State-owned enterprises (SOEs) play a significant role in the South African economy. In key sectors such as electricity, transport (air, rail, freight and pipelines), and telecommunications, SOEs play a lead role, often defined by law, although limited competition is allowed in some sectors (e.g., telecommunications and air). The government’s interest in these sectors often competes with and discourages foreign investment. South Africa’s overall fixed investment was 19 percent of GDP. The SOEs share of the investment was 21 percent while private enterprise contributed 63 percent (government spending made up the remainder of 16 percent). The IMF estimates that the debt of the SOEs would add 13.5 percent to the overall national debt.
The Department of Public Enterprises (DPE) has oversight responsibility in full or in part for seven of the approximately 700 SOEs that exist at the national, provincial and local levels: Alexkor (diamonds); Denel (military equipment); Eskom (electricity generation, transmission and distribution); South African Express and Mango (budget airlines); South African Airways (national carrier); South African Forestry Company (SAFCOL – (forestry); and Transnet (transportation). These seven SOEs employ approximately 105,000 people. For other national-level SOEs, the appropriate cabinet minister acts as shareholder on behalf of the state. The Department of Transport, for example, has oversight of the state-owned South African National Roads Agency (SANRAL), Passenger Rail Agency of South Africa (PRASA), and Airports Company South Africa (ACSA), which operates nine of South Africa’s airports. The Department of Communications has oversight of the South African Broadcasting Corporation (SABC).
Combined, South Africa’s SOEs that fall under DPE’s authority posted a loss of R15.5 billion (USD 1.3 billion) in the 2017/2018 financial year. In recent years many have been plagued by mismanagement and corruption, and repeated government bailouts have exposed the public sector’s balance sheet to sizable contingent liabilities. The election of President Cyril Ramaphosa and appointment of Minister of Public Enterprises Pravin Gordhan signaled a renewed emphasis on improving SOE governance and performance.
The state-owned electricity giant Eskom generates approximately 95 percent of the electricity used in South Africa. Coal-fired power stations generate approximately 93 percent of Eskom’s electricity. Eskom’s core business activities are generation, transmission, trading and distribution. South Africa’s electricity system operates under strain because of low availability factors for base load generation capacity due to maintenance problems. The electricity grid’s capacity reserve margins frequently fall under two percent, well below international norms. Beginning in November 2013, Eskom periodically declared “electricity emergencies,” and asked major industrial users to reduce consumption by ten percent for specified periods (usually one to two days). To meet rising electricity demand, Eskom is building new power stations (including two of the world’s largest coal-fired power stations, but both are years overdue and over budget). Eskom and independent industry analysts anticipate South Africa’s electricity grid will remain constrained for at least the next several years. In December 2019 Eskom implemented State 6 load shedding, when portions of the grid are put offline for planned or unplanned maintenance on a rotating basis, which was a major blow to the economy and raised concerns about the viability of Eskom’s ability to generate sufficient power to meet South Africa’s electricity needs. In February 2019, President Ramaphosa announced that Eskom would be split into multiple entities for power generation, transmission, and distribution, but new structural changes have not occurred within the utility other than a new CEO starting in February 2020.
In October 2019 the DMRE finalized its Integrated Resource Plan (IRP), which outlines South Africa’s plan for new power generation up until 2020. The IRP calls for an increase in renewable energy, the decommissioning of coal-fired power plants, and does not provide for new nuclear power. The South African government has implemented a renewable energy independent power producer procurement program (REIPPP) that in the past three years has added 1500Mw of a planned 3900Mw of renewable energy production to the grid and in April 2018 signed 27 Independent Power Producer agreements to provide an additional 2,300 MW to the grid. DMRE published a Request for Information (RFI) with the public comment period ending on January 31, 2020 for new power generation. Companies were asked to provide solutions for energy generation that the government would consider in developing procurement requests for proposals. Given the new IRP, the RFI, and Eskom’s implementation of load shedding, industry is expecting new procurement rounds to be announced for renewable energy and battery storage in 2020. Considering that new energy generation procurements will take place and there is the potential for a new bid round for the REIPPP, recent credit rating agency downgrades could impact investors ability to obtain credit to finance long-term energy deals. All three major credit ratings agencies have downgraded Eskom’s debt. The rating agencies’ decision follows Moody’s downgrade of South Africa’s sovereign debt rating in March 2020, affecting South African government-related entities such as Eskom.
