Why SAA belongs in private hands

‘What is common to many is taken least care of, for all men have greater regard for what is their own than for what they possess in common with others’. Aristotle

Has anyone read an economic textbook lately that recommends subsidising the wealthy? Researchers wishing to know how it is done should examine the operations of South African Airways (SAA). They subsidise wealthy passengers, which flies in the face of both rational economics and social policy.

Most of SAA’s passengers are discerning business people who value the frequency, convenience, punctuality and reliability of flights. However, according to the latest financial release, SAA recorded an operating loss of R240 million. If government covers the loss, as it has done in the past, taxpayers will be subsidising affluent people who don’t fly on low cost carriers.

Adam Smith, David Hume and other eighteenth and nineteenth century thinkers advanced the case for individual freedom and private enterprise economies. They advocated a system where individuals have the freedom to make the vast majority of decisions that affect them. This preference does not assume that people are always rational and seldom make mistakes, but only that the great majority of people are more rational and make fewer mistakes in promoting their own interests than well-intentioned government officials.

Privatisation of government services has been used successfully in the UK and a number of 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 exclusive 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. The reason why both developed and developing countries are actively pursuing privatisation is not hard to understand: privatisation works!

Privatisation involves delegating to the private sector functions, responsibilities and activities that have traditionally 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.

According to a 1997 study by National Economic Research Associates (NERA), in the first year of Mrs Thatcher’s government (ie, 1979-80) 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. New Zealand has also carried out a privatisation programme that has significantly reduced government expenditure from 42 per cent to 35 per cent of GDP over a ten-year period. These dramatic savings were in part due to reducing the size of the civil service by more than one half.

During 1999/2000 SAA was partly privatised and the SA government received an estimated R1.4 billion for the sale of a 20 per cent stake in the company to Swissair. That revenue was small comfort because in 2004 SAA posted a record pre-tax loss of R8.7 billion, largely the result of hedging against possible depreciation of the rand. Subsequently, when the rand strengthened the book was closed, costing taxpayers approximately R5.9 billion. Furthermore, during 1999/2000 government’s burden-sharing agreement settled pension fund shortfalls attributable to SAA costing taxpayers R1, 3 billion. A private airline would have disappeared into oblivion: taken over or liquidated.

Subsequently when Swissair collapsed, Transnet bought back its former partner’s shares and currently has a 95 per cent shareholding. 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 sell off the rest of the airline in a public auction to the highest bidder? Alternatively, use the shares for the empowerment of the poor. This could bring swift benefits to those who need it most. The latest labour force survey in SA showed that the most affected section of the population is black, with about 45 per cent of households in the lowest two income quintiles having no income earners.

The national carrier, as well as its sister outfit, SA Express, (both owned by transport parastatal Transnet), have not taken any significant steps to cut costs in the face of the rise of the low cost carriers. Rather, SAA has noted that it is not a low-cost carrier and therefore has no reason to change its market positioning. Indeed, there is no obvious reason for SAA to improve its services because the government will always be available to bail it out. Furthermore, the currently preferred policy of forming public-private partnerships (PPPs), does not offer a fundamental solution to the problem. These quasi-privatisations have significant drawbacks since they shirk responsibility and decrease incentives. No government or parastatal should be in the airline business and the sooner SAA is sold the better it will be for all South Africa’s citizens.

Author: Jasson Urbach is a research 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/ 13 December 2005 - Policy Bulletin 17 June 2009