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Making Privatization Work in South Africa and Africa


  • pg 1
									      FROM THE FRONT LINES

Making Privatization Work
in South Africa and Africa
Leon Louw

         rom some reports the                 maintain that the stock market has       ic policy remains relatively direc-
     F   African National Congress
         (ANC) party, returned to
                                              reached record highs, agriculture
                                              and transport have been radically
                                                                                       tionless. There is no detectable pol-
                                                                                       icy paradigm or philosophy. In-
power in South Africa’s recent gen-           liberalized and privatized, tax rates    stead, there is a random muddle of
eral election, will steer the country         lowered, restrictive laws deregulat-     inconsistent and often contradicto-
into another economic disaster in             ed, and democratic values upheld.        ry policies.
Africa. The new government is said            These reports claim that hundreds           In the wake of South Africa’s re-
to be bent on a destructive course            of thousands of formerly homeless        cent general election, there are few
of centralizing power, nationalizing          people have been housed (with            indications of the direction, if any,
mineral and water rights, terminat-           water, electricity and other ser-        South Africa is likely to follow
ing efficient outsourced services,            vices), black living standards have      under its new president, Thabo
intensifying censorship, violating            risen without reducing South             Mbeki. There are hints that Presi-
the rule of law and the constitu-             African whites’ standards, state         dent Mbeki might end labor policy
tion, and interfering                                                                             excesses that have dri-
with financial markets.                                                                           ven labor costs up and,
Further, according to                                                                             consequently, unemploy-
these reports, it is politi-                                                                      ment to unprecedented
cizing the central bank,                                                                          levels (more than 25%
socializing health care,                                                                          of the labor force is now
violating property rights, victimiz-          corporations are being commercial-       unemployed). During and after the
ing employers, curtailing the free            ized and privatized, budget deficits     election, the ANC recommitted it-
press, implementing centrally                 have been slashed, government            self to its promarket GEAR policy
planned “industrial clusters” and             functions are being outsourced           of privatization and small-business
“development corridors,” denying              competitively, and subsidies are         deregulation.
international patents, and more. It           being cut. It is claimed that the           In direct contradiction, the ANC
is alleged that under the ANC cor-            civil service is being reduced, infla-   also recommitted itself to its anti-
ruption, crime and unemployment               tion is down, investment is up,          market RDP (Reconstruction and
have reached all-time highs.                  small business is booming, and           Development) policy, and an-
   Other observers, however, insist           that there is unprecedented stabili-     nounced the nationalization of
that the ANC has adopted high-                ty and racial harmony.                   mineral and water rights. The party
growth, free market policies under               In South Africa more than else-       has continued to implement dra-
the GEAR (Growth, Employment                  where, commentators tend to pre-         conian, unconstitutional consumer
and Redistribution) program. They             dict one of two opposite scenarios:      protection laws and upheld its re-
                                              boom or bust. Both of these diver-       verse discrimination practices.
     Leon Louw is Executive Director of the   gent views are an oversimplifica-           While analysts are waiting anx-
     Free Market Foundation of Southern       tion. In truth, the ANC’s economic       iously to see which path President
     Africa.                                  policies and performance are nei-        Mbeki will take, the earliest indica-
                                              ther clearly good nor bad. Econom-       tions are that he will not signifi-

