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Reining in South Africa’s rampant state wage bill

Stabilising public finances won’t be easy given the precarious condition of numerous state-owned enterprises.

The highlight of the South African financial calendar in October was the medium-term budget speech (MTBS). The eyes of the world fell on newly appointed minister of finance Tito Mboweni as he detailed the mid-year state of the South African budget.

The economic stimulus package and the current state of affairs with regards to revenue collection and government expenditure were the most keenly anticipated topics. Mboweni stated that decisive action would support more rapid economic growth and sustainable public finances. This statement sounds simple enough, however, South Africa faces a vast challenge in stabilising public finances given the current weak financial state of a number of state-owned enterprises (SOEs).

Mboweni made two distinct statements that will impact the SOE labour force, albeit with different consequences:

  • Without restructuring, there is a significant risk that the weak financial condition of SOEs will put major pressure on public finances.
  • The main driver of increased spending is large increases in wages and other employee benefits, rather than increases in employment. 

Restructuring an organisation, particularly in an effort to cut costs through increased efficiency, often results in redundant employees being retrenched. Adopting policies to limit the increases of wages and benefits within SOEs would almost certainly result in industrial action as a large percentage of employees within these enterprises are unionised and have traditionally resorted to industrial action over wages. Regardless of these concerns, this is a daunting but necessary task as the cost of servicing SA’s debt is becoming unsustainable. It will reach approximately 18% of all government expenditure by 2026 if SA does not improve its economic growth outlook.

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Table 1 details a few key economic indicators that should be taken into account when making such a decision.

According to the South African Reserve Bank (Sarb), compensation of employees has consistently increased at a rate above inflation. Over the same period, unemployment has been on the rise, which provides even more evidence to the MTBS stating that: “The main driver of increased spending is large increases in wages and other employee benefits, rather than increases in employment.” 

One reason offered for the increased expenditure on wages and benefits: wages at the lowest ranks of public service were increased in an effort to reduce the wage gap. But let us compare public sector pay to private sector pay. Figure 2 illustrates SA private sector general staff pay by grade compared to that of SOEs.

The graph shows that SOE pay exceeds private sector pay across all levels of general staff. The reason provided for accelerating the increases of the wages and benefits of the lower level employees within SOEs may seem like a noble ideal, but there needs to be a link between pay and productivity. If pay is simply raised without increased production, the unit labour cost of staff increases, which ultimately drives up the wage bill relative to production. Within most organisations, salaries and wages form the largest expenditure line item, and the same is true within government and SOEs.

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The question of whether to restructure the organisations’ design or rein in the rate of increases is a controversial topic given the state of the economy and the plight of lower level employees. Employment is critical to the economy and the current unemployment rate of 27.2% (Q2 2018) is unsustainable if South Africa is to become a more equitable society. Conversely, tackling the issue of inflation-plus increase expectations is a monumental task given the rampant industrialised action over wages in this country. The answer will most likely sit somewhere in the middle as every effort needs to be made to preserve employment – although there is a need to restructure organisations to improve efficiency and productivity.

A model of redistribution of employees (to improve productivity) rather than termination of employment, together with more realistic increase demands (within the context of state finances) would alleviate both concerns. This process would require all stakeholders to come together and work as one to find the optimum economic path for both labour and government. It would require all parties to focus on the long term economic path of the country rather than their individual interests and portfolios.

Read: Move to improve infrastructure project outcomes 

Regardless of the path chosen, there will need to be concessions between stakeholders if South Africa is to avoid uncontrollable debt given the current economic path. Debt is not an ‘evil’ in and of itself if it is used for tangible development and the building of infrastructure. But debt used to service expenditure items is the start of a debt trap as the entity using debt in such a way will progressively spend more of their already strained finances to service the ever-growing debt.

The transparency with which the MTBS was presented was refreshing and painted a somewhat grim picture of the current state of the economy. This transparency was very necessary to acknowledge the elephant in the room: growing debt and unemployment. South Africans now know the potential consequences of our current path and need to work together towards reining in the rampant state wage bill.

Bryden Morton is executive director and Chris Blair CEO at 21st Century.

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Good analysis here. The facts are quite damning.

Higher wages in Public sector have not led to productivity, growth or jobs.
In fact the opposite.

Either set productivity targets linked to remuneration for workers or fire them. Often “managing change” means changing the management.

Good luck with this Tito.

Walk into any extension of government and attempt to get efficient service. See the glazed eyes, the irritation, the sloth-like movement, the empty KFC containers. Now, tell me again how these cadres will accept anything below inflation +1, or retrenchments, without burning down the entire country?

Blatt.r…..your KFC analogy spot on

Economists could use it to describe the South African public sector

“The KFC malaise”, “The KFC syndrome”

A well-timed offer of a Nandos chicken works wonders at the South Gauteng High Court.

this boils all down to a choice for the ANC – it’s a voter count to stay in power or a count on stabilising public finances. BIG talker Tito only trying to please rating agencies with another ANC promise. ANC will not give up any votes, no matter the consequences. – The best way to tell a lie, is to tell a very carefully, planed and edited truth…exactly what Tito did.

