attribution"><span class="source">Flickr/GCIS</span></span></figcaption></figure><p><em>South Africa’s state owned enterprises have been hit by one scandal after another signalling serious political and corporate governance failures. The largest of these, the power utility Eskom, has seen its CEO <a href="https://theconversation.com/eskom-ceo-saga-highlights-massive-systems-failure-in-south-africa-78432">Brian Molefe</a> resign, then return, and then be <a href="http://www.iol.co.za/news/politics/brianmolefe-fired-again-9448206">fired</a> – all in the space of seven months. This was followed by the unexpected <a href="http://www.news24.com/SouthAfrica/News/eskom-board-chair-resigns-20170612">resignation</a> of Eskom Chairperson Ben Ngubane. The Conversation Africa’s Sibonelo Radebe asked Owen Skae to make sense of it all.</em></p>
<p><strong>What do you make of what’s happening at Eskom?</strong></p>
<p>It’s an unholy mess. The entire basis of the departure, reappointment and subsequent firing of the Eskom CEO raises so many red flags it’s hard to know where to start. And, to cap it all, the chairman has resigned with immediate effect. That means Eskom is without a CEO and now has a <a href="http://www.news24.com/SouthAfrica/News/eskom-board-chair-resigns-20170612">stand-in chairperson</a>.</p>
<p>One thing is clear. The board, the chairperson Ben Ngubane, the minister of public enterprises Lynne Brown, and Molefe failed in their duties to serve Eskom. They failed South Africa’s taxpayers who are the indirect shareholders of Eskom. And they failed the country. </p>
<p>To understand their duties, one has to consider the basic principles of governing state owned enterprises. Eskom is a <a href="http://www.eskom.co.za/OurCompany/CompanyInformation/Pages/Legislation.aspx">public company</a> and its sole shareholder is the government. The shareholder representative is the ministry of public enterprises. A <a href="http://www.eskom.co.za/OurCompany/CompanyInformation/Pages/Legislation.aspx">shareholder compact</a> guides the relationship between the board, the executives and the minister. </p>
<p>The shareholder compact is an annual agreement between Eskom’s leadership and the minister. It documents the power utility’s mandate, as well as key performance measures. It also sets out what’s expected from a good governance perspective. It’s meant to avoid the kind of mess that has visited Eskom over the past few months.</p>
<p><strong>What went wrong?</strong></p>
<p>A number of things.</p>
<p>The main one is that corporate governance rules designed to manage conflicts of interest were totally disregarded. </p>
<p>The country’s <a href="http://www.iodsa.co.za/?Companiesact">Companies Act</a> spells out what a director may or may not do if they have a personal financial interest in a matter. These rules apply as much to state owned enterprises as they do to publicly listed ones. The Eskom situation suggests that directors, and Molefe in particular, disregarded this principle. </p>
<p>This is highlighted in the former public protector Thuli Madonsela’s “<a href="https://www.ujuh.co.za/state-of-capture-public-protectors-report/">State of Capture</a>” report which suggested that Molefe had had an improper relationship with the Guptas, a family of businessmen with close ties to President Jacob Zuma. Among other things, the report questioned the way in which the Eskom leaders collaborated with the Guptas to buy, some say <a href="https://www.businesslive.co.za/bd/companies/energy/2017-05-16-brian-molefe-helped-the-guptas-hijack-a-mine-says-ngoako-ramatlhodi/">hijack</a>, a mine supplying power utility with coal.</p>
<p>The Eskom board and the minister also failed to apply their minds properly around Molefe’s controversial <a href="https://mg.co.za/article/2017-05-22-now-eskoms-molefe-was-on-unpaid-leave">departure and return</a>. This includes a deal to give him a pension payout of <a href="https://mg.co.za/article/2017-05-12-lynne-brown-paying-brian-molefe-r30-million-is-the-only-solution">R30 million</a> just 18 months in the job and 13 years before he is due to reach <a href="https://www.moneyweb.co.za/news/south-africa/brian-molefe-50-too-young-for-early-retirement/">retirement age</a>.</p>
<p>A good understanding of the act, as well as the <a href="http://www.iodsa.co.za/?kingIII">codes</a> of good corporate governance that have been developed in the country, make it clear that the board should have:</p>
<ul>
<li><p>called a special meeting to consider Molefe’s departure</p></li>
<li><p>applied its mind to the circumstances of his departure</p></li>
<li><p>ensured that the necessary legal, risk and reputation issues were addressed.</p></li>
</ul>
<p>Another big area of failure was the role of the board’s chairperson. Even though he has resigned, he should still be held accountable for not providing the necessary oversight at such a momentous time.</p>
<p>As the only shareholder, the government is also complicit. As the shareholder representative the minister of public enterprises had the responsibility of asking the board questions as part of a consultative process that’s set out in the shareholder compact.</p>
