Time to privatise SAA

There is a curious national mindset that regards BEE as the transfer of assets from whites to blacks, yet by far the fastest, cheapest, most substantial and nationally most beneficial way to empower blacks is by redistributing the vast assets accumulated by and inherited from the apartheid regime, including South African Airways (SAA).

The basic question is whether governments should run enterprises serving rich people at massive losses when private operators can, and if permitted do, provide all the economy’s needs efficiently and profitably? The answer is obvious. Or is it?

What if, as with SAA, the Minister announces ‘a successful turnaround’ after decades of losses? Would there be a need for the government to bail out SAA with a R4bn ‘recapitalisation package’ if a ‘successful turnaround’ has in fact been achieved? Why would Minister Erwin announce recapitalisation after telling Parliament that SAA would not be ‘recapitalised’ merely because of a ‘knock at the door of the minister’ and that there would ‘have to be exceptionally pressing circumstances for the state to put in capital’?

If that’s confusing, it gets worse. Instead of a ‘turnaround’, SAA’s external auditor, Deloitte & Touche, says SAA spent R283m ‘without proper controls’ in 2004-05, and SAA’s accounts show perennial losses. According to SAA Chairman, Jakes Gerwel, he ‘never, or seldom, entered an organisation where systems were so lacking’. In the six months to end-September, SAA reported a 7% rise in operating costs to R10,1bn and posted a net loss of R652m, higher than last year’s interim loss of R475m.

It’s slightly less befuddling, though more ominous, to know that the Minister who said there was a successful turnaround was former Minister Jeff Radebe back in February 2001. There was, of course, no turnaround. Nor were there turnarounds when virtually every predecessor since the 1960s said there were.

What ‘compelling reasons’ and ‘exceptionally pressing circumstances’ persuaded Public Enterprises Minister Erwin to divert R4bn from health, housing, education and policing just three years after the preceding bailout? How does this policy compare with that of the apartheid regime, which defended perennial wealth-consuming nationalisation and subsidies by claiming that SAA was a ‘strategic industry’ and a ‘national flag carrier’?

There is speculation that local control is regarded as necessary in case the government needs to commandeer planes during a national crisis, but all that’s required, if sufficient charter flights cannot be purchased from international operators, is the existence of other locally owned airlines. No, the reasons are not that compelling.

The reason given by Erwin in Parliament on 2 March 2007 is that SAA is a ‘national asset that had to be preserved’ because it is ‘the second-oldest commercial airline in the world’. Were this true, critics can be forgiven for not regarding the romance of history as sufficiently compelling. As it happens, SAA was established in 1934 when Union Airways (1929) was nationalised. The oldest commercial airline (with its original name) is KLM (1919). Lufthansa was created in 1926, and Air France in 1933 (when French airlines were nationalised). Many US airlines pre-date KLM. After mergers and acquisitions they were consolidated into some of today’s airlines during the 1920s and 1930s.

That aside, no one wants SAA to vanish. On the contrary SAA’s experience since domestic airline deregulation fifteen years ago shows that it cannot survive without perpetual wealth-consuming subsidies. Privatisation would enable SAA to survive and prosper like other privatised airlines. It is in the self-interest of our ‘national asset’, its management and staff that it be privatised before it is forced into liquidation. Government enterprises are victims of too many perverse incentives for it to survive competitive ‘open skies’.

Like his predecessors, Minister Erwin assured Parliament that the government would not ‘bale out’ SAA or other parastatals in future. No one knows if the government will stop pouring money down the parastatal drain but we do know that SAA will survive only if it is emancipated.

The official line is that the government hasn’t privatised SAA and still holds 95%. In truth, nearly 50% of the domestic market has been privatised, yet it is never mentioned nor did the government get one cent for it. The mystery of how this was done becomes clear when it is understood that there are basically four ways to privatise: sell, give, withdraw and outsource. Public-private partnerships (PPPs) are a sub-optimal combination of these options.

Most people would have expected the government to sell the privatised share of SAA. Selling the privatised share of SAA would have had the double benefit of converting dead capital to beneficial revenue and cutting losses. Giving can be direct or indirect: shares can be given directly to beneficiaries (BEE beneficiaries, employees, politicians etc) or market share can be given away simply by allowing others to take it. In effect, when the government allowed market entry, it gave about 45% of SAA to people it didn’t know, some of whom weren’t even in the industry.

The benefits of privatisation-by-default are obvious to all observers, as are the hazards of the government giving away market share (by allowing competition) and then trying to recapture it (with subsidies and restructuring), which disrupts markets at the ultimate expense of consumers and, of course, competitors who cannot always survive the impact of Big Brother’s unpredictable assaults on and withdrawals from the market. Privatisation and deregulation should go hand in hand.

Further and formal privatisation would benefit the government and the country by way of improved fares and services, increased tax revenue, termination of losses, growth in market size, increased tourism and international travel, and much more. The reason no coherent reasons have been given for continued disruptive, inefficient and costly nationalisation is that there are none.

The closest anyone gets to defending the status quo is concern about privatisation leading to job losses. Firstly, the Minister has announced that state ownership will result in many lost jobs. Secondly, many jobs have already been lost in SAA in that the employee-passenger ratio has fallen. Thirdly, deregulation has already contributed substantially to market growth so that there are more employers and more jobs in the sector. Fourthly, government subsidies for SAA are a wealth transfer to relatively rich people at the expense of the general public. Finally, the entire country, especially ‘the masses’, will benefit from a more efficient, dynamic, innovative, consumer-driven and price-sensitive airline industry.

Author: Leon Louw is the Executive Director of 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 Foundation.

FMF Feature Article/ 20 March 2007 - Policy Bulletin / 09 February 2010