Understanding the impact of our SOEs on the economy

STATE-OWNED enterprises are companies in which government owns, directly or indirectly, more than 50% of the shares.

Worldwide, states own 10% of the largest companies. In South Africa, state-owned enterprises play a significant role in the important sectors of mining, energy, communications, air and rail transport.

Some state-owned entities loom large over the economy.

Global experience shows that when state-owned enterprises are well managed and good governance is in place, they can provide essential commodities and services to the population at affordable cost.

The reverse is also true. When they are poorly managed, state-owned enterprises directly affect the poor the most. The poor are the most vulnerable to failure by the state and its entities. The poor performance can manifest itself through ineptitude, corruption and generally poor delivery of public services.

State-owned enterprises are often vulnerable and prone to corruption. This can severely undermine their performance. In addition, governmental support can result in lower production efficiency and poor economic performance. This is because the protection they get often insulates them from competition.

We used a macroeconomic modelling simulation framework to explain how reduced economic performance and reduced foreign investments influence the economy. Our findings are that the inefficiencies of state-owned enterprises and high levels of corruption within them do spill over to the rest of the economy.

These negative spillovers include reduced economic growth and income as well as job losses, leading to increased risk of poverty. Low skilled workers in particular are the most affected.

The poor performance of stateowned enterprises has a cascading effect throughout the economy. The channel is as follows. It first raises their operating costs, which in turn affects companies and economic sectors that are directly dependent on the services provided by the state-owned enterprises. This reduces the domestic and international competitiveness of these sectors.

It eventually spreads to the entire economy. This makes the country’s exports less competitive. As a result, exporting firms reduce production and eventually lay off workers.

This increases unemployment, which in turn reduces household income and therefore household consumption, which is one of the drivers of growth.

In time, economic growth weakens, further reducing the economy’s capacity to create jobs. Weakened growth also implies reduced savings, investment and lower tax collection by government. This further constrains the government’s ability to increase various transfers and welfare redistribution efforts.

Fraud and corruption also lead to mistrust in government by citizens and by domestic and foreign investors.

This hampers investment, which slows down economic growth, causing further increases in unemployment.

While corruption and fraud make a few rich households richer, the poor and low-skilled lose their jobs and become poorer.

The government’s participation in economic activity can also open the door to corruption and fraud. The negative effects of the subsequent under-performance won’t be limited to state-owned enterprises.

They spread throughout the economy, and eventually affect economic growth, unemployment, household income and consumption.

The only winners in this vicious circle are a few rich and politically powerful individuals. The poor families of low- and unskilled workers bear the brunt of a weak economy.

The priority for the South African government should be to restore the competitiveness of state-owned enterprises to create a virtuous cycle of increased citizen and investor confidence, which in turn will lead to higher economic growth.