Why state enterprises will never be fixed

Posted 30 September 2015 Written by Leon Louw

State-owned enterprises can never succeed no matter who runs them, argues Leon Louw of the Free Market Foundation, because the normal disciplines of the market are absent. Managers will serve their political masters, knowing they will be fired if they don't. 

We suffer from ignorance and denialism about the reason our nationalised undertakings (state-owned enterprises or SOEs) are doomed to failure. CEOs, chairpersons and directors are so commonly replaced or suspended in a futile and desperate bid to defy reality that staff seldom know nor care who their bosses are.

When she announced Eskom’s latest chair and CEO, Public Enterprises Minister Lynne Brown said "they are part of my ongoing interventions to stabilise Eskom". Ongoing means in perpetuity. Conventional wisdom holds that what troubled SOEs need is good management. Five SOEs were lamented in last week’s press. In 2012, Leadership magazine mentioned a "long list of troubled SOEs" and said "besides management upheavals, a number of public enterprise ministers have been replaced".

The symbiotic twin of the leadership myth is that SOEs were efficient during apartheid. Eskom supposedly supplied the world’s cheapest electricity without subsidies, and the Post Office supposedly delivered post efficiently. Exposing the full extent of apartheid SOE mythology is, for present purposes, peripheral.

Suffice it to say that, under apartheid, SOEs received generous cross-subsidies in the form of capital, services and land provided by other departments; the government backed secured cheap loans; they served a small proportion of the population, as President Jacob Zuma pointed out controversially; and so on.

The failure to understand why SOEs are not successful explains, in part, the endless succession of new executives. It never occurs to those doing the appointing that the reason SOEs fail is their inherent nature, not poor leadership.

One reason for the perennial and inevitable failure of SOEs is they entail negative or perverse incentives. Even where SOEs such as Eskom, South African Airways and the South African Broadcasting Corporation are nominally independent, the fact that politicians hire, fire and suspend their leadership means SOEs serve selfish management and short-term party-political ends at the expense of long-term efficiency.

Factors such as tenuous and politicised leadership appointments, monopoly protection, government subsidies and guarantees, and immunity from insolvency ensure that the self-interest of leadership conflicts with the interests of the people they are meant to serve.

The inability of political masters and underlings in leadership to benefit from improved performance, asset values or profitable efficiency promotes corruption and abuse. The lack of reward consistent with performance means that a busy, honest and efficient day that would be a good day in the private sector, tends to be a bad day in the government.

Without the discipline of vulnerable shareholders and investors, and with immunity from consumers free to choose alternatives, there are no efficiency drivers to speak of. These and related institutional realities make it impossible for SOEs to be efficient, regardless of leadership.

Imagined rare exceptions are not real. The most celebrated recent example is the US government bail-out after the 2008 "financial crisis" of nearly 1,000 companies that received more than $600bn and paid back $390bn plus $283bn in dividends and interest. The net government gain was $56bn. Apart from the fact that this was less over the period than would have been earned had the money been commercially invested or left with taxpayers, the crucial factor is that none of the companies were SOEs and none were nationalised. The articulated objective was temporary assistance to viable private companies.

Nothing can change the extent to which SOEs are doomed. We will continue to be impoverished and embarrassed by up to 200 failed SOEs until enlightenment and reality replace antiprivatisation fanaticism.

• Louw is executive director of the Free Market Foundation. This article first appeared in Business Day.

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