Economics 101 – Why SOEs (public entities) has never and will never work in South Africa

State-owned enterprises (public entities) are meant to be independent bodies partially or fully owned by government. By textbook definition, using public authorities rather than full privatization is seen as taking advantage of private-sector efficiencies and maintaining public accountability.

Forget about corruption, blame the system rather than the government

Let’s look at an example: You receive annual output targets and an annual budget that must be utilized to achieve those output targets. In the private sector you and the entity will get rewarded for achieving your output goals if you were under your annual budget.

In the public-sector there is no reward for extra output or staying under your allocated budget. If you have reached your output goals with less funds than your total budget, you will simply get a lower budget for the next year.

In short, the private-sector does not allow for greater output levels at reduced costs (economies of scale). The cost saving from one entity will simply be used in another entity. In turn, having too much of the economic output controlled by the government does not position a country to produce goods and services that allows a country to produce goods and services in tandem to reduce the overall input costs (economies of scope).

Having too much of the economic output controlled by governments will create an economy that does not aim to achieve profitability and advanced means of output, but rather an economy that operates by doing ‘just what’s needed’ as there will be less resources next year if you achieve your output goals with less than the budget that you have received.

Inevitably, the government will have too much on its plate as sectors that are draining fiscal funds will receive additional funding at the cost of sectors that are performing at economies of scale.

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Caveat Capital MGMT (Pty) Ltd is a CATII – Authorized Financial Services Provider (FSP no. 24777) registered at the South African Financial Services Conduct Authority (FSCA).