R75bn shortfall forces focus on bloated SOEs and failed bailouts

Finance Minister Enoch Godongwana now needs to find R75 billion that would have flowed from the 0.5-percentage point increase in the value-added tax (VAT) that was cancelled yesterday.

One of the answers that should be staring him in the face: the cash-guzzling state-owned enterprises (SOEs), which alone have swallowed R520 billion in taxpayer money over the past decade.

Critical services at risk

Experts said the reality of a revenue shortfall in the medium-term continues to place critical government functions like education, defence and health care at risk of further defunding.

Wealth management strategist Lynn Marais of Chelete Management said the VAT reversal “may soothe political pain, but it slices a deep hole in the fiscal bucket”.

She said the big question is, where will the money come from? And while some government departments have already been stripped budget-bare, others like SOEs continue to guzzle enormous chunks of taxpayer money.

By the end of March this year, the cumulative cost of SOEs over the past decade or so totalled about R520 billion.

This means the average annual cost to government is about R52 billion.

“Constantly throwing billions at state-owned enterprises with no turnaround strategy is fiscally reckless,” said Marais. “Without an accompanying revenue-replacement strategy or fiscal reform plan, this VAT rollback could undermine more than just budget numbers – it risks our financial credibility.”

ALSO READ: A R1 billion U-turn: Scrapping the VAT increase leaves no winners, just absolute chaos

Privatisation and reform pitched as solutions

Government can fund the medium-term shortfall by getting out of businesses which should be run by the private sector, said Organisation Undoing Tax Abuse chief executive Wayne Duvenage.

“Government should get out of the state entities that compete with the private sector like airlines and armament manufacturing,” said Duvenage.

He added government processes and political interference tend to hold these businesses back.

“They are not agile or efficient enough to grow and become the successful organisations they could be. Government mustn’t fear a lack of control by allowing these entities to become privatised. The private sector will employ people and pay taxes, which is what government seeks.”

Academic dean of Regent Business School Shahiem Patel suggested that public asset optimisation might contribute to addressing the shortfall.

“This could entail better management of underutilised state properties and SOE reform,” said Patel.

Performance over ideology

Ray Langa, chief executive of Leagas Delaney, said to balance the books, “we must make tough calls, starting with SOEs that no longer deliver strategic value”.

“Entities like [Passenger Rail Agency of South Africa] need serious review. It’s time to put people before inefficiency and focus resources where they matter most,” said Langa.

Yet, Patel reckons SOEs still have a role to play. “I don’t think any SOE should be closed. A fully functional suite of SOEs will help drive economic growth,” he said. “The issue is that not all SOEs are fully functional. The focus should be on corruption-free, efficient, and effective SOEs.”

ALSO READ: Economists welcome scrapping of VAT increase

Khudusela Pitje, chief executive of New GX Capital, said there are inefficiencies within the public sector that should be given attention to fill the revenue gap.

“Government should focus on ensuring each of the SOEs and municipalities have a return of capital mentality to optimise what is a shrinking wallet. Being focused on growth and job creation will, over the long term, be the right medicine for the country and its fiscus.”

Economist Dawie Roodt has long been an advocate for the privatisation of bailout-hungry entities such as South African Airways.

The bigger picture

But he cautioned the loss in revenues due to the VAT reversal is a drop into ocean compared to the alarm bells the International Monetary Fund’s downgrade of South Africa’s economic growth this week.

“In the bigger picture, the shortfall is not so bad. Our growth outlook that’s been slashed because of geopolitical events, a potentially unstable [government of national unity]. It is critical we look past the VAT issue, too,” said Roodt.

Pitje said government needs to strike a balance between delivering key developmental mandates that should drive social and economic return.

Roodt added the VAT debacle simply ended up being political grandstanding, just to see who would blink first.

“In this case, it was the ANC, and they have egg all over their faces,” he said.

NOW READ: VAT U-turn: How businesses felt the brunt of political roulette