Why State-Owned Enterprises impact Tax Freedom Day

There are 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.

There is a trend worldwide for wealthier countries to have large governments, but South Africa’s government is larger than expected, and is growing steadily. On the other hand, the international trend is for poorer countries to have many SOEs, and for government investment to be a larger fraction of total investment. South Africa manages to be on the wrong side of this trend too. We have more SOEs and government investment than we should for a country at our level of development.

As can be seen from South Africa’s Tax Freedom Day*, which this year falls on May 25, five days later than last year and five weeks later than in 1994, SOEs are a substantial burden on the taxpayer and economy.

Orthodox economics says that enterprises run by the state tend to be less efficient than the same type of enterprise run by the private sector. This is because, in an SOE, the incentives of the stakeholders and the associated bureaucracy, as well as the lack of competition, do not encourage efficiency. Our government has admitted as much in its report on SOEs and in the last two budget speeches. Indeed, the return on investment in SOEs has declined over the last five years to 2.9% in 2014/2015.

Some SOEs are so inefficient that they make large and/or persistent losses. An obvious example is SAA, which has cost treasury more than R30-billion in bailouts since 2007. In 2015, government provided SAA with R14.4-billion in guarantees, which SAA lost no time in ‘needing’. SAA is a major risk for the state. Should it default on its debt, it would leave Treasury holding the tab. Government says it has no plans to get rid of, or to privatise SAA, but is considering a private equity partner and replacing the board. Chairperson, Dudu Myeni, a friend of President Jacob Zuma, however, is considered untouchable in political circles.

There is no good reason to keep SAA. The purpose of an SOE is not to create jobs, but to supply a valued service. While 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 managed to lose R20.6-billion, that is 2% of government revenue down the drain. It may not sound like much, but at roughly the cost of R167,000 per low-income house, that is a missed opportunity of providing 123,600 houses (along with the thousands of building jobs that this would entail). Petro SA was the biggest loser over the financial year 2015/2015, R14.4-billion – mostly in fruitless exploration in Mosselbay. The SABC lost R394.7 million. The Post Office lost R1.5 billion in 2015/2016. SAA and SANRAL make up the rest of the five.

Government has provided loan guarantees of R467-billion for all SOEs. This is 11%, or 1/9th of GDP and nearly half of all government revenue. So far treasury is exposed to R258-billion, or 6% of GDP. Eskom is the beneficiary of 75% of the guarantees and already accounts for R144.5-billion in exposure for treasury. SANRAL was assigned R38.9-billion in loan guarantees and has exposed treasury to R30.2-billion of it. We have already seen that SAA has exposed treasury to all R14.4-billion of the loan guarantees granted them. Apparently 11% of government debt is in foreign currency. SOE foreign debt is 39% of all debt, therefore, SOEs are the main driver of the risk of SA getting an investment downgrade to junk status.

In addition to loan guarantees, government gives SOEs large amounts of cash. For example, ESKOM was given R15-billion, the Post Office R650-million, SANRAL R1.4-billion (over 3 years), and so on.

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 reduced 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 investment rating downgrades. By international standards, South Africa has far too many of them.

* 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 2016 falls on May 25.

Author: Garth Zietsman, statistician and consultant.

This article was first published in Business Day on 25 May 2016



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