During Trustco’s Results Presentation
keynote, Dr Quinton van Rooyen revealed a very telling statistic about the
Namibian economy – namely that 58% of the net worth of the top 30 companies
reporting public financial information in Namibia is owned by government.
Furthermore, analysis of his figures showed that whereas foreign companies and
Namibian companies generally give a return on equity of 18% and 21%,
State-Owned Entities only managed a return of 2% - of which 97.6% was
contributed by Namdeb and MTC!
When we consider that government itself
constitutes about 30% of the economy on its own, these figures reveal that
through state owned-enterprises, government itself thus has effective control
of a much larger segment of Namibia’s GDP than can be easily seen. Thus, when the
nation is in a recession, it seems like government itself should have the
capability to kick-start the economy itself – after all, it is in direct
control of a large part of it. Why then are we having a recession? And if
government cannot leverage optimal returns from the SOE’s, why do they exist?
Well, state-owned enterprises form as a
result of a failure of the free market due to natural monopolies. A monopoly
exists when a specific business is the only supplier of a particular commodity.
As a result, if a business is a monopoly, it seeks to maximize profit – but as
a monopoly, it can SET the price of the commodity, as it is the only supplier.
In a competitive market, other suppliers would compete, and drive prices down
to the marginal, or per-unit, cost of the commodity, but when no competitors
exist, the monopoly will increase prices to maximize profit.
A natural monopoly arises when a business
requires high fixed costs to start-up, and has unique resources that can only
be acquired once – such as a port at sea, etc. Natural monopolies, then, mostly
arise due to infrastructure. After all, once a road network or power
distribution network is built, it is much easier for those owning the networks
to expand, and conversely, prevent any competitors from springing up. Hence,
when such a natural monopoly is created, it is in government’s interest to own
it, as government can then ensure that it is run for the people. Or at least,
that’s what they intend.
Unfortunately, state-owned enterprises fall
victim to what is known as the principal-agent problem. The principal-agent
problem develops when a principal (investor/owner) creates an environment in
which its agent’s (managers/officers) incentives don’t align with its own.
Where in a private company, investors demand profits, and align its employee’s
incentives to reward them for increasing profit, either via increased sales or
greater efficiency by reducing costs, now the government usually wants to run
the monopoly to serve the most people. Unfortunately, governments are used to
run government – and set up their incentives in the same way they’re used to.
For any government, its greatest incentive
is to remain in power – to provide whatever promises and services is needed to
ensure they retain the trust and, more importantly, the votes of the public.
Government funds itself via tax revenues – which they can raise because the
people demanded this or that and they need to fund it. When such incentive
structures are replicated in a monopoly, however, you start to see a problem.
With incentives designed to stay in power, there is no incentive to remain
efficient, to provide returns for the people. For the first few years, the SOE
is run at prices much closer to marginal cost, but without incentives to stay
there, soon the incentives to stay in power take hold.
Above-average salary increases are granted,
with perks to keep staff loyal. This increases costs, but no matter – the SOE
is a monopoly and can adjust prices. They are still, after all, cheap. Yet a
few years down the line, these price increases can no longer be tolerated – the
people complain. The principal demands that prices be kept down, and the agents
have no choice but to comply. To sustain their incentive structures, corners
are cut. Efficiency drops, and pretty soon all the returns that had to go to
the people, are now going to those managing the SOE.
That is how the return on equity of a
state-owned enterprise ends up in the doldrums. When we take a look at our own
State-Owned Enterprises, is this not exactly what we see? The solution is
simple – fix the principal agent problem. Ensure that the incentives of the
managers and officers of state-owned enterprises don’t reward staying in their
positions, but rather that they are rewarded for efficiency and service
delivery.
If government finds this difficult, it
should consult the private sector for guidance – after all, these are the
companies that know how to align employee incentives for above-average
performance. In the private sector, there is no qualms about firing employees
who do not contribute to performance. It might be a painful adjustment for
those managing state-owned enterprises, but it is what we as a public not only
expects from them, but what we require from them.
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