<p>Either the minister wasn’t <a href="https://www.ujuh.co.za/lynne-brown-brian-molefes-return-to-eskom-is-better-than-r30m-payout/">properly informed</a> or didn’t ask the questions she was entitled to ask, or a mixture of both. This raises red flags about her level of commitment to the shareholder compact.</p>
<p><strong>What does it tell us about the broader political environment?</strong></p>
<p>There’s just too much interference – for nefarious reasons – from outsiders in the running of state owned enterprises. Excessive power and authority is vested in too few people. I often use the analogy of being a sports coach. Imagine a situation where the coach is called to account for his actions every day, where he has no say in who is picked and is told to change the game plan. The situation becomes unmanageable. </p>
<p>Interference undermines the way things should be, erodes confidence and allows conflicts of interest to flourish. This is particularly true when the interference is from people who aren’t acting in the best interests of the team. </p>
<p>But being untouchable is also a recipe for disaster. So we have to find a middle ground. The rules of the game must be established and the parties must carry them out with integrity, competence, responsibility, accountability, fairness and transparency.</p>
<p>These rules of the game are clearly set out in the South African context. Nobody can claim they don’t know what they are. In the case of Eskom they’ve simply been flouted.</p>
<p><strong>What do the events at Eskom tell us about state owned enterprises in South Africa?</strong></p>
<p>Sadly, state owned enterprises are seen as instruments to serve an elite few rather than fulfilling their broader mandate. </p>
<p>On top of this they aren’t financially viable which means they’ll continue to be a drain on the fiscus. The government must consider partnerships with the private sector. This can be done by selling minority stakes as <a href="https://www.moneyweb.co.za/news-fast-news/finance-minister-says-like-saa-minority-equity-partner/">suggested</a> by former finance minister Pravin Gordhan.</p>
<p>The success of the partly privatised telecommunications entity Telkom supports this view. The company has just posted <a href="https://techfinancials.co.za/2017/06/05/sas-telkom-earnings-lifted-by-mobile-business/">handsome profits</a>, suggesting it’s a model that could be used to turn around other state owned enterprises, including Eskom.</p><img src="https://counter.theconversation.com/content/79155/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Owen Skae does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The scandals surrounding South Africa’s power utility, Eskom, were caused by the neglect of corporate governance rules by the board, the executive authority, and the public enterprises minister.Owen Skae, Associate Professor and Director of Rhodes Business School, Rhodes UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/665232016-10-12T09:27:49Z2016-10-12T09:27:49ZSouth Africa is at an inflection point: will it resist, or succumb to state capture?<figure><img src="https://images.theconversation.com/files/141091/original/image-20161010-3886-57hdrt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The 2016 South African local government elections showed the country moving away from single party dominance</span> <span class="attribution"><span class="source">Rogan Ward/Retuers</span></span></figcaption></figure><p>South Africa is sailing through tempestuous seas. It has no captain and is manned by a dysfunctional crew. Depending on the outcome of this rudderless journey, the country’s future could include being commandeered by <a href="http://www.rdm.co.za/politics/2016/07/18/inside-the-mind-of-the-crony-capitalist">crony capitalists</a> and a credit rating downgrade to <a href="http://www.tradingeconomics.com/south-africa/rating">sub-investment grade</a>.</p>
<p>This in turn would <a href="http://mg.co.za/article/2016-03-17-a-downgrade-to-junk-status-will-hurt-everyone">tip</a> it into a recession. It would also entrench policy dysfunction, heighten socio-political and macroeconomic strife and undermine democratic fundamentals. </p>
<p>Alternatively, the country could resist state capture and weak governance; democracy could deepen, and centralised corruption could weaken.</p>
<p>There’s a fierce battle underway between two opposing camps. The outcome will determine whether the country is finally captured by crony capitalists, and shape its democratic trajectory. The one camp is represented by the patronage politics of President Jacob Zuma and the Gupta network. The other includes the National Treasury, African National Congress stalwarts, the media, nongovernmental organisations and business leaders. </p>
