Pragmatists versus idealists: How to revive broken SOEs

To privatise or not isn’t the question. If the state can raise billions from the strategic sale of assets, it is compelled to act.

Reviewing the book, Why Nations Fail, Niall Ferguson, author of The Ascent of Money, fittingly says: “For those who think that a nation’s economic fate is determined by geography or culture, Daron Acemoglu and James Robinson have bad news.

“It’s man-made institutions, not the lay of the land or the faith of our forefathers, that determine whether a country is rich or poor. Synthesising brilliantly the work of theorists from Adam Smith to Karl Marx and Douglass North with more recent empirical research by economic historians, Acemoglu and Robinson have produced a compelling and highly readable book.”

Finance Minister Tito Mboweni threw down the gauntlet when he said the government would not be able to support struggling state-owned enterprises (SOEs), which many read or heard as an indication of an intent to privatise.

Okay, I thought, so what’s wrong with that? I continue to wonder.

How can we forget that rating agencies have cited SOEs, including Eskom and SAA, which carry debt approaching R700 billion, among the major risks to the sustainability of the country’s finances?

We face an imminent threat of blackouts as the power utility, Eskom, is constrained by a stunning debt of R454 billion, maintenance issues and design flaws at its new coal power stations, Medupi and Kusile.

The public broadcaster, the SABC, has also been in the spotlight for all the wrong reasons; it should bring us the news, not be the news.

Hlaudi Motsoeneng, the man who to all intents and purposes ran the state broadcaster, was shown to lack a matric qualification and – more worryingly – was willing to lie about it.

An investigation by amaBhungane on a confidential report on Transnet’s R50 billion deal to buy 1 064 locomotives involved a second Chinese supplier in paying what appeared to be kickbacks to a Gupta-linked firm.

A report by law firm Werksmans indicates that China North Rail (CNR) paid a middleman to extract R647 million from Transnet for a project that, by one internal estimate, should have cost just R9 million, according to amaBhungane.

How can we forget the image of the former rail agency Prasa chief executive, Lucky Montana, trying in vain to assure us – the concerned citizenry – that he had the best skills in the now proven liar, former chief engineer Daniel Mthimkhulu.

I have come to a realisation that in South Africa we are two sides of the same coin: On one side there are those who believe the troubles we have with SOEs will be resolved by some divine intervention or, as Ferguson suggests, “faith of our forefathers” who are in bed with idealists.

And, on the other, pragmatists who see things for what they really are and seek the best possible solution.

The believers and idealists hope for a miracle.

To them the concept of partial privatisation or selling off sections of an SOE to private investors to bring in more money to the organisation is blasphemous.

Well, this tone has nothing to do with ideology and beliefs; it is more historical.

See, in 1999 Swissair agreed to buy a 20% stake in SAA for R1.4 billion.

In July of the same year, then public enterprises minister Jeff Radebe gave the privatisation programme a further stimulus by promising to bring in either outside management or equity partners to trim down three large public companies, getting ready for privatisation.

Early in 1996 Nelson Mandela is quoted as saying: “Privatisation is the fundamental policy of the ANC and is going to be implemented.“

This was after a visit to Germany in May of that year.

On the other side, Radebe’s colleague, then communications minister Ivy Matsepe-Casaburri, promised to sell off a 10% stake in public telephone company Telkom to add to the 30% divested in 1997.

Chunks of the state forestry and arms businesses were to be sold that year and the UK and New Zealand postal services were to be hired to clean up the SA Post Office.

In August Radebe promised a full audit of all SOEs by the end of the year in preparation for an accelerated sell-off.

In a usual knee-jerk reaction some regarded this as a grand Thabo Mbeki project (the 1996 Class Project).

The truth is this spectre was replicating throughout the continent. Increasingly, African countries were moving towards free-market policies.

At a Corporate Council on Africa Summit in Houston, Texas (on April 26 to 28 1999), numerous African leaders and senior officials were speaking a new language for Africa.

