Is the SOE development mandate worth the cost?

In his rousing budget vote earlier this week, President Cyril Ramaphosa promised clean governance and that those using state-owned enterprises (SOEs) to line their own pockets would be pursued by law enforcement. But his administration needs to address another elephant in the room concerning such SOEs.

It is not about their privatisation, as the state seems reluctant to cut the apron strings of its more than 700 state-owned companies, many of which are draining the fiscus without any successful solutions being applied to them.

And the situation has been allowed to get worse. Since 2012 there has been an increase in government guarantees to struggling SOEs, to allow them to borrow.

The other issue concerning SOEs — and this is one of the most contested areas — is their noncommercial development mandates, according to Avril Halstead, a senior official in the department of public enterprises.

Ramaphosa’s government needs to decide which developmental mandates are still relevant and how they will be paid for. In some cases the argument about why a particular SOE is underperforming financially has been justified by using the developmental mandate as an excuse to mask the money being siphoned off through dodgy tenders, for example.

Examples of legitimate developmental mandates placed on SOEs are the supply of electricity and water to lower-income consumers at below cost, and concessional

loans by development finance institutions.

In some cases the development mandate, such as in aviation, is far from clear. There has been no obligation placed on SAA to account for the Beijing route that SAA flew for several years at a loss of R50m annually.

The airline assumed that the government wanted it to operate this route, according to Halstead, who was addressing students and government employees at a public economics workshop a week ago.

When SAA finally came to its senses and cancelled the route, Air China took up the vacancy and a partnership was formed between the two airlines without cost to SAA.

Another example of waste is in terms of obligations placed on private-sector suppliers to develop local and industrial capacity. The costs of this are borne by the SOE as it comes with a price.

For example, when SAA bought aircraft, one of the tender requirements was to either transfer or develop local suppliers, which meant the aircraft came at higher price than what competitors paid.

The department of public enterprises has now initiated an exercise to quantify the cost of these noncommercial developmental mandates.

Hopefully, this will include determining the return on investment.

But the role of SOEs needs to be clarified beyond what their developmental function is, because at this stage these entities are not helping to develop SA, rather they are sinking us.