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Privatisation of SOEs is not a silver bullet for South Africa


David Buckham is CEO of management consultancy Monocle, and one of the authors of ‘The End of Money — The Great Erosion of Trust in Banking, China’s Minsky Moment and the Fallacy of Cryptocurrency’.

Privately owned and publicly traded firms have repeatedly demonstrated their inability to self-regulate, and their tendency towards greed, exacerbating the wealth gap that continues to distort the social framework and which continues to eradicate basic human values.

The recently released auditor-general of South Africa (AGSA) report on the 14 state-owned enterprises that are audited annually by the government – Eskom and Transnet are not currently audited by AGSA – makes for particularly chilling reading.

Three, including SAA, failed altogether to submit their financials, while the other 11 were all found to not be in compliance. The central themes across the SOE audits, and explicitly referenced in the consolidated national and provincial audit report, were procurement mismanagement and irregular wasteful expenditure.

These are terms that, to many, will be completely analogous with corruption. In essence, the conclusion that will be drawn is that the extent of irregularity in expenditure across the SOEs, which is measurable from the audit exclusions, will be a number that will estimate the low-water mark for the cost of corruption, and specifically State Capture.

The auditor-general report will further fuel the calls for privatisation of some, if not all, state-owned enterprises. As Nazmeera Moola argues in her Business Maverick article “24 billion reasons why the government needs to worry about its debt”, the government could hypothetically reduce its extra interest costs by as much as R9-billion if, optimistically, SAA were sold, and Eskom was broken up as outlined by Tito Mboweni.

Additionally, she argues, “we also need progress on the government wage bill – progress that reduces the growth in the wage bill next year”. While the idea of reducing wasteful expenditure, and the idea of improving the efficiency of Eskom is laudable and seems self-evident to be the only viable path forward, I have several misgivings in respect of this line of thinking.

First, and perhaps most importantly, any economic policy directive should be cognisant of the political and social environment in which the idea is posited. The national government, its SOEs, and provincial government and its ancillary services employ roughly 13% of all employed people in the country (2.1 million civil servants out of 16.3 million total employed, noting that just 10.1 million are employed in the formal non-agricultural sector). Post-apartheid, were it not for government jobs, the unemployment rate in South Africa would be even worse, and barring our poor education system – another hangover from apartheid policy – this single metric is the most significant measure of success or failure of this country, even considering our annual interest charge.

Official unemployment now sits at 29%, which continues to be the most stubborn of all hindrances to this country. A policy that reduces the wage bill of a significant portion of the country’s employed people, achieved either through cutting jobs or reducing salaries, would be disastrous for economic growth, social cohesion, and confidence. It would further increase unemployment, inequality, and potentially, the number of people living below the poverty line.

To adopt this position, however, does not in any way advocate the idea of simply increasing the wage bill and does not advocate continuing to increase civil servant salaries above the rate of inflation. Nor does it advocate that we should accept non-performance of SOEs as a necessary evil. Rather, it may be far more politically viable, as well as far more economically mature, to institute rigid performance criteria with real and immediate consequences for non-performance at a director-general level, for example, than simply privatising, breaking up SOEs, or laying workers off. Imagine the positive psychological effect on aggregate performance of firing a few non-performing ministers, rather than simply imposing a financial wage bill mandate. Perhaps a scalpel can be taken to the operating table, rather than a hammer.

Second, in contemplating the broad calls for privatisation of all SOEs – not only those that are most publicly failing, namely SAA and Eskom – it is striking to note there is a fundamental assumption that underlies this economic philosophy: that privately owned firms run more efficiently and are more successful at delivering services than publicly run institutions. Not wishing to sound like a closet communist, but this assumption is simply not true if one takes into account concerns for long-run social equality and basic fairness.

Privately owned and publicly traded firms have repeatedly demonstrated their inability to self-regulate, and their tendency towards greed, exacerbating the wealth gap that continues to distort the social framework and which continues to eradicate basic human values. When the US deregulated the energy market, Enron emerged, and cynically and maliciously manipulated the energy supply to California so that they could continue to overcharge for gas power by orders of magnitude. When Iceland denationalised its banks, a decade later, total bank assets to GDP had skyrocketed to 800% and the country thereafter imploded, probably never to fully recover.

The 2007/2008 financial crisis clearly demonstrated that the laissez-faire free market system is logically implausible, since without government bailouts, the largest financial institutions on Earth would have failed, the entire international monetary system would have seized up and the world would still, a decade later, be in the deepest of depressions. As it was, 107 of the top 1,000 banks in the world by asset size, effectively failed and required significant bailout funding or nationalisation to continue functioning, without which the world would have gone back to the Dark Ages.

In South Africa alone, the number of failed banks over the past two decades is shocking. There was Saambou, FBC Fidelity Bank, the Regal Treasury Bank, PSG Investment Bank, African Bank, and VBS. And this is within an industry that is lauded for being world-class.

The stories of Steinhoff, Tongaat Hulett, EOH, Omnia, Sekunjalo, and even the radical erosion in value of firms such as Aspen, never mind the anti-competitive behaviour within the construction industry, do not motivate at all the argument for privatisation. Particularly in a country whose unemployment rate is the real albatross around our necks in terms of our economic and social future.

When, in a recent interview with Joseph Stiglitz – the Nobel-prize winning economist known for his very critical view of the Chicago school of economics, the policies of Milton Friedman, and what he calls the free market fundamentalists – conducted by Dr Gilad Isaacs on the topic of South Africa’s economic policies, his primary message was to warn against the policy of austerity.

Isaacs asks him at one point, “We had the MTBPS and there was an announcement of widespread cuts both in terms of social services – health, education and so on – and also in terms of infrastructure investment. Put in a crude way: would you turn around and say to us ‘that’s the wrong way to go’?” Joseph Stiglitz’s answer is declarative: “What I would say is I would be very worried.” He compares the outcome 10 years post-crisis between the economic policies pursued by Portugal and Greece respectively. The latter pursued austerity and is now a failed state. The former borrowed and built infrastructure.

Contemplate next year, 2020, and imagine the difference between a country that laid off a significant portion of its employed population and made no attempt at reviving the economy through infrastructure development, versus one that endured, for a little bit longer, a heavy interest burden, but kept jobs, built dams and bridges, and held senior officials, both public and private ones, truly accountable. DM


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