More than diligence needed

Public Enterprises Minister Pravin Gordhan has in the space of a few months blazed through the boards of SA’s three biggest publicly owned corporations in an effort to “recapture”, in his words, the institutions.

It has been a satisfyingly brutal exercise. No one knows exactly how much was stolen from the big three, but the prima facie amounts are staggering. Gordhan himself estimates that the amounts involved could be R100bn.

In the case of logistics giant Transnet, he did not even wait for cabinet approval, establishing an interim board while the process of finalising the board members is completed. This is someone in a hurry, and in Gordhan’s speech to Parliament on his budget, it emerges why.

Many of the state-owned enterprises (SOEs) are in a desperate financial state, far worse than the most pessimistic suggestions. Gordhan confirmed that Denel experienced “severe liquidity constraints”. This was linked to state capture, which resulted in financial institutions withdrawing credit lines, he said. Denel was unable to pay employees, “just one example of how the plundering of state resources directly impacts on workers”.

Some of this was already known, but it was only hazily apparent that private-sector financiers were refusing to lend capital to SOEs. Business Day reported that with South African Airways (SAA) banks had refused to lend even against a government guarantee because the airline could not demonstrate how it would become profitable. SAA has estimated that it will need R21bn as part of its turnaround plan, around half as much as has already been injected by taxpayers over the past five years. It has not been profitable since 2011 and is not just haemorrhaging. Gordhan was, however, able to present some good news. Eskom raised R43bn from January to March, demonstrating that the problem has never been the availability of capital but the reluctance of private-sector companies to engage with a corrupt government enterprise. The new broom at Eskom has opened the doors, and capital has been flooding in — not a moment too soon. As welcome as this all is, it is only a prerequisite for turnaround, and re-establishing honest boards does not itself guarantee a new operating environment. The first problem is that the SOEs have to re-establish their reputations. This constitutes an enormous task and there is no guarantee it will succeed. For SAA, the competition is brutal and a declining reputation can compound its problems even if the company is recapitalised.

This is where Gordhan was disappointing. In his speech, he again launched a defence of SOEs, saying they should deliver important public services and improve lives while reducing the cost structure in the economy so that other economic players become more efficient and competitive. Yet very few, if any, of the parastatals come even vaguely close to this bold aim.

A good example is Transnet’s ports business, in which container charges are consistently among the highest in the world. Far from reducing the cost structure of the economy, Transnet uses its virtual monopoly to sustain itself at the expense of businesses large and small.

SAA is another example. The Free Market Foundation’s claim rings true that the airline is the largest single subsidy by the poor in favour of the rich in SA.

Gordhan had other bad news, saying it had become evident that several of the SOEs would not be able to trade and borrow their way out of their financial difficulties and “some funding will be required from the government”. He added the rider that this funding would be contingent on the companies diligently implementing interventions to become sustainable and efficient. We have all heard this before. The restructuring of parastatals needs more than diligence; it requires new business models and the inclusion of private-sector equity investment. Even Chinese government-owned companies often include private sector investment partly to ensure some real-world business methodology and rigour form part of the make-up of the enterprises.

In the news the focus is often limited to four or five SOEs, but in fact there are more than 700. Clearly, different models are required for different enterprises, but public-private partnerships not only should be part of the mix they may have to be since the government’s stretched finances mean that without private-sector finance any increase in investment will not happen.

SA has — with some luck and Gordhan’s timely intervention — staunched the loss of blood. But that is only the first step in getting the patients back on their feet, and for that a much more thorough and specific diagnosis will be necessary.

GORDHAN’S TIMELY INTERVENTION HAS STAUNCHED THE LOSS OF BLOOD. BUT THAT IS ONLY THE FIRST STEP