South Africa - 8-State Owned EnterprisesSouth Africa - State Owned Enterprise
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 (i.e., telecommunications and air). The government’s interest in these sectors often competes with and discourages foreign investment. The Department of Public Enterprises (DPE) minister has publicly stated that South Africa’s SOEs should advance economic transformation, industrialization and import substitution. DPE has oversight responsibility in full or in part for six of the approximately 700 SOEs that exist at the national, provincial, and local levels: Alexkor (diamonds), Denel (military equipment), Eskom (electricity generation), South African Express Airways, South African Forestry Company (SAFCOL) (forestry), and Transnet (transportation). South African Airways (SAA) was transferred in 2014 to control by the National Treasury. These six SOEs employ approximately 105,000 people. South Africa’s overall fixed investment was 19% of GDP. The SOEs share of the investment was 21% while private enterprise contributed 63 % (government spending made up the remainder of 16%). The IMF estimates that the debt of the SOEs would add 13.5% to the overall national debt.
The state-owned electricity giant Eskom generates approximately 95% of the electricity used in South Africa. Coal-fired power stations generate approximately 93% 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 2%, well below international norms. Beginning in November 2013, Eskom periodically declared “electricity emergencies,” and asked major industrial users reduce consumption by 10% 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. The South African government has implemented a renewable energy independent power producer procurement program (REIPPP) that in the past 3 years has added 1500 MW of a planned 3900 MW of renewable energy production to the grid. Following the sovereign downgrade, S&P dropped the rating to Eskom to a highly speculative B+, with a negative outlook.
Transnet National Port 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% at its ports to finance a $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 ($25 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 ($9.2 billion) in the previous four years in rail, ports, and pipeline infrastructure. S&P dropped Transnet’s ratings below the investment-grade threshold in line with the sovereign’s in March 2017, but the company’s stand-alone credit profile remains at BBB. Of the major South African SOEs, Transnet is among the most competently managed.
Direct aviation links between the United States and Africa are limited, but have expanded over the past few years. 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. In South Africa, the state-owned carrier, South African Airways (SAA), relies on the government for financial assistance to stay afloat. SAA has had decades of consecutive losses including a R5.6 billion loss ($412 million) for fiscal year 2014/2015 and a R1.4 billion loss ($103 million) for 2015/2016. In 2016, the National Treasury agreed to another R5 billion ($353 million at the time) guarantee in exchange for a new twelve member board expected to help the airline turn around. The compromise helped the airline continue normal operations, hire Bain & Company for a three month contract to advise SAA on its strategy, and expand its fleet through the leasing of new wide-body aircraft from Airbus. During fiscal year 2016/2017, SAA lost R4.5 billion ($321 million).
The telecommunications sector in South Africa, while advanced for the continent, is hampered by regulatory uncertainly 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 analog-to-digital migration by June 1, 2015. As of April 2017, South Africa has initiated but not completed the migration. Until this process is finalized, South Africa will not be able to allocate the spectrum freed up by the conversion. Many of the issues stem from the confusion and infighting caused by the 2014 split of the Department of Communications into two departments—the Department of Communications (DOC) and the Department of Telecommunications and Postal Services (DTPS). The DOC is responsible for the migration and has oversight of the sector regulator, the Independent Communications Authority of South Africa (ICASA). DTPS is responsible for ICT policy.
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 all 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. The controversy is expected to delay any policy implementation and contribute to ongoing uncertainty in the sector.
Although in 2015 and 2016, senior government leaders discussed allowing private-sector investment into some of the more than 700 state-owned enterprises (SOEs) and recently released a report of a presidential review commission on SOE, which called for rationalization of SOEs, no concrete action has been taken on the topic yet.Prepared by our U.S. Embassies abroad. With its network of 108 offices across the United States and in more than 75 countries, the U.S. Commercial Service of the U.S. Department of Commerce utilizes its global presence and international marketing expertise to help U.S. companies sell their products and services worldwide. Locate the U.S. Commercial Service trade specialist in the U.S. nearest you by visiting http://export.gov/usoffices.
South Africa Economic Development and Investment