BLSA CEO Newsletter – 18 September 2023

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We are facing a difficult moment for government’s fiscal management. Government revenue is suffering the reality of low economic growth in which tax collection has been less than expected. On the other hand, that low growth has increased pressure for social grants that can relieve the poverty trap many in our country find themselves in.

The challenge is that government simply can’t open the spending taps. That would directly lead to an explosion in new debt issuance at a time when rates are high and market appetite for more exposure to the South African government is low. Increasing borrowing would be expensive and compound the growth problem as businesses and investors would become more concerned about the sustainability of government finances. Confidence is already low, constraining investment and economic activity, and would plummet if business lost trust that Treasury was keeping a tight grip on government finances.

National Treasury is well aware of the challenges – it has engaged with the rest of government to seek out ways to save money, reducing expenditure to try and make the books balance. It has also floated the option of increasing the VAT rate. However, cabinet, no doubt conscious of a national election next year, has pushed back against those efforts, particularly anything that might constrain the government wage bill.

There is a significant risk of populism dominating, leading to a reckless expenditure splurge exactly when the country can least afford it. That would be sharply negative for the business environment, sucking money out of the economy to fund the government, whether through taxes or borrowing, and raising fears of a financial crisis when government could no longer pay its debts. In the February budget, National Treasury planned to raise over R2bn in debt every working day this year – that number is going to have to rise but pushing it up significantly would have dire consequences.

The standoff between cabinet and the Treasury is a distraction from what really matters: growth. To deliver that, the business environment must be one that encourages confidence and investment. The private sector, as I’ve written here before, is ready and willing to invest and grow the economy if the right policies are in place and key network industries can support their growth. This is what cabinet should be focused on.

The electricity crisis is one obvious problem, and it is the one we have made the most progress in addressing. Of course, we could have done it faster – the fact that the planned legislation to enable an independent national grid operator has not yet emerged from parliament is unfortunate. But we are moving in the right direction, and already hundreds of billions are being invested by the private sector, currently the only bright point in our growth outlook.

The role of the state-owned enterprises is critical to that outlook. The SOEs have a dual impact on the business environment – the services they provide are critical for business, but their financial performance is also material to that of government. So, I was eager to see what would be contained in draft legislation tabled on Friday that would create a new holding company for the state-owned enterprises. I have to say, though, on first read, there is little that will inspire confidence in business.

In principle, a holding company structure may make sense. There are several good examples in public sectors around the world, from Kazakhstan to Singapore. We see them in the private sector – a conglomerate that uses its expertise to manage assets effectively can add significant value to those assets. A state holding company that was fully empowered to do what is necessary to turn around and manage state-owned enterprises, bringing in private shareholders and even disposing of them if that were deemed optimal, would be welcome. Such an entity could ensure proper commercial principles were applied in running the SOEs, while the rest of government concerned itself with policy and regulatory issues.

To achieve that, the holding company would need a level of independence, able to make operating decisions that ensure the financial performance of the SOEs. It should have budgetary autonomy, and its legislation should give it full authority over the operating and financial affairs of the SOEs. It needs a board of accomplished, experienced professionals with extensive corporate expertise and not political cronies. In turn, it must have authority over the boards it appoints to manage the SOEs, and to monitor performance and ensure delivery. While it must report to a suitable government department, it should also have a line of accountability to parliament.

While SOEs should have a development mandate, they should also be financially sustainable and even profitable. Elsewhere in the world, SOE holding companies are important sources of revenue for their governments, delivering dividends every year that helps to fund activities. South Africa has seen some dividend flows, particularly from Telkom which has historically been a regular dividend payer – but it is too rare an exception. Instead, Eskom and Transnet have been massive drains on the public purse, contributing massively to the fiscal problems government now faces.

The draft legislation does provide for the holding company to exercise oversight of SOEs. It also is positive in providing for the corporatisation of state enterprises that are not yet legally companies in line with the Companies Act. But one disappointment is that the legislation envisages the holding company being only sole or majority shareholder, leaving out the option of minority ownership which may sometimes be optimal, as the Telkom example illustrates. Good examples of holding companies in the rest of the world are able to trade their interests in companies to realise the most value for the state.

The legislation itself does not make it clear that the new holding company will achieve the kinds of ends that would be desirable. A great deal will depend on who is appointed to the board of the new company, and then what kind of executive management is appointed. The legislation positions the president as the sole representative of the company, rather than any particular minister such as the minister of finance, which would have positioned financial sustainability as a key concern of the holding company. All business can take from the legislation as tabled is that the new holding company might be a good thing, but it also might not, depending entirely on how it is implemented. Indeed, the worst fear is that it becomes yet another expensive white elephant that adds no value.

The growth imperative now needs to be all consuming for government. There are reasons we have lagged the world in recovering from Covid, reasons that are to do with the legacy of State Capture and our failure to overcome it. Corruption has not been dealt with and we have not fully delivered the structural reforms we need. We need decisive action to turn around our logistics system in particular and accelerate the progress in electricity reform. The private sector is obviously the best way to achieve these – well-regulated and in an appropriate policy environment.

Of course, I would support the expansion of grants to support the poor if it can be done sustainably. At times of strong fiscal performance, like before the financial crisis in 2008, the state did massively expand welfare spending, without damaging business confidence. But we are not in a time like that – now would be completely the wrong moment to expand spending, it would compound negative sentiment and condemn us to an even worse growth outlook. Business and government need to unite instead to deliver the best growth outlook possible, to enable the spending needed.

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BLSA is a business organisation that believes in South Africa’s future and shares the values set out in the Constitution. BLSA is committed to playing its part in creating a South Africa of increasing prosperity for all by harnessing the resources and capabilities of business in partnership with government and civil society to deliver economic growth, transformation and inclusion.

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