<p>The intensity of the battle was evident again when Finance Minister Pravin Gordhan <a href="http://ewn.co.za/2016/10/11/Finance-Minister-Pravin-Gordhan-issued-with-summons-for-fraud">was issued with a summons</a> to appear in court on an alleged fraud charge. The charge has been brought by the country’s National Prosecuting Authority which is viewed as <a href="http://www.corruptionwatch.org.za/tag/national-prosecuting-authority-7/">being closely aligned to Zuma</a>. It opens the door for a cabinet reshuffle to install a more <a href="http://www.bdlive.co.za/national/education/2016/10/12/perhaps-the-next-finance-minister-is-in-the-fees-task-team-quips-mbhazima-shilowa">Zuma-aligned Finance Minister</a>.</p>
<p>South Africa’s future prosperity, stability and cohesion is at stake. Corruption not only affects economic performance, including foreign direct investment. It also undermines a society’s democratic fundamentals.</p>
<h2>Corruption and the economy</h2>
<p>Literature shows that corruption negatively affects economic growth in the long-term by weakening three areas:</p>
<ul>
<li><p>Domestic investment is deterred by uncertainty, weakened property rights, lower profits, and increased <a href="http://qje.oxfordjournals.org/content/110/3/681.abstract">contract-related risks</a>.</p></li>
<li><p><a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=880260">Public infrastructure</a>. State expenditure becomes biased in favour of security. It shifts away from critical basic services like health care and education. This lowers public infrastructure’s quality and efficiency.</p></li>
<li><p><a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0297.1997.tb00005.x/abstract">Institutional quality</a> is weakened as trust and the effectiveness of political institutions and court systems is eroded.</p></li>
</ul>
<p>There are two opposing arguments when considering corruption and foreign investment. One is that corruption acts as a “helping hand” for investment. This is because paying bribes may speed up bureaucratic processes and facilitate access to publicly funded projects. </p>
<p>The other view is that corruption acts as a “grabbing hand”. This is because bribes are an indirect tax that reduce investment profits, waste resources and heighten contract-related risks. </p>
<p>Both of these views have been advanced in debates about the <a href="http://mg.co.za/article/2016-03-24-00-the-gupta-owned-state-enterprises">Gupta family’s involvement</a> in South Africa’s state-owned enterprises. One side claims that Zuma has allowed the Gupta family to influence his appointment of ministers, heads of state-owned entities and to facilitate multi-billion rand business deals with the state. The other side <a href="http://city-press.news24.com/News/rupert-rumours-spark-new-row-20160326">argues</a> that the family has created employment and diversified the economy and that it is being targeted by South Africa’s banks and the “white establishment” in retaliation.</p>
<p>In tandem with this power-play, the country has experienced significant <a href="http://www.moneyweb.co.za/moneyweb-opinion/the-story-of-sa-in-two-depressing-charts/">capital outflows</a> and increasing hesitancy from the private sector to fund state-owned entities. A case in point was the decision by FutureGrowth Asset Management to stop lending money to six of South Africa’s largest <a href="http://www.bdlive.co.za/business/financial/2016/08/31/futuregrowth-will-stop-lending-to-six-state-owned-firms-including-eskom">state-owned companies</a>.</p>
<p>A portion of this negative sentiment stems from global <a href="http://www.bdlive.co.za/markets/2016/06/24/bond-yields-steepen-on-global-risk-aversion">risk-aversion</a> and the ongoing search for yields. But there have also been accelerating outflows in response to South Africa’s increasing political risks. This was made more visible after Zuma <a href="http://www.fin24.com/Finweek/Business-and-economy/the-consequences-of-nene-leaving-20151210">fired</a> Finance Minister Nhlanhla Nene late in 2015. </p>
<p>These dynamics suggest that investors are increasingly, and openly, judging the costs associated with corruption scandals to be a “grabbing” rather than a “helping” hand.</p>
<h2>Corruption and democracy</h2>
<p>This changing perception has implications for democratisation. Recent research shows that the relationship between corruption and democracy <a href="http://eprints.gla.ac.uk/88052/">is U-shaped rather than linear</a>. The “helping hand” is more prevalent in the early stages of democracy. The “grabbing hand” becomes more dominant as democracy matures. </p>
<p>The association between corruption and democratisation in the long run is less clear. In theory, corruption levels should decline as democracy deepens. But corruption creates economic distortions. These then suppress development and hamper democratisation. </p>
<p>It has also been <a href="https://www.aeaweb.org/articles?id=10.1257/mac.1.2.88">argued</a> that the accumulation of “democratic capital” is more important than democracy <em>per se</em>. It takes time for citizens to learn to cherish and respect democracy as a valuable form of government.</p>
