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Why retrenchments in state owned enterprises fail

2nd September 2015


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In the past few months both SAA and Telkom announced their intention to embark on retrenchment exercises in an attempt to reduce costs.

It seems that these state owned enterprises are massively overstaffed with the number of their employees increasing over recent years at the same time that their financial performance has been decreasing. The end result is excessive overstaffing which cannot be sustained.


At first glance, when seeking a solution, one is tempted to welcome the decision to retrench as it suggests that management is alive to the challenges which they face and are prepared to address them. The matter is, however, not that simple.

Despite these bold announcements, it often happens that the retrenchments are never implemented.  There may be several reasons for this. 


Firstly, by the time that the unions and affected employees are formally notified of the possible retrenchments, inappropriate announcements have already been made that retrenchments are inevitable. These are normally based on studies which prematurely conclude that retrenchments cannot be avoided without factoring in that input from the unions is required. As a result, the unions correctly complain that it appears that a firm decision has already been taken to retrench employees without their knowledge and they question the role they are subsequently expected to play in these circumstances.

Secondly, managers assigned to deal with the retrenchments may lack the expertise to implement the retrenchments. This is particularly the case where their work experience has largely been in the public service and, as such, they have never been exposed to retrenchments.  In addition to this, these managers are also mindful that they too may be affected by the process and therefore the failure of the exercise is not necessarily a bad outcome for them. Unlike in the private sector, there seems to be little appreciation for the fact that the money to fund the “operation” must come from somewhere. These employees therefore work on the basis that government, or more accurately taxpayers, will bail them out.  A failing business in the private sector does not have this safety net and management normally appreciates that painful measures are required to save the business.

Thirdly, these entities tend to abandon their retrenchment plans after legal action is threatened or instituted by the unions. It is often not difficult for the unions to interdict the retrenchment as a result of the failure of the state owned enterprise to follow the required procedures or to provide relevant information. The unions walk out of court claiming that the outcome is a “victory for workers”. Unfortunately, the true nature and effect of the court order is not properly communicated. The message that goes out is that the court has ordered that the retrenchment may not proceed, in the sense that the employer has no right to retrench. However, at most, the Labour Court would have ordered that the retrenchment cannot proceed until the required procedures have been followed. It will not, however,  interfere with a genuine decision to retrench.

In the end the announcements of retrenchments are replaced by announcements that the parties are engaging each other in ongoing discussions, which inevitably means that the proposed retrenchments will quietly disappear over time or are replaced by generous severance packages. 

This outcome has serious consequences for state owned entities and the country as a whole as they continue to employ people who are not needed and cannot be afforded. While the affected employees may survive losing their jobs in the short run, the underlying financial problem has not disappeared. In the case of SAA this has meant billions of rands in bailouts. Other state owned enterprises which are required to deliver important services to the public struggle to do so partly because they are hamstrung by their wage bill.

Urgent thought needs to go into how to address the above concerns in order for state owned entities to be able to adjust the number of employees to financially viable levels.  However, the often excessive salaries paid to senior managers and executives at these enterprises must also be factored in before placing the burden exclusively on large numbers of lower paid employees.

Written by Bradley Conradie, partner at BCHC (Bradley Conradie Halton Cheadle)


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