24                                                                                     NUMBER TWO 1999 ECONOMIC REFORM TODAY
cantly change direction, or that         erations, and hotels in Tanzania;       positive per capita growth rates (31
he does not have any direction           retail stores, flour mills and phar-    of 48 in 1996).
in mind. In short, the expectation       maceutical companies in Lesotho;
is that most things will continue        11 state enterprises including          Moving towards Privatization
to improve slightly, while some          chemical products, airports, and           Privatization began in South
will continue deteriorating under        telecommunications        in    Mali;   Africa before it started elsewhere in
conditions of low growth and in-         telecommunications in Mauritius; a      the continent. Under the former
vestment and high unemployment           new privatization program coincid-      apartheid regime in South Africa,
and crime.                               ing with democratization in Nige-       for example, the privatization
   Meanwhile, other African coun-        ria; 213 companies including            program included the iron, steel
tries are increasingly moving to-        telecommunications, hotels, air-        and petroleum industries, toll
wards free market policies. At the       lines, banks, and coffee marketing      roads, agricultural marketing,
Corporate Council on Africa sum-         in Uganda; and telecommunica-           and aspects of broadcasting and
mit in Houston, Texas, in April of       tions, forestry industries, insur-      telecommunications.
this year, many African leaders and      ance, chemicals, engineering, re-          More common than direct priva-
senior officials were pledging new       fineries, publishing, hotels, and en-   tization is commercialization, cor-
directions for Africa.                                                                      poratization and un-
African socialism, dele-                                                                    bundling of state under-
gates were assured, is                                                                      takings. There has also
dead. These decision-                                                                       been substantial privati-
makers foresee a new,                                                                       zation at regional and
investor-friendly Africa.                                                                   local government levels.
Every few months an-                                                                        In the city of Welkom,
other African nation                                                                        for instance, over 30 mu-
holds its first democratic                       Privatization is                           nicipal functions were
elections.                                 the fundamental policy                           privatized. The small
   At a recent CIPE con-                    of the ANC and it will                          town of St. Lucia out-
ference in Harare, Zim-                                                                     sourced almost every-
                                               be implemented.
babwe, various African                                                                      thing to the point where
speakers described the                         —Nelson Mandela, 1996                        it employed only two
course of privatization/                                                                    people: a town clerk and
liberalization programs                                                                     a secretary, who just ne-
in their countries. It has                                                                  gociate contracts with
become common for                                                                           private providers.
many African leaders to                                                                        During its early years,
engage in a verbal contest about         gineering in Zambia. By 1997 the        the ANC government suspended
which nations are privatizing the        World Bank had documented more          privatization, and spoke of rena-
fastest. Examples of this can be         than 2,700 privatizations in Africa.    tionalizing and reregulating what
found in every issue of the grow-        This figure is conservative, since      had been privatized and liberal-
ing number of African business           the cumulative number listed for        ized by its predecessors. But by
magazines.                               South Africa by 1996 (nine) is less     1996 privatization and liberaliza-
   The many examples of this bur-        than one-third of the number of         tion was official ANC policy. Rather
geoning privatization include water      privatizations that have occurred in    than reverse the privatization
distribution in Angola; agro-indus-      the past three years in just one        processes started by the former
tries, transport, mining, beverages,     town, Welkom.                           South African National Party, the
and tourism in Cameroon; more               The numbers recorded by the          ANC continued them, albeit after a
than a hundred private firms estab-      World Bank for some African coun-       quiescent period.
lished in the Congo; palm oil in-        tries is impressive for such a short
dustries in Cote d’Ivoire; electricity   time period. They include Mozam-        Track record
and water in Gabon; breweries,           bique (548), Angola (331), Tanza-       Railways and harbors. The South
mines, resorts, and land in Mozam-       nia (244), Ghana (205), Zambia          African Railways & Harbors Admin-
bique; miscellaneous parastatals         (183), and Kenya (145). For the         istration (SAR&H) was the coun-
and government services in Kenya;        first time since decolonization,        try’s biggest organization, second
game reserves, breweries, tour op-       most African countries are listing      only to the government itself. Were