<p>The recent local government elections results indicate that over the past two decades South Africa has accumulated sufficient democratic capital to challenge the conventions of race-based <a href="http://ewn.co.za/2016/08/05/ANALYSIS-ANC-shaken-to-core-as-South-African-voters-look-beyond-race">voter patterns</a>. This even raises the possibility that the ANC may no longer rule the country after national elections in 2019.</p>
<p>There are indications that patronage networks are coming under pressure after the elections. This includes the Gupta family’s decision to <a href="http://www.reuters.com/article/us-safrica-guptas-idUSKCN1120HT">disinvest</a>, and the court judgments against President Zuma and his <a href="http://mg.co.za/article/2016-09-15-npas-nomgcobo-jiba-and-lawrence-mrwebi-struck-from-the-roll-for-advocates;http://www.bdlive.co.za/national/law/2016/10/07/zuma-awaits-supreme-court-of-appeal-ruling-on-corruption-charges-plea">appointees</a>. </p>
<p>But there are also signs of efforts to use state-owned enterprises as funding channels to replace opportunities lost in metropolitan municipalities. This is evidenced by attempts to frustrate efforts to install greater financial controls at <a href="http://mg.co.za/article/2016-08-24-transport-minister-peters-seeks-to-derail-prasa-probe">dysfunctional companies</a> such as South African Airways, Eskom, Denel and the South African Broadcasting Corporation, and the renewed battle to <a href="http://www.bdlive.co.za/national/politics/2016/10/12/news-analysis-zumas-empire-strikes-back-hard">gain control</a> of Treasury. This in turn has exacerbated factional conflicts between leaders of the ruling party who sense that President Zuma’s <a href="http://mg.co.za/article/2016-10-07-00-new-blows-to-zuma-inc">influence is diminishing</a>. </p>
<h2>Inflection point</h2>
<p>The post-election backlash indicates that society’s historic patience is wearing thin as the country urbanises, democratises and becomes more informationally <a href="http://www.researchictafrica.net/publications/Evidence_for_ICT_Policy_Action/Policy_Paper_7_-_Understanding_what_is_happening_in_ICT_in_South_Africa.pdf">complex</a>. </p>
<p>Recent developments suggest that South Africa is at an inflection point where:</p>
<ul>
<li><p>single-party dominance gives way to <a href="http://www.theworldweekly.com/reader/view/storyline/2016-08-11/is-south-africas-era-of-one-party-dominance-coming-to-an-end/8847;%20http://africanarguments.org/2016/08/08/south-africas-local-elections-reasons-for-each-party-to-be-happy-and-sad/">multi-party plurality</a>,</p></li>
<li><p>centralised corruption will either become entrenched or dissolve into decentralised corruption, and</p></li>
<li><p>investors consider bribes and crony capitalism as more of a “grabbing hand” than a “helping hand”. </p></li>
</ul>
<p>South Africa’s history of transition indicates that depending on the outcome of the latest salvo, the country will likely recover from the Zuma years. Whether the ANC as a political party will do so is, however, less certain.</p><img src="https://counter.theconversation.com/content/66523/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 Graduate School of Business. </span></em></p>Recent political events suggest that South Africa is at a crossroad where it could either be tipped into a fully corrupted state or saved by multi-party pluralitySean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/649192016-09-13T15:44:09Z2016-09-13T15:44:09ZWill the ANC turn South Africa into a developmental welfare state?<figure><img src="https://images.theconversation.com/files/137191/original/image-20160909-13359-8l99jf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A power utility is considered a key asset for a development state.</span> <span class="attribution"><span class="source">Reuters/Siphiwe Sibeko</span></span></figcaption></figure><p>South Africa is grappling with the <a href="http://www.bbc.com/news/business-36443111">possibility of a sovereign downgrade</a> by global credit rating agencies. This will bring unnecessary economic costs if it happens. </p>
<p>The health of the country’s state-owned enterprises are a key factor in determining credit ratings, because how they are managed has an impact on the fiscus. It makes the prevailing <a href="http://www.fin24.com/Economy/state-capture-fears-grow-as-zuma-sycophants-eye-sarb-20160901">political noise</a> around the country’s state-owned enterprises all the more pertinent.</p>
<p>Throughout modern history and around the world, state-owned enterprises have played a critical role in shaping successful paths for developing economies. </p>
<p>The typical developmental state models are usually thought of as those of Japan, <a href="https://en.wikipedia.org/wiki/Four_Asian_Tigers">the Asian Tigers</a>, or China, where the state actively guides and participates in the economy. The approach worked well in these countries because government departments worked closely with the private sector to create and require businesses to be internationally competitive.</p>
