Stimulus must not go into state debt holes
More than 10 years ago the politics of the governing ANC changed dramatically when, frightened by the financial crisis unfolding across the Atlantic Ocean, it called for an increased role for government in the state. The governing party, through its control of state-owned enterprises (SOEs), would drive a developmental agenda.
The report card on that period in our history is not kind towards the state. The largest of its institutions, Eskom, is now sitting on a mountain of debt that will be impossible to pay off on current and future revenue projections. Our national airline, SAA, is in a rather complex business rescue process after years of mismanagement and corruption. These are just the headline-grabbing crises — large swathes of our more than 700 SOEs face similar issues. State ownership and, ultimately, control has failed.
As we now grapple with the task of stimulating an economy bludgeoned by the Covid-19 pandemic, the state has to outline its role in what some have billed a “postwar reconstruction” of the economy. At the weekend there was a leak of the economic response proposals by the governing party that showed that, in at least one respect, we could expect some welcome change in how the ANC is viewing the role of the state. It is now open to private ownership of SOEs to some degree.
In the draft that is circulating, the party says an understanding of the developmental state as only about public investments and ownership is “narrow and flawed”, and it emphasises the limited funds of the state. That does mark a significant break from orthodox thinking. Any privatisation, even partial, has always been anathema to the ANC and has been at the centre of disputes for the duration of its government of the country.
In breaking with this dogged determination to keep a tight hold on ownership, there is perhaps a more pragmatic approach to the challenges the country faces.
However, offering only a small stake in any entity will not appeal to investors if they do not gain any say over the running of the company. Many SOEs are in a dire state and need dramatic measures to resuscitate them.
At the very least, the state will need to offer controlling stakes, which will enable investors to ensure they can fix what is broken and set a path to recovery; or minority stakes with very stringent management contracts granted to those investors, which amounts to the same thing. It’s all about return on investment. Offering investors minority stakes only and trying to assure them that, suddenly, the government will prove itself capable of managing these entities, is operating in nevernever land. Bold thinking and a break with past paradigms are needed now more than ever.
With the real nuts and bolts of the economy in much need of stimulus over the next 12-18 months in the wake of Covid-19, the money, or rather debt, raised by the Treasury shouldn’t find itself filling the debt holes in any of our troubled institutions. With much of the government’s R500bn economic stimulus package rightly targeted at protecting the most vulnerable, there’s an argument to be made that it may not be enough to get our economy back to whatever new normal after the pandemic. As much of the stimulus as possible must be squeezed out to support growth. It must not be used to pay down debt that resulted from what the ANC now calls a “narrow and flawed understanding” of a developmental state.
There certainly is reason to applaud the change in the ANC’s views, even if they don’t go far enough, but we are concerned by the caveat in the proposal: the document calls for “high levels of guidance” in the economy. Now if this amounts to giving SOEs clear mandates and the respective boards the space to meet them, it is welcomed. But as to how it extends to the private sector, business has to remain wary.
The key question is the form taken by the state’s bigger role in guiding the economy. The document encourages the use of pensions or to push the Reserve Bank to fund infrastructure projects, returning us to debates around prescribed assets and the independence of the Bank.
These are confidencesapping debates and serve only to add further uncertainty to the SA story. Business has long called for the sixth administration to create a more certain policy environment, one that is conducive to businesses to thrive and grow inclusively. This is the only guiding hand, if any, that business needs from the state to ensure the economy does in fact recover over the next couple of years from the “great lockdown”.
It’s only in creating such an environment that a country as starved of investment as ours will see badly needed fixed investment return. Dabbling in the areas of prescribed assets or fiddling with the independence of the Bank will not rebuild confidence.