It’s the SOEs, stupid

ANTHONY BUTLER: Politicians, take note: It’s the SOEs, stupid

Business Live 10 February 2022 and Business Day 11 February 2022

Amid SA’s plethora of urgent and important challenges, one stands head and shoulders above the rest: failing state-owned enterprises (SOEs).

The wellbeing of communities and the fate of the economy alike depend on functional utilities and network industries. Load-shedding, price rises that destroy private businesses, collapsing transport systems and congested ports are merely the visible faces of the SOE crisis.

The fiscal framework cannot survive repeated bailouts and recapitalisations, enormous unexpected expenditures or further exposure to huge contingent liabilities.

The importance of SOEs has been underlined by a recently published paper on macroeconomic risk from Ricardo Hausmann and others at Harvard’s Growth Lab. The paper explores SA’s post-2009 combination of slow growth and rapidly rising debt.

Hausmann first debunks a comforting account that blames external factors, especially declining mineral prices after 2008. The resource sector’s limited contributions to growth and tax revenues make it merely a contributory factor.

He then punctures cherished macrowaffle from both right and left, including say that high government spending significantly crowded out private investment, or that Treasury fiscal consolidation was self-defeating. Macroeconomic policy choices didn’t reverse the slowdown, but they didn’t cause it either.

Instead, Hausmann and his colleagues show that only microeconomic accounts of the growth slowdown fit the facts. “The last decade has seen a worsening of the performance of state-owned enterprises,” Hausmann observes, “which are key to the performance of network industries such as power and transportation.” Misguided and corrupt investment and procurement decisions ultimately lie behind rising tariffs and debt.

Declining productivity in energy, transport and mining sectors created a drag on productivity across the economy, reducing productive investment and growth. Hausmann backs the joint Treasury-presidency Operation Vulindlela initiative that is pursuing urgent structural reforms in key network industries. Government needs to rein in contingent liabilities, and exercise tighter fiscal control and oversight over SOEs. All this requires financial, structural, and also governance reforms.

The Growth Lab is merely the latest of many domestic and international critics of our SOE governance. Even the state capture commission recently ventured that political interference in board and executive appointments must be stopped.

Rafael Leite, a researcher at the Government & Public Policy think-tank, has observed that we have copious analyses of SOE governance failings, and many strategies for rectifying them, but no implementation of these remedies. The key question is why.

The broadly political impediments to addressing the unfolding SOE governance disaster are becoming clearer by the day. There are specific interests, for example organised workers, whose vulnerability to change needs to be understood and accommodated.

Intellectual or ideological disagreements about the proper role of the state and private sector in the economy need to be negotiated less dogmatically.

More intractably, SOEs sit at the centre of the ANC’s broad black empowerment framework, linking enterprise creation, the building of a black bourgeoisie and employment equity. The current iteration of that framework makes reform virtually impossible.

Other stubborn problems flow from ANC dependence on parastatals and their supply chains for party donations and high income patronage jobs. Eskom’s Medupi and Kusile debacles can be traced back to party funding front vehicles in the Thabo Mbeki era. A recently leaked recording of President Cyril Ramaphosa speaking at the ANC’s national executive committee confirmed that SOEs still fill campaign war chests for internal factional contests.

Meanwhile, as recently released minutes reveal, the ANC’s national deployment committee really has no idea of the damage it is doing.

The time has come to update James Carville’s famous campaign epigram, coined during Bill Clinton’s 1992 presidential campaign, and to plant it on our politicians desks: “It’s the SOEs, stupid.”

• Butler teaches public policy at the University of Cape Town.

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