<p>State-owned enterprises can serve South Africa’s development state ambitions. But sound policies and governance practices are needed to ensure they stand as value creators and do not become financial burdens to the public purse. The key consideration currently is to prevent the abuse of these enterprises by corrupt politicians and their cronies.</p>
<h2>The good and the bad</h2>
<p>When private companies make big mistakes the public doesn’t fret because the private shareholders pay the price. But when state-owned enterprises make losses taxpayers have to pay for their mistakes.</p>
<p>First, let’s be clear that state-owned enterprises are not inherently bad and can be very good. They offer value especially when they supply public goods or fill a natural monopoly. No-one complains that the government spends taxpayer money on public education, national defence or the roads system. </p>
<p>But there is a case for answering the question: why does the government need to own transport companies, military equipment manufacturers, airlines, mining companies or other “commercially oriented enterprises”? </p>
<p>If commercially oriented state-owned enterprises were managed on a commercial basis they would present less of a financial threat to the government and there would be a level playing field in the commercial sector. But the governing African National Congress maintains that state-owned enterprises are not about making a <a href="http://mybroadband.co.za/vb/showthread.php/715648-State-owned-enterprises-not-about-making-profit-ANC">profit</a>.</p>
<p>That may be roughly true about non-commercial state-owned enterprises that produce a net social welfare benefit, but it is no excuse for inefficiency, over-staffing, and high salaries.</p>
<p>When evaluating the use of subsidies to government owned enterprises (that is, they would make a loss otherwise), we need to assess the overall social welfare benefit against the social and economic costs. </p>
<p>The public may be tolerant of giving subsidies to the post office, which delivers benefits to a broad cross-section of the population. But should taxpayers be tolerant of subsidising an inefficient airline that services the affluent?</p>
<h2>Flashing red lights</h2>
<p>There have been danger signals from the state-owned enterprises space for some time. A <a href="http://www.thepresidency.gov.za/electronicreport/downloads/volume_3/discussion_papers-edited_by_expert_writer/Draft_Restructuring%20of%20SOE%20in%20South%20Africa.pdf">Presidential Review Committee</a> in 2010 concluded that:</p>
<blockquote>
<p>The need for another round of large-scale restructuring of public enterprises is definitely eminent in South Africa.</p>
</blockquote>
<p>But little has happened in the way of restructuring proposals. </p>
<p>Instead, the space is dominated by news and allegations of state capture. These include reports that the former finance minister Nhlanhla Nene was <a href="http://www.news24.com/SouthAfrica/News/four-possible-reasons-why-nene-was-fired-20151210">fired</a> after refusing to finance new airplanes for South African Airways through a questionable third-party agent. </p>
<p>There are also reports that the current finance minister, Pravin Gordhan, is <a href="https://theconversation.com/new-move-against-gordhan-suggests-south-africas-laws-are-under-threat-64459">under pressure</a> for similar reasons. </p>
<p>In light of this, President Jacob Zuma’s move to take <a href="http://www.dailymaverick.co.za/article/2016-08-22-zuma-takes-charge-of-state-owned-entities-but-where-does-this-leave-ramaphosa/">control</a> of the special committee that oversees state-owned enterprises has raised eyebrows. </p>
<p>Zuma has justified the move on the grounds that it will ensure that state-owned enterprises are properly governed. But how will he achieve this when his policies and relationships with certain individuals are being called into question?</p>
<p>The private sector is beginning to show concern. This is reflected in a decision by <a href="http://www.bdlive.co.za/business/financial/2016/08/31/futuregrowth-will-stop-lending-to-six-state-owned-firms-including-eskom">Futuregrowth Asset Managers</a> to suspend funding to state-owned enterprises. Other banks and lenders may follow suit.</p>
<p>This doesn’t mean the state-owned enterprises are in imminent danger. But it does appear that their future financial viability is in question. This is because of government interference in their management in form of cronyism is weakening them.</p>
<h2>The developmental state</h2>
<p>The majority of the South African economy looks similar to other market economies where a majority of the ownership of the means of production is in private hands. </p>
<p>In a typical market economy, the role of the government is to be the regulator, to guarantee fair play, and to provide a social safety net for those unintended casualties of market dynamics. </p>
<p>South Africa is not far from this model – except that the government has higher than average public ownership of the means of production and worse than average public sector governance. An <a href="http://www.oecd.org/daf/ca/OECD-Guidelines-Corporate-Governance-SOEs-2015.pdf">OECD</a> study of 53 countries placed South Africa as having the 11th largest public sector, and rated it the 15th lowest on quality of governance of state-owned enterprises. </p>
