The South African Civil Society Information Service

Parastatals between a Rock and a Hard Place: From Privatisation to Commercialisation and Back

By Leonard Gentle · 4 Aug 2010

Picture: SACSIS

The revelation that ex-SAA CEO, Khaya Ngqula is being chased by the board of SAA to recover some R31m expenditure has made headlines recently.

In the same week that this news broke, a Deloitte’s survey of the top 200 South African company CEOs found that while they were comfortable with the government’s predictable economic policy, “The single biggest standout concern, for all industries, was corruption and its impact on doing business” (Hugh Harrison of Deloitte, quoted in Business Day 22 July 2010). The CEOs went on to say, “The next big worry for business was the diminishing ability of state entities to deliver essential services at competitive cost and with reliable efficiency.”

The furore around Eskom, its World Bank loan and the increase in electricity prices and the case of its ex-CEO, Jacob Maroga, chasing compensation of millions of Rand, is a moot point. As is the involvement of the ruling ANC’s investment arm, Chancellor House, in the Eskom saga. But across the parastatals - from the SABC, to Denel, to ACSA, the public has been treated to a story of inefficiency, wastefulness and patronage. 

Of course, none of the parastatals are public utilities, serving some kind of developmental function, any more. ‘Escom,’ founded in 1923, to ensure that electricity was provided on a non-profit basis “for the public interest” became a parastatal in 1948 when the private company Victoria Falls and Transvaal Power Company was nationalised. It was then converted to behave like a private company realising shareholder value in 1989 under the ‘Eskom’ Conversion Act. Telkom is partially privatised with major shareholder, Telkom Malaysia. SAA was privatised upon being sold off to Swissair and was only returned to state ownership when Swissair itself went bankrupt.

Nevertheless, the wave of privatisation via which major state utilities, particularly in energy, telecommunications and airlines, were directly sold off, as Margaret Thatcher did in the 1980s, has long since ebbed globally. Instead, for some time now, neoliberal states have preferred forms of Public-Private Partnerships or the commercialisation of utilities so that they act exactly like private companies, whilst still being bailed out by public funds, where necessary.

However, in the wake of these scandals around the parastatals in South Africa, there is a not so subtle attempt to revive the public mood for a new round of privatisation. Jacob Zuma himself has begun to rally to this cause announcing that a special Presidential committee will look at the performance of the parastatals with a view to making policy recommendations (in so doing, also pre-empting the work of his own National Planning Committee, which is supposed to formulate a future vision for economic policy). This is code for a further round of privatisation.

Already Eskom has announced that it will be setting up an independent system and market operator as a precursor to ensure that private electrical providers, independent power producers (IPPs), will take up the 40% of electricity provision that Alec Irwin promised so many years ago. And Transnet has called for tenders for under-used railway lines.

But hang on, when did privatisation first start in South Africa and how successful has it been? Let’s look at two case studies, the privatisation of both Iscor and the South African Reserve Bank, to establish how effective the strategy has been.

Firstly, there is the case of the privatisation of Iscor and its offshoots Arcelor Mittal and Kumba. It takes some doing to supersede in tawdriness the current debacles around the parastatals, but that is precisely what the fracas between the big private corporations, Arcelor Mittal and Kumba, has achieved.

The first privatisation in South Africa was the privatisation of Iscor – the old Iron and Steel Corporation that was the backbone of South Africa’s industrialisation project since 1928. (As an aside, the ANC’s spin doctors like to speak about a “developmental state,” which, apparently, intervenes decisively in the economy to ensure industrial development occurs to fulfil national objectives. Well that is what the segregation and apartheid regimes were -- and there was nothing redistributive about that.)

Iscor was privatised in 1989 when the then-apartheid government decided to float it on the Johannesburg Stock Exchange (JSE). In 2001, Iscor was unbundled and broken into two divisions: iron-ore mining and steel production, as part of this process. The mining division was bought by South Africa’s biggest monopoly, Anglo American, and renamed Kumba. The steel manufacturer was successively taken over by LNM holdings, and then by Mittal Steel to become Arcelor Mittal.

As part of this privatisation and unbundling, the apartheid state offered the sweetener of a guaranteed price of cost plus 3% for iron ore from Kumba’s Sishen mine for the newly privatised rump section of Iscor -- a practice continued by the ANC’s Irwin. When Arcelor Mittal took over Iscor from LNM it not only got the continued benefit of low price fixing from Kumba, but also proceeded to charge steel users in South Africa import parity pricing. This means that Arcelor was charging South African businesses a price for steel as if it were imported whilst enjoying a cosy, cheap price fixing arrangement with Kumba. This was all underwritten and guaranteed by the state. So much for the reality of the so-called free market!

When Kumba did not invoke its new order mineral rights for the Sishen mine with the state (which proceeded to give these rights to a group of ANC cronies) Kumba threatened to tear up the old “cost plus 3% agreement.” In a fit of pique, Arcelor Mittal threatened to immediately stop production at its main West Coast plant, Saldanha Steel, threatening hundreds of domestic steel users. So much for the efficiency of privatisation!

A number of issues can be clarified from this case study. Firstly, the notion that privatisation involved the state withdrawing from the economy is simply not true. Privatisation in all its guises, from the big-bang approach of Thatcher’s sale of British Airways, British Aerospace and British Telecoms to the partial privatisation of SAA, has always involved state support and continued interventions to “sweeten the deal” and to underwrite it so that private buyers are guaranteed success. There is nothing here about relieving the state of the burden of carrying millstones round its neck.

Secondly, whereas the deal which gave a transnational corporation (TNC), like Arcelor Mittal the guarantee of cost plus 3% for its input costs of iron ore, was such a “sweetener” to attract a foreign investor, the TNC did not feel any obligation to respond likewise for South Africa’s downstream needs of processed steel by passing on a good price, or even by just respecting “market prices” for South African steel users. No, Arcelor Mittal set the price for its steel at import parity rates. That’s at higher levels than domestic prices.

This is a tale of corporate price fixing to guarantee inflated profits. Rather than privatisation having lead to greater efficiency and lower costs - as the ideologues of neoliberalism would aver - privatisation has been crippling for South African steel users.

And now Arcelor Mittal seeks to blackmail South Africa by pleading poverty and threatening to shut down its Saldanha Steel plant, threatening thousands of jobs and the devastation of local economies all along the West Coast.

A second tale of privatisation involves an entity that has long been hailed by the media for its “courage” and “independence” but is now being looked at a little more critically because of growing concerns about interest rates and the rand. This is the case of the South African Reserve Bank (SARB).

Set up in 1921, precociously, as only one of four central banks outside Britain and Europe, the SARB was publicly owned until 1989. Prior to this, the apartheid state’s 1985 De Kock Commission, chaired by the then-economic advisor and convert to neoliberalism, Gerhard De Kock, recommended that the SARB focus on curbing inflation