Our bloated state entities could easily be privatised

A SPECIAL place in hell must be reserved for state-owned enterprises (SOEs). What makes these entities particularly loathsome is the fact that they purport to do work which can just as easily be done by the private sector much more cost-effectively and at higher levels of service quality. And meanwhile, they serve as a rent-seeking feeding trough for the powerful and the well-connected.

According to the DA, South African Airways (SAA), Eskom, the South African National Roads Agency Limited (Sanral), PetroSA, the South African Post Office (Sapo) and the Passenger Rail Agency of South Africa (Prasa) made a combined loss of R15.5 billion for the 2014/15 financial year and in 2016 held R408.9 billion in government guarantees between them.

In 2015, PetroSA alone reported a loss of R14.5 billion, the biggest loss ever incurred by a state company in the nation’s history. This is money the country can ill afford at a time when it is struggling to meet its own budget.

SAA’s going-concern status rests on government guarantees of R19.1 billion. In the 2016/17 financial year alone, it incurred a loss of R4.5 billion.

SAA has been bailed out approximately 13 times in recent years. One of the difficulties is that government regulates the airlines with a barely disguised monopolistic attitude. To its credit, in recent years the government has permitted private companies to compete with SAA, but then again they are often regulated completely out of competition. There should be open skies for anyone able to operate an airline.

Few South Africans need to be reminded of the rolling blackouts courtesy of state power utility Eskom that occurred in 2007/08 and again in 2014/15. The power cuts crippled economic growth, and the fact that they have ceased is a sign of economic slowdown rather than anything Eskom has done. Furthermore, during 2015 and part of 2016, Eskom managed to supply additional power by making use of outsourced electricity supplies from private suppliers. Extraordinarily, this practice was stopped in 2016 for reasons having to do with price.

More is the pity, as South Africa could benefit from a general rollout of electricity supplied by private suppliers. Ideally, there should be hundreds of small suppliers of electricity.

The Post Office reported a loss of R1.14 billion in 2015/16. The only reason Sapo is being kept alive is because it provides jobs to people whom the government does not want to alienate politically, and because nationally it provides a service.

It is legislated that no other competitor may provide any service in respect of the delivery of letters. In the meantime, the world has switched to e-mails. Even the poor have access to the internet via cellphones.

Postal

Very few people, and even fewer businesses, use the postal service any more. Deregulation of the delivery of letters and private competition would enable local competitors in under-served areas to provide this service where it is still required. That packages can be delivered by the private sector without any difficulty already proves that the notion that the state has to deliver letters is archaic.

In 2015, Prasa bought 13 new locomotives from Europe that were too high for the structures on long-distance routes for which they were intended. The blunder cost R600 million and formed part of a R3.5 billion contract. This is but a small example of the inefficiencies accompanying the SOEs that continue to operate in the South African transport sector. In 2015, Prasa posted an operating loss of R1.2 billion.

In 2015, Broadband Infraco, a broadband infrastructure provider, appealed to the government for a bailout of R500 million to help it sustain operations.

The company has consistently made losses since 2010 and only survives due to bailouts from the government.

Hlaudi Motsoeneng, the former chief operations officer of the SABC, who was appointed to the post despite lacking any qualifications, was an operational and public-relations disaster. Under his watch, senior management received exorbitant salary increases, all while the SABC incurred losses. (In the 2015/16 financial year, it reported a R411 million net loss, an increase from R395 million on the previous year.) Furthermore, as a political mouthpiece for the government, the SABC’s very existence makes a mockery of media independence.

In September 2016, Futuregrowth Asset Management shocked the South African business world when it announced the suspension of new loans to state-owned enterprises. Futuregrowth funded some of the largest SOEs – notably Eskom, Transnet, Sanral, the Land Bank, the Industrial Development Corporation and the Development Bank of Southern Africa – by means of direct loans and capital and money-market instruments.

Futuregrowth expressed concern about the reliability of SOEs as investment destinations. One of the factors in its decision was an announcement that the Presidency would chair a council directly to oversee SOEs, something that could potentially open them up to further political influence. Political influence is a major problem with these entities, and something which privatisation avoids.

Privatisation

We could try to patch up our ailing SOEs, but privatisation would be far more effective. What follows is a bird’s-eye view of privatisation over the last 30 to 40 years. Since the 1980s, approximately $3 trillion worth of state-owned undertakings have been sold off into private hands worldwide.

“Privatisation has been a very successful reform,” writes Chris Edwards, the director of tax policy studies at the Cato Institute. “An Organisation for Economic Co-operation and Development report reviewed the research and found ‘overwhelming support for the notion that privatisation brings about a significant increase in the profitability, real output and efficiency of privatised companies’. And a review of academic studies in the Journal of Economic Literature concluded that privatisation ‘appears to improve performance measured in many different ways, in many different countries’.”

Provided it is accompanied by the creation of competitive markets, privatisation maximises productivity gains.

“British privatisation has been a big success,” writes Edwards. “Bloated workforces at many formerly state-owned firms were slashed. Employment in the electricity and gas industries was cut in half between the mid-1980s (before privatisation) and the mid-1990s (after privatisation).”

This had the effect of saving the government money and is an indication of increased efficiency. Almost without fail, privatisation in Britain improved labour productivity, especially in firms in competitive industries.

Edwards notes: “A British Treasury study found that real prices after a decade of privatisation had fallen 50% for telecommunications, 50% for industrial gas and 25% for residential gas.” Electricity prices were down more than 25% within 10 years of privatisation.

The performance of businesses before and after privatisation has been the focus of intense scrutiny.

Edwards writes: “A 1994 study in the Journal of Finance looked at 61 privatisations in 18 countries and found ‘strong performance improvements, achieved surprisingly without sacrificing employment security. Specifically, after being privatised, firms increased real sales, became more profitable, increased their capital investment spending, improved their operating efficiency and increased their work forces.’

Blighted

Our blighted SOE sector in South Africa must be privatised as soon as possible. There is simply no justification for continuing to inflict so much pain by way of power blackouts, bailout shocks, political patronage, public-fund haemorrhage and poor delivery and service. That anyone – save the trade unions (who needlessly fear job losses), corrupt politicians and their deployed cadres in SOEs – still wants these rent-seeking monstrosities beggars belief.