Transnet National Ports Authority (TNPA), the monopoly responsible for South Africa’s ports, charges some of the highest shipping fees in the world. In March 2014, Transnet announced an average overall tariff increase of 8.5 percent at its ports to finance a USD 240 million modernization effort. High tariffs on containers subsidize bulk shipments of coal and iron ore, thereby favoring the export of raw materials over finished ones. According to the South African Ports Regulator, raw materials exporters paid as much as one quarter less than exporters of finished products. TNPA is a division of Transnet, a state-owned company that manages the country’s port, rail and pipeline networks. In April 2012, Transnet launched its Market Driven Strategy (MDS), a R336 billion (USD 28 billion) investment program to modernize its port and rail infrastructure. Transnet’s March 2014 selection of four OEMs to manufacture 1064 locomotives is part of the MDS. This CAPEX is being 2/3 funded by operating profits with the remainder from the international capital markets. In 2016, Transnet reported it had invested R124 billion (USD 10.3 billion) in the previous four years in rail, ports, and pipeline infrastructure. In recent years ratings agencies have downgraded Transnet’s rating to below the investment-grade threshold. In November 2019 S&P downgraded Transnet’s local currency rating from BB+ to BB.
Direct aviation links between the United States and South Africa are limited to flights between Atlanta, New York (JFK), and Washington (Dulles) to Johannesburg and Newark to Cape Town. The growth of low-cost carriers in South Africa has reduced domestic airfares, but private carriers are likely to struggle against national carriers without further air liberalization in the region and in Africa. The launch of the Single African Air Transport Market, which is composed of 23 African Union member states including South Africa, in January 2018 demonstrates the potential for further cooperation on the continent.
In South Africa, the state-owned carrier, South African Airways (SAA), relies on the government for financial assistance to stay afloat and received back-to-back bailouts of R5 billion (USD 357 million) in 2018 alone to repay creditors. That same year, the airline’s management requested a R21.7 billion (USD 1.55 billion) bailout from the government over three years to turn the company around. In 2019, however, creditors initiated business rescue proceedings, the equivalent of Chapter 11 bankruptcy, to restructure and salvage the airline after a crippling strike over wage increases left the airline’s finances in complete disarray. SAA last released its earnings for fiscal year 2017/2018, in which it lost R5.7 billion (USD 407 million) and brought the company’s cumulative losses since 2011 to a total of R23 billion (USD 1.65 billion).
The telecommunications sector in South Africa, while advanced for the continent, is hampered by regulatory uncertainty and poor implementation of the digital migration, both of which contribute to the high cost of data. In 2006, South Africa agreed to meet an International Telecommunication Union deadline to achieve analogue-to-digital migration by June 1, 2015. As of May 2020, South Africa has initiated but not completed the migration. Until this process is finalized, South Africa will not be able to effectively allocate the spectrum freed up by the conversion. The biggest development in 2019 was the unveiling of the Department of Communications and Digital Technologies (DCDT), which reintegrated the Department of Communications (DOC) and the Department of Telecommunications and Postal Services (DTPS) that had been split 2014.
In October 2016, DTPS released a policy paper addressing the planned course of action to realize the potential of the ICT sector. The paper advocates for open access requirements that could overhaul how telecommunications firms gain access to and use infrastructure. It also proposes assigning high-demand spectrum to a Wireless Open Access Network. Some stakeholders, including state-owned telecommunications firm Telkom, agree with the general approach. Others, including the major private sector mobile carriers, feel the interventions would curb investment while doing little to facilitate digital access and inclusion. In November 2017, DTPS published a draft Electronic Communications Amendment Bill that would implement the ICT White Paper, but the Minister of Communications withdrew the bill in February 2019. Private industry and civil society had criticized the reach of the bill. The Minister stated that the DCDT would consult with relevant stakeholders to re-draft the bill before submitting it to Parliament.
Although in 2015 and 2016 senior government leaders discussed allowing private-sector investment into some of the more than 700 SOEs and a recently released report of a presidential review commission on SOE that called for rationalization of SOEs, the government has not taken any concrete action to enable this. The CEO of SAA has stated that a fund-raising plan to sell a stake in SAA to an equity partner will be shelved until the airline can shore up its balance sheet. He announced the restructuring of the national carrier into three segments: international, regional, and domestic, but he has not articulated how that would occur in practice. SAA is currently in business rescue.
Other candidates for unbundling of SOEs / privatization are ESKOM and defense contractor Denel.