PRIVATISATION IN SOUTH AFRICA AND AFRICA

By Leon Louw, Executive Director of the Free Market Foundation of Southern Africa.

WHITHER SOUTH AFRICA AFTER MANDELA?

According to the experts, the ANC is determined to turn South Africa into another black African economic disaster. It seems incapable of getting anything right. They are centralising power, nationalising mineral and water rights, terminating efficient out-sourced services, intensifying censorship, violating the rule of law and the constitution, interfering with financial markets, politicising the central bank, socialising health care, ignoring property rights, victimising employers, threatening the press, implementing centrally planned “industrial clusters” and “development corridors”, denying international patents, and more. Under the ANC corruption, crime and unemployment have reached all-time highs.

According to other experts, the ANC has adopted high growth free market policies under “GEAR”, the stock market is at all-time highs, agriculture and transport have been liberalised and privatised radically, tax rates are down, restrictive laws are being deregulated, democratic values are upheld, hundreds of thousands of formerly homeless people are now housed (with water, electricity and other services), black living standards have risen without reduced white standards, state corporations are being commercialised and privatised, budget deficits have been slashed, government functions are being outsourced competitively, subsidies are being cut, the civil service is being reduced, inflation is down, investment is up, small business is booming, there is unprecedented stability and racial harmony.

Driven by a binary imperative that informs public discourse, commentators tend, here even more than elsewhere, to see and predict one of two opposites: boom or bust. As philosopher John Hospers once said, the words he wants on his grave are: “It’s not that simple.”

In truth, ANC economic policies and performance are neither clearly good nor bad. Economic policy is pretty directionless. There is no detectable policy paradigm or philosophy. Instead there is a random muddle of inconsistent and often contradictory policies: a muddling along scenario.

In the wake of South Africa’s recent general election there are few indications of the direction, if any, South Africa is likely to follow under its new President, Thabo Mbeki. Predictably, clues are as muddled as policies hitherto. There are hints that Mbeki might bring an end to the labour policy insanity that has driven labour costs, and thus unemployment, to unprecedented levels (over 25% of the labour force is now unemployed). During and after the election the ANC re-committed itself to its pro-market GEAR policy, privatisation and small business deregulation.

In direct contradiction, it re-committed itself to its anti-market RDP policy, and announced mineral and water right nationalisation, and continued with draconian and unconstitutional consumer protection laws, and nakedly racist affirmative discrimination.

Whilst analysts are waiting anxiously to see which way Thabo Mbeki will go, the earliest indications are that he does not have any significant change of direction in mind – or, more he does not have any direction in mind. In other words most things can be expected to continue improving slightly and slowly, whilst some continue deteriorating, under conditions of low growth and investment, and high unemployment and crime.

LIBERATING AFRICA

Meanwhile, increasingly, other African countries are moving towards free market policies. At the Corporate Council on Africa Summit in Houston, Texas (26-28 April 1999), numerous African leaders and senior officials were speaking a new language for Africa. “African socialism”, delegates were assured, is dead. Africa is on a new investor-friendly path. And every few months an African country holds its first democratic election.

At a recent Center for International Private Enterprise (CIPE) conference in Harare, Zimbabwe, various speakers explained privatisation/liberalisation programmes in their countries. It has become customary for people from many African countries to engage in a “My country is privatising more than yours” contest. Examples are to be found in every issue of one the growing number of African business magazines.

There are many examples: water privatisation in Angola; agro-industries, transport, mining, beverages and tourism in Cameroon; 105 firms in Congo; palm oil industries in Cote d’Ivoire; electricity and water in Gabon; breweries, mines, resorts and land in Mozambique; miscellaneous parastatals and government services in Kenya; game reserves, breweries, tour operations and hotels in Tanzania; retail stores, flour mills and pharmaceutical companies in Lesotho; 11 state enterprises including chemical products, tobacco, matches, airports and telecommunications in Mali; telecommunications in Mauritius; a new privatisation programme coinciding with democratisation in Nigeria; 213 companies including telecommunications, hotels, airlines, banks and coffee marketing in Uganda; and collieries, telecommunications, forestry and forest industries, insurance, chemicals, sawmills, engineering, refineries, publishing, fisheries, mines, hotels, engineering in Zambia.

