A miserable tale of State-owned enterprises which should swiftly be privatised

Gary Moore, a practising attorney for 30 years, is a Senior Consultant at the Free Market Foundation. He has written extensively on the legality of state action and the meaning of statutes.Gary Moore, a practising attorney for 30 years, is a Senior Consultant at the Free Market Foundation. He has written extensively on the legality of state action and the meaning of statutes.

No government can ever run a business “on a commercial basis”, even when it honestly tries. True commercialisation requires full privatisation. Anything less, and the government can still exert influence on the company’s operations.

The Organisation for Economic Co-operation and Development (OECD), a rich-country club, has observed that many of South Africa’s significant State-owned enterprises (SOEs) are characterised by chronic underperformance, with poor returns on government investment and continuous reliance on government support, whether in the form of explicit government guarantees or subsidies. These shortcomings can be attributed to major corporate governance failures, including weak managerial accountability, excessive politicisation, and unclear objectives.

To address the weaknesses in South African SOEs, the OECD has recommended that:

  • The government should set realistic profitability objectives which SOEs should meet;
  • SOEs’ governing structures should be professionalised and the government should refrain from short-term political interference;
  • SOEs in markets with a sufficient degree of competition, such as telecoms, should be privatized;
  • Competition should be promoted by re-evaluating the prominent position of SOEs which hampers the entry of new firms and increases the costs of intermediate products; and
  • In “network industries”, which provide fixed infrastructure for the delivery of goods or services to end users (such as telephone or electricity cables and wires, rail track, or airport runways), independent regulators should be charged with ensuring non-discriminatory third-party access.

This advice has fallen on deaf ears.

A recent draft legislative measure (described below) to deal with SOEs has been criticised as a deckchair-moving exercise. The planned partial privatisation of one SOE is being investigated for probable corruption. Shortcomings affecting certain SOEs are also described below.

Moving deckchairs at Eskom and Transnet

The South African government has a Minister and Department of Public Enterprises. They oversee several SOEs including Eskom and Transnet. Those SOEs operate in the energy, resources, and transport fields, which the Department describes as “core” or “strategic” sectors of the economy.

The Department’s lofty vision for those SOEs is to create an enabling environment in which they “add real economic value” by focusing on “operational excellence and commercial viability”, which will “drive developmental objectives and job creation”. The Department states, ambitiously, that its mission is to seek to ensure that these SOEs are “financially sustainable” and “operationally robust” and that they provide “reliable, high-quality and cost-effective services” to industry and citizens.

Despite the Department’s ambitions about the provision by SOEs of reliable services, Eskom has of late been cutting the supply of electricity across South Africa for more than 12 hours a day. This amounts to “Stage 8” load shedding, according to the official national code of practice for load shedding, says energy analyst Chris Yelland. As to whether Eskom was “financially sustainable”, in early 2019 the Department stated that Eskom was “technically insolvent”.

President Cyril Ramaphosa announced that the government would break Eskom up into separate generation, transmission, and distribution SOEs to better manage its serious operational and financial problems. In response to feared job losses from the breakup, Cosatu organised a national strike. This caused the apparent abandonment of the government’s plans to restructure Eskom. In July 2019 Eskom’s then CEO, however, announced that Eskom had entered a “death spiral” and needed the restructuring. 

Two thousand Eskom employees were laid off during 2020 and 2021, and another 6 000 layoffs are reportedly needed for the company to continue operating.

In July 2023, the National Energy Regulator granted a licence to operate a transmission system to the National Transmission Company, a wholly owned subsidiary of Eskom.

ebt relief

The government is providing Eskom with debt relief of R254 billion spread over the three financial years ending 2025/26. Despite that subsidy and a recent 9.61% tariff increase approved by the National Energy Regulator, Eskom still operates at a loss.

The company experiences endemic theft of materials for resale, and sabotage to force repairs to be made at corruptly inflated prices. The responsible minister, Pravin Gordhan, recently told the National Assembly’s Standing Committee on Public Accounts (Scopa) that not enough people are imprisoned for corruption at Eskom.

