Fixing South Africa State Companies Comes Second to Politics

(Bloomberg) -- South Africa’s government is facing potentially unpopular decisions needed to fix state companies that are drowning in debt, bleeding cash and fettering the economy, that may alienate voters ahead of next year’s elections. So far, it’s shied away from hard choices.

Companies such as power utility Eskom Holdings SOC Ltd., South African Airways and the South African Broadcasting Corp. are reeling after repeated management and strategy bungles and have indicated they need state aid and staff cuts to survive. While President Cyril Ramaphosa’s administration has replaced boards and top executives, it’s opposed suggestions of mass firings across the board or privatization and more bailouts at the power utility.

“There are probably going to be no major decisions and certainly no new strategies developed or started until after the election,” said Ian Cruickshanks, chief economist at the Johannesburg-based South African Institute of Race Relations. “The cost of production in all of the state-owned enterprises is going to continue escalating, the revenue will continue diminishing and if you look at what government is doing about it, the long silence means nothing.”

Fixing South Africa State Companies Comes Second to Politics

The May election will be the first since the ruling African National Congress forced Jacob Zuma to quit after a scandal-marred tenure that spanned almost nine years and saw its support decline. While opinion polls suggest the party’s fortunes have turned since Ramaphosa took office in February and it will easily win the vote outright, it can ill afford to alienate labor union allies that oppose job cuts and asset sales.

Looting Spree

Taxpayers would likely frown on giving state companies more money, after probes by the nation’s anti-graft ombudsman and lawmakers showed they were systemically looted of billions of rand during Zuma’s tenure. A struggling economy has also limited room to maneuver if it’s to stick to its expenditure ceiling and budget-deficit targets. South Africa emerged from a recession in the third quarter and economic growth hasn’t exceeded 2 percent since 2013.

“I think they’ve got cold feet, even beyond the elections,” Ivor Sarakinsky, a senior lecturer at Johannesburg’s Wits School of Governance, said. “When they look at the numbers and the general increase in unemployment, to contribute to that by reducing the number of people inside the state-owned enterprises will have quite significant socioeconomic impact.”

Fixing South Africa State Companies Comes Second to Politics

Ratings companies and the nation’s auditor-general have called the parlous finances of state entities as a key risk to the economy. While Public Enterprises Minister Pravin Gordhan, who oversees the seven biggest companies, acknowledges the situation is untenable, he’s given little indication of what’s being done about it, save to say that turnaround plans are being worked on that will seek to minimize job losses.

“We have a problem, not only in Eskom but in many entities where the cost structure of the entity doesn’t justify the current operations and revenue in those entities,” Gordhan told reporters on Dec. 6.

Biggest Headache

Eskom, which provides about 95 percent of the nation’s electricity, is by far the government’s biggest headache. It’s racked up 419 billion rand ($29.5 billion) in debt, most of it state-guaranteed, isn’t selling enough power to cover its costs and has fallen behind on plant maintenance, resulting in widespread outages.

The utility employs about 48,000 people, up from 32,600 a decade ago, and a World Bank study published in 2016 found it was potentially overstaffed by 66 percent. Eskom has said it may have to fire as many as 16,000 workers and it will finalize a new strategy next year.

Ramaphosa last week named a team to help turn Eskom around after saying a bailout would boost national indebtedness. Gordhan intervened in June when a management decision to freeze pay triggered protests.

“There are critical decisions that have to be made at Eskom and it’s urgent,” said Philippa Rodseth, executive director of the Manufacturing Circle, a Johannesburg-based industry association. “It’s certainly not something that can comfortably wait until after elections because the manufacturing sector needs reliable energy supply.”

South African Airways has lost money for the past seven years. Despite having secured 19.1 billion rand in government debt guarantees and a 5 billion rand allocation in the October mid-term budget to help it repay loans, it still faces a 3.5 billion-rand cash shortfall by the end of March. Finance Minister Tito Mboweni’s suggestion that the carrier should be shut because it isn’t viable was shot down by his cabinet colleagues.

The South African Broadcasting Corp., which lost 633 million rand in the past financial year, has said it needs to fire almost a third of its 3,376 staff and 1,200 freelancers after the Treasury declined its request for 3 billion-rand cash injection. Four members of its interim board quit after the government opposed staff cuts, citing political interference in their work.

State companies will probably have to muddle though for now, with the government allocating them some additional funds from within the existing budget rather than taking the touch decisions that will benefit the economy in the long term, according to Cruickshanks.

“They are stuck in that ‘win the elections first’ mode,” he said.

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