State-Owned, Unenterprising: Recognizing South Africa’s institutional failure

South Africa’s state-owned enterprises (SOEs) are in a state of crisis. Communications, transport, mail, water, and electricity delivery are interspersed with crippling labor strikes and breakdowns in aging infrastructure. The state of SOEs in South Africa is a spectacle of incompetence, mismanagement, malfeasance, and ruin. Unless the government employs competent business leaders and technocrats to reinvigorate service delivery and invests the money necessary to allow SOEs to expand to meet growing demand, this state of affairs will only persist.

South Africans don’t trust the state to provide them with the things they need most and are turning to the private sector for solutions, including generators for electricity, boreholes for water, and private couriers for package delivery. Given the history of SOEs, many of which were established during apartheid to provide resources only for white citizens, and that they’ve had 20 years to grow, their failure to grow and meet the needs of the full population is surprising. Those who can afford private industry solutions will survive. The real problem is that the state is failing those who depend on government services — the poor.

South African SOEs are entrusted with the provision of telecommunications, transport, mail, and water — to name but a few of their primary responsibilities. However, they have routinely underinvested in the maintenance and expansion of infrastructure and hence don’t have the capacity to meet growing demand. Failure to carry out their mandates has left the rest of the economy lagging in the wake of their incompetence.

South Africa’s resource-based economy should have flourished in 2008, when global demand for commodities surged. But Transnet — the rail and ports monopoly — failed to maintain its assets and adequately invest in infrastructure. Iron ore and coal mines could have exported up to 50 percent more had mining companies been able to get their minerals to the international markets. This debacle should have catalyzed Transnet to begin capacity building, but eight years later, South Africans are faced with déjà vu. Though typically a net exporter, South Africa will be forced to import 5 million tons of corn due to its worst drought in 20 years. Given that Transnet’s ports only have an annual capacity of 4 million tons, the imports needed to feed South Africans will face the same bottlenecks as in 2008. Moreover, branch lines to rural areas, where many of the poor live, are out of operation. It’s likely that food shortages will ensue and prices will skyrocket, once again hitting the poor the hardest.

South Africans are also paying the price for Eskom’s, the state-owned electricity utility, gross ineptitude and low capacity constraints. At times in 2015, Eskom was running at just above 50 percent of its capacity, with close to half of its power plants out of service due to broken equipment and fuel shortages for the combined cycle diesel turbines. Since 2007, load shedding, the disconnection of electricity in certain areas at different times of the day, has become a common practice to lighten the load on the national grid. Refrigerated food rots in homes and stores, traffic lights go out — causing chaos on the roads — and business operations come to a standstill. Rolling blackouts have imposed a significant cost on the economy and caused South Africa’s GDP to contract by 1.3 percent in the second quarter of 2015 after the worst period of load shedding.

Constant upheaval in management at Rand Water — the state’s largest water facility — has also caused failures. Rand Water has had five CEOs in the past five years, none of whom stayed with the facility long enough to implement an action plan to combat the current drought. The Water Research Commission found that up to half of the water provided to residents by their municipalities is lost through leaks in aged and poorly built infrastructure. This is a nationwide phenomenon. Citizens face water restrictions not only because there is a lack of water, but also because the demand for water exceeds what crumbling infrastructure can provide. Once again, those in rural and poor areas suffer the most, as they cannot drill boreholes, buy bottled water, or relocate when their livestock and crops die.

Poor corporate governance is at the core of the rot. The government has shown extremely poor judgment in its selection of board members at many SOEs, and in many cases, undue political interference results in unqualified party loyalists securing plum jobs. Qualified business leaders have been systematically pushed out of key positions as the heads of SOEs and replaced by political lackeys without the skills or business acumen to run these organizations. President Jacob Zuma has been accused of appointing personal friends and family members to strategic positions in the government throughout his presidency. In one such instance, he allegedly instructed his close personal friend and CEO of South African Airways, Dudu Myeni, to open a route from Johannesburg to Khartoum as a show of support for Sudanese President Omar Al Bashir, who is wanted by the International Criminal Court for war crimes. When esteemed finance minister Nhlanhla Nene rejected Myeni’s spending proposal to the treasury — which would have incurred $2 million in losses in the first two years — Zuma fired Nene. Sacking Nene sent the economy into a free-fall, yet another case in which SOE mismanagement negatively impacted the economy.