As for whether Transnet “adds real economic value”, the Reserve Bank’s governor has just identified Transnet’s ports and rail operational inefficiencies as “serious constraints on the country’s economic growth”. Transnet has asked the Treasury to take on R61 billion of its debt.

South African Airways

Turning to other SOEs, South African Airways’ acting CEO stated in 2015 that the airline’s only profitable long-haul routes were London, Hong Kong, Munich, Frankfurt and Perth, and it operated all the others at a loss.

In 2017, Standard Chartered Bank and Citibank refused to extend their loans to SAA of R2.2 billion and R1.8 billion respectively.

In 2019, the government announced that SAA had not turned a profit since 2011 and had run out of money. A court found that, although SAA was financially distressed, there was “a reasonable prospect of rescuing it,” and ordered that SAA be placed under supervision and that business-rescue proceedings commence to rehabilitate the company.

SAA reportedly received R50 billion in government assistance between 2004 and 2020. Nonetheless, National Treasury reported that SAA incurred a R32 billion loss between 2008 and 2020.

During 2020, SAA returned 34 Airbus aircraft to their lessors.

At present, SAA flies from Johannesburg only to Accra, Durban, Harare, Kinshasa, Lilongwe, Lusaka, Lagos, Mauritius, Sao Paulo, Windhoek and Victoria Falls. In 2021 the Government agreed to sell 51 percent of the state’s shares in SAA to a private consortium which, according to the Minister, would invest R3 billion in the airline. In July 2023, the Competition Tribunal approved the proposed sale, subject to a moratorium on retrenchments.

In November 2023, the Auditor-General informed Scopa that SAA’s irregular expenditure in the four financial years between 2018 and 2022 doubled to R44.5 billion. SAA has not released annual financial statements for the last five financial years up to 2022/2023. The Auditor-General’s office reported to Scopa that it had completed audits for four of those years. The Auditor-General further reported that it gave SAA audit disclaimers for all four years due to material misstatements in its financial reports from poor record-keeping and inadequate governance.

Also in November 2023, the Special Investigating Unit into corruption and looting at SAA gave Scopa an interim report of its findings. The SIU’s investigations implicate SAA officials, former directors, and businesses. These parties conspired with corrupt businesses and misappropriated at least R3.4 billion. Contracts for the procuring of maintenance and technical repair services were affected by inflated pricing, fictitious vendors, fronting, conflicts of interest, fictitious work orders, overpayments, non-delivery and non-performance. The SIU further informed Scopa that it was assessing allegations which it had received about the 51 percent SAA share sale to the private consortium.

False ‘privatisation’ not the way to go

In September 2023, the Department published a draft “National State Enterprises Bill” and invited interested persons to comment on it. The Bill seeks to provide for the incorporation of a “State Asset Management SOC Ltd” with the state as its sole shareholder.

The President would be this new company’s sole representative with power to assign his functions to a Cabinet member.

The Bill envisages that the company will be a “holding company” and contemplates the transfer to it of the state’s shareholdings in state enterprises to be listed in the Bill.

Directors of this holding company will have to consider, not only the company’s ‘long-term business sustainability’, but (contradictorily) also ‘the public interest and development objectives’.

Critics of the Bill rightly point out that it preserves and entrenches political interference, does not mention how SOEs will become well run and sustainable, and is a weak measure that fails to address the underlying problems.

Even a ‘commercialised’ government company can never be the same as a private company in which the shareholders have a direct interest in its profitability and can more easily replace bad managers.

Privately owned companies which are poorly run can be bought by investors who put in better managers. State-owned enterprises face no threat of takeover if they are inefficient, so have less incentive to be efficient. Economics professor Richard J Grant (a senior consultant for the Free Market Foundation) points out that control of SOEs is in the political arena: It’s everybody’s business, and therefore nobody’s business; and no decision-maker bears the cost of failure.

Only true, full, privatisation can serve as an antidote to the ailments of South Africa’s SOEs.