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Why listing state-owned enterprises is not the solution

Mismanagement, incompetence, corruption and looting are at the core of the problems facing the country’s state-owned Enterprises and unless these are addressed - and swiftly - our public entities will continue to flounder or even fail, says Misheck Mutize.

SOUTH Africa’s state-owned enterprises (SOEs) are in a dire state and in urgent need of a lifeline. What form this lifeline should take is up for debate.

There is little doubt that constant government bailouts have not helped the situation to date. Instead, they continue to put pressure on the country’s fiscus, pushing government debt into dangerous territory. South Africa’s debt burden is already far higher than other emerging markets at more than 50% of GDP.

In spite of such warning signs, however, there has been an alarming lack of action around addressing the challenges. The continuing retention and recycling of senior executives involved in corruption scandals indicates that there is still little commitment to reforming the institutions.

This includes the reappointment of the former chair of South African Airways, Dudu Myeni, as adviser in the transport ministry after she presided over the failing airline for three years.

The parliamentary inquiry of the portfolio committee on public enterprises continues to unearth instances of governance failure at SOEs. Evidence from the inquiry shows gross levels of misgovernance that could have cost the country billions.

The mismanagement has materially benefited a politically connected elite, while compromising the potential economic contribution of the public entities and undermining social development. Attempts by the minister of public enterprises to demonise the inquiry exercise and denigrate the committee have further highlighted a lack of government commitment to confronting these issues.

Instead, several cases of intimidation and threats reportedly made against members and the witnesses of the inquiry indicate deep-rooted patronage networks of corruption and nepotism that are resistant to any form of justice and accountability.

The situation at Eskom and other SOEs has been cited as one of the main reasons for the series of credit downgrades inflicted upon South Africa. And these, in turn, are further pushing the parastatals towards a cliff. Their balance sheets are fast shrinking and their liquidity positions deteriorating further.

Government is also running out of options for funding sources as the demand for parastatal bailouts surge. This is posing a serious threat to government’s fiscal balances and policy priorities. Standard & Poor’s forecasts government guarantees at over R500bn by 2020, which is about 10% of South Africa’s current GDP. This is more than twice the government contingency in 2015/2016.

Listing: business (almost) as usual

Unfortunately, the fractured African National Congress is incapable of salvaging the situation. Instead, individuals are more concerned about positioning themselves for their party elective conference and the national elections.

The recent suggestion by the deputy president to list the cash-stripped SOEs on the stock exchange for the private sector to invest in is, at best, a partial solution because it would not address the underlying mismanagement, incompetence, corruption and looting.

Public entities could be listed on the stock exchange without being privatised. This is done through the realignment of their ownership structure to allow the private sector to invest in these parastatals through buying shares on the stock exchange.

The entities would therefore secure funding through public trades on a stock exchange. This exercise would mean that the government retains control of the parastatals' operations. Thus, the government remains largely influential in how the institutions are run.

Listing provides many opportunities to raise capital, widen the shareholder base, maintain fair value of shares, and attract and maintain good employees. Although the move could help boost the balance sheets and introduce good governance in public entities, it is neither prudent nor viable in the present circumstances for a few reasons.

First, it will not improve their real balance sheet or minimise the cost of maintaining entities to citizens. Although listing on stock exchanges has worked in other countries such as China, Singapore, Malaysia and some European countries, their entities considered this option while still competent and fairly sustainable.

Second, the private sector is aware of the operational challenges leading to the decreasing capacity in government support. It is therefore unlikely that the private sector would be willing to take the risk of investing in these entities before the issues of good governance are addressed.

Third, the cost of listing and meeting the enhanced listing requirements is not affordable, given the dire financial situation most parastatals are in. Lastly, the listing process requires a considerable timeframe whereas the current situation in most public entities needs immediate solutions.

The financial markets are already increasingly unwilling to tolerate mismanagement and corruption. They have subjected some government entities to market discipline and disapproval, such as was witnessed by the subscription failure of Transnet’s bond auction earlier this year. Private asset managers are becoming extremely cautious about lending money to inefficient public entities.

Privatisation: an option worth considering

In contrast to stock exchange listing, privatisation or semi-privatisation of struggling public entities would see the government transfer ownership and control of the business operations to a privately owned entity.

Telkom’s financial statements strengthen the case that some degree of privatisation is an option worth considering in solving the ongoing financial and corporate governance challenges in South Africa’s SOEs.

Telkom, which has had private shareholding interests since 1997, put in a “solid performance” in a tough operating environment in 2017, delivering a 56% higher dividend for shareholders in contrast to the woeful financial status of Eskom, SAA, PetroSA, and others.

Moneyweb commented that the reported results “show that Telkom is well-managed, adheres to high levels of corporate governance, is financially sound and has a clear strategic vision”, and Minister of Telecommunications and Postal Services Dr Siyabonga Cwele called on other SOEs to “learn from Telkom how it achieved this turnaround”.

Privatisation may not be a silver bullet, but it would have the benefit of saving the fiscus from having to use taxpayers money to provide bailouts for parastatals. Hence, government guarantees could be strategically used to support infrastructure, investment and capital expansion rather than to finance losses and inefficiencies in the state-owned enterprises.

The notion that privatisation does not help the poor is negatively exaggerated. Unions and politicians have campaigned against it for personal gain and political mileage.

Although privatisation has some disadvantages such as job losses and possible expensive service provision, it remains the most viable option to save the entities from total collapse. Without immediate response, their total failure is inevitable and will result in massive job losses anyway.

However, the reality is that most of South Africa’s main SOEs cannot be privatised in their current state and would first have to be rationalised and restructured. Unbundling a monolith like Eskom is possible (there are precedents in sub-Saharan Africa), but this would be nearly impossible in the current climate of political uncertainty around nuclear, for example.

The government has demonstrated its reluctance, too, in navigating the political and economic instability that would likely ensue from unions should such a proposal be tabled.

The way forward

Essentially, the direction the government takes from here will hinge on the outcome of next week’s ANC elective conference, the outcomes of the 2019 elections thereafter and ultimately, whether South Africa will need an International Monetary Fund bailout.

Whatever direction the government chooses – because doing nothing is clearly not an option – it must begin with closing loopholes in the operation of public enterprises and the imposition of strict financial discipline. This includes appointing suitably qualified and experienced technocrats to improve efficiency and build a long-term sustainable strategy.

If the issues of governance and operational inefficiencies in these entities are not addressed, no option will be sustainable and South Africa’s much-needed public entities will continue to flounder and, eventually, fail with disastrous consequences for this economy.

  • Misheck Mutize is a doctoral candidate at the UCT Graduate School of Business.

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