ECONOMIC REFORM TODAY NUMBER TWO 1999                                                                               25
it a company it would have been          owned by Autonet, and is expand-        by outsourcing some activities such
one of the biggest in the world. It      ing into private sector fleet mainte-   as security and maintenance, and
included the country’s railways,         nance and management business.          is seeking privatization partners for
harbors, national airline, container        Surplus railway land has been        its container handling and depots.
depots, and much more—even its           transferred to Propnet with a view      The SAR&H police force, which po-
own statutory police force. As part      toward exploiting the commercial        liced railways, harbors and air-
of a lengthy 15-year process,            potential of substantial amounts of     ports, has been dissolved. Some se-
SAR&H was transformed and, ulti-         surplus land through sale or devel-     curity functions have been out-
mately, dissolved.                       opment. Stations are being com-         sourced, and the rest are adminis-
   The basic functions were un-          mercialized into profitable business    tered by the national police service.
bundled, commercialized or corpo-        centers. Engineering and technical         An important aspect of privatiza-
ratized into numerous sub-               services have been transferred to       tion has been liberalization and
sidiaries, most of which fell under      Protekon Ltd., which also envi-         deregulation. The most visible ex-
Transnet Limited, a state-owned          sions expansion by seeking private      ample of this has been the emer-
company that changed from a bu-          sector contracts.                       gence of a huge microbus industry
reaucratic state-run organization           The new state-owned and partly       competing with former government
(South African Transport Services)       privatized companies have boards        bus and rail monopolies. Within a
into a dynamic group of business-        of directors drawn increasingly         decade there were 100,000 new
es. Transnet and its subsidiaries        from the private sector. They must      black-owned microbuses, account-
are being privatized incrementally.      operate as other companies, as          ing for 300,000 jobs and one billion
Initially, a minority share is sold to   profitable business ventures, with-     dollars worth of capital investment.
a “strategic equity partner,” a pri-     out subsidies or, in time, any privi-   This was achieved without affirma-
vate company or consortium. This         leges or protection. To this end,       tive action or financial assistance
means that the day-to-day man-           commercialization coincided with        and in the face of continued ha-
agement is transferred to the            varying degrees of deregulation, in-    rassment and restrictions.
“partner,” which contributes new         cluding the admission to the mar-          In a recent statement the Minis-
skills, finance and technology. In       ket of private competitors, mainly      ter for Public Enterprises, Stella
due course the remaining entity is       in the form of alternative transport    Sigcau, the only woman to have
privatized.                              modes. The only subsidies that re-      been president of an African na-
   The former SAR&H monolith has         main are for commuter services to       tion, announced that part of the
been divided into seven major and        historically black areas, on the        national airline and two of the non-
a few lesser subsidiaries. Some ac-      grounds that they serve commuters       core assets, Connex and Transwerk,
tivities were simply discontinued        who were forced by apartheid resi-      would be sold within 18 months.
and left to private enterprise, such     dential laws to live far from their     She expressed optimism that the
as airport buses, porters and cater-     places of employment and from           pace of privatization would acceler-
ing. Some railway tracks and             business centers.                       ate during 1999.
rolling stock (trains) were fully pri-      One of the most conspicuous             As a result of the successful
vatized, such as the narrow gauge        successes of this policy has been       commercialization of the South
Banana Express near Durban and           the emergence of the Cape Town          African railways, I was approached
the Apple Express near Port Eliza-       Waterfront. The Cape Town harbor        by the Kenyan government to con-
beth. Private trains are now also        was converted into a first-rate         sult on the restructuring of its rail-
permitted on commercialized gov-         recreational and commercial tourist     ways. A similar approach as that of
ernment tracks, the most signifi-        attraction, with a board of directors   South Africa was adopted. In some
cant of which is the internationally     drawn largely from the private sec-     respects, Kenya has overtaken
renowned Rovos Rail.                     tor. Previously the area had only       South Africa, beating it at its own
   A 30% share in Transnet’s fleet       harbor facilities and one commer-       game. I also played a small role in
management services was priva-           cial restaurant. Now there are three    the deregulation of Zambia’s rail-
tized in a sale to Viamax Fleet So-      leading hotels, one of the largest      ways. Kenya and Zambia now
lutions, a consortium of private         shopping malls in the southern          allow private trains on government
businesses, black “empowerment”          hemisphere, theaters, night clubs,      rails, much as private vehicles,
interests and trade unions. After an     and numerous restaurants and en-        planes and ships use government
open tender procedure, the new           tertainment areas.                      roads, airports and harbors.
company secured the contract for            The harbor company has in-
the maintenance of 5,000 vehicles        creased commercialization in turn       Airlines. National airports in South

26                                                                               NUMBER TWO 1999 ECONOMIC REFORM TODAY
Africa were transferred to The Air-      Among other things, it leads to mo-       ambulance services—also priva-
ports Company, 30% of which is           nopoly abuse and conceals the po-         tized—with fire services, and the
being sold to Rome Airport Compa-        tential benefits of privatization.        utilization of the fire service’s radio
ny, which provides the benefit of        Rather, privatization after deregula-     transmitters for cellular telephone
direct foreign investment. Among         tion is preferable because the entry      purposes.
the more successful manifestations       of private competitors increases
of airport commercialization has         pressure for improved efficiencies        Universities. In response to re-
been the conversion of airports into     and, ultimately, full privatization.      duced subsidies, government uni-
profitable business ventures. Most       Indeed, deregulation is a form of         versities—previously a statutory
of the airports have expanded and        privatization because, to the extent      monopoly—have been forced to
modernized. They no longer have          that it allows private entry, there is    outsource much of what they do.
restaurant, duty-free shopping or        a spontaneous transfer of market          They have enjoyed cost savings
car rental monopoly franchises. Jo-      share to the private sector.              with improved efficiencies. Simul-
hannesburg International Airport                                                   taneously, private universities,
has a commercial conference center.      Local government. At the opposite         mainly by way of distance learning
   A key issue is sequencing:            end of the spectrum is the privati-       programs, have successfully en-
Should privatization precede dereg-      zation of the fire service of the city    tered the market.
ulation, follow it, or should they       of Benoni. This resulted not only in
coincide? The conclusion seems to        improved efficiencies and reduced         National orchestra. South Africa
be that privatization before deregu-     costs, but in numerous innova-            cut the National Symphony Orches-
lation is the least desirable option.    tions, such as the combination of         tra’s subsidies, and privatized it.