<p>The ANC’s 2007 conference declared its intent to pursue <a href="http://www.anc.org.za/content/2007-anc-national-policy-conference-report-commission-economic-transformation">policies</a> that would make South Africa into a developmental state. Its means of achieving this would be through the use the state-owned enterprises to lead and drive economic development.</p>
<p>The Asian model of a developmental state tended to follow a high investment, export-led growth strategy, initially based on low-wage competitiveness. The governments of these countries gave subsidies and protection to big businesses (not labour) in return for their investment to become a global competitor.</p>
<p>Many also consider the Scandinavian economies as developmental states, although they follow a welfare state model of high wages, high productivity and high state social transfers. The Scandinavian economies are already wealthy and tend to be more capital-intensive, whereas the Asian economies are labour-intensive. </p>
<p>The South African government appears to want the impossible solution of living like a Scandinavian welfare state and growing like an Asian developmental state. </p>
<p>This is the unique ANC Developmental Welfare State – but it can’t work now. We want to keep the social welfare net, but the government has to grow the economy, create jobs, and create more wealth. This requires more encouragement and flexibility for the private sector. Why not partially privatise the commercially oriented state-owned enterprises and make them more efficient and competitive?</p><img src="https://counter.theconversation.com/content/64919/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Ellyne 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 prevailing political fights over control of state-owned enterprises in South Africa has the potential to have a deep impact on the economy, and the quality and direction of the development state.Mark Ellyne, Adjunct Professor, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/637572016-08-11T07:27:52Z2016-08-11T07:27:52ZChanging state-owned enterprises provide less cause for Chinese investment fears<p>China’s state-owned enterprises are becoming increasingly privatised, as government involvement shifts from full control to economic guidance. This means these firms should be treated like any other foreign investor when it comes to buying Australian assets. </p>
<p>Treasurer Scott Morrison <a href="https://theconversation.com/morrison-blocks-chinese-bids-for-nsw-power-grid-63821">recently rejected the bids</a> by both state-owned State Grid Corporation of China and private Hong Kong firm Cheung Kong Infrastructure for the lease of 50.4% of Ausgrid, the New South Wales electricity distribution network, on the grounds of national security.</p>
<p>Concerns about Chinese investment usually centre around the role of the Chinese government and its noncommercial objectives. China’s government does maintain extensive influence over its market economy, through both indirect policy measures as well as direct participation via state-owned enterprises. </p>
<p>However <a href="http://ser.oxfordjournals.org/content/11/2/265.short">political economists</a> argue the Chinese state is more developmental than predatory. This is because Chinese foreign investment policies have changed from a restricting and regulating approach, through strict approval mechanisms and foreign exchange allocation, towards a more facilitating approach.</p>
<p>The Chinese government provides general guidance, government services, and financial incentives to align commercial decisions of firms with the strategic planning of the country. One example of this is <a href="https://theconversation.com/chinas-five-year-economic-plan-is-rich-with-symbolism-50001">the one-belt-one-road strategy</a> aimed at building economic cooperation and trade links with a number of countries, including Australia. </p>
<p>The vast majority of Chinese state-owned enterprises have upgraded their internal governance and senior management teams including appointing external independent directors or foreign senior managers. Many of these enterprises have taken steps to introduce mixed private ownership to improve managerial autonomy. </p>
<p>According to <a href="http://link.springer.com/article/10.1007%2Fs10490-015-9436-x">research</a>, by 2013, more than 52% of central state-owned enterprises have transitioned into mixed-ownership enterprises. For example, China’s biggest oil producer, PetroChina Company Limited, is the the listed arm of state-owned China National Petroleum Corporation (CNPC), now publicly traded on <a href="http://www.sse.com.cn/assortment/stock/list/info/company/index.shtml?COMPANY_CODE=601857">Shanghai</a>, <a href="https://www.hkex.com.hk/chi/invest/company/quote_page_c.asp?WidCoID=0857">Hong Kong</a>, and <a href="https://www.nyse.com/quote/XNYS:PTR">New York</a> Stock Exchanges. </p>
