Impotence and corruption fuels M&A activity

South Africa is facing one of the most challenging times in its history. Energy crisis aside, the country has now been greylisted which is indicative of a business environment that will attract scrutiny over optimism.

South Africa is the most developed economy on the continent as was once the largest economy on the continent. It now lies third behind Nigeria and Egypt with no visible signs of any ambition to regain the top spot.

But is that the aim? Or is the immediate goal trying to strengthen the business landscape so that we become attractive to international investors once again? Until this takes place, M&A activity will only increase in the country. According to Nick Hedley, this is not the only driver.

Impotence and penchant for corruption are leading to the privatisation

The article points out that one of the great ironies of the ANC is that while it wants nothing more than to have a tight grip on all sectors of the economy, its impotence and penchant for corruption are leading to the privatisation of almost everything.

The big one, of course, is energy. Even though it was clear long ago that Eskom was hopelessly indebted and incapable of keeping the lights on by itself, the state refused to allow private companies and municipalities to play in the energy game.

Eventually, it accepted reality and yielded – and now the floodgates have truly opened.

According to Eskom, power projects with a combined capacity of 20.2GW are actively seeking grid access or are already in the process of connecting to the national electricity network.

The article adds that this comes after the government removed the licensing threshold for privately driven power projects – a move that mineral resources and energy minister Gwede Mantashe resisted. Fascinatingly, Mantashe said just weeks ago that the private sector wasn’t that keen on power projects. How wrong he was.

Allowing private organisations more control

The article points out that Eskom will also soon have to allow private organisations to help run its key power plants – those that can still be salvaged – and participate in the rollout of transmission infrastructure, according to a debt-relief deal it’s struck with National Treasury.

While electricity transmission and distribution will remain mainly state-owned – as they should – the privatisation of electricity generation was an inevitable outcome of the ANC’s appalling planning and incompetence.

The article adds that next up will be the privatisation of safety and security services due to the inefficiency of the public police force. There are now some 2.7 million registered security officers in South Africa, according to the Private Security Industry Regulatory Authority. That’s up from 1.8 million in 2011.

The housing crisis

Then there’s housing.

The article points out that, despite some success with the democratic government’s initial low-cost housing programme, there remains a massive shortage of decent accommodation facilities in the low- and middle-income market.

Once again, the pendulum has started swinging towards private sector-led offerings.

JSE-listed Balwin Properties, for instance, is partially filling the void. The company is developing 56 000 apartments across Gauteng, the Western Cape and KwaZulu-Natal, a large portion of which are targeted specifically at lower income families.

And many of the kids in those estates go to privately run education facilities.

The article adds that, in fact, more than 100 000 kids are enrolled at schools operated by Curro and ADvTECH alone. That’s up from about 65 000 in 2015.

While that’s still a small fraction of the total learner contingent, these numbers are constantly growing as parents give up on the public education system – even if they barely have the means to.

Water, water everywhere?

The article points out that the state is even having to turn to the private sector for assistance in the provision of water.

Food producer Tiger Brands is supplying backup power and expertise to Ashton Municipality’s water unit to ensure its canned fruit facility has a reliable water supply so that it can continue operating.

Elsewhere, mining group Anglo American is involved in a public-private partnership in Limpopo to supply potable water to vulnerable communities, and says the R25 billion project water infrastructure project could be replicated in other parts of the country.

The article adds that in transportation, a 97% decline in passenger rail numbers over the past decade has been partially countered by a rise in private bus, minibus taxi and other services, while in healthcare, private companies are pushing into the under-serviced lower end of the market.

The article adds that the private sector’s foray into these segments of the economy isn’t something to be celebrated. It’s a symptom of an incapable and corrupt state, and most importantly, a huge portion of the population is being left behind in the process.

Competition between the public sector and private players is good and should be encouraged, but there will always be gaps – particularly for lower income households – that have to be addressed by the government.

Inequality will increase

The article points out that, on our current trajectory, the inequality gap will continue to widen, since most people cannot turn to the private sector for all of their basic needs. And those in the middle are racking up enormous debts to send their children to private schools or use non-state healthcare facilities.

In short, the ANC’s reluctant move to outsource the provision of basic services is a tragedy, and it’s showing no signs of stopping. A fresh start is desperately needed.

I tend to agree.