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The Reality of State Owned Companies in SA

02 March 2018   (0 Comments)
Posted by: Author: Brian Kantor
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Author: Brian Kantor (Investec)

The Budget Review for 2018-19 informs us that “In cases where state owned companies are making large investments in infrastructure, capital expenditure reduces profitability. Even after these investments are paid for, profitability is unlikely to match private-sector profit rates because these entities often provide public goods and services below the cost of production to enable economic activity……”

Capital expenditure whenever properly managed should be a source of improved profitability and returns rather than of additional waste.  Moreover the requirement a government might make on any enterprise to subsidise some of its customers can be paid for directly and transparently by the government- that is taxpayers. There is an obvious distinction between public enterprises able to charge for their services and public works – as in supplying rural roads -where charges cannot be levied in any realistic way to cover costs.

The Review goes on to tell us however (that) “in many cases, however falling profitability reflects mismanagement, operational inefficiencies and rising financing costs. Over the medium term, state-owned companies need to raise their returns to generate value, and to reduce their reliance on debt and injections from the fiscus”.  (2018 Budget Review p 96)

A combined balance sheet of state owned companies provided in Table 8.2 of the Review indicates how poor the financial performance has become over the years. The combined total assets of these companies totalled R1 225.2 billion in 2016-17. Total liabilities (debts) were R869b. The Net Asset Value or equity of the companies fell by 1.5% last financial year and the average return on equity was am mere 0.3% or about 10 million rand. Adding back interest on the liabilities at say 10% p.a would give them earnings before interest and taxes (also paid to  the owner State) of approximately 97m and so a return on assets of less than 8% -less than the interest cost.

This begs the question as to why they are publicly rather than privately funded in the first place. It is not because they may provide public goods. They might have been founded – backed by the taxable capacity of the nation - because at the time private capital (correctly so) would not have been willing to undertake the risks involved. There may have been strategic or nationalistic objectives that taxpayers had to accept. Such constraints on the availability of private capital sourced globally to fund SA infrastructure have long since gone. Private capital would fund the essential SA infrastructure on favourable market determined terms provided they could be satisfied with the T’s and C’s.

This could take government (tax payers) guarantees for well ring fenced projects with clearly earmarked revenue streams. As with the so intended infrastructure bonds. A much better deal for the tax payers of SA guaranteeing the leasing charges would be private ownership and management of these assets. With these companies broken up and sold off.  Ports and pipelines not only separated from railways and competing with each other and by separating the generation of electricity by a number of independent power producers from its distribution. Partial private ownership or private–public partnerships of various proportions might also attract private capital. But without private sector control of the performance of the managers and workers and their remuneration the efficiency with which the infrastructure is operated and expanded is unlikely to improve.

The reason for the State Owned Companies remaining state owned has little to do with efficiency. It is the political influence of the managers and workers that have kept them so. The have been able to defend their superior employment benefits at the expense of taxpayers and customers. This largesse has brought the system into disrepute and strained the ability of taxpayers to keep the gravy train running. We must hope for reforms of the essential kind that change the goal of the managers of these companies from serving themselves to serving their owners. By so doing relieving taxpayers of the risks of failure that they now carry and by helping their customers for whom they would compete and by so doing helping the economy to grow faster. Rather than being a huge drain on the economy as is now the case. 



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