The ANC’s idea of a “developmental state” is confronted with the realities of the free market. After redistributing the cake, the ANC cadres are now fighting each other for the crumbs. They arrived at the Margaret Thatcher moment, they ran out of other people’s money.

We have the cheapest source of energy in the world, but the price of electricity is the highest. We have the highest unemployment figure in the world, with prohibitively high wages and the most militant workers.

Denel was one of the best weapons manufactures in the world. They are pleading with their client to take them over. Eskom was the best utility in the world and the ANC policies drove it to bankruptcy. SAA was one of the best state airlines in the world. It is bankrupt. We provide free birth control, and then we give grants to incentivize pregnancies.

We need confirmation of property rights to draw more capital investments. The ANC promise voters that they will expropriate without compensation.

What is the root cause of these destructive policies? It is fairly simple. The people in rural districts do not have title-deeds because the ANC and the chiefs believe they will sell the land to the bank. So, people who are not sophisticated enough to own property, have the power of the vote to decide about other people’s property. The chiefs fear that the people will bankrupt themselves if they own property. Well, these same people, as a collective, do own property. In a democracy the citizens are the owners of state assets. These fears of the chiefs became a reality. Even though the people do not own the title-deeds to the land they live on, they pawned their “collective” properties in the form of SOE’s.

The constitution give people the power to shape the country in their own image. The people are doing this at breakneck speed.

Mrs Thatcher also said that the ANC is incapable of governing SA. Sayno more

Only a mad person will continue to do they same thing over and over again, whilst expecting a different result in doing so. Urgent corrective, real actions are now required to turn the tide of economical suicide and self destruction for S.A.

This turn-around must start with the deployed senior cadre. They must demonstrate that the ANC is serious about austerity measurements and they must set the example for the rest of the voting public and the international community to see their absolute commitment.

To start with, all parliamentarians, ministers, deputy ministers, CEO”s, boards and all senior staff at all spheres of government, SOE’s and local authorities should embark on a remuneration moratorium for the next two fiscal years by willingly denouncing any salary increase, any bonuses, any renewal or expansion of perks such official cars, cell phones, laptops, official houses, security entourage, fan-fare parties or indaba’s, sponsorship’s, etc. Discipline starts at the leaders of the ANC family.

That will go a long way to demonstrate the commitment of the ANC to fix the mess that they themselves have created in the first place under the destructive example set by the Zoo-ma brigade.

State employment is not about efficiency, it’s about employing the otherwise unemployable.

State employment and parliament, unfortunately.

Like, what job (besides car guard) could Julius ever hope to do with his little politics degree. Sweet nothing, that’s what. Yet our man Juju sits in parliament with a salary higher than most South Africans will ever see. For adding almost no value to society at all.

I’m so tired of breathing the same air as these people. If every politician disappeared tomorrow, I think society would have a much better chance going forward. Parasites, the lot of them.

They wouldnt last as car guards. Too much time standing. On your own feet.

Come to think of it……..a chill runs down one’s spine realising a year ago when “Zoomer & cohorts” were in still steering Ship-SA, the Govt was adamant to proceed with the unaffordable NUCLEAR-deal with the Russians!!

….that would’ve lead to a nice debt default!!

Countries (and individuals) go broke slowly, and then fast. We are now speeding up.

Government institutions to date have not once won in a round of wage negotiations ..

I had a opportunity to chat with some of the people working at a certain dept due to work. They told me that upper management who are around 40-50+ in age, and usually with only high school level education actively suppress younger employees with degrees. They feel threatened by them and also I’m guessing inferiority complex.

This one lady told me that a employee who was hard working and was on track for promotion was poison when someone put something in her tea while she was away from her desk. She also told me that management and others don’t like people who work hard because they look bad.

Also one thing that shocked me was that everyone came into the office at around 8:30-9 and left at around 4 (Office hours are from 8 till 4:30) These people also take like 1hr+ lunch and there were no repercussion for constant lateness at all.

It was that one department and while the situation is mostly the same, there are some places where if there is a good senior employee, the office is run strictly and efficiently.

To conclude from what I saw, the main reason for inefficiencies in public sector was lazy senior managers.They just spread the culture of laziness and inefficiency. There just isn’t any performance management at all.

It is about management. Any organization or department if you are serious about fixing it you work top down. Fix the leadership and the example they set and the ethics they drive and you fix half the problem.

Nothing will happen, SoEs are supposed to be strategic vehicles of growth or security for the country.

Eskom tried to give 0% increases because they have no cash and have way too much staff, staff nearly burnt down their stations and equipment.

SAA, SABC, Transnet, Denel etc etc need to be privatised or at least partiall so. It seems like all of these institutions have at least double the staff of global comparable, that is unsustainable.

I can’t see the ANC doing anything in the short term and it may be too late to do anything over the medium term, not very surprising as we all understood what Zuma’s policies were doing.

The rural vote guiding the economic policies of SA does not make sense, neither does letting the EFF guide policies. The ANC will be voted in again next year and unless they change path drastically then SA will remain a low growth environment with half of their tax base fleeing.

South Africa burns, while Malusi Gigupta fiddles.

That was more than fiddling!!! Sies!!

Top notch article!
Productivity per taxpayer rand is way too low.
We can probably fire half the entire government( all departments) and if the werkers were productive do better.

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