<p>The role of Chinese government in foreign investment alternates between that of a shareholder, who wants to invest in the safest and most profitable foreign assets to that of an economic coordinator, using investment as a channel of upgrading the country’s industry infrastructure. </p>
<h2>China’s changing investment in Australia</h2>
<p>China as an emerging economy has been a popular destination of foreign direct investment for decades since its <a href="http://www.jstor.org/stable/4540439">“open-door” policy in the 1980s</a>. Its participation in the global economy as an outward investor is a relatively recent phenomenon, with substantial growth only after China’s entry into the World Trade Organisation in 2001. The growth has however been trending upwards consistently in the recent years despite the global financial crisis. </p>
<p>The driving forces, motivations, and the resultant patterns of Chinese investment overseas have evolved over time. Starting in the early 1990s, Chinese investment was primarily concentrated in the natural resource sector, directly mandated by the state to compensate for the <a href="http://www.jstor.org/stable/4540439">lack of raw material and energy supply domestically</a>. </p>
<p>Chinese investment in manufacturing overseas picked up steam in the following years, partially in response to the rising labour costs and market competition at home that motivated producers to seek cost efficiency and market potentials in neighbouring emerging economies. It was also partly aiming to catch up with global market leaders by tapping into foreign markets for high-value brand assets, technological competencies, and other intangibles. </p>
<p>More recent years have seen Chinese <a href="http://www.e-elgar.com/shop/multinational-enterprises-and-the-global-economy-second-edition">foreign investment diversifying</a> into the service sector, such as commercial services, mining services, logistics, and utility infrastructures, reflecting an effort by Chinese investors to move up the global value chain.</p>
<h2>A level playing field in assessment</h2>
<p>The notion that Western economies need to have foreign investment regulations (often China-specific) to ensure national security is disputed in <a href="http://link.springer.com/article/10.1007/s10490-008-9112-5">academic research</a>.</p>
<p>Existing regulations for foreign direct investment in advanced economies are already sufficient for safeguarding national interests. The sale of Ausgrid should have been evaluated based on the existing foreign investment regulations only rather than relying on the decision of the Treasurer, made on a case by case basis. </p>
<p>State-owned enterprises should disclosure the details of asset sales, not only financial details, but also the key contractual arrangements with regard to the ownership and operation of assets. Fair or unfair, Chinese state-owned enterprises are in a disadvantaged position in terms of their legitimacy perceived by host country stakeholders.</p>
<p>According to <a href="http://link.springer.com/article/10.1057/jibs.2012.1">research</a>, these sorts of enterprises should pursue shared ownership arrangements, such as a join venture structure, which can help these firms mitigate formal and informal institutional barriers in the host country. </p>
<p>Adhering to corporate governance practices and information disclosure norms of the host country can deliver greater transparency against sinophobia. Non-market strategies, such as networking with social and political leaders, as well as corporate social responsibility initiatives, can also help Chinese investors build local legitimacy in host countries.</p><img src="https://counter.theconversation.com/content/63757/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lin Cui receives funding from the ARC. </span></em></p>The Chinese government is changing its role in state-owned enterprises and there’s less cause for concern about the investment bids of these firms in Australia.Lin Cui, Associate Professor School of Management, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/541592016-02-14T19:19:01Z2016-02-14T19:19:01ZCorruption charges fail to faze Chinese investors<p>In 2014 alone, more than <a href="http://www.china.org.cn/china/2015-01/09/content_34514533.htm">70 top executives</a> of China’s state owned enterprises (SOEs) were investigated for corruption, as part of China’s anti-corruption campaign.</p>
<p>If this happened in western economies, corruption allegations would have sent the values of the affiliated firms south. But things are somewhat more complicated in China. If the sharemarket reaction is of any indication, then Chinese investors did not seem to care much about things like that.</p>
<p>China’s anti-corruption effort features an extensive reach. The authority targets not only government and military officials, but also executives of SOEs. Data collected by the <a href="http://www.chinafile.com/multimedia/infographics/visualizing-chinas-anti-corruption-campaign">Asia Society</a> shows that 175 people from SOEs have been penalised so far. </p>
