Business

State-owned enterprises have built the Chinese economy. They can save SA too

2019-09-10 23:31

China’s SOEs are competitive and claim a huge global trade market – SA can do it too, writes Yonela Diko

Economist Milton Friedman theorised that the main purpose of business is to maximise profit for its owners and shareholders (in the case of a publicly traded company).

Business, therefore, exists to create value for its owners.

Others, however, have taken the purpose of business further, to the very foundation of society.

To these, business exists to create value for customers and to make products customers need.

Hence business exists because society exists.

Either way, these interpretations reflect the symbiotic relationship between business and society – where business meets the needs of society, consumers and owners.

State-owned enterprises (SOEs), on the other hand, are government entities created to “undertake commercial activities on behalf of government”.

The reason government enters into such commercial enterprises is to generate resources to provide public goods and public infrastructure.

While the profits of private business are enjoyed only by some members of society (owners and shareholders), profits from SOEs are meant to be enjoyed by all members of society through the provision and maintenance of public goods.

This means both the products and profits of SOEs belong to society.

In South Africa, the role of SOEs goes deeper than the provision of services and the reinvesting of profit into the provision of further public goods.

Over the past few years, unfortunately, our SOEs have failed to meet their purpose.

The ANC’s 2017 policy conference took a firm and instructive resolution on SOEs.

In the outcome of the strategy and tactics discussion, the policy conference agreed that SOEs were pillars of transformation and were a potent tool to achieve strategic economic interventions.

To achieve this, they needed to be technically capacitated and properly orientated.

Institutionalising ethical standards was also seen as critical in ensuring the effectiveness of SOEs.

The rationale was that it is through the state and SOEs that we can deal with what was characterised as “racial capitalism”.

Over the past few years, unfortunately, our SOEs have failed to meet their purpose. Crippled financially and rendered incapable of providing services, they have, instead of providing profit for capital expenditure, been basket cases of regular recapitalisation themselves, draining valuable resources from other productive pursuits.

This has raised questions about whether, as a country, we need SOEs.

In the late 1970s into the 1980s, Europe and the US had this conversation about their necessity – whether they were fulfilling their purpose or were just a drag on the state, and whether their continued existence could be justified given their efficiency vis a vis private entities.

The outcomes resulted in the sell-off of state assets. SOEs were seen as incapable of providing efficient and effective services, and, being poor in financial management, were a drag on the state and its finite resources.

The conclusion was that selling them off could provide the needed resources for the provision of other public needs.

SOEs were also focused on industries that did not really interest private capital and were largely localised.

Management was also viewed as lacking the drive private owners had, therefore producing a lacklustre financial performance.

That was until the rise of China’s SOEs, along with those in Saudi Arabia, Thailand and other countries. Being state-owned was seen as an economic dividend.

The deployment and accountability to the Communist Party of China, and its personal and professional discipline, suddenly became a core advantage, along with constant pressure to prove and protect the party’s legitimacy among the people as capable of running and outcompeting other modern states.

Today, China’s SOEs alone are responsible for about 10% of the world’s exports.

They are highly efficient, globally competitive and claim a huge global trade market share.

Western private business experts and advisers have suddenly become interested in SOEs, and even jealous of them.

Read: SA’s debt is bleeding the economy

Today, these Chinese SOEs are accused of unfairness because, unlike private businesses, they have business guarantees from their government and have better access to bank loans, while private companies are battling to secure funding – an unfair advantage that is said to be distorting the free market system.

These sudden accusations and fears are curious because these are the same advantages SOEs have enjoyed since their inception and, in fact, these guarantees were seen as the very reason SOEs were inefficient.

So what has changed?

China is home to 109 corporations listed on the Fortune Global 500, but only 15% are privately owned.

Chinese state corporations are outcompeting private businesses and are more profitable than private businesses.

This poses serious existential questions to the international private business model that is widely exported by the West and its business schools.

Private businesses suddenly feel vulnerable and their Western underwriters want to change the rules of the game at the World Trade Organisation.

If private institutions are said to be superior to government-run institutions, how did our textbooks miss this?

Last year, Chinese SOEs outperformed the private sector in revenue and profit due to a healthy domestic economy and, more importantly, the efficiency of their SOEs.

So how did Chinese SOEs flip the script on private companies?

In his book, The Governance of China: Volume 2, Chinese President Xi Jinping makes it clear what the Communist Party expects from government officials.

“Officials at all levels must develop a sound attitude towards power, maintain lofty moral pursuit, and retain absolute respect for the party, law and discipline.”

He also says officials must be “diligent in acquiring knowledge and improving their competencies ... to become more skilled in their work”.

Bloomberg columnist Noah Smith, writing Is China a capitalist or communist success story?, argues that it’s the latter.

While most people think China’s rise coincided with the opening up of its markets to free enterprise and private ownership, this is not the case.

What the Chinese did was list their SOEs so that government can own them differently – not directly as the state, but almost as a player in the private space.

This was done using different mechanics.

“For example,” writes Smith, “Baoshan, a Shanghai steel manufacturer, is at least 75% owned by BaoSteel, which is wholly government-owned. In reality, Baoshan is a state-owned enterprise, but in the official figures, it’s counted as a private company.”

This is where the ANC has failed. The focus has been singularly on deployment of officials into SOEs, but not demanding high standards of performance, ethics and efficiency.

As a result, unlike China, which can impose the highest penalties on corrupt officials, we have simply replaced them, one after the other, making a mockery of our SOEs.

For South Africa, as with China or elsewhere, what is seen as the core reasons for the failure of SOEs are in fact our greatest advantages.

A governing party must put a high premium on continuous political and economic study to build the most effective public officials and political agents, and ensure the country builds a huge class of capable civil servants who would contribute to ensure state organs are run with efficiency and effectiveness.

Firstly, it’s party deployment. The three core values of the ANC – Batho Pele, selflessness of leadership and commitment to the cause of the people, held honestly and diligently, with dire consequences where they are violated – become the greatest leadership qualities for any leader of an SOE.

A governing party must put a high premium on continuous political and economic study to build the most effective public officials and political agents, and ensure the country builds a huge class of capable civil servants who would contribute to ensure state organs are run with efficiency and effectiveness.

Secondly, government guarantees do not exist to be abused by failed leadership, but rather to give all stakeholders with a vested interest in an SOE confidence in their investment and make SOEs prime investment vehicles, particularly for pension funds and other investment funds with a lower risk appetite.

This means that, when an SOE does well, it serves as the guarantor of the most important and sensitive investments of the people, beyond giving life to the needs of consumers and the country.

SOEs have built the Chinese economy, if not the world’s economy.

They have built Saudi Arabia, Thailand and other countries ravaged by misaligned neoclassical economics.

SOEs can build South Africa too.

Diko is a media strategist and political commentator

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December 8 2019