Julius Nyerere of Tanzania, Modibo Keïta of Mali, Léopold Senghor of Senegal, Kwame Nkrumah of Ghana and Ahmed Sékou Touré of Guinea – the main architects of African Socialism – assured delegates that African Socialism was dead.

Africa was on a new investor-friendly path. And every few months afterwards an African country held its first democratic election.

We’ve heard people claiming to be defending the history of the ANC. Yes, it is true that the liberation movement had longheld nationalisation to be one of its economic principles.

In 1955 the Freedom Charter had called for the nationalisation of the country’s wealth and this remained the most developed statement of the congress movement until the 1980s.

At the ANC’s 1969 Morogoro Conference, 50 years ago, the movement adopted a paper arguing that the basic wealth and resources needed to be “at the disposal of the people as a whole and … not manipulated by sections or individuals, whether they be white or black”.

The organisation’s 1979 Green Book called for the liquidation of economic exploitation.

Similarly, the climate of the late 1980s – when the ANC began the process of developing an economic model for a democratic South Africa – strongly influenced ideas of what was and wasn’t possible.

First and foremost, the unravelling and eventual collapse of the Soviet Union was profoundly influential and deflated belief in centralised state planning.

Second, the South East Asian economies were growing at a rapid pace and appeared to some people to offer an alternative to Anglo-Saxon capitalism, especially in the use of the state.

Third, the social democratic welfare states of Western Europe were facing internal and external economic and political pressures, suggesting limits to that model.

Clearly, at each point the organisation sought to analyse the prevailing conditions at local and global levels to inform its policy position.

So, to understand the hullabaloo about the suggestion of partial privatisation, or selling off SAA, one needs to remember what Milan Kundera called the “struggle of memory against forgetting” in its literal form.

Some people could be idealists extraordinaire, or they have forgotten some of our history or want something to blame on the Ramaphosa presidency (“Ramanomics”).

Therefore, the task we face was (in my view) well-articulated by Mcebisi Jonas (former deputy finance minister), in his book, After Dawn: Hope After State Capture, in which he says: “I think we need to take a different approach about the correlation or the relationship between the state and markets. We need to take a more pragmatic view.”

According to the Privatisation Barometer (2015), China was the leading privatising nation that year, raising an astonishing $176.8 billion through 298 sales of at least $50 million each.

To put this into perspective, this dollar total exceeds the billions raised by all European privatisations for the three years from 2012 to 2014.

It is common cause that the tone of the privatisation debate, as we see it here, has evolved in recent years as privatisation activity shifted towards developing economies like ours and, as a consequence, it was influenced by the past experiences, difficulties of implementation and some privatisation failures in the 1980s and 1990s.

There is sufficient literature of lessons on privatisation programmes around the world to pick from.

But to posit the debate as binary – “to privatise or not” – is reductionist.

The debate is not about the “isms”. It is about reviving broken SOEs so that they help jump-start our economy.

Overwhelmingly, literature reflects a more cautious and nuanced evaluation of privatisation.

Thus, private ownership alone is no longer argued to automatically generate economic gains; pre-conditions (especially the regulatory infrastructure) and an appropriate process of privatisation are important for attaining a positive effect.

Thomas Piketty’s book, Capital in the Twenty-First Century, highlighted the importance of income distribution in the growth process and discussed the effect of privatisation on capital accumulation.

In principal, privatisation need not affect the stock of wealth in an economy, nor its distribution.

SOEs are public assets which earn a return for their owners.

Provided the assets to be privatised are valued in such a way that their price represents the discounted sum of the profits (net present value) to be earned from them, then privatisation means that the state is replacing an income stream with its discounted capital value in its asset portfolio.

The problems require well-designed and sequenced transformation of the economy; the implementation of complementary policies; the creation of regulatory capacity; attention to economic development and social impacts; and strong citizen activism.

In the face of what the sceptics, believers and idealists might say, to fix these man-made harms, we must be pragmatic and identify the scope for efficiency-enhancing options that also promote the wellbeing of workers and economic security of the country.

Maxon is a social commentator

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