The privatisation conundrum and the paradox of the South African economy

When the ANC came into power in 1994 it sought to mirror the Afrikaner nationalist strategy — create a space for capitalism, but in turn keep space for the government to intervene in the economy in a broad-ranging way.

Most whites these days forget that they are beneficiaries of an economic chimaera — “socio-capitalism” — that was installed to the benefit of a small minority during the heyday of apartheid. The fleet of state-owned enterprises (SOEs) we have today come from this socio-capitalist past.

South Africa is a mixed economy and this outcome is a century old because it was fundamentally about aligning different interests and claimants around the economy into an acceptable arrangement between excessive socialisation versus privatisation.

When different holders of power are incapable of moving each other out of the way, compromises can be found or each party simply leaves the battlefield only to engage the fight at a later date if they feel they have gained some position of advantage over the other. Nothing in this world of compromises or stalemates is static as different groups with power and influences go through their ups and downs.

This debate, of how much socialism versus capitalism there must be in our economy, is playing itself out again over the Independent Power Producer (IPP) furore and the Eskom unbundling. This is, however, a debate that is distracting us from the real issues and the things that work and do not work in our mixed economy.

The mere mention of the splitting of Eskom into three parts has nurtured the conclusion that it is a Trojan horse for privatisation. There may be some validity in the idea, but it’s not so clear-cut. Given Eskom’s woes and its inability to pass through full costs to the consumer, it is still to be seen whether private firms will line up to buy a stake in the utility.

Public entities can be run well if they are managed by the best people, they are transparent and have high degrees of accountability for performance. Most of our SOEs are mired in poor performance and improper governance.

There are exceptions. Eskom’s peer SOE, the Airports Company South Africa (ACSA), is expanding rapidly outside South Africa. ACSA is more of a property company these days than an airports company.

With regulated airport taxes on the decline, ACSA had to diversify its revenue base in other areas of asset acquisition and services. Despite a dip in profits, ACSA has not run to the government for guarantees and is using its own balance sheet to finance future growth.

You have to be intrigued at how can two state entities under the same government be run and perform so differently?

Another example from the continent is Ethiopian Airlines. Its expansion makes South African Airways (SAA) pale in comparison. Like South Africa, Ethiopia is a mixed economy and its government is pursuing a vigorous developmental agenda modelling itself somewhat on the Asian and Chinese examples. Ethiopian airlines has close to 12 million customers annually, multiplying its passenger occupancy rate fourfold compared to a decade ago.

Italian firm Enel, initially roped in to advise how to fix Eskom, was also once a national utility. In the 1990s Enel unbundled in the same manner proposed for Eskom. Today, Enel has close to 24% ownership by the state, but has a much larger customer base and has become a global energy player. In fact, it is because Enel is a significant player in South Africa’s IPP market that the Department of Public Enterprise recently replaced its advice with that of a local task team that will be looking into the technical problems besetting Eskom at present.

The IPP debate is a useful distraction from the fact that Eskom is already a convenient milking cow for debt providers, coal miners, coal transporters and other suppliers. If most of Eskom’s profits go into paying the cost of finance, then most of Eskom’s balance sheet is already privatised by dint of the debt burden.

The irony of the ownership debate today is that you do not need to own an asset to privatise it. You can simply find ways to channel its profits to private channels or vehicles.

This is what the early oligarchs did in Russia: Open a bank, push debt down the throat of a state entity; if it could not pay, either squeeze more interest out of its debt or convert the debt into equity. As long as the state is able to repay debt, a creditor will benefit as the SOE will not default or there is little danger of a haircut down the line when default is imminent.

Another form of privatisation by stealth is when private firms receive a lottery for annuity profits through long-term contracts charging them below market rates for power. This has happened before with sweetheart deals for energy-intensive users in the past and premium prices for coal producers today — especially if there is internal collusion. Social benefits are transferred to private owners.

The one-sided debate about IPPs is full of contradictions. While their assets may be privately owned, the market for power is a highly regulated one where government-procured renewables during a buyers’ market in a structured competitive process try to ensure that market offers the best price with the most optimal socio-economic benefits.

Guarantees for IPPs reduced the risk (and cost) of finance for their owners — but the benefits of publicly procured energy were passed on to consumers through subsequent iteration of bids (even though the first rounds were quite expensive).

There are many unaccounted-for benefits such as the learnings from the introduction of new technology and the expansion of new forms of energy services. Much of these learnings are yet to be socialised by a state entity.

The government also had the ability to invest directly or indirectly in IPPs. Both the Industrial Development Corporation (IDC) and the Public Investment Corporation (PIC) have invested in IPPs. So have some union investment arms. There is ample opportunity to increase the government’s share in IPPs through refinancing, as the commercial banks have to exit at some point.

Given that so much of the coal supply chain is privatised, while its social, environmental and health costs are extensively socialised, it is ironic that there are few attacks of the privatised coal industry with similar vigour to that applied to the IPPs.

There are no ideological cornerstones or theories to be won here: The fact of a heavily malfunctioning state entity forces us straight into the abyss of falling off a cliff or making astute compromises under very difficult circumstances.

The fact remains that as Eskom flails and limits our fiscal space to redistribute and invest, energy is already being privatised due to advances in generation technologies. Rich households and private firms are steaming ahead to install solar technologies on their rooftops so they do not depend on the state for electricity. They are starting to impact on municipal finances and their ability to cross-subsidise poorer households.

Government and public entities can benefit from a mixed economy as supply risks are diversified, efficiencies are introduced and the state can spread its own savings and investments more widely. Through public investments, some of the profits of the open market are socialised.

If the privatisation of a social good can take place through various forms not dictated by ownership characteristics, while the socialisation of private profits can take place in a regulated market, the real question we face is about governance: Who controls the governance space and whether those who control it can be trusted to serve the public interest. This is a perennial question all citizens face. Citizens harmed by poor public service or corruption want accountability. Citizens being ripped off by private firms want recourse and look to government, civic organisations or the law for protection.

A number of cases now sit with the Competitions Commission and National Consumer Council on precisely these questions of private monopoly and pricing strategies that seek to secure excessive profits at the expense of consumer interests.

Perhaps we should also have an independent body for citizens to vote with their feet when it comes to poor governance and services from public enterprises if independent boards are not doing their job.

The ratio of social versus private goods will be a continuous debate in South Africa, but nothing is won in favour of the social if corruption, poor governance and performance continue to bedevil the developmental arm of the state. DM