State-owned enterprises live in a world of their own
People who are hallucinating can act and talk as if in another world, ignoring what is actually happening around them. The major state-owned enterprises (SOEs) seem to be in a similar dream state.
Virtually all rely on business models developed for longgone circumstances that are far from current realities. The outcome has been a series of financial and governance crises.
Eskom stands out, both for its importance to the economy – SA has long depended on cheap, coal-fired energy — and for its increasingly obvious distance from reality. Eskom demand has fallen almost 10% since 2011 as electricity prices more than doubled in constant rand while the metals boom that started in the early 2000s came to an end. Eskom’s paradoxical response was to pursue double-digit price increases to sustain its massive expansion plans. Similarly, facing pressure to reduce greenhouse-gas emissions it avoided getting into renewables itself, then tried to shut private suppliers out of the grid.
These manoeuvres make no sense. Demand for coal-based electricity is declining worldwide and the metals boom isn’t coming back any time soon. A canny businessperson would surely adapt to those realities, rather than ignoring them in the hope they will go away.
South African Airways (SAA) is also out of touch. In every year from 2006 to 2016 its operating costs exceeded its business revenue. The value of its assets shrank 39% from 2008 to 2016. These results might be tolerated if SAA provided unambiguous external benefits, for instance by promoting mass tourism from overseas and improving access to secondary cities.
But it has made no effort to demonstrate these sorts of spin-offs. Instead, it has taken government subsidies to provide high-cost, full-service flights that no-frills airlines easily undercut.
The South African National Roads Agency Limited’s (Sanral’s) business model aims to expand toll roads to maintain world-class national roads without burdening the fiscus. Toll roads have climbed from 7% of the national road system in 2006 to about 15% today. The Gauteng Freeway Improvement Project shows the risks from this model. Traffic improved but from 2014 to 2016 Sanral collected just 40% of what it charged motorists. If it could get the full amount, the Gauteng freeways would pay two thirds of its total toll revenue. Instead, they pay about half. Since 2014, Sanral has reported almost R10bn in losses on toll roads. The rest of its network, funded by petrol taxes, broke even.
Sanral keeps lobbying for more toll roads, even though motorists clearly aren’t willing to pay for world-class roads. It would make more sense to start by analysing how much improvement motorists are willing to pay for. Then, if government thinks there are external benefits from investing more than that amount, it should pay through transfers. Like Eskom, Sanral has to accept that monopoly power has limits in a democracy.
While some of the SOEs, notably Transnet, have responded more nimbly to changing realities, none has addressed deep-rooted flaws in its business model. These weaknesses could be papered over during the metals boom.
Now it is necessary to face the fact that commodity prices will probably remain below their peaks, which means both private sector demand and state subsidies will be less lavish for the foreseeable future. It is past time to review SOE mandates and operations to deal with these intransigent realities.
The Department of Public Enterprises remains a weak link. It is often unresponsive when the companies it oversees face crises and it opts too often to cushion the SOEs from the consequences of economic change.