Analysis

Why it makes sense to run South African SOEs efficiently but at a loss

By Buddy Wells

THERE’S a lot of talk right now about how much SOEs are costing us.  While most SOEs in SA run at a profit, some like SAA and Eskom have made billions in losses, requiring bailouts from government.  These bailouts give the impression that SOE losses are costing SAns, but is that really true, and is profit important when it comes to SOEs?

To answer this question we must first understand that SOEs are part of the public sector, and SOE profit is similar to taxation in that it removes money from the private sector to the public sector and, in the case of SOEs operating overseas, from the foreign sector to the public sector.

There have been many calls to reduce our government deficit and reduce government debt, but doing so would be disastrous while the foreign sector runs a surplus (due to our large current account deficit of around R200bn per year, mostly due to foreign investors removing profit, dividends and interest).  

Until we can reduce our current account deficit, the foreign sector surplus it creates must be funded either by private sector or public sector deficit, and because private sector deficit is much more harmful than public sector deficit, we must run a public sector deficit to keep our private sector in surplus.

To maintain a public sector deficit, the state must spend more than it earns from taxation and income from SOEs, which increases government debt if it is funded by bond sales.  

Because South Africans generally don’t have much money to spend, demand in the SA economy is too low to incentivise investment in local production.

While demand is too low, and our inflation is not demand pulled but cost pushed (as it is now) it makes sense to increase demand and reduce our private sector costs by reducing taxation. 

Tax adds to our businesses’ cost, as do the fees and tariffs charged by our SOEs.  Reducing tax and SOE fees and tariffs reduces cost push, and increases demand by leaving us more money to spend.

Those calling for our SOEs to be run at a profit are really calling for more taxation (removal of money from the private sector to the public sector), which means higher business costs and less demand for our goods and services.

Instead, while demand, growth and employment are too low, we should be working to ensure SOEs are run efficiently and corruption free, but at a loss so that our business costs are reduced, making our products more competitive, while increasing demand for our goods and services by leaving us more money to spend.

Of course the above is true only if SOE losses benefit the private sector (not the foreign sector) which means SOEs should only procure from local owned companies as far as possible, and try to run overseas operations at a profit, but bearing in mind that losses on overseas ventures (like flight routes) might be offset by added income from trade and tourism that those routes enable.

Article first published in https://buddywells.wordpress.com/

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