GHALEB CACHALIA: The government, Eskom, social value and the P-word
Privatisation, without competition, may simply transform a public monopoly into a private monopoly — so let’s get Eskom right first time
The constant drain on public funds by Eskom and the attendant inefficiencies that require action remain bogged down in the utility’s inability to access the required funding. This calls for a dispassionate examination of the value of privatisation — populist and vested-interest aversion notwithstanding.
The government is seriously remiss in its unwillingness to address these issues.
It is common cause that many economists are of the view that privatised firms are expected to be more efficient than state-owned ones and that privatisation will enhance efficiency in the supply of a product or service. That said, privatisation, without the introduction of competition, may simply transform a public monopoly into a private monopoly, resulting in increased prices and an actual worsening of allocative efficiency.
If handled properly though — and here’s the rub — privatisation may well depoliticise economic decision-making, enabling government to reduce public outlays, cut taxes, reduce budget deficits, shrink public sector borrowing and reduce the monopoly power of unions and the entrenchment of an aristocracy of labour, which is particularly strong in state-owned enterprises (SOEs).
The key test will be the extent to which privatisation changes market structure — how attempts to capture and preserve rents can be avoided in the quest for increased efficiency. To obviate the creation of a zaibatsu (a “financial clique”, as happened in Japan), the promotion of popular capitalism through a wider ownership of shares and the diminution of the power of the unions in the public sector is needed.
If a government were to sell to the private sector it could use the windfall to retire some of its debt. If monies were drawn from foreign sources it would mean the repatriation of monies previously shipped abroad
Governments often compel SOEs to cross-subsidise services and to be employers of last resort. When private shareholders own a company, decisions such as these are exposed and diminish the possibility of the enablement of groups that have acquired control of the state apparatus to establish a preferential economic base for themselves.
Public offerings or exchanges at a concessional price involving limitations on the number of shares an individual is allowed to acquire, and payments through salary deductions or subsidised credit, are all options that merit consideration.
The government would be well advised to consider the merits of privatisation on a case-by-case basis. In this regard, Eskom presents a prime example. Here, the social value of the enterprise under private operation is key and the value of the firm under private operation is likely to be different from that under government operation, affecting the firm’s static inefficiency. In private hands, the social value may well prove higher than if the firm remained in state hands.
It would allow for “dynamic entrepreneurship” and the ability of private buyers to exact changes in the regulatory environment from the government that would add to the real net output of the national economy, by getting prices right, lowering trade barriers and increasing credit viability.
Indeed, if the social value of the entity in private hand exceeds the social value in government hands, government might well rationally consider giving the enterprise away to the private sector, and perhaps even paying the private sector to take it over.
This is not a wayward suggestion and has been empirically scrutinised under many scenarios, but given the unlikeliness of this, if a government were to sell to the private sector it could use the windfall to retire some of its debt. If monies were drawn from foreign sources it would mean the repatriation of monies previously shipped abroad. Added funds would also allow a government to generate higher social value in other spheres.
This thinking is not new and has been explored over many decades in Chile, the UK, Jamaica, Bangladesh and Togo, among other countries. It has been documented by the World Bank, from which much of these arguments and recommendations are drawn and presented. The question is why the government refuses to entertain any of these ideas in the face of patent failure of Eskom, for example, and the unending threat it poses to the fiscus.
Finance minister Tito Mboweni has, in the past, hinted at the value of privatisation of state assets and clearly the separation of the utility into three parts — generation, transmission and distribution — paves the way for this. So why the silence when it comes to candidly examining the value of such a move?
While cellphones broke the monopoly of Telkom, the cellphone oligopoly exacts other punitive privations on consumers. Surely, it’s time to learn from this and other global examples, and responsibly examine the value of privatisation — under what conditions, and to what effect?
Privatisation was not possible in the past — a result of global sanctions imposed on the apartheid government, which meant few world-class companies were interested in doing business in SA. That is not the case now. In addition, we have highly developed local expertise and funding mechanisms that will be able to step into this sector and potentially result in an efficient utility that makes electricity affordable and available — as per Eskom’s (failed) mandate.
The time for this discussion is now. After all, the social value under private operation is simply the present value of expected net benefits accruing to society as a whole from the private operation of an enterprise. Surely it’s long overdue to have this dispassionate discussion instead of stumbling from blackout to blackout, from one debt crisis to another, as we compound the burden of an increasingly incapable state that won’t countenance the P-word?
• Cachalia, a DA MP, is shadow public enterprises minister.
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