BusinessDay
Nigeria's leading finance and market intelligence news report.

Vested interests are dragging South Africa down

This month South African Airways will pay its nearly 6,000 staff only half of their November salary. Next month, without a substantial bailout it won’t be able to pay them anything at all.

The partial payment follows a bruising week-long strike that grounded all of the airline’s flights. In the end, workers got a 5.9 per cent pay increase that
management said had been on offer anyway. Some 900 jobs are still threatened amid planned cuts to lossmaking routes. Mismanaged and looted for a decade, the airline has failed to produce accounts for two years running. It has swallowed some $4bn in state aid over two decades.

The government has been divided over what to do. Pravin Gordhan, minister of public enterprises, would like to turn the airline around. Tito Mboweni, the finance minister who must approve any bailout, would like to close it down.

Nearly a year ago, the former businessman compared the chronically lossmaking airline to a chicken farm that wasn’t producing any eggs. If it were his money, he said, he would not invest a single cent.

The government of President Cyril Ramaphosa will decide within days what to do. Sentiment is turning. The idea of pouring money into a flag carrier for middle-class people is beginning to look like a luxury South Africa cannot afford.

The stakes are high. Of the main rating agencies, only Moody’s has South Africa’s sovereign debt above junk status. If it downgrades, South Africa will have to pay more to service a debt already hovering at around 60 per cent of gross domestic product.

Read also: Shoprite mulls exit from Africa except South Africa as earnings dip

Whether the government decides to give the airline one last shot or to pull the plug, Mr Ramaphosa surely understands one thing: the airline is the easy part. The face-off with the unions is merely a dress rehearsal for a much tougher battle ahead: the fight over the state-owned power generator, Eskom, and the battle with its much stronger vested interests. Eskom provides 95 per cent of South Africa’s electricity, mainly from clapped-out, coal-fired power stations.

Some numbers will illustrate the scale of the challenge, which now falls to Andre de Ruyter, a packaging company executive who has been brave — or foolish — enough to take on the role as Eskom’s chief. The company’s $30bn debt is roughly 9 per cent of GDP against merely 0.5 per cent for SAA. This year alone, the government committed to a $4.9bn bailout as Eskom struggles to keep the lights on by fixing and upgrading power stations that are on average nearly 40 years old.

Of Eskom’s costs, some 21 per cent goes to its roughly 47,000 workers, 15 per cent on debt servicing and a whopping 55 per cent on energy inputs, mostly bloated coal contracts.

Eskom is a monopoly. Pulling the plug is not an option. Without reliable electricity South Africa cannot hope to create the growth needed to transform the lives of millions of South Africans still stuck in poverty.

Read also: South Africa hit by another wave of rolling blackouts

So what is to be done? The list is long and the choices are unpalatable.

First is improving the operational efficiency of a grid that has been starved of investment through a combination of mismanagement and theft. The government is rightly considering splitting Eskom into three: generation, transmission and distribution. Private generators could feed electricity into the grid, effectively breaking Eskom’s monopoly. In the long run, it will have to deal with its accumulated debts.

Lurking behind these issues are the hardest questions of all. Stopping the bleeding at Eskom can only be achieved through cutting the wage bill, reducing the cost of inputs or raising electricity prices.

Increasing electricity prices would harm ordinary South Africans and the country’s competitiveness. Cutting the wage bill means an almighty battle with the unions who will defend both salaries and staff numbers, even though Eskom employs at least 15,000 too many people. Reducing the coal bill means renegotiating contracts, many with businessmen who have benefited from black empowerment schemes designed to right the injustices of apartheid.

The coming struggle goes to the heart of what has gone wrong in the post-apartheid era. The efforts of the African National Congress have gone into creating a black middle class through strong unions and favouring black businesses. The impulses behind that attempt at social engineering are entirely justifiable. But they have resulted in huge inefficiencies and cost ordinary South Africans — the vast majority of whom are black — dear.

Mr Ramaphosa will be loath to take on the vested interests that helped him to the ANC presidency. If he cannot, Eskom will drag the country down with it.

Whatsapp mobile

Get real time updates directly on you device, subscribe now.

Comments are closed, but trackbacks and pingbacks are open.