SAA crisis: Gwede Mantashe has the solutions, but can he talk sense to Cyril? - Biznews

12 February 2020 - Time is running out for a resolution of the burden imposed by state enterprises. The only reason SA government bonds have not fallen in price is due to Reserve Bank credibility in fighting inflation and the liquidity of the market in official debt. But that could reverse as the market is bolstered by hot money in search of high yields.

Jonathan Katzenellenbogen

The next few weeks will present big opportunities for the ANC to re-start an economy in which growth is negligible and per capita income is declining. But confusion and indecision would appear to reign supreme.

Tomorrow is the State of the Nation Address in which President Cyril Ramaphosa has the chance to restore economic confidence. Later this month, Finance Minister Tito Mboweni, the lone economic reformist, will go as far as he can to deal with the fiscal crisis.

The Big Five issues are those of Eskom and SAA, the biggest of the failing state-owned enterprises, and the three issues around the related fiscal crisis – revenue shortfalls, the public service salary bill, and unsustainable debt.

Dealing with the state-enterprises crisis could give substantial economic relief, but there are mixed signals about prospects for a resolution. A source of hope has come from a most unlikely source. Gwede Mantashe, National Chairperson of the ANC, and former Communist Party Chair, is a state interventionist at heart. He now says a sell-off of SAA should not be excluded, and that independent power producers should be allowed. Mantashe’s position on SAA is at odds with that of the party and the President.

Bailouts serve to finance debt service, salaries, and current spending on suppliers, and take away resources from valid growth-generating opportunities. Apart from the contribution to employee consumption, there is no value added to growth and development. These are high-risk investments in assets with negative rates of return for the economy.

As the government is faced with revenue shortfalls and a tightening borrowing constraint, it is now drawing on other state-financing sources. A Development Bank of Southern Africa (DBSA) director admitted that normal due diligence was not followed in making a R3.5bn loan to SAA last week. Despite statements to the contrary by the DBSA, a bailout loan to SAA is hardly within the remit of a development bank. For what possible development purpose does a bailout to a failing entity burdened by over-manning and an inflated cost structure serve?

And from the Development Bank, the government moves on to civil servants’ pensions to play a part in bailouts. From there it might well go on to forcing the hand of commercial banks, and then privately held pension funds. Should they refuse, there is always the threat of prescribed assets for private pension funds. Pension funds are obligated to run balanced portfolios to allow sufficient cash flow to support obligations to their members. There is no argument that investment in Eskom either as debt or equity meets these criteria.

And for what possible purpose, other than to finance the continuing loss-making and value-destroying state entities to save jobs, and the beneficiaries of lucrative contracts?

Eskom’s crisis is a priority because it is now a large economic burden on growth. Its debt amounts to about 10 percent of GDP, 80 percent of which is government-guaranteed. Failure to repay debt would have big economic knock-on effects. The cumulative cost to the budget of Eskom, according to the IMF, was more than 9 percent of GDP in the ten fiscal years up to 2018/19.

The Congress of South African Trade Unions (Cosatu) plan for Eskom, reportedly backed by the President, would see about R250bn of Eskom’s R450bn debt taken up by the DBSA and the Public Investment Corporation (PIC), which manages the pensions of civil servants. Full details have not been revealed, but one of the conditions is that there would be no layoffs at Eskom.

The form the plan will finally take might be revealed in the State of the Nation Address, according to Business Maverick. The priority is to take as much debt as possible off the Eskom balance sheet to allay concerns at the credit rating agencies.

What might be the deal behind this financial window dressing? Might the banks and even pension funds be told to cough up to avert prescribed assets? This heightens the risk of an Eskom default contaminating the entire financial sector.

What are Cosatu, as well as Eskom management and employees, giving up for the deal?

As a turnaround plan, this fails to address the problems of bloated Eskom costs due to salary rises, large-scale hiring over the past decade, and the purchasing of coal at way above the world price. Implicit in the plan has to be the idea that the state would ultimately bail out both the DBSA and the PIC when things worsen at Eskom. All this is a bad deal for taxpayers and risky for civil servants’ pensions. Privatisation would mean that assets could be run more efficiently and many Eskom employees could find new more secure work. Besides, it is unclear what Cosatu is really giving up in this, as there are non-Cosatu members and Cosatu members who do not hold Eskom jobs, whose funds will be used under the proposal.

Mantashe’s plan to allow independent power producers to play an expanded role represents an ideological change of some importance. However, Mantashe also wants a state-owned rival to Eskom, indicating that few lessons have been learned from the state’s disastrous recent history in the sector.

Hopes for privatisation of Eskom’s coal-fired plants have been rejected by the powers in the ANC. Could it be that, after a time, private producers are allowed to raise their share of total production? This would be a very gradual approach and one that would risk political derailment.

SOE Plan (SAA). More of Zapiro’s magic available at
SAA debt is at R12.7bn, small compared to Eskom’s, but it too is a massive economic burden on the state. The airline is in business rescue to avert bankruptcy and the report of the team tasked with the turnaround is due at the end of the month. The hope last December was that the appointment of the rescue specialists would pave the way for a plan free of political interference.

But there are signs that the rescue team may in the end have to bow to government, thereby compromising the exercise. President Ramaphosa has said that government disagrees with the rescue team’s decision to cut routes, and there were no plans to sell the airline.

“SAA is not only a great symbol for the country, but it is also an economic enabler,” in moving people around the country, the President told the SABC.

The arguments for state ownership on the basis of the need for a national symbol and the importance of its economic function have lost validity. Around the world, governments have either sold off or reduced their stakes in airlines but left them under independent management.

Why can’t a private airline with South Africa in its name be a national symbol?

Why can’t SAA be an economic enabler in private hands and at no cost to government?

In contrast to the president, Gwede Mantashe says SAA can be sold off or liquidated. His reasoning is that SAA does not fly the working class, but the elite, and therefore must make its own way to survive. Give the subsidies rather to taxis and trains, he says. SAA must make money, be closed down, or sold, is the Mantashe line.

The Mantashe reasoning is at odds with prevailing party policy and could be applied more broadly to all state enterprises. In the case of Eskom, the working class pays heavily in taxes and in the form of opportunities lost to the economy for investment in infrastructure and much else.

Time is running out for a resolution of the burden imposed by state enterprises. The only reason SA government bonds have not fallen in price is due to Reserve Bank credibility in fighting inflation and the liquidity of the market in official debt. But that could reverse as the market is bolstered by hot money in search of high yields.

Could the Mantashe approach be the first step toward a new pragmatism in dealing with these problems?

Failure to deal with them in this State of the Nation and Budget month could push the economy into a new and awful space.

Jonathan Katzenellenbogen is a freelance financial journalist. The views of the writer are not necessarily the views of the IRR.

This article first appeared on the IRR’s online publication, Daily Friend.

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