South Africa faces economic woes with a projected growth rate of just 1.0 percent, trailing global counterparts. The International Monetary Fund cites logistical constraints, especially at state-owned Transnet, as a major hindrance. Rail and port inefficiencies impact exports, exacerbating the economic downturn. Frequent power cuts and ongoing bailouts to state enterprises add to the financial strain. Despite calls for privatisation to spur growth, the ANC clings to state control, prioritising ideology and patronage over economic revitalisation, potentially perpetuating the nation’s stagnation.
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Later this month the Minister of Finance, Enoch Godongwana, will present a budget against a backdrop of disappointment. The country’s economic growth rate this year is likely to be lower than previously expected, and the budget deficit and public debt will be higher as a share of GDP.
Our growth has been dismal for almost the past 15 years, with our economy failing to make strong sustained bounce-backs after the Great Financial Crisis of 2008 or the Covid lockdown. And now, as the world economy experiences surprisingly resilient growth, South Africa languishes.
In an update to its World Economic Outlook forecast released last week, the International Monetary Fund cut South Africa’s projected growth rate for this year by nearly a percentage point to just 1.0 percent since its forecast last October. And next year it only expects us to grow by 1.3 percent. Last year the Fund estimates that we only grew by 0.6 percent.
With the world expected to grow by 3.1 percent, emerging markets and developing countries by 4.1 percent, our 1.0 percent is pitiful. The Chinese economy might be slowing down, but it is still expected to grow by 4.6 percent this year. India, the new economic superstar, will grow by 6.5 percent. The Fund expects our own region, Sub-Saharan Africa, to grow by 3.8 percent, revised down by 0.2 percent because of our lower growth.
A high growth rate would make it far more possible for us to make inroads into our over 30 percent unemployment rate and poverty.
And what accounts for our revised downward-growth figure?
The Fund says the main reason for our slower-than-expected growth rate is, “increasing logistical constraints, including those in the transportation sector, on economic activity.”
More precisely, that is the mess at Transnet, the state-owned freight rail, port, pipeline, engineering, and property behemoth pulling down the economy. The railways are a mess and the ports do not operate at full capacity because of a lack of investment and poor management. This has been in the making for years, but hit a crisis point toward the end of last year.
A shortage of railway rolling stock means the mining companies cannot export all that they are capable of producing, and fruit farmers cannot get much of their produce to market on time. It also could mean a shortage of key spare parts to keep machinery going.
Frequent Eskom power cuts are already baked into our low growth rate, with the Reserve Bank recently estimating that we lose about two percentage points in growth every year from these. To some extent, the squeeze of Eskom on the economy has been lifted by the massive investment in private power production and independent power producers coming on stream, but this is still insufficient to meet the country’s power demands.
The other economic burden from the disaster at state enterprises is the bailouts that they require from the state. In presenting the Medium-Term Budget Policy Statement in 2021, Godongwana said there would be no additional funding. “We need to practise tough love and remove this ‘Daddy must help you’ mentality. SOEs have been badly managed and have failed to deliver. In many instances, most of them have also been devastated by state capture, making them increasingly reliant on government support,” he said.
Yet last December, the finance minister agreed to a R47 billion guarantee facility, now the preferred instrument for public enterprise bailouts. This will allow Transnet to roll over any debt that does not have a state guarantee with lower interest borrowing, owing to the state’s assurance of repayment. The guarantee is not a cash bailout that would be shown on the budget.
There is a price to pay for these guarantees. As a result of these guarantees, the amount the state can credibly commit to repay is lowered. There is a market constraint on the debt the state can raise and the guarantees it can offer. That means there is still a wider cost to the economy from the use of this bailout technique.
And what is the debt largely used for, by public enterprises?
The answer is to largely fund debt service and operating losses, rather than massive new capital investment. And the investment that is managed by public enterprises does not have the returns for the economy that private investment tends to generate.
No leaps in improvement
Despite help from organised business and commitments, we do not see leaps in improvement at public enterprises. Last year there were a record-breaking 332 days of power cuts, and Transnet remains an economic drag. Two years ago, the plan was to concession off Eskom’s fleet of coal-fired power stations for private operators to run. There is nothing on this yet. And we have yet to see sustained results from a Transnet turnaround.
We will probably hear words of reassurance and reform from President Cyril Ramaphosa, when he delivers his State of the Nation Address tomorrow evening. Speaking at the African Mining Indaba, we had a bit of a taste, “We will unlock massive new investment in SA’s rail system. This will support jobs in the economy through mining, trade, and agriculture,” he said.
Many governments faced with this extent of a breakdown in their state enterprises have sold off these burdens for what in our case would be a rand apiece, just in order not to have to keep pumping taxpayer money into them. The ANC is committed to the false hope of trying to turn them round, allowing limited private participation, but certainly no wholesale privatisation. The problem for the ANC is that a sell-off would be an admission of immense ideological failure.
Less scope for patronage
And practically it would mean that there would be less scope for patronage through cadre deployment and contracts. Much might change with privatisation, particularly if this were to be accompanied by an end to empowerment legislation and cadre employment.
While some countries such as France and Germany have not done a bad job in running their state enterprises, in most cases even natural monopolies are best run by appropriately regulated private firms.
Management is better incentivised and independent, there is a lot less political interference and less red tape.
The ANC has chosen to hold onto state enterprises rather than privatising and stimulating growth. It has chosen not to privatise at the cost of reduced economic growth. This trade- off preserves state-owned enterprises as a means of patronage and power at the cost of economic growth. It is the preservation of party power at the expense of a public benefit, faster growth of the economy.
Our economy will remain stuck in its low growth, high unemployment trap so long as the ANC continues to sacrifice growth for ideology and patronage.
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Jonathan Katzenellenbogen* is a Johannesburg-based freelance financial journalist.
This article was first published by Daily Friend and is republished with permission