This article was first published by BizNews on 19 December 2023
South Africa is facing a general collapse of state capacity. From SOEs such as Transnet failing to meet their obligations to operate the ports and South Africa’s rail network, and Eskom failing to provide electricity, to municipalities failing to maintain roads and provide water and sanitation, it is clear that the public sector has failed in economically sensitive areas. To fix these problems we need to bring in the private sector.
Bringing in the private sector, if it is done correctly, would have many benefits. It would allow greater competition, thus providing an incentive to improve, instead of what we have currently with the failure of companies like Eskom and Transnet bringing the entire economy to a standstill. With more competition those who need to offload their cargo at our ports can do so and those who need electricity can get that from someone who is ready to provide the service.
Apart from competition, bringing in the private sector would also bring in non-government sources of investment into infrastructure like roads, rail, energy, and ports. South Africa’s fiscal situation has deteriorated to an extreme level. Revenues can only improve meaningfully if the economy grows meaningfully, but that cannot happen while critical network industries like transport and energy as well as municipal infrastructure are all collapsing.
That means to the extent that the problem can be solved by investment, the government cannot provide this investment without reducing spending on things like health, education, and grants. Everyone knows this is not politically feasible for the government, so the investment has to come from the private sector. To attract private capital the owners of the capital need a way to deal with the risk, so they need to have greater control.
If the government wants private investment in Eskom’s power stations, for example, or in building new power stations, the private investors should be able to run the power station without interference and they should be able to set the price at which they sell their electricity into the grid.
Government regulation should be minimal and only focused on safety and protecting the environment – not achieving socio-economic objectives.
Bringing in the private sector would also bring greater efficiency. Private parties have to make a profit. They cannot rely on gaining political control over taxes to make up for bad management at a company. If a private company fails to consistently make a profit, it cannot rely on bailouts from the National Treasury so it would eventually die.
When it comes to SOEs like Transnet and Eskom, the government should simply privatise assets – making sure, of course, not to sell the assets from one SOE to one group of private investors, to avoid replicating the current monopolies.
South Africa’s state-owned giants can be privatised in various ways. One potentially attractive way would be to simply give shares in the company to employees of that company.
Of course, the employees are unlikely to have the money to capitalise the company if it requires more capital, so they would most likely need to sell their shares. This would run the risk of the shares ending up with one group. So the best way to privatise, in my opinion, is to auction off the assets belonging to each SOE separately.
In the case of Eskom, Eskom would continue running the transmission grid but the power stations would be sold off individually. The part of the distribution grid owned by Eskom would also be auctioned off piece by piece based on locales that make sense. Government would need to make sure that not only are separate companies bidding for these assets, but these parties don’t have significant overlaps in ownership.
The same goes for Transnet.
The rail network can be sold off, and the ports too. The current idea to bring in private operators without changing ownership of these assets does not provide enough assurances to the private investor for the risk they would be taking. When it comes to the rail network, it can be sold off in sections that make economic sense, for example the Joburg-Durban line can be sold as one thing.
When it comes to sea ports, it would depend on what makes sense. Can the government sell off docking berths and continue owning the port or do they need to sell the whole thing? In each case the option that makes the most economic sense must be chosen.
When it comes to local infrastructure, municipalities have to consider privatisation too. To the extent that they are unable to maintain their water and electricity infrastructure (much of the distribution grid is owned by municipalities) then they have to sell it to the private sector. The private sector would need to find a way to monetise municipal roads, for example, whether tolls or some other means make sense for each situation.
When it comes to privatising municipal infrastructure, the principle is that any tax revenue generated from economic activity on infrastructure formerly owned by a municipality should go to that municipality. This revenue dimension is the main reason why municipalities might be reluctant to privatise. Going forward we need to find a more permanent answer to the question of municipal revenue. Perhaps it makes more sense when revenue is split between national, provincial, and local governments for local governments to get a greater share.
After all, things like public schools and hospitals can potentially be run at the local level, so why should we pay a provincial and national bureaucracy for those things? What value do they add? In fact, this is true for most things except the military, border control, and foreign affairs.
Privatisation is an idea whose time has come.
Argentina’s new president, Javier Millei, has made similar proposals in his country.
Maintaining government monopolies when the government is failing to provide the services, at the expense of the economy, makes no sense. South Africans need to provide an answer for the more than 40% of able-bodied adults who are unable to find jobs and that answer will need to include the economic growth that privatisation would enable.