<p>Many of the implicated SOEs are <a href="http://www.china.org.cn/china/2015-01/09/content_34514533.htm">big players</a> in strategic sectors like energy and resources, finance, media and telecommunication.</p>
<p>Corruption charges are commonly expected to impact on the share price of the related firm. A reason is that they reveal poor corporate governance. Moreover, companies’ brand name and reputation are damaged. That in turns may affect business dealing or access to credit. In the context of Chinese economy, there are additional potential factors at play. </p>
<p>Executives of SOEs in China by nature are politically well-connected. Their prosecution therefore may signal that they, and possibly the affiliated firms as well, have lost the support of their political patrons. It is also possible that the patrons themselves have lost their power. </p>
<p>Furthermore, in China firms with better political connections are able to obtain bank loans more easily. Therefore a loss of the political capital also means a squeeze on the finance.</p>
<p>Corruption news is not necessarily all bad news though. Suppose the prosecuted executives are indeed guilty, rather than merely on the wrong side of a <a href="http://blogs.wsj.com/chinarealtime/2016/02/03/chinas-antigraft-campaign-isnt-house-of-cards-peoples-daily-says/">political struggle</a> as some see it. Then their removal should provide their companies an opportunity to improve corporate governance and thus business performance in the future. </p>
<p>If the positive factor dominates the negative factors, the affected SOEs may even see their share price rising instead of falling. There is no straightforward prediction on a firm’s share prices from the outset when corruption news broke. So we recently did some <a href="http://www.uq.edu.au/economics/abstract/555.pdf">data crunching</a>.</p>
<p>We first collected announcements on investigations or prosecutions against SOE executives. These announcements were the first public release about the government’s action against the alleged corrupted executives. Typically, the executives in question would have been penalised and removed from their positions.</p>
<p>We gathered the information from the websites of all provincial departments of supervision in China. The data spans nearly three years from January 1, 2013 to August 31, 2015. A total of 231 firms were implicated in over 300 announcements. Amongst them 45 firms were listed on the Shanghai or Shenzhen Stock Exchange. </p>
<p>We then examined how the announcements moved the share prices of these 45 firms using the “event study” method. This method is commonly used in finance to test if a particular event – a new announcement in our study – has any noticeable effects on asset prices.</p>
<p>No two firms are identical. To compare like-with-like, we adjusted for firm differences in size (measured by market capitalisation), investment returns (measured by price-to-book ratio), and leverage level. We also considered the possibility of the news was leaked days before the official announcement or the market took days to fully comprehend the implications.</p>
<p>We consistently found that there were no systematic differences in share price movements between the SOEs in questions and other companies on China’s two Stock Exchanges. In other words, the market did not seem to bother about the announcements.</p>
<p>Why did Chinese investors appear to be indifferent to the news? Some possible explanations are:</p>
<ul>
<li>The market got wind of the investigation long before the announcements were made;</li>
<li>The market has long priced in the possibility of SOE executives stepping down for political reasons;</li>
<li>Large SOEs’ monopolistic power and profitability have a much deeper root than just one politically connected executive;</li>
<li>The market expects the new executives to be equally well-connected politically; and</li>
<li>Chinese investors were more interested in betting on capital gains than monitoring companies’ management.</li>
</ul>
<p>Started three years ago, China’s anti-corruption campaign still shows <a href="http://blogs.wsj.com/chinarealtime/2016/01/25/chinas-anticorruption-campaign-will-continue-party-watchdog-pledges/">no sign</a> of slowing down. It was <a href="http://blogs.wsj.com/chinarealtime/2015/12/11/china-anticorruption-cases-have-quadrupled-since-2013-study-says/">reported</a> that since 2015 the anti-corruption authority has shifted its focus from local governments towards SOEs and most recently the financial sector. </p>
<p>It will be interesting to see if this muted market reaction will continue amid a larger clean-up.</p><img src="https://counter.theconversation.com/content/54159/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Corruption charges may shake the share prices of western companies, but in China the situation is more complex.KK Tang, Associate Professor, School of Economics, The University of QueenslandHaishan Yuan, Lecturer, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.