By 1997 the World Bank had documented conservatively over 2700 privatisations in Africa.
Number of Privatisation Transactions
Year Annual Cumulative
Pre-1990 - 362
1990 298 660
1991 322 982
1992 237 1 219
1993 220 1 439
1994 345 1 784
1995 437 2 221
1996 497 2 718

Source: Jean-Louis Sarib, V-P, Africa region, WB.

The degree to which these figures are conservative is potentially extreme, since the cumulative number listed for South Africa by 1996 (9) is less than 1/3 of the number of privatisations that occurred in just one town, Welkom.

The number for some African countries in just a few years was impressive, such as Mozambique (548), Angola (331), Tanzania (244), Ghana (205), Zambia (183) and Kenya (145). For the first time since decolonisation most African countries are listing positive per capita growth rates (31 of 48 in 1996).

FROM NATIONALISATION TO PRIVATISATION IN SOUTH AFRICA

“Nationalisation of the mines, banks and monopoly industries is the policy of the ANC and a change or modification of our views in this regard is inconceivable.”
Nelson Mandela, 1990.

“Privatisation is the fundamental policy of the ANC and it will be implemented.”
Nelson Mandela, 1996.

Privatisation started in South Africa before it had started elsewhere in Africa. Under the former apartheid regime the privatisation programme included the iron and steel, and the petroleum industries; toll roads; vehicle roadworthy testing; agricultural marketing; aspects of broadcasting and telecommunications, by way of example.

What was and remains more common than direct privatisation is commercialisation, corporatisation, and unbundling of state undertakings. There has also been substantial privatisation at regional and local government level. In the city of Welkom, for instance, over 30 municipal functions were privatised. The small town of St Lucia out-sourced almost everything to the point where it employed only two people: a Town Clerk and his/her secretary, whose job it was to negotiate contracts with private providers.

During its early years the new ANC government suspended privatisation, and spoke of renationalising and reregulating what had been privatised and liberalised by its predecessors. But by 1996 privatisation and liberalisation was official ANC policy. Instead of proceeding with the reversal of privatisation processes started by the former National Party, the ANC continued with them, after a period of limbo.
Railways and Harbours
The South African Railways & Harbours Administration (SAR&H) was the country’s biggest organisation, second only to the government itself. Were it a company it would have been one of the biggest in the world. It included the country’s railways, harbours, national airline, container depots, and much more – it even had its own statutory police force. As part of a lengthy process over 15 years SAR&H was transformed and, ultimately, dissolved. The basic functions were unbundled, commercialised or corporatised into numerous subsidiaries most of which fell under, Transnet Limited, a state owned company which describes itself thus: “Transnet Limited has met the challenge to change from being a bureaucratic state run organisation (South African Transport Services) into a dynamic group of businesses”. Transnet and its subsidiaries are being privatised incrementally. Initially a minority share is sold to a "“strategic equity partner”, a private company or consortium. What this tends to mean is that day to day management is transferred to the “partner”, which contributes new skills, finance and technology. In due course the remaining entity is privatised.

The former SAR&H monolith has been divided into seven major and a few lesser subsidiaries: Portnet (harbours), Transnet (railways), South African Airways (airline), Autonet (road transportation), Petronet (pipelines), PX (parcel services), Metronet (commuters), FastForward (rail freight), Propnet (real estate), Transwerk (workshops/mechanical engineering), Protekon (port engineering), The Airports Company (airports), Transtel (telecommunications), and others such as Promat, Connex and Datavia.

Some activities were simply discontinued and left to private enterprise, such as airport buses, porters and catering. Some railway tracks and rolling stock (trains) were privatised fully, such as the narrow gauge Banana Express near Durban and the Apple Express near Port Elizabeth. Private trains are now also permitted on commercialised government tracks; the most significant of which is the internationally renowned Rovos Rail.

