The continued economic burden of SAA

The recent announcement that Tulca, the new South African Airways (SAA) subsidiary company, would launch a new no-frills airline called Mango is both unethical and inefficient. The creation of what amounts to another state run airline will divert more taxpayer funding from alternative competing functions. As decades of successful privatisation has shown, private sector managers, who are free to innovate and use their initiative, manage businesses more efficiently than public sector officials.

In February 1997, at the annual parliamentary media briefing by the then Minister for public enterprises, Ms. Stella Sigcau, she stated, “It is agreed generally that in view of…. the severity of its problems, the restructuring of SAA should be speeded up”. It has been almost a decade and the South African government continues to hold a majority share (95%) in an activity that it is ill suited to conduct, and which is beyond its general capability to run effectively. This is demonstrated by SAA’s ongoing dismal financial performance.

In April this year the Irish government decided to sell off the majority of Aer Lingus (Gaelic for “air fleet”) through an Initial Public Offering (IPO), nearly a decade after it first announced its intention to privatise the carrier. Aer Lingus said it raised 471.8 million euros (R4.656 billion) through the floatation and the government said it would net about 200 million euros (R1.974 billion) from the sale of the airline. Furthermore, as part of the deal, the government earmarked approximately 10.8 million euros (R107 million) for an employee trust, which benefits more than 6,000 current and former employees.

Privatisation involves transferring to the private sector functions, responsibilities and activities that have previously been carried out by the public sector. A key principle of privatisation is that, under most conditions, private firms provide better, more client-oriented services at lower cost than public sector suppliers are capable of doing. Indeed, the services for which a clear-cut case remains for state provision are rapidly diminishing in number.

South African Airways, its subsidiaries and sister outfit SA Express, should be sold off in a private bidding process designed to achieve the highest price. A private sale will create sales revenues for the government as well as a new source of tax revenue from the ensuing enterprise. Alternatively, some form of voucher privatisation could be employed, which would be a genuine transfer of the assets into the hands of the general population. Freely tradable vouchers could be either sold by recipients or exchanged for shares in the company.

Privatisation of government services has been used successfully in the United Kingdom and a number of other countries to decrease the financial and administrative burden on scarce public resources, improve quality, and reduce prices. The increase in privatisation of state-owned assets has not been confined to developed countries. Indeed, the World Bank notes that from 1988 to 2003 there have been over 9,000 cases of privatisation in developing countries.

Developing countries have used privatisation as a tool to improve the productivity of state enterprises, which is typically two to three times lower than that of private firms, and to reduce the fiscal burden of loss-making firms. As the World Bank noted, 120 developing countries carried out 7,860 transactions between 1990 and 2003, generating close to USD410 billion in privatisation proceeds. The reason why both developed and developing countries are actively pursuing privatisation is not hard to understand: privatisation works!

According to a 1997 study by National Economic Research Associates (NERA), in the first year of Mrs Thatcher’s government (1979) 33 state enterprises, all later to be privatised, absorbed £500m of public funds as well as more than £1 billion in loan finance. By 1987, these same companies were contributing £8 billion a year to the Treasury in share sales, tax receipts and dividends. Under Mrs Thatcher’s leadership, the United Kingdom rose from 19th to 2nd in the OECD rankings.

During 1999/2000 SAA was partly privatised and the SA government received an estimated R1.4 billion for the sale to Swissair of a 20 per cent stake in the company. That revenue was small comfort because in 2004 SAA posted a record pre-tax loss of R8.7 billion. The loss was largely the result of the company hedging against the possible depreciation of the rand. Subsequently, when the rand strengthened the book was closed, costing taxpayers approximately R5.9 billion.

When Swissair collapsed, Transnet bought back its former partner’s shares. In August 2004, Transnet revealed that aviation was not core to its business and SAA was unbundled to the Department of Public Enterprises. However, does it really make sense to continue to divert scarce resources away from schools, hospitals and other social priorities to enable government to keep trying to run a loss-making airline? Why not dispose of it and use the proceeds for the empowerment of the poor. This could bring swift benefits for those who are in greatest need while removing potential future burdens on long-suffering taxpayers.

Author: Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 10 October 2006 - Policy Bulletin / 22 September 2009