Why the rationalisation and streamlining of Eswatini’s public enterprises is good for the economy
The National Development Plan 2019/20 to 2021/22 laments the performance of the Eswatini economy, noting that economic growth has been lacklustre for more than a decade to a point that the economy had reached a state of emergency. What it meant, was that, the economy was at a critical juncture where government had to take decisive policy action to restore macroeconomic fundamentals to stabilise the economy and support inclusive growth that can address the country’s low productivity levels, poverty, and inequality. This is consistent with the understanding that the government’s primary role is to create a conducive environment, address market failure and externalities, and provide goods and services that are public in nature.
At the heart of Eswatini’s economic problem is an economy characterised by poor economic growth and heavily dependent on government for employment creation and stimulus. In fact, the dependency on the public sector to drive economic growth in Eswatini intensified in the last decades, such that the overall fiscal position now has a critical and heavy bearing on how the economy performs. Exacerbating the issue is that the major part of the Eswatini’s private sector that has historically been the engine of the country’s long-term productivity and economic growth (that is the manufacturing and agriculture) have experienced lacklustre growth over the last two decades. At the same time, economic activity and employment have shifted to become more concentrated into the public and services sectors, where potential productivity growth is generally far less. Excluding public enterprises, the public sector has grown by an average of 6.1% per year and now makes up 17% of both the economy and employment. If the public sector is to continue on this growth trajectory without associated or even greater growth in the private sector, the Eswatini economy will face significant challenges. Also, a large public sector increases the cost of doing business in an economy. Therefore, the Government of Eswatini (GoE) realising the need and urgency of reforms, re-focused its attention to instituting an economic recovery programme to correct the current situation and to bring the economy back on track. The much needed economic turnaround can only be achieved through a reform agenda that addresses structural bottlenecks including driven by undertaking public sector reforms that create the necessary fiscal space in the short term. This is a fundamental premise that will lay the ground for the private sector to return as the primary engine of the economy. Notably, this is anchored in the current NDP that is being implemented by Government.
The GoE in 2018 developed the Strategic Roadmap (2018-2022) and an associated Government Strategic Road Map Fiscal Consolidation Plan, which requires the Ministry of Finance (MoF) to undertake key reforms that address structural impediments and restores the country’s fiscal sustainability and sets the economy on a long-term growth trajectory. The focus of these reforms is on repositioning the entire public sector so that it becomes more efficient in enhancing government’s role in the economy, which is to facilitate and support social and economic development as detailed in the country’s national development plans.
Specifically, the Consolidation Plan seeks to implement measures that will rationalise government spending and improve revenue generation, while protecting social and core infrastructure/capital spending. It has become public knowledge that wages and salaries and transfers/subventions to public entities now exert the highest pressure on the fiscus, gobbling up as much as 60% of the national budget. To ease this pressure on the fiscus, many people in the economy will also note that government has in recent years limited new hires and implemented other policy measures as part of the consolidation plan to reduce the amount of resources demanded by the public sector for it to be able to facilitate social and economic development more efficiently.
While fiscal reforms have continued to be implemented to some degree within central government, more comprehensive are necessary. Hence, part of the Plan is to extend the reform measures to all public entities to improve the overall operational efficiency of government as whole. The goal is to rationalise the size of the public sector to a level that it becomes efficient in terms of ensuring that the tax revenue it draws from the economy allows it to improve the wellbeing of its citizens by implementing well-targeted public programmes as per the national development plans. The reforms are expected to deliver sustained fiscal improvements and enhance the long-term growth prospects of the economy. To achieve this economic recovery path, there is a need for Eswatini to strengthen its governance systems to ensure effective and efficient allocation of resources to priority areas with high multiplier effects on economic activity and to support social development of the country’s citizens.
Public enterprises (PEs) also known as state owned enterprises (SOEs) or parastatals are a critical arm of government responsible for facilitating and regulating development and growth of the various sectors of the economy. They are essential conduits of public service delivery and facilitators of development and economic growth. That said, Eswatini has had a significant growth in the number and size of PEs and there is need to rationalise this component of the public sector in terms of its size and contribution to the economy in order to achieve the objectives of making government more efficient.