                 SUCCESSFUL PRIVATIZATION EFFORTS                            IN   SOUTH AFRICA
                                         Accomplishment                                     Impact
   Infrastructure              Road construction, management and             • Private contractors develop BOOT
                               maintenance are privatized.                     system
                                                                             • Major investment in needed road
                                                                             • Improved transportation & increased
                                                                             • Ownership of road system to be
                                                                               transferred to government in 25 years

   Defense                     The national armaments industry,              • Emergence of aviation, artillery, civilian
                               Armscor, is commercialized into a private       products, information technology,
                               entity, Denel, which in turn is unbundled       & real estate sectors
                               into five subsidiaries.                       • Improved efficiencies
                                                                             • Reduced costs

   Local government            City of Benoni emergency services are         • Improved response time
                               privatized.                                   • Reduced operational costs
                                                                             • Consolidation of ambulance and fire
                                                                             • Fire service radio transmitters
                                                                               converted to cell phone use

   Education                   Breakup of government monopoly on             • Increase in quality of education
                               universities; some services are outsourced.   • Reduction in tuition costs
                                                                             • Rise in number of private universities
                                                                             • Competition from distance learning

   National orchestra          Subsidies are cut by government.              • More frequent performances
                                                                             • Larger attendance and wider musical

ECONOMIC REFORM TODAY NUMBER TWO 1999                                                                                       27
     Liberalization/deregulation         government housing, franchis-       Commercialization
        The privatization process is     es, or services management, it         Most protagonists of privati-
     usually a matter of degree and      can privatize by upgrading          zation would not expect state
     context, seldom resulting in        those rights, ultimately to full    efficiency in areas more suited
     solely government or private        ownership. Upgrading land           to privatization. Exceptions
     entities. Much of South             title, in full or by degree, can    occur when commercialization
     Africa’s privatization, especial-   be the greatest act of privatiza-   is a prelude to fuller privatiza-
     ly that which has benefited the     tion that African governments       tion. Commercialization is one
     masses directly, has been           can undertake. People who           of the degrees of privatization,
     achieved without the direct         have government franchises—         and tends to yield commensu-
     disposal of a single state asset.   training or testing, for exam-      rately modest benefits. In
     Liberalization resulted in the      ple—can be upgraded to full         some South African case stud-
     emergence of various private        owners.                             ies the benefits have been sur-
     alternatives to government ac-                                          prisingly substantial. The in-
                                         Outsourcing vs. sale
     tivities, from transport and                                            centives of “full” commercial-
     policing, to telecommunica-             Outsourcing is probably the     ization simulate, although in-
     tions and marketing. By merely      most common form of privati-        completely, positive private
     allowing what was previously        zation, though it is not always     sector incentives, which are
     curtailed, privatization occurs     recognized as such. In the          achieved when subsidies are
     spontaneously.                      South African context, in par-      cut unambiguously, private
        Instead of divestiture, gov-     ticular, outsourcing is one of      sector directors and/or man-
     ernment can simply discon-          the easiest and most effective      agers are brought in and prof-
     tinue a function it performs.       ways to benefit emerging en-        its are allowed and encour-
     When the local government           terprises and historically disad-   aged—in short, when the un-
     bus service in Welkom was           vantaged people who live in         dertaking is managed like a
     discontinued, for instance,         various regions of the country.     business venture.
     within days private, owner-             Divestiture is not the most
     operated microbuses moved           common form of privatization,       Corporatization
     in to provide a more pop-           but it is the most widely recog-       Corporatization involves a
     ular, efficient and affordable      nized. As with all methods of       more advanced degree of pri-
     alternative.                        privatization, there are many       vatization, where the govern-
        Where government is unsuit-      ways to transfer state assets to    ment concern is converted into
     ed for a particular activity or     the private sector: sale in         a company. There are varia-
     function and resources are no       whole or part, sale with or         tions on this approach as well:
     longer directed toward that ac-     without a special voting right      the company can be anything
     tivity, they should be privatized   “golden share,” sale by public      from a nominal company—
     by the mere expedient of leav-      offering or private placement,      with continued government
     ing them in the private sector      sale preceded by unbundling         protection, subsidies, political
     by way of lower taxes. One of       to smaller enterprises, man-        interference, etc.—to a truly
     the most obvious examples is        agement buyout, employee            autonomous public company,
     the abolition of influx control,    share option schemes, and so        perhaps listed on stock ex-
     whereby blacks were kept out        on—or any combination of            changes, with directors and
     of South African cities. Another    these. There are countless vari-    management drawn entirely
     was the scrapping of most           ations on the privatization         from the private sector, free
     forms of business licensing.        theme. The common element           from any political interference,
                                         is that what was once done by       and dividends paid to the
     Upgrading land titles               the state is no longer done by      owner.
        Where government confers         it, even if it is no longer done
     rights or privileges, such as       at all.