Poor performance has led to a high executive turnover rate for companies such as the state-owned South African Broadcasting Corporation, which has had nine CEOs since 2009. But underperforming as the leader of a South African SOE bears no real consequences.  The combination of corruption and a short-term outlook has given CEOs the opportunity to earn significant salaries without actually performing their intended roles. With each suspension or resignation, worker and investor disquiet intensifies. Diminishing investor confidence has serious repercussions for many SOEs, which rely partially on private investment to fund development. When investors lose confidence, they withdraw their money and leave SOEs struggling for funding. This, in turn, hurts the SOEs’ performance, which further inhibits private investment. Research from South Africa’s Chamber of Commerce shows that business confidence has dropped to historical lows.

Yet even if the charge is not nepotism or corruption, there is the still the matter of plain incompetence. Daniel Mtimkulu, former-lead engineer of the Passenger Rail Association of South Africa, resigned after being exposed for lying about his qualifications. He now faces criminal fraud charges for falsely claiming to have a bachelor’s, master’s, and doctorate degree, and that he was registered with the Engineering Council of South Africa. Mtimkulu was the chief engineer in charge of the purchase of $39 million worth of locomotives that eventually didn’t fit the dimensions of South African railway tracks.

To eliminate these developmental hurdles and fast-track growth, President Zuma appointed a National Planning Commission in 2010 to draw up a long-term development strategy. In 2012, the commission proposed the National Development Plan 2030 (NDP) — a comprehensive economic policy document that aims to end poverty and reduce inequality by 2030. The NDP specifically addresses how SOEs must be reformed to move the country toward this goal. The NDP recommends giving SOEs clearer mandates and simpler tasks that will be easier to deliver. Their governance structures need to be clarified and simplified, and their capacity constraints must be addressed with precise strategies for skills development and a reliable funding models. Yet while the NDP has the potential to rescue South Africa from its own vice, it has been dead in the water since it was formally adopted.

Negotiations between the African National Congress (ANC), the South African Communist Party, and the Congress of South Africa Trade Unions (COSATU), known collectively as the Tripartite Alliance, have halted the implementation of the NDP. COSATU has publicly declared its opposition to the plan, deeming it an antiworker policy document, while supporting a strong interventionist state and a planned economy. COSATU’s opposition to the NDP has significantly blocked its progress because the tripartite alliance must vote together on strategic economic issues, and the ANC relies on COSATU’s loyalty for the votes of its members. Hence, the ANC is beating around the bush to appease COSATU until a compromise can be found.

It is imperative that South Africa implement the NDP’s recommendations. Large-scale bankruptcy of SOEs is such a fiscal worry that last year, the country’s budget review document included a new chapter called “Financial Position of Public-Sector Institutions” to candidly address bailouts for failing SOEs. Eskom has already received $658 million in equity from government and is expected to receive $804 million more by March. Bailing out companies that show no promise of recovery isn’t a solution to South Africa’s SOE problem: It will only put more fiscal strain on the already lagging economy.

All’s not lost, but SOEs need to radically change their practices soon. By following the NDP’s how-to guide for improving long-term performance, SOE leaders can reinstitute transparency, accountability, efficiency, sound business judgment, and conform to regulations. The government needs to provide SOEs with reliable funding models, and SOEs need to manage their funds responsibly, using money to build desperately needed capacity. This will, in time, remedy the damage caused by decades of mismanagement and underinvestment. A sustainable future is possible in South Africa, as long as the government can clean up its act.