Kaizer’s Musing

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The recent announcement by Finance Minister Enoch Godongwana that henceforth the Government would adopt a “tough-love” approach to State-owned entities (SOEs) would have come as welcome news to many South Africans who have long been concerned about the re-direction of scarce resources from social services to bail out failing SOEs.

Godongwana revealed in the National Assembly, during his Medium-Term Budget Policy Statement, that the Government had spent R290 billion on SOEs since 2013. A year earlier, the National Treasury had stated that R291 billion had been spent on bailing out SOEs since 2008. Of that amount, R38,4 billion had gone to SAA, which is now in the process of being privatised, with the State to retain a significant stake in the airline.

In an echo of views long expressed by various economic commentators, Godongwana said the Government would have to “consolidate some of our SOEs and let go of those that are no longer considered strategically relevant”. A few days later, Deputy Finance Minister David Masondo said “tough love” towards SOEs would include the enticement of the private sector to get involved in “some of these industries in which the State” had been dominant over the years. Masondo stressed that the Government could not finance everything, hence trade-offs would have to be made. 

Treasury Director-General Dondo Mogajane stated that SOEs offered neither value for money nor returns on the investment made in them, and Treasury Asset and Liability Head Duncan Pieterse added that no future financial support would be provided to SOEs, unless the Government had to make good on debt for which it had offered guarantees.

It may not be the first time that Treasury officials and their political heads have consistently communicated the same message on an issue, but the degree to which this central message has been communicated in the recent past must be seen to be indicating a crucial step-change in the Government’s thinking. This can no longer be seen as the position of a maverick Treasury team.

Some, like Parliament’s Finance Committee Chair Joe Maswanganyi and those who belong to the ANC’s so-called RET forces, can be counted upon to oppose the “tough-love” approach to SOEs. Predictably, they will harp on the concept of a developmental state which is meant to have the financial wherewithal to bail out SOEs indefinitely, even when it is clear that they are a drain on the fiscus and divert resources from health, education and other important social services. They will be sceptical of the sensible approach to involve the private sector in such entities.

Presumably, a developmental state funds SOEs indefinitely, even if they are a drain on the fiscus and provide no value for money, merely because they offer employment. 

The “tough love” advocated by Godongwana and his team is consistent with the “precipice management” approach advocated by Chris Tarry, a leading aviation analyst and advisor based in London. Tarry argues that, in order to break the cycle of state-owned airlines’ dependence on government funding, it is important for a government to get such an airline to believe that it won’t receive further funding from the state.

However, such a strategy would work only on condition that the government does not buckle under pressure to provide another bail out. Empty warnings or threats which are not accompanied by actions which reinforce them lead to loss in credibility. Therefore, the moment the Government bails out another SOE, unrelated to the aforementioned guarantees, will make a mockery of the death of the “tough-love” approach – if not mark its death.

There is an important caveat that needs to be introduced to this discussion at this stage. Just as there was once a time in our country when struggling SOEs were bailed out as a matter of course, often as a result of the opportunities they provided for patronage and malfeasance, it is very important that we do not swing from that position to the other extreme, where even deserving SOEs are now starved of capital. It is very important that we do not move from one extreme, where the mantra was “bail out SOEs because the developmental state demands that”, to another where we do not fund or capitalise any SOE because of “tough love”. Such a stereotypical approach would be both short-sighted and potentially more damaging in the long term.

The truth is that no business can be turned around successfully without access to finance. Failure to capitalise deserving SOEs which have the potential to add value to the country would be tantamount to consigning them to the scrap heap. Such a situation will considerably worsen our unemployment crisis.

After all, implementing a turnaround strategy is costly and hard. At the very least, a company needs access to capital, “competent management with full authority to make all the required changes”, a viable core of the business and motivated employees who have a positive attitude in order to stand a chance of being successfully turned around. Turnaround strategy guru Biebault says “cash is king” when a company is being turned around, than at any other stage in its life cycle. Scholars Gadiesh, Pace and Rogers argue that ensuring that a company is properly capitalised “is the first order in corporate turnarounds”, and Onich stresses that even the best strategy, with the best leadership team and motivated employees, “will fail without adequate resources”.

Therefore, the decision confronting the Government is not whether or not SOEs should be funded appropriately (or, in the popular parlance, “bailed out”). Instead, the Government needs to take a view about which SOEs are of strategic importance to the country and then support them appropriately, including financially, in addition to ensuring that they are led by qualified men and women of integrity, and to decide which ones are less strategic and let go of them. Among the options available to the Government is to bring strategic partners on board when it comes to the important SOEs which need to be properly capitalised and saved, and to offload to interested buyers those SOEs which are considered to be less strategic and to be a drain on the fiscus. Pragmatism, rather than ideology, must inform our approach to SOEs.

Telkom provides a salutary example in this regard, and its template appears to be the one used in the case of SAA.

Of course, funding is but one component, albeit a very important one. Serious attention would also have to be given to the many other circumstances created by the Government as a Shareholder, which have predisposed a growing number of our SOEs to fail.

An important starting point for the Government would be a review of the recommendations of the Presidential Review Committee of SOEs, which was appointed by President Jacob Zuma and whose work was then ignored, and any other work which was subsequently done by any similar structure.

Dr Kaizer M. Nyatsumba is a turnaround strategy expert, the author of Successfully Implementing Turnaround Strategies in State-Owned Companies and the Managing Director of KMN Consulting.