A 30% share in Transnet’s fleet management services was privatised in a sale to Viamax Fleet Solutions, a consortium of private businesses, black “empowerment” interests, and trade unions. After an open tender procedure, the new company secured the contract for the maintenance of 5000 vehicles owned by Autonet, and is expanding into private sector fleet maintenance and management.

Surplus railway land has been transferred to Propnet with a view to exploiting the commercial potential of substantial amounts of surplus land through sale or development. Stations are being commercialised into profitable business centres. Engineering and technical services have been transferred to Protekon Ltd, which also envisages expansion by seeking private sector contracts.

The new state owned and partly privatised companies have boards of directors drawn increasingly from the private sector. They must operate just like other companies, as profitable business ventures, without subsidies or, in due course, any privileges or protection. To this end, commercialisation coincided with varying degrees of deregulation, including the admission to the market of private competitors, mainly in the form of alternative transport modes. The only subsidies that remain are for commuter services to historically black areas, on the grounds that they serve commuters who were forced by apartheid group area laws to live far from their places of employment and far from business centres.

One of the most conspicuous successes of this policy has been the emergence of the now famous Cape Town Waterfront. It has converted the Cape Town harbour into a world class recreational and commercial tourist attraction. It has a board of directors drawn largely from the private sector. Previously the area had only harbour facilities and one commercial restaurant. Now there are three leading hotels, one of the largest shopping malls in the southern hemisphere, theatres, night clubs, countless restaurants, entertainment areas and the like.

The harbour company has passed commercialisation down the line by outsourcing some activities, such as security and maintenance, and is seeking privatisation partners for its container handling and depots. The SAR&H police force – which policed railways, harbours and airports – has been dissolved. Some security needs have been out-sourced and the rest is left to the regular national police service.

An important aspect of privatisation has been liberalisation and deregulation. The most conspicuous example of this has been the emergence of a huge microbus industry competing with former government bus and rail monopolies. Within a decade there were 100 000 new black-owned microbuses, accounting for 300 000 jobs and R6 billion worth of capital investment. This was achieved, not only without affirmative action or financial assistance, but despite continued harassment and restrictions.

In a recent statement the former Minister for Public Enterprises, Stella Sigcau announced that part of the national airline, and two of the non-core assets, Connex and Transwerk, would be sold within 18 months. She said that she was “optimistic” that the pace of privatisation generally would accelerate during 1999.

As a result of the success of the railways commercialisation, I was consulted by the Kenyan government on the restructuring of its railways. A similar approach was adopted. In some respects, Kenya has overtaken South Africa, and is beating it at its own game. I also played a small role in the deregulation of Zambia’s railways. Both countries now allow private trains on government rails, much as private vehicles, planes and ships use government roads, airports and harbours.
Airlines
In a recent Briefing Paper, Freedom in the Skies: Air Transport in South Africa, Terry Markman (Free Market Foundation, Johannesburg), describes the air transport revolution. “Today our ‘open skies’ policy is one of the freest – if not the freest – in the world. Anyone can enter the market and operate on any route, subject only to safety, insurance and financial requirements.” Benefits include reduced spending on subsidies, increased revenues from taxes and capital realisation, lower air fares, increased commuter and freight traffic, and increased flight frequencies.

National airports were transferred (see above) to The Airports Company, 30% of which is being sold to Rome Airport Company – which entails the added benefit of constituting direct foreign investment.

Amongst the more successful manifestations of airport commercialisation has been the conversion of airports into profitable business ventures. Most of the airports have expanded and modernised. They no longer have restaurant, duty free shopping or car rental monopoly franchises. Johannesburg International Airport has a commercial conference centre.

