How South Africa Sacrifices Peace, Justice and Good Governance to State Owned Enterprises

The trend worldwide is for wealthier countries to have large governments. South Africa has a government larger than expected and still growing steadily. The international trend for poorer countries is to have many SOEs, and government investment a larger fraction of the total. South Africa has more SOEs and government investment than is normal for a country at our level of development. A recent assessment reported no fewer than 717 State Owned Enterprises (SOEs) in South Africa with total assets of R1 trillion, or 27% of GDP, and government investment amounting to more than 30% of our total investment.

As can be seen from South Africa’s Tax Freedom Day*, which this year falls on May 25, same as last year but six weeks later than in 1994 and a full 2 months later than 1972, SOEs are a substantial burden on the taxpayer and economy.

Orthodox economics says that return on investment in government is lower than in the private sector because, in an SOE, the incentives of stakeholders and the associated bureaucracy, as well as the lack of competition, do not encourage efficiency or innovation. Our government has admitted as much. In its report on SOEs, it stated that, over the five years up to 2014/15, the return on investment in SOEs had declined to a low 2.9%. Shifting resource allocation from private enterprise to government slows down growth which, long term, adversely affects welfare. A 2%, rather than a 1%, per capita growth rate, over 70 years, would result in double the relative welfare.

Some SOEs are so inefficient that they make large and/or persistent losses. An obvious example is SAA, which has cost treasury more than R35-billion in bailouts since 2007. Government says it has no plans to get rid of or to privatise SAA even though there is no good reason to keep it. The purpose of an SOE is not to create jobs, but to supply a valued public service. Employing almost as many people, private companies competing for air routes and customers could supply a far better service without making a loss (at least not one for tax payers to bear). The same applies to all of the other SOEs.

Bad as it is, SAA is not nearly the largest loss maker among South Africa’s SOEs. In 2014/2015, five SOEs managed to lose R20.6-billion or 2% of government revenue. It may not sound like much, but it would have been enough to roughly double the rate of housing delivery – not to mention the thousands of building jobs that this would entail.

No matter whether SOEs are profitable or not, they create a direct drag on the rest of the economy through being protected from competition, and an indirect drag by being a large, wasteful fraction of the economy. Protecting inefficient enterprises, or shoring them up, slows the growth of productivity and reduces the number of sustainable jobs that would result from a growing economy.

To sum up, SOEs are unnecessary for welfare and employment; inefficient or downright wasteful enterprises; a drag on the economy; create major opportunity costs; expose the treasury to significant risk and the country to bad investment ratings.

Another area where the South African government underperforms is in keeping peace and providing justice and good governance, i.e. rule of law. Government has no business doing anything unless it has provided for adequate rule of law. Providing a sound justice system is costly and there is a tight relationship between government consumption and good law indices. Nevertheless governments do vary in how much they spend to provide a given level of rule of law. By international standards, and the current level of government consumption, rule of law in South Africa falls short by 26-27%. Alternatively, given our current state of rule of law, government consumption is 26-27% too high, and, arguably, we need a much better justice system than is being provided for.

By any reasonable standard, South Africa has far too many of SOEs and far too little rule of law. To invest in better rule of law without increasing the tax load to higher growth sapping levels, we need to end wasteful and unnecessary SOEs.

* Tax Freedom Day (TFD) is the day after which South Africans have worked enough days to pay their taxes. Tax Freedom Day is calculated by dividing general government revenue by GDP for a calendar year, applying this fraction to the number of days in a year, and adding a day. TFD 2017 falls on May 25.

Author Garth Zietsman, statistician and consultant.