Privatisation the solution for SOEs - IRR

Johannesburg – Privatisation may be the only viable option for struggling state-owned enterprises (SOEs), according to the South African Institute of Race Relations (IRR).

A paper, Privatisation or bust, by the IRR proposes the privatisation of SOEs. The paper was authored by research fellow, John Kane-Berman. If privatisation is properly executed, then it can be beneficial for South Africa.

“The alternative to privatisation is continued poor governance, crony capitalism, never-ending rising costs in both tax payers and consumers, and a continued delay in meeting the country’s need to upgrade and expand its economic infrastructure,” according to the IRR.

The paper indicates some of the country’s biggest companies such as Eskom and the South African Airways (SAA) cannot survive without government guarantees enabling them to borrow money.

There are three financial problems with SOEs, the IRR highlighted. Firstly their overall return on equity is negative. It dropped from 7.5% in 2011/13 to -2.9% in 2014/15.

READ: Despite political noise, SA institutions remain strong - Moody's

Additionally, the losses are a risk to public finance. Government guarantees to SOEs currently stand at R467bn. Guarantees are at 11.5% of GDP, this adds pressure on the sovereign rating. Moody’s released a credit opinion recently in which it indicated that unless government’s indebtedness is reduced, there is a risk that it will be downgraded to sub-investment grade.

Further SOEs have difficulty raising money to invest in the economic infrastructure the country needs, because of their fragile balance sheets. Deputy Minister of Finance, Mcebisi Jonas previously highlighted that the Public Investment Corporation (PIC) would not be able to continue to invest in the same manner as in the past because of the problems SOEs are facing.

Growing concern over governance

These financial problems are a function of poor governance, according to the IRR. Standard and Poor’s stated earlier this year that it would downgrade the rating if SOEs required more government support.

ALSO READ: Moody times for state enterprises

Recently, Futuregrowth Asset Management, the largest private fixed income money manager stated it would not make loans to six SOEs companies because of concerns over governance and independence. These companies include Eskom, Transnet, Sanral, the IDC, the Land and Agricultural Development Bank of South Africa and the Development Bank of South Africa.

Following Futuregrowth’s statement, Danish bank, Jyske Bank also stated it would not lend to South African SOEs.

Solutions for SOEs

The government’s plans to divest of assets which are not useful is a good starting point, but it may not be enough, stated the IRR. The assets being sold are not likely to be large and proceeds may be squandered if injected into other failing assets.

The IRR proposed its own solutions:

  • State to divest of assets not vital for core functions. SOEs must be recapitalised before being sold.
  • Pay off public debt.
  • Turn companies that drain the fiscus into taxpayers that contribute to it.
  • Make companies accountable to shareholders and consumers not just government  and politicians.
  • Subject SOEs to the disciplines of the market.
  • Make SOEs more efficient.
  • Introduce more competition into provision of services.
  • Reduce costs to consumers.
  • Stimulate innovation.
  • Transfer costs of maintenance from taxpayers to shareholders.
  • Allow better allocation of scarce capital.
  • Attract Foreign Direct Investment to the country.
  • Foster an efficient economy with better infrastructure.
  • Reduce opportunities of capture by politicians.

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