One of the key issues addressed in the Markman Paper is sequencing:. should privatisation precede deregulation, follow it, or should they coincide? The conclusion he reaches is that privatisation before deregulation is the least desirable. Inter alia it leads to monopoly abuse. It conceals the potential benefits of privatisation. Privatisation after deregulation is preferable because the entry of private competitors increases pressure for improved efficiencies and, ultimately, full privatisation. Indeed, it is seldom realised that deregulation is a form of privatisation in that, to the extent that it allows private entry, there is a spontaneous transfer of market share to the private sector.
Local Government
At the opposite end of the spectrum is the privatisation of the fire service of the city of Benoni. This resulted not only in improved efficiencies and reduced costs, but in numerous innovations, such as the combination of ambulance services – also privatised – with fire services, and the utilisation of the fire service’s radio transmitters for cellular telephone purposes.
Universities
In response to reduced subsidies, government universities – previously statutory monopolies – have been forced to privatise (outsource) much of what they do. They have enjoyed cost savings with improved efficiencies. Simultaneously, private universities, mainly by way of distance learning, have entered the market successfully.
National Orchestra
The government cut the National Symphony Orchestra’s subsidies, and privatised it. For a period of music lover’s distress, it was assumed that it would disappear. Instead, it now performs more frequently to more people. Subsidies had the effect of rewarding it for not playing music, at least not of the kind people wanted to hear.
Armaments
One of the unintended consequences of sanctions was the development by the government of a sophisticated nationalised armaments industry, Armscor. It was commercialised into Denel, and unbundled into five subsidiaries: aviation, artillery, civilian products, IT, and real estate.
Roads
Another successful privatisation has been in the areas of road construction, management and maintenance. There has been virtually no government investment on major road construction in recent years. Private contractors are now primarily responsible for road construction under the “BOOT” system: build, own, operate, transfer (to government after 25 years or more).
Land
The South African government owns between a quarter and a third of all the country's land by area, and probably more by value. Most black people live on government owned land as tenants. An integral part of the government’s land reform and housing policy is (a) to transfer land to homeless people, and (b) to upgrade tenancies to ownership. When and if completed there will be about 10 million new land owners, in what will be one of the world’s greatest acts of empowerment and privatisation.
PRIVATISATION METHODS

Privatisation is usually thought of myopically as the sale by the state of assets. The standard privatisation literature tends to reinforce this view. The privatisation discourse in South Africa, as in most African countries, tends to be confined to the sale of large state undertakings – and how much the government can get into its coffers. Specifically, it is assumed that privatisation transfers government monopolies to private conglomerates, thereby enriching a few elites.

According to critics of privatisation, this occurs at the expense of the poor, especially labour. Brendon Martin calls privatisation “A Plan for Legalised Mugging” in an analysis of “Who Benefits from the Privatisation of State Assets.” He concludes that: “In short, privatisation guarantees very little except that a few people get very rich”, at the expense of the masses. In order to reach this perverse conclusion he has to ignore not only the substantial mass benefits that flow even from privatisation in terms of his limited conception of the process – for which its protagonists are partly to blame – but 90% of privatisation techniques.

Such confusion and ignorance also explains, at least in part, trade union opposition to privatisation. Some South African trade unions are beginning to see privatisation in a more sophisticated way. One of the largest and supposedly most radical unions, NEHAWU, for instance, is assisting its members in the formation of enterprises to tender for privatised services from erstwhile employers and others. NUM, the mineworkers union, has accepted privatisation conditionally – if it benefits workers.

Firstly, privatisation is not binary – things are seldom unambiguously government or private. Privatisation is usually a matter of degree and context. It is often not even recognised as constituting privatisation.
Liberalisation/Deregulation
Much of South Africa’s privatisation, especially that which has benefited “the masses” directly, has been achieved without the direct disposal of a single state asset. Liberalisation resulted in the emergence of various private alternatives to government activities, from transport to policing, and from telecommunications to marketing. By merely allowing what was previously curtailed, privatisation occurs spontaneously.
Withdrawal
Instead of divestiture, government can simply discontinue what it does. When the local government bus service in Welkom was discontinued, private owner-operated microbuses moved in within days to provide a more popular, efficient and affordable alternative.

