STUART THEOBALD: SAA and Acsa are giant red flags for private investors in SOEs

There is no sucker unwise enough to take a minority stake in return for their capital and expertise

This column was first published in Business Day 

I suppose it is progress that the ANC’s national executive committee now accepts the importance of introducing “equity partners” into underperforming state-owned enterprises (SOEs). The problem is that the idea — giving outside investors minority stakes in return for their capital and expertise — isn’t going to fly. There is no sucker unwise enough to take such a deal, especially given the government’s history of abusing minority shareholders.

We proved it first with the introduction of private shareholders at SAA. Back in 1999 Swissair took a 20% stake, but when it became clear that the government wasn’t going to follow through with full privatisation, the Swiss got out.

We proved it again with the much-abused minority shareholders in Airports Company SA (Acsa). That sorry case is now embroiled in litigation as shareholders who bought in good faith in 1999 are still fighting to get the government to buy them out at a reasonable price after a promised JSE listing never happened.

But we also proved the converse with the case of Telkom — it was only once the government relinquished effective control that the company was able to take flight.

SAA and Acsa stand as giant red flags for any investor that would consider taking a minority stake in an SOE. To convince them to do it, government would have to effectively remove all risk. It could do that by giving shareholders the right to sell the interest back without incurring any loss (a put option), or by granting them effective control through a management contract with a giant break fee (which is what SBC Communications had in Telkom until 2004 when it sold out). But these approaches just create inefficiencies without any benefit, apart from easier optics.

Red line

Giving private shareholders genuine control is a red line for many of the governing alliance’s left flank. The main problem seems that SOEs would no longer be tools to deliver the developmental state vision. But the sorry state of our SOEs makes it clear that they cannot be such tools in the first place. The developmental state needs to be fostered by government regulation and investment, not by burning money on large companies in which political contestation undermines their viability.

Scanning the financial results of the SOEs makes clear how hopeless SOEs are for development. SAA lost R5.6bn in 2017, the last year it has managed to produce financial results. SA Express has not been able to produce financial results since 2016, and a horror show is expected.

The SABC lost R621m in its 2018 financial year. Denel lost R1.7bn in its 2019 financial year. PetroSA lost R666m in 2018. The Passenger Rail Agency of SA lost R1.7bn in its 2019 financial year. The SA Post Office lost R1.1bn in 2018. Eskom, the Chernobyl of government finances, lost R20.1bn in 2019.

Add that up and we’re on R31.5bn for the most recent financial years alone (and that kind of bloodbath has been happening annually for several years). The one notable exception is Transnet; it made a R6bn profit in 2019.

Of course, loss-making SOEs pay no tax — they absorb it. The developmental state project would be far more advanced had all those companies been managed on proper commercial principles as they would be in private hands, subject to strict regulation.

Contrast the SOEs to Telkom, which this year generated an after-tax profit of R2.8bn, which the government shares through its 40% stake (plus the government collected R1.1bn in income tax). In 2013, the last year before the government got out of the driving seat of Telkom and left things to the board and management, it lost R11.6bn.

While the state and the Public Investment Corporation (PIC) still hold the majority of the shares between them, the PIC’s interests mostly align with those of private shareholders. The board has managed to secure enough cover for management to pursue proper commercial objectives. The government can now realise value by selling off that stake — the 40% stake is worth R14bn. That value would shoot up as shareholders could discount the risk that the government could introduce non-commercial objectives into the company.

Obviously, there are certain public services that must be delivered by the state, and sometimes state-owned companies are the best mechanism. The SABC is a public broadcasting service that provides an important public good, for example.

But there is absolutely no reason for the state to own SAA, Denel, the Post Office, PetroSA or most of Eskom. The public service requirements from them can be better achieved by using licensing conditions. As far as Eskom goes, its generating assets are obvious candidates for the chopping board. The Renewable Energy Independent Power Producers Programme has proved that if you let the private sector compete to supply the state at the best price, remarkable efficiency and price gains are made.

The last remaining objection to selling the SOEs is employment. Eskom, for example, probably employs 15,000 more people than it needs to. It is clearly the case that Eskom would shed jobs in a financial turnaround. But just think of the destruction to employment that has been caused by Eskom’s dysfunction: the deindustrialisation of the economy on the back of the insecurity of electricity supply and massive price increases has cost us hundreds of thousands of jobs. Bloated, inefficient SOEs are also job killers. It is time to let them go, completely.

  • Theobald is chairman of Intellidex.