28                                                                              NUMBER TWO 1999 ECONOMIC REFORM TODAY
For a time it was assumed that it       tails the sale of assets by the state.   creased efficiency; opportunities for
would disappear. Instead, it now        The privatization discourse in           entrepreneurs, disadvantaged peo-
performs more frequently to more        South Africa, as in most African         ple and elites; increased tax rev-
people. Subsidies had the effect of     countries, confines itself to a dis-     enues; and net wealth creation,
rewarding it for not playing music,     cussion of the sale of large state       with accompanying growth and in-
at least not the type of concerts pa-   undertakings—and how much prof-          creased employment.
trons wanted to hear.                   it the government can reap from             Ironically, the principal objection
                                        such divestiture of assets. Specifi-     to privatization—expressed primar-
Armaments. One of the unintend-         cally, it is often assumed that priva-   ily by trade unions—demonstrates
ed consequences of sanctions            tization transfers government mo-        its superior benefits. The most
against apartheid was the govern-       nopolies to private conglomerates,       common concern is that it will re-
ment’s development of a sophisti-       thereby enriching a small elite class    sult in retrenchment of redundant
cated nationalized armaments in-        at the expense of the masses. This       employees. But if critics of privati-
dustry, Armscor. It was commer-         erroneous belief ignores not only        zation really believed what they
cialized into Denel, and unbundled      the substantial mass benefits that       claim—that governments can better
into five subsidiaries: aviation, ar-   flow from privatization in terms of      perform privatized functions—they
tillery, civilian products, IT, and     even this limited conception that is     would predict increased inefficien-
real estate.                            so prevalent—and for which priva-        cy, and the need for more employ-
Roads. Another successful South         tization advocates are partly to         ees. This fear of critics of privatiza-
African privatization effort has        blame—but also the majority of ac-       tion amounts to an implicit conces-
been in the area of road construc-      tual privatization techniques.           sion that the private sector—under
tion, management and mainte-               Such confusion partly explains        conditions of free competition and
nance. There has been virtually no      trade union opposition to privatiza-     positive incentives—can do the
government investment in major          tion. Some South African trade           same job with fewer people. In
road construction in recent years.      unions are, however, developing a        other words, it concedes that peo-
Private contractors are now primar-     more sophisticated view of privati-      ple are more productive in the pri-
ily responsible for road construc-      zation. One of the largest and re-       vate sector.
tion under the so-called BOOT sys-      putedly most radical unions, NE-            Efficiencies achieved by privati-
tem: build, own, operate, transfer.     HAWU, for instance, is assisting its     zation amount to extra wealth in
After 25 years or so, the private       members to form enterprises to           the economy. More wealth means
contractors will transfer the road      tender privatized services to former     more demand and, in turn, more
system to the government.               employers and others. NUM, the           jobs at higher incomes, even if not
                                        mineworkers union, has accepted          in the same undertaking. Privatiza-
Land. The South African govern-         privatization on condition that it       tion-induced unemployment is
ment owns between a quarter and         benefits workers.                        therefore transitional.
a third of all the country’s land,         The box on page 36 outlines              Finally, understanding the role
and probably more if its value is       some of the means by which gov-          played by incentives is the key to
taken into account. Most black          ernments can implement privatiza-        understanding why privatization
people live on government owned         tion throughout their economies,         works and to designing the optimal
land as tenants. An integral part of    with particular emphasis on the          privatization strategy in each
the government’s land reform and        South African model.                     case. Privatization is an elaborate
housing policy is to transfer land to                                            issue, but in the final analysis
the homeless, and to upgrade ten-       Conclusions                              it provides profit incentives where
ancies to ownership. When and if           Privatization in South Africa has     government fails to and, conse-
the policy is implemented, there        been more successful than is gener-      quently, increases national produc-
will be some 10 million new land        ally recognized, even by its own         tivity and wealth.
owners in what will be one of the       government. It has taken place at
world’s greatest acts of empower-       all levels of government, especially
ment and privatization.                 the local level. And it has been es-
                                        tablished in many diverse forms
Lessons from South Africa               not always regarded as privatiza-
   The standard literature on priva-    tion per se. Privatization in almost
tization tends to somewhat myopi-       any form has been successful at
cally reinforce the view that it en-    achieving expenditure savings; in-

ECONOMIC REFORM TODAY NUMBER TWO 1999                                                                                29

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