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South Africa: How State Companies Fail Country

Mathabo Le Roux

31 October 2008

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Johannesburg — CONTRADICTIONS in the policies that guide state-owned enterprises impede the operation of these enterprises severely, with grave implications for growth and employment, studies commissioned by the Presidency show.

One of the studies found that, had the competitiveness gap been closed in telecommunications and transport, gross domestic product growth in 2003 would have been 3,9% higher while unemployment would have narrowed 5,5% .

The estimate reflects only the once-off improvement, and does not account for the multiplier effect that would have continued in subsequent years.

Nor did it take into account the possible spin-offs and new activities that might have arisen, study author Miriam Altman of the Human Sciences Research Council (HSRC) said.

"These are things that we can control. If we had done that (enabled state enterprises to compete better against global benchmarks) it could have had an extraordinary impact."

The studies, commissioned by the Presidency and carried out by the HSRC and Genesis Analytics, were presented at a policy conference this week .

In a damning indictment of state policies, the studies found parastatals faced "a complex double mandate" to maximise profits and meet social goals. Moreover, the regulatory environment was often so weak that some state-owned enterprises -- all of whom are de facto monopolies -- were in effect operating without regulatory oversight.

While parastatals are least-cost producers, they have a strong incentive to charge monopolist prices as they are profit-maximising entities.

One study suggested the only way to ensure that cost-efficiency benefits reached consumers was to regulate prices.

The findings have profound implications for industrial policy objectives. As the state prepares to aggressively ramp up support for industrial development, the studies indicate that basic infrastructure needed to sustain new industries and make them competitive cannot adequately and efficiently support these aims. This is despite state policy that parastatals should aim for developmental outcomes. State services referred to in the studies include rail, ports, electricity, water supply and also previously state-owned telecoms.

Sarah Truen of Development Network Africa, and author of the report on Transnet, said state ownership was hampering the ability of state-owned enterprises to play an important role in the economy. Unless policies were clarified and the double mandate to parastatals was resolved, the situation would not change.

The studies found state-owned enterprises tended to have ambitious financial targets, exceeding those of listed companies. Transnet earnings last year matched those of the top 40 JSE groups, but its services were abysmal.

Truen said that the freight service on the Durban-Gauteng corridor should take on average 12-14 hours. In practice, the end-to-end time could be six to 11 days, up to 17 times longer than it should take.

She also uncovered evidence of cross-subsidisation, with more profitable ports subsidising underperforming rail. This meant in effect that exports were taxed, she said. High prices sustained in the ports sector might constitute excessive pricing.

Chamber of Mines economist Roger Baxter, responding to the Transnet study, said it was a "good exposé of the state of affairs".

Referring to recent reports by the Harvard Group and the Organisation for Economic Co-operation and Development , which both identified SA's poor export performance as one of the economy's key weaknesses, he said: "Inadequate freight transport and poor services are part of that problem.

"The central failing is that the underlying regulatory and policy environment is not conducive to operating an efficient rail system."

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