Time to share out the ‘family silver’

Harold Macmillan, in a speech to the British House of Lords in 1986, referred to the privatisation of nationalised industries as ‘selling the family silver’. He was criticising his own Conservative Party, then led by Margaret Thatcher, for disposing of a long list of state-owned industries, including Associated British Ports, British Airways, British Gas, British Telecoms, electricity supply, water supply and a great deal more.

This was the same man who, as British prime minister, in a speech to the South African Parliament on 3 February 1960 made the famous statement: ‘The wind of change is blowing through the continent. Whether we like it or not, this growth of national consciousness is a political fact.’ The thrust of Macmillan’s speech was that colonial domination of Africa was doomed and by implication, apartheid and white domination of South African politics was also doomed.

Notwithstanding the anger of the members of the apartheid government, who believed that Macmillan had abused their hospitality, his prediction about the changes that were to sweep through Africa and remove them from power proved to be correct. However, his opposition to the disposal of the state-owned industries later proved to be based on incorrect premises and ill-advised.

Disposal of the state-owned enterprises to private owners transformed them from tax-consuming, protected and inefficient entities, into tax-paying, competitive, efficient and thriving firms, capable of being taken over if badly managed. Removal of statutory monopolies allowed new entrants into vitally important markets, giving British consumers a choice of service-providers, better service and lower prices.

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.

Harold Macmillan obviously believed that governments should cling to public enterprises in the way he believed that heirs should cling to family silver, whether or not it made economic sense to do so. A similar view appears to have developed in SA, apparently based on the belief that government can induce greater efficiency at lower cost than an open competitive market. There is substantial empirical evidence to show that such a belief is unfounded.

Several good reasons suggest that the SA government should not cling to public enterprises. There is a conflict of interest between the state owning major enterprises and government taking the steps necessary to create a high growth economic environment in the country, conducive to job creation and efficient delivery of goods and services to consumers, especially when regulations prohibit entry by competitors and protect public enterprises from competition.

There is a further conflict between using tax revenues and borrowings to carry out core functions of government and providing cash to capital-hungry enterprises. Managements of public enterprises are constantly looking over their shoulders, wondering when they will next be expected to place political considerations before economic efficiency. Long term enterprise planning is impossible when it becomes confused with political agendas and government spending priorities. The majority of managements and staff of British enterprises found the transfer from the public to the private sector to be a release from bondage.

However, the opportunity for mass BBBEE is as important as the efficiency considerations in deciding the future of SA’s public enterprises. We are told that these enterprises belong to the people, so what better course can government follow than to give ownership of the enterprises to the people.

All the previously disadvantaged people who have had no benefit from BEE policies could become owners of the public enterprises using similar ownership transfer methods to those employed by the Czech republic and Slovakia. With the advice of President Václav Klaus of the Czech Republic, who recently visited SA, the mechanisms could be refined and improved. The benefit to the recipients would, by a conservative estimate, amount to R120bn, or R6,000 each if there are as many as 20 million beneficiaries. In one fell swoop government could meet its delivery commitments to the nation and the enterprises would no longer be political footballs.

Maximum benefit could be obtained, especially for the poorest sector of the population, by the simultaneous removal of all statutory prohibitions and barriers to entry in the sectors in which the enterprises operate. This would increase productivity and what the new owners lose in immediate value they will rapidly gain in lower cost services and new job opportunities. They will have both the family silver and better use from it.

SA’s economy would receive an enormous boost, government would no longer have the burden of enterprise management, and enterprises like SAA would be asking shareholders and bankers for more money rather than going cap in hand to the Treasury asking for taxpayers’ money.

Author: Eustace Davie is a 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 Free Market Foundation.

FMF Feature Article/ 30 January 2007