BRIAN KANTOR: Staff of SOEs are doing it for themselves

The Budget Review for 2018-19 informs us: "In cases where state-owned companies are making large investments in infrastructure, capital expenditure reduces profitability. Even after these investments are paid for, profitability is unlikely to match private sector profit rates because these entities often provide public goods and services below the cost of production to enable economic activity..."

Capital expenditure, properly managed, should improve profits and returns rather than additional waste.

The review tells us that "in many cases, however, falling profitability reflects mismanagement, operational inefficiencies and rising financing costs. Over the medium term, state-owned enterprises (SOEs) need to raise returns to generate value and to reduce their reliance on debt and injections from the fiscus."

A combined balance sheet of state-owned companies provided in Table 8.2 of the Budget Review indicates how poor the financial performance has become over the years. The combined total assets of these companies totalled R1.2-trillion in 2016-17. Total liabilities (debts) were R869bn. The net asset value or equity of the companies fell by 1.5% in the last financial year and the average return on equity was a mere 0.3%, or about R10m. Adding back interest on the liabilities at say 10% a year would give them earnings before interest and taxes (also paid to the owner state) of about R97m and so a return on assets of less than 8% — less than the interest cost.

This raises the question why they are publicly rather than privately funded in the first place. It is not because they may provide public goods. They might have been founded — backed by the taxable capacity of the nation — because at the time private capital (correctly) was unwilling to accept the risk. There may have been strategic or nationalistic objectives that taxpayers had to accept.

But such constraints on the availability of private capital sourced globally to fund infrastructure have long gone. Private capital would fund the essential South African infrastructure on favourable market-determined terms provided they could be satisfied with the terms and conditions.

This could take government (taxpayer) guarantees for well ringfenced projects with clearly earmarked revenue streams. As with the so intended infrastructure bonds. A much better deal for the taxpayers of SA guaranteeing the leasing charges would be private ownership and management of these assets, with these companies broken up and sold off. Ports and pipelines should be separated from railways and compete with each other, and generation of electricity should be separated by a number of independent power producers from distribution.

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Partial private ownership or private-public partnerships of various proportions might also attract private capital. But without private sector control of the performance of the managers and workers and their remuneration, the efficiency with which the infrastructure is operated and expanded is unlikely to improve.

The reason state-owned companies remain state owned has little to do with efficiency. The political influence of managers and workers has kept them so. They have been able to defend their superior employment benefits at the expense of taxpayers and customers. This largesse has brought the system into disrepute and strained the ability of taxpayers to keep the gravy train running.

We must hope for essential reforms that change the goal of the managers from serving themselves to serving their owners. They would relieve taxpayers of the risks they now carry and help their customers, for whom they would compete.

• Kantor is chief economist and strategist at Investec Wealth & Investment. He writes in his personal capacity.