Government keeps SOEs alive to milk them as cash cows

South African Institute of Taxation CEO Keith Engel said the government faces a significant budget shortfall but is unwilling to do the one thing it can to fill the gap – cutting off its struggling state-owned enterprises (SOEs).

National Treasury revealed that the budget moved to a monthly deficit of R143.8 billion in July. It is the largest deficit since 2004 and wider than the R115.5 billion forecast by economists.

Bloomberg reported that national debt has risen to R4.7 trillion and could reach R6 trillion in 2025, compared with R500 billion in 2006.

The Sunday Times reported that the National Treasury prepared radical measures after a cabinet meeting in August at which ministers were warned of dwindling tax revenue.

Engel told Kaya Biz that the government has run out of options to raise more revenue since it cannot raise taxes further without sacrificing growth. It has already accumulated far too much debt.

The only option left is to cut expenditure – something the government seems unwilling to do.

Despite the significant budget deficit, the government has repeatedly mentioned its intention to issue a basic income grant in South Africa or to make the R350 social relief of distress grant permanent.

“My feeling is, if you want to fund social grants, the best thing to do is cut some of our wasteful state-owned enterprises,” he said.

He used the example of the South African Post Office (SAPO), which has faced significant challenges over the past few years.

On 9 February 2023, a group of creditors placed the SAPO in provisional liquidation following a successful application.

The provisional liquidation resulted from SAPO’s inability to pay its debts to creditors to continue operations.

Cabinet approved that the Post Office be placed under voluntary business rescue based on the DCDT’s business continuity report.

A business rescue specialist has been appointed and has commenced work with the Post Office.

The SAPO stated in its business rescue application that it needs R3.8 billion of funding in addition to the R2.4 billion it received from the National Treasury in the budget. 

It said that additional funding is needed to execute its turnaround strategy, with the Cabinet having already agreed to more funding for SAPO. 

This is despite the state-owned enterprise having already been given over R10 billion in bailouts since 2014. 

“Like the post office, do we really need to keep that going? Does that make sense? That’s costing us a lot of money?” said Engel.

“You know, there are places where we have several parastatals which we can get rid of. We don’t seem to want to get rid of them.”

“That’s the best way if you’re going to fund the social grants. But again, that will be at a political cost internally, and people are unwilling to bear that political cost.”

University of the Witwatersrand Professor Alex van den Heever previously said the government keeps many of South Africa’s SOEs alive because the “ANC and other political parties want to retain these organisations as cash cows”.

Van den Heever said that vested interests in many SOEs prevent them from being cut off from government support.

Deregulate

Another solution to the fiscal deficit would be deregulating South Africa’s private sector. “That is the cheapest solution because that requires less work and fewer people,” Engel said.

“You need to free up the private sector, not all regulations, but deregulate wherever you can.”

However, the government is also unwilling to do that. This is partly because the government’s voting base is not in the private sector.

“The government’s voting base is other government workers, people on government tenders and people on social grants,” he said.

“So they’re not willing to listen to business because it’s not their voter base.”

He said the government is playing a short-term game instead of a long-term game by focusing on short-term goals like winning the next election.

“Deregulation would mean that you’re freeing up the private sector for growth, and you aren’t going to cost the base that you have,” he said.

“But, ideologically, they’re committed to big government, and that’s part of the problem.”