One thing that cost South African taxpayers R520 billion

South African taxpayers have bailed out state-owned enterprises (SOEs) to the tune of R520 billion, and many are still in deep financial trouble. 

This cost, borne by taxpayers in the past decade, stems from the government’s failure to reform these companies to adapt to a changing world.

The business model and reason for a large share of South Africa’s over 700 SOEs to exist are not suitable for a country with a highly open economy exposed to global competition. 

This is feedback from Econometrix chief economist Dr Azar Jammine, who outlined the fundamental reason behind the financial struggles of many South African SOEs. 

Jammine explained that many SOEs were created during the Apartheid-era to develop the South African economy, particularly its industrial base. 

These companies sought to fill the void left by large international companies in the South African economy, which had been isolated due to international sanctions. 

Heavily subsidised and protected from competition, these companies operated well and provided cheap, reliable services in South Africa. 

However, in an open economy post-1994, these SOEs could not compete with global competitors by directly operating in South Africa or exporting to the country. 

A topical example of this is Arcelor Mittal South Africa, which flourished as Iscor during Apartheid, but has been unable to compete with cheap steel imports from Asia post-1994. 

“The problem was that while the Apartheid government could keep SOEs running and profitable, they had no competition for skills and customers,” Jammine told Newzroom Afrika.  

“The ANC inherited these SOEs and, rather than restructuring them in a big way to compete with private companies, they carried on with the same formula.” 

This is the fundamental issue with South Africa’s SOEs. Their inability to compete with private-sector alternatives has resulted in financial difficulties 15 years into democracy. 

Regardless of how well these companies could be run, their business model was predicated on some form of state support and protection, without which, they would struggle to survive. 

State capture’s role

The inability of South Africa’s SOEs to compete with foreign imports and private companies would eventually have caused them to run into financial trouble. 

However, the pace at which their financial health deteriorated and the scale of the bailouts needed to support them were largely due to state capture throughout the 2010s. 

Jammine explained that state capture accelerated the decline of South Africa’s major SOEs, leaving them gutted a decade later and unable to service customers. 

The turning point came in late 2008, when Thabo Mbeki was recalled as the president of South Africa to be replaced by Jacob Zuma. 

“Basically, we had a regime under Mbeki that succeeded in growing the economy at 5.5% per year, and yet he was replaced by Jacob Zuma,” Jammine said. 

“He led this project of state capture, and much of the funds that should have been going into maintenance and development went into the pockets of politically-connected people.” 

Alongside the looting of funds meant for the proper operation of SOEs and the development of the local economy, significant leadership changes occurred at the companies. 

“With the change in South Africa’s ruling regime in 2008, the country then began to experience state capture whereby funds were stolen and political appointments were made to run SOEs rather than based on their capacity and competence,” Jammine said. 

State capture effectively gutted key state institutions and SOEs, with funds meant for maintenance and development going towards private pockets. 

In the long run, this resulted in these companies having to turn to the government to bail them out to ensure they remained going concerns. 

Jammine said these companies could no longer generate profits and finance their own operations due to their broken business models and state capture. 

“That is the story, and we are still in that situation right now, with Eskom being the predominant, but by no means the only one.”