Not all state activities are necessarily desirable. Sometimes what the state does should simply not be done at all. When resources are no longer directed to a government activity, they are, or should be privatised, by the mere expedient of leaving them in the private sector by way of lower taxes. One of the most obvious examples was the abolition of influx control, whereby blacks were kept out of South African cities. Another was the scrapping of most forms of business licensing.
Upgrading
Where government confers rights or privileges – such as government housing, franchises, or services management – it can privatise by upgrading those rights, ultimately to full ownership. Upgrading land title, in full or by degree, is probably by far the greatest act of privatisation that African governments can undertake. People who have government franchises – training or testing, for example, can be upgraded to being owners.
Outsourcing
Outsourcing is probably the commonest form of privatisation, and yet it is not always recognised as such. It is proving in the South African context, in particular, to be one of the easiest and most effective ways to benefit emerging enterprises and historically disadvantaged people.
Sale
Divestiture is not the most common form of privatisation, although it is, as we have observed, the most widely recognised. There are, as with all methods of privatisation, many ways to transfer state assets to the private sector; sale in whole or part; sale with or without a special voting right “golden share”; sale by public offering or by private placement; sale preceded by unbundling to smaller enterprises; management buy-out; employee share option schemes (ESOPs), and so on – or any combination of these.

There are truly thousands of permutations on the privatisation theme. The only thing they have in common is that what was once done by the state is no longer done by it, even if it is no longer done at all. For many decades after the Napoleonic wars – indeed until the 1950s – the British government maintained the coastal watch for a Napoleonic invasion. To its credit this function was discontinued rather than privatised!
Commercialisation
Most protagonists of privatisation would not expect the state to be able to do well what it ought to privatise. There are instructive exceptions. They seem to occur especially when commercialisation is a prelude to fuller privatisation. Commercialisation is one of the degrees of privatisation, and tends to yield commensurately modest benefits. In some South African case studies the benefits have been surprisingly substantial. The incentives of “full” commercialisation simulate, albeit not fully, positive private sector incentives, which are achieved when subsidies are cut unambiguously, private directors and/or managers are brought in, profits are allowed and encouraged, and so on, ie if the undertaking is run like a business venture.
Corporatisation
This is a more advanced degree of privatisation, where the government concern is converted into a company. Here too there are variations on the theme: the company can be anything from a nominal company – with continued government protection, subsidies, political interference et al – to a truly autonomous public company, perhaps listed on stock exchanges, with directors and management drawn entirely from the private sector, free from any political interference, and with dividends paid to the owner.

CONCLUSIONS
There has been a lot more successful privatisation in South Africa than is generally recognised, even by its own government. It has occurred at all levels of government, especially at local government level. And it has been in a wide diversity of forms. Privatisation in almost any form has been successful at achieving expenditure savings, increased efficiency, opportunities for emerging entrepreneurs and historically disadvantaged people as well as elites, increased tax revenues, and net wealth creation and thus growth and job creation.

Ironically the primary objection to privatisation – voiced mainly by trade unions – concedes its manifest superiority. The most common concern is that it will result in retrenchment of redundant employees. The point is that, if privatisation critics really believed what they say, that governments can do privatisable things better, they would predict increased inefficiency, and the need for more employees. What the fear of privatisation amounts to is the implicit concession that the private sector – especially under conditions of free competition and positive incentives that replace the perverse incentives characteristic of the civil service – can and will do the same job with less people. In other words, that people are more productive in the private sector.

In the real world, efficiencies achieved by privatisation amount to extra wealth in the economy, which means more demand, and, in turn, more jobs at higher incomes, even if not in the same undertaking. Privatisation-induced unemployment is therefore transitional.

Finally, understanding the role of incentives is the key to understanding why privatisation works, and to designing the optimal privatisation strategy in each case. This is an elaborate issue – the subject of entire schools of thought, like public choice and rent-seeking theory – but it all boils down to the seemingly inevitable fact that in the government sector a busy day tends to be a bad day; in the private sector a busy day is a good day.