PEs/SOEs are an important instrument in any government’s toolbox for societal and public value creation, given the right context. They play a significant role in promoting a country’s national development agenda, such as providing employment opportunities, promoting development of critical infrastructure and public amenities, and implementing overall socioeconomic and industrial policy. The Kingdom Eswatini has 49 PEs/SOEs and the number is on the high side considering the size of the economy and the ability to sustain these entities. Given that Government’s footprint on the economy is already large, the PEs/SOE sector has to be adjusted to fit the needs of the economy, particularly to make it more competitive and to deliver quality public services. With the ever increasing number of PEs, it is becoming very costly for government to fully support these entities to their expectations, so that they can in turn discharge their mandates efficiently and effectively. In addition, the existence of these entities means a huge cost of doing business in Eswatini as they demand a lot of resources from the economy in order for them to implement their mandates.
Put differently, the huge public sector in which the PEs are part of contributes to a huge tax burden on the economy. All monies collected/generated (tax, levies, etc.) by the PEs are public funds and belong to government. The levies collected by the PEs or even the profits some make are still a tax to the consumer and the economy. It means that consolidation is not just about the PEs that continue to draw from the fiscus but even those that are self-sustaining through revenue generation. In other words, even if a PE is profitable (through a levy or other self-generated income), it might still be wise to consolidate it to allow the economy to breathe. It’s about putting the economy first.
More than 60% of Eswatini’s PEs rely on government support for their recurrent and capital budget. Even those that have a potential of generating revenue, they are performing below expectations and continue to request more from government as their revenue continues to decline. Moreover, the PEs offer costly production inputs (e.g., electricity, telecommunications, etc.,) and, with a few exceptions, represent a significant burden for the budget and are source of fiscal risks for the government. In fact, the fiscal position in which Eswatini finds itself in is as a result of this problem, that is, the large public sector increasing the cost of doing business and in turn making the economy less competitive.
Rationalising the appropriate size, structure, and function of the PEs is key to the success of the fiscal consolidation efforts and to support long-term growth potential of the Eswatini economy. Worth noting, is that despite the expansionary policies in the past two decades, which also includes expansion of the PE sector, the Eswatini economy has in turn seen decelerating private investment, declining external competitiveness, and subdued growth. The history of expansionary budget spending policies and in the background of declining Southern African Customs Union (SACU) revenues has indeed widened the fiscal deficit, resulting in rising public debt, and accumulation of domestic arrears. Even beyond 2020/21, the economic outlook for Eswatini remains fragile and highly dependent on continued fiscal adjustment, which means an implementation of these key public sector structural reforms.
The pace at which the country has been setting up it PEs is concerning and points to a lack of policy/framework for establishing PEs in Eswatini. The expansion of PEs has not been preceded by careful and systematic planning, hence their establishment has been by and large uncoordinated, for some haphazard, and overall largely driven by a response to social and political exigencies rather than based on purely long-term economic considerations. There is no clear criteria that compels the Government of Eswatini to declare departments or organisations as public enterprises. From a general analysis of the mandates, it has been seen that there is sometimes an overlap on their mandates, which then creates duplications and becomes very expensive for the Government.
As a result of this ever growing number of PEs, government’s footprint on the economy through the PEs has been stretched significantly to a point that is now affecting competitiveness and mostly likely contributing to the crowding out the private sector. For example, the high number of commercialised PEs can distort markets because these PEs have an unfair competition with private entities as they have no direct support from government. Since the state is a significant owner of PEs/SOEs, the latter enjoy a monopolistic position in the market and have a competitive advantage vis-à-vis other private enterprises. This creates many unintended market consequences such as inefficiency, non-transparency, and weak governance. Ideally, PEs should be developmental in their approach and contribute to the expansion of the economic base, socioeconomic sustainability, and enhanced government service delivery. The major reason for streamlining of the PEs is to ensure that government returns to its core function, which is:
- To address market failures by bridging market gaps where the private sector does not see value to invest mainly due to initial investment outlays required and high market barriers;
- To provide social services to the public such as education, transport, utilities, etc.;
- To stimulate economic growth by investing in strategic sectors of the economy such as energy, technology, ICT, etc.; and
- To attract local and foreign investors to invest in specific areas of the economy that are earmarked to drive growth.
Various regulatory and institutional frameworks for reforming PEs/SOEs have been adopted by countries around the world in order to stimulate competition, increase efficiency, and improve the level of their performance. Eswatini has to follow suit but must be careful to develop and follow a Public Enterprises Reform Framework that makes sense in the context of the Eswatini economy.