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Should South Africa Have a Department of Public Enterprises?

Public Enterprises Minister, Barbara Hogan’s comment that public enterprises requiring massive bailouts will be considered for sale, has elicited a polarised response.

On the one hand, the statement has found support as an expression of the self-evident. Taxpayer’s money should not be used to subsidise loss making enterprises, because it is a waste of taxpayer money, the argument goes.

On the other hand, the African National Congress (ANC) has indicated that the statement does not reflect existing policy. The Congress of South African Trade Unions (COSATU) has argued the importance of keeping public services public.

These responses indicate a wide chasm in South Africa about the role and future of public enterprises. This chasm has an underlying foundational debate: should South Africa have a Department of Public Enterprises (DPE)?

On the cusp of the 2009 elections, the mandarins in the DPE produced a policy proposal arguing for its functions to be relocated under The Presidency. As if the proposal would be a fait accompli, the 2009 DPE budget estimates have little more in them than payment of salaries and support for basic operational budgets. Importantly, this is across the Medium-Term Expenditure Framework, which runs until the 2012 budget.

Much earlier in the debate in 2001, during the anti-privatisation strikes led by COSATU, the need for having the DPE was questioned. The obvious reference was to its very existence being rooted in the apartheid government’s programme of privatisation, most notably Iscor and Sasol. More importantly, unions raised the question of who was in charge of policy for crucial sectors such as transport, electricity and forestry. 

The electricity reform programme reflected this tension. Government’s intent was to build new generation capacity through the introduction of independent power producers. The failure of this approach is seen today in the need for massive injection of public funds, together with significant increases in tariffs for households and businesses.

Importantly, despite arguing that market conditions were not conducive to private participation, Eskom’s requests for expanding distribution capacity was not accepted. Effectively, our policy on the generation of electricity was guided not by the obvious increase in demand related to economic growth, but rather with a strict adherence to policy to support private participation.

Time has shown that these dissenting voices were not fear mongering, or engaged in ‘the hysteria of rolling blackouts’, as one government official put. In effect, due to DPE monitoring Eskom’s performance, it arguably played a more significant role in the formulation of electricity policy than the Minister for Minerals and Energy. The same argument on the relative power between DPE and Department of Transport can be made. 

Moreover, the DPE became something of a selection of strategic interventions, some showing promise and some questionable. The most questionable is the support for the Pebble Bed Modular Reactor (PBMR), which is an experimental nuclear technology to generate electricity. The potential environmental impacts and the capital intensity of this technology should have subjected the policy proposals to greater levels of public debate. It is important to note that funding was available for the PBMR and not for Eskom.

Perhaps the more profound implication is that venture capital was available for the PBMR, whilst government blocked attempts for establishing a state run venture capital institution that would provide support for start-ups. The People’s Budget Campaign calculates the scale of the investment at a massive 12 billion since 2004. 

The establishment of Broadband Infraco aims to reduce the cost of broadband through a range of initiatives, by introducing a public service provider to compete with private companies. There was however once a public sector provider, Telkom, which through better regulation and government subsidies, could have played a significant role in reducing prices and extending services. Instead it was privatised and by keeping prices high, has acted not in public interest.

Broadband Infraco, in effect, shows the failure of the privatisation programme in Telkom, which argued that greater access and reduced prices, would follow. However, government requires a strategic role in broadband development, with Broadband Infraco proposals for more marine cables and long distance cables important for narrowing the digital divide, through providing cheaper wholesale prices. The success of the strategy will however be determined by the cost reductions being passed on to consumers. 

A more complimentary reading of both the PBMR and Broadband Infraco is that it suggested foresight, or in its more political sense ‘the strategic role for the developmental state’.  However, this argument has a central weakness, the DPE failed to fulfil its core functions. These functions are excellent corporate governance, cheaper prices, continued supply and initiating strategic investments. It currently aims to do this through its shareholder compacts (i.e. performance agreements between government and public enterprises) and its shareholding in Telkom.  But these instruments are weak because government does not have strong enough sanctions to enforce compliance with broader developmental objectives.

This is demonstrated in proposals to close so-called light density lines run by Spoornet, some years ago. However, research undertaken by the National Labour and Economic Development Institute (NALEDI) showed that closing eight lines in rural KwaZulu-Natal would save Spoornet R30 million per annum, but would increase the cost of road maintenance by R130 million per annum. Moreover, it would provide significant cost escalations in transports cost for households, needing to access government services.

Fortunately, in this case, the research was commissioned and supported by trade unions in the transport sector, thus ensuring that power and evidence based research combined. Equally important, the Department of Transport did not, as in the case with electricity, adopt a dismissive attitude to evidence based proposals, but acted on the advice ensuring that many light density lines would continue to be maintained and be operational. Potentially, this has lessons for civil society organisations that have proposals for extending broadband and shifting to renewable energy sources, with the state playing a key role in each of these proposals.

There is thus a clear need to ensure that the state plays a role in keeping public services public. The ideological rancour on this question is sometimes misleading, in that it suggests that private sector participation would improve efficiencies. Whilst, there is certainly a role for the private sector in improving performance of public enterprises, the calls for the private sector to run public services is misguided. It is misguided because public services by their very nature are non-rival and non-excludable.

From a developmental perspective, it is almost a non-starter to suggest competing companies would be feasible in the delivery of electricity and transport infrastructure. The sheer scale of investment and returns on these investments take much longer than would be tolerable to even the most socially conscious capitalist.

This suggests that loss making in initial periods, which improve the capacity of the economy to perform might be important for reducing both the cost of living and doing business. However, even if losses are tolerable, this can never be simply a bottomless pit. Strong alignments to developmental outcomes are vital and even these should rest on strategies to make the enterprises financially viable over time.

However, this is not an argument for all enterprises currently under the management of the DPE, especially in defence and aviation. Arguably, these are strategic areas of investment that cannot be considered public services, even if one adopts an expansive definition of public services. The turnarounds in these areas have been slow and future losses can safely be assumed.

Moreover, from an ethical standpoint, should a democratic developmental state be supporting arms manufacturing or airline travel, which is the preserve of those that can afford flights and are spoilt for choice?

The current engagements on divesting from forestry and diamond mining by the state provide another important lesson. Given our complex history, various challenges have emerged. The land restitution process on forestry land has resulted in the divestiture from Komatiland Forests being extended by five years. Similarly, the attempts to transfer mining rights to the community around the Alexkor mine have resulted in retrenchments.

The lesson from these cases is not only that restructuring carries costs, but that it is never as simple as supporters of privatisation suggest. This becomes even more complex and contested once government attempts to engage the ‘community’, with all its own power dynamics. Moreover, it shows that in terms of performance, public enterprises are a mixed bag.

Whether the DPE continues to exist or not, the requirement of improved monitoring and stronger sanctions against non-performance for government needs to be addressed. Certainly, in the case of enterprises effectively providing private services, the option of divestiture by the state should be considered. However, for those providing public services privatisation is not an option, but stronger measures to improve performance are needed. This should start with new service and operational agreements between the state and enterprises. At its core, must be extension of services, reduction of costs and good corporate governance. This must include more than the slap on the wrists provided by parliamentary committees, the media and Ministers.

For all the polarity Minister Hogan’s statements generated, as South Africa, we still need to answer the question: what will we do with non-performing public enterprises? It is a question that is central to how the ANC will translate lofty ideas about the ‘developmental state’ into practice.

This article was first published under creative commons license on South African Civil Society Information Service website.