South Africa is one of the few remaining countries where the state has a monopoly when it comes to the provision of certain key services. For a long time, these services were operating efficiently; however, these companies have faced decades of challenges which have slowly eroded these institutions, leaving South Africa with the remains of an aging infrastructure and the fallout from years of mismanagement and corruption.
The challenges these companies face are well documented. Corporate brands have been destroyed and balance sheets have been maxed out. Between the years of 2000 and 20008, there were national discussions regarding the privatisation of State-Owned Entities (SOEs), which were ultimately jettisoned given the constraints around serving vulnerable consumers.
I attended a virtual event held by the University of Pretoria (UP) entitled: Rethinking Privatisation towards Economic Recovery on May 12 where panellists provided some insights into what the privatisation debate should look like if it were reignited.
SAA: a case for privatisation
Those familiar with the business rescue industry do not need to be reminded of the recent (arduous) journey that was just completed at South African Airways (SAA). With the rescue completed, the focus now shifts to what is next for the beleaguered airline.
Thomas Kgokolo, Interim CEO of SAA, was one of the panellists at the UP event. When asked if privatisation could benefit the airline, his answer was surprising.
“It is hard to say whether privatisation would have benefitted the airline in the past. However, if we look at the environment that the airline currently operates in, a strong case can be made for privatisation. If we look at SAA within the South African context, it seems as if it is a big airline; however, if you look at SAA within the global aviation context, it is a small airline. The way that SAA has been set up in the global market, one could say that – from a commercial point of view – you are coming in small and competing against airlines that have massive balance sheets and are able to accommodate a lot of costs within their business model. These costs are not conducive to high profit margins. This means that Government, even beyond SAA, does not have the balance sheet for the airline to compete in the global space. Therefore, a strong case can be made for privatisation,” said Kgokolo.
He added that Covid-19 is a major game changer. “If we look at who is flying now, following Covid, it is airlines that have deep pockets. Small airlines are competing against those who can burn cash the most. As we are well aware, Government is tired of burning cash on entities that are in a strained position,” said Kgokolo.
According to Kgokolo, SAA is a strong brand and does have loyalty and the opportunities to generate revenue out of the aviation market, provided there is a strategic equity partner tied to the business.
“How will this partnership look? Capital is a good starting point in that SAA can go into the market with a strong balance sheet. However, the current market conditions suggest that SAA will need more than this. More collaboration is needed with the leadership of these equity partners provided that they are competent and have experience working in the aviation sector. If we look at the future and where the company is going, it will be good to have a strategic equity partner that can beef up areas where SAA is lagging,” said Kgokolo.
This gives some key insight into SAA’s next move in its turnaround plan. If SAA is looking for a strategic equity partner, which Kgokolo all but admitted that the company is, that partner will need to have two things: a fairly significant war chest when it comes to capital and a leadership skill set which is deeply rooted in the aviation industry.
Eskom: a case against privatisation
South Africans do not need to be reminded about Eskom’s troubles either. They have been well documented since 2007 when the infamous loadshedding schedule was introduced.
Many turnaround models have been touted with privatisation being one of them. André de Ruyter, Chief Executive of Eskom, also attended the UP event and (predictably) made a strong case against privatisation.
“If you define privatisation as the selling off of state assets, one has to look at the quality of that asset. If you know of any investor that wants to buy a 40-year-old power station that has not been well maintained, that requires extensive investment in terms of environmental mitigation to remain compliant with international standards, that requires huge maintenance expenditure going forward and has only got a lifespan of 10 more years, I would be interested to meet this investor. South African power stations are fundamentally not sellable assets. That is part of the reason why the Eskom roadmap – which was drawn up by the Department of Public Enterprises – aims to create an environment in which these aging assets are replaced with new private sector funded and operated assets,” said De Ruyter.
It is clear then that privatisation is not a panacea for every company that faces challenges. De Ruyter added that there is more evidence to support discarding the privatisation of Eskom as a turnaround strategy. “South Africa would in essence be turning a state held monopoly into a privately held monopoly. And one would need to have extraordinary regulation to prevent the privately owned monopoly from being abused by a profit seeking private sector. I am all for profit in the private sector, I am not a foam at the mouth socialist. However, the simplistic model of selling off assets and expecting that the private sector will not want to come in and demand significant increases in electricity tariffs to fund a 10-year return is wishful thinking,” said de Ruyter.
Can we afford to jettison the debate?
We need to remove the political rhetoric and personal opinion from this debate and judge this purely on the merits of economics.
The departure point of this is simple; who does the company serve? In the case of both SAA and Eskom, it is the public. But in the case of Eskom, the greater portion of this leans towards the vulnerable consumer who cannot afford to have the blinded focus on profits that privatisation may install. At the UP event, Dr Tshepiso Scott, a Lecturer at UP, said that we need to consider: what will the impact on the vulnerable consumer be?
What will the impact be on the vulnerable consumer who needs to receive a service from an entity that has properly functioning services and exists within a market where there is competition so that consumers can vote with their feet if needs be? “If South Africa does not have the conversation regarding privatisation, people who are suffering will be left out in the cold,” said Dr Scott.
She added that there are provisions at our disposal to hold companies accountable that do not involve privatisation. King IV forces companies to be ethically run and there are provisions within the Companies Act that allow for the removal of board members who derelict their duties.
There are many more cases that can be mode both in favour of privatisation and against privatisation. Do not expect this debate to go away easily.
