SOEs put fiscal security at risk
• Bailout billions could be diverted into setting up commercial farmers
The demands on government resources are such that it is impossible to provide for everything. As the renowned US intellectual Thomas Sowell once remarked, “There are no solutions. There are only trade-offs.”
This has an earthier corollary everyone has probably heard from their parents: “Money doesn’t grow on trees.”
Much can be learnt about what really matters to those in power by watching how they use money. It is revealing indeed to see the periodic requests by state-owned enterprises (SOEs) for the government to help them out. Overcome a cash crunch here, sort out an irate creditor there. Or simply keep them off life support (or should that be on life support?).
SAA (South African Airways) is a case in point. Its cash-flow position being “unsustainable”, it asked the government for a R5bn bailout in April to tide it over. For a few months. In 2017 it received R10bn.
The R5bn has apparently been granted, according to SAA CEO Vuyani Jarana. He did, however, helpfully indicate in asking for the money that to get back on track (its balance sheet “restructured”, revenue “accelerated” and the carrier’s fleet “refreshed”) this sum wouldn’t really cut it. Rather, a long-term plan was needed.
The most recent remarks by Jarana are that SAA will need about R21.7bn over the next three years. By then, its “turnaround” strategy envisages it breaking even.
Much can happen in three years. National carriers do not come cheap. We all get the idea…
SAA isn’t unique in its calls on public money. The 2018 Budget Review records state guarantees during 2017-18 of about R466bn, with actual exposure at just more than R300bn. Eskom alone could call on guarantees of about R350bn and had racked up an exposure of about R221bn. To put this into perspective, total consolidated spending by the government in the current year is expected to amount to R1.671-trillion. The guarantees it could be liable for come to about 27% of this; the actual amount borrowed to 18%.
The commitment to keeping these entities viable, or at least retaining the appearance of functionality, has been an expensive one.
The Budget Review puts this into sterile, but easily comprehended accountant-ese: “Guarantees to some state-owned companies remain a major risk to the fiscus.”
This has been a trade-off the government has made, even if not an explicit one. It has provided the ideological satisfaction of not having capitulated to the dread goddess of privatisation and having retained ownership of these assets for “the people”.
Whether “the people” want them, or in the case of SAA will ever use them, is another matter. Owning these large entities gives SA the trappings of a mighty developmental state, although it is highly questionable whether they give it much of the substance.
SA has compromised its fiscal position. Its ability to commit to other spending — social services, say, or policing — is that much harder. And should there be a dramatic reversal of SA’s fortunes, the government’s commitments to its SOEs could be the burden that breaks SA’s fiscal back.
The trade is a portfolio of SOEs in exchange for fiscal security. Not a great one.
Meanwhile, back at the Union Buildings, expropriation without compensation is all the rage. The case for doing so is about as thin as that for pouring billions into the ravenous maw of the national carrier, but since it is being taken seriously by those in power, citizens had better do so too.
One sort-of argument is that we just don’t have the money for proper land reform, so we’ll perform a policy sho’t left (have to love that phrase) and grab what we need. The same sort of inspiring results seen in SOEs can probably be expected. Imagine a trade-off between bailouts and land reform. Imagine that the bailout billions could be diverted into setting up commercial farming operations — real, sustainable, debt-free operations that provide livelihoods, employ people, generate revenue and put food on supermarket shelves.
After speaking to agricultural experts we estimated that a 1,000ha farm could be pur- chased free and clear, with the required equipment and livestock (200 head of cattle) and working capital for three years, for R15m-R20m. The farm would be on a paying basis from the get-go. Can’t get much fairer than that, can it?
For the R15bn the government has lavished on SAA over just two years, it could therefore have established 750-1,000 serious black commercial farmers. And for the R21.7bn required over the coming years 1,0801,440 more farmers could be given a healthy start.
As the commercial farming community numbers about 35,000, these are not inconsequential figures.
It’s anyone’s guess how many such farmers might have been created by the time SAA has gone through its restructuring, acceleration and refreshment. And if this doesn’t say everything required to know about the government’s priorities, well, it says a great deal.
SA is on the runway for the worst of both worlds: the investor-confidence negation of compensation-free expropriation and the fiscal vampirism of the “guarantees” and “bailouts” to SOEs. It is no solution to anything and a lousy trade-off.
This leaves everyone desperate for a drink. We can get one on the flight, and we deserve it after what we’ve paid for it. Fasten your seatbelts — there’s turbulence ahead.