Does your local state school or clinic make a profit? It seems unlikely. Even in the richest suburbs their income doesn’t cover the services they provide. But no-one expects them to be shut down just because they depend on government subsidies.
The same logic should apply to SAA. Admittedly, its losses are on a different order of magnitude. Few neighbourhood schools or clinics manage to burn through R5bn a year or run up debts of R12bn. No other state-owned company (SOC) makes anywhere near the same losses relative to its size and assets.
But while SAA should arguably be shut down for terminal dysfunction, it would be a risky precedent to close it solely because it loses money. Like schools or clinics, SOCs are expected to meet social aims, which in turn may cut into their profits or even require subsidies.
The problems start when the state doesn’t define clear socioeconomic aims or cost them. That’s the explicit aim of the government’s shareholder compacts with SOCs. In practice, they have generally set performance indicators for efficiency alone. For decades SAA’s (largely unmet) targets centred on world-class travel services and cost cutting. But there’s no reason for the state to subsidise a company just to replicate private operators.
The deregulation and privatisation of airlines from the late 1970s underscored the risk of ignoring these socioeconomic needs
There are two plausible reasons to subsidise airlines, though neither appeared in SAA’s performance targets:
- To sustain air travel to smaller towns, which is often too unprofitable for private carriers.
- To lower the cost of international connections, including for business and tourism.
In both cases the argument is that the economic and social returns on lower-cost air travel outweigh the cost of the subsidy.
The deregulation and privatisation of airlines from the late 1970s underscored the risk of ignoring these socioeconomic needs. For instance, in the US many smaller towns no longer have any access to air travel, making it harder for them to conduct business or engage socially with the rest of the country. In Greece it’s hard to fly directly to Athens from many countries, which in itself discourages tourism — the economy’s lifeblood.
SAA is not the only loss-making SOC without a visible socioeconomic mandate — think Denel and PetroSA. But without an explicit developmental function SOCs become the worst of both worlds. They aren’t required to meet defined national needs, supporting growth and social development, but they get a blank cheque to lose money. The result is often inefficiency and corruption.
Economic theory points to two broad reasons to accept that SOCs will make lower returns than their private peers:
- SOCs may be able to invest in projects that are not in themselves profitable but will stimulate broader growth in the rest of the economy. For instance, Sanral is mostly funded by the state, but first-rate national roads keep the economy humming.
- In deeply unequal societies like SA, the government may want to ensure some basic goods and services are affordable for everyone. For all Prasa’s faults, we can’t just close down commuter rail.
If the government used its shareholder mandates to articulate clear developmental aims for the SOCs it could quantify their cost and demand efficiency in meeting them. It could then require SOCs to at least break even when that subsidy is included in their revenue.
No SOC, profitable or not, should be kept in the public sector unless it has an explicit, well-defined and costed developmental purpose.
Shareholder compacts and published performance indicators should lay out and cost every SOC’s socioeconomic contribution. Then we could have a rational discussion on how best to finance those objectives, and whether they are affordable. Absent that clarity, any SOC loss inevitably fuels calls for privatisation.
• Makgetla is a senior researcher with Trade & Industrial Policy Strategies.
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