By Dennis George
PRESIDENT Cyril Ramaphosa should announce far-reaching and real structural reforms of state-owned enterprises (SOEs) in his State of the Nation Address (Sona).
Finance Minister Tito Mboweni announced in Nedlac that South Africa's debt levels will increase to 100 percent of gross domestic product (GDP) by 2025, and almost 114 percent before the end of this decade.
South Africa's debt-to-GDP has significantly increased from its lowest point in 2008 at 27.8 percent, when Thabo Mbeki was president, to more than 62.2 percent at the time Jacob Zuma was recalled.
Power utility Eskom is currently the biggest liability to the South African economy, a position that has now been exacerbated by two massive bailouts from the government: a proposed R59 billion bailout over the next two years and a promised R69bn in guarantees to 2021.
The efforts of the government to transform and restructure SAA, Denel, Eskom, Transnet and other SOEs for the past 25 years have failed. Bailouts have become an unbearable burden on taxpayers, whose incomes are shrinking, while the government is continuously finding money for these bailouts, taking away spending on education, health, security and police.
Ramaphosa must announce a credible framework to commercialise and privatise SOEs as the government did in the case of Telkom SA Limited to reduce the debt burden on the country, while being mindful that the public-sector debt may rise to a staggering R6.4 trillion over the next three years with GDP growth being constrained by the Covid-19 pandemic.
We are simply not growing enough to continue borrowing at the rate we are doing, and when we do so, the money is not going into productive assets to generate a significant return for the government to pay its expenses, deliver on its agenda, and service its debt.
The case study of Telkom established interesting lessons for the government to consider: The company was commercialised and privatised in 1996, when 30 percent of Telkom shares were sold to Telkom Malaysia in a joint bid with the US-based SBC Communications.
Reuters reported that from 2004, when Telkom listed, it had delivered more than R22bn in dividend payments to shareholders, which includes the government. The dividend payments currently have a yield of 9.8 percent.
JSE-listed Telkom's market capitalisation has grown significantly since the partial privatisation. This listing has also seen Telkom produce clean audits and launch innovative products.
As of March 31, 2020, Telkom shares are 50.5 percent held by institutional investors like pension funds managed by the Public Investment Corporation; 40.5 percent by the government of South Africa; 6.4 percent by non-institutional investors and the remaining 2.6 percent as Treasury shares.
Listing of SOEs via debt and/or equity would release some short-term cash for the government, which it can use to service debt. It would make economic and financial sense to partially float the SOEs to drive governance and liquidity, while allowing the government to still own the entity, but benefit economically.
Telkom is soaring and profitable as its turnaround strategy paid off. Its success shows that SOEs benefit from commercialisation and privatisation when executed under a credible framework, while managing issues such as labour, economics, modernisation.
Recovery will pave the way for an economic success story for SOEs.
Eskom: Eskom has a debt of about R488bn, which the company is struggling to service and, hence, the constant government bailouts. This weighs heavily on already deteriorating public finances.
Salaries are swelling, blackouts are rolling while mismanagement and corruption scandals keep plaguing the entity. There seems to be no credible plan to reduce the power utility's crippling debt, and there comes a time when we can no longer blame legacy issues for its failure.
The revenue growth of Eskom has been almost single-handedly driven by tariff increases – with virtually no change in the group's power generation over the period, despite more demand. Meanwhile, Eskom has continuously grown its staff contingent. Eskom's reported average revenue per kilowatt-hour (expressed as its average cost of electricity) has grown from 14.98 cents per kW/h in 2002 to 90.01c per kW/h in 2019 – a jump of more than 500 percent.
SAA: From 1994 the government has given SAA more than R57bn in bailouts and the country has received no dividend for these huge bailouts, while the airline industry is hit by the pandemic. SAA was already in business rescue before Covid-19 hit.
We have endured a lot of bad decisions, and the inability of the government to draw a clear line necessitates urgent reform. The government has, and will continue, to be exploited by the trade unions and its political alliance partners, who are trapped in the ideologies of yesterday. This only further serves to disadvantage South Africa. Taxpayers are fed up with these continuous SOE bailouts and never-ending corruption.
Denel: Denel made a loss of R1.7bn in 2019 and struggled to pay its staff their full June salaries and pension contributions. It was sad to see the response of Mboweni, who announced in Parliament that Denel, and other SOEs would be recapitalised with billions in extra funding, but with conditions.
The framework for commercialisation and privatisation should include broad-based empowerment.
This is in line with the government's policy to advance economic transformation to prevent what happened with Russia's privatisation of SOEs, for example, which only served to create an elitist class of oligarchs.
The government could learn another valuable lesson from the introduction of the landmark Premier Fishing empowerment deal whereby Premier Fishing SA, a division of JSE-listed Group Premier Fishing and Brands Limited, one of the largest black-owned, managed, and fully transformed fishing companies in South Africa, issued shares to its 900 employees and stakeholders in the value chain.
The framework for commercialisation and privatisation would benefit the country and better enable the government to generate financial resources.
The involvement of the private sector may succeed in the optimum use of resources by maintaining efficiency, improve competition, reduce the fiscal burden of the government, improve economic democracy by private participation, better industrial relations and increase the number of workers as listed companies are more public vigilance.
Furthermore, it will reduce political interference in these SOEs, to the detriment of the country, provide more representation to the private sector and employees in the management thereof (German co-determination model), as well as improve productivity by maintaining efficiency in its operations. The success of the private sector resides in the profit motive, where companies pay corporate taxes.
Dr Dennis George is the executive chairperson of African Quartz. He writes in his personal capacity.
*The views expressed here are not necessarily those of IOL or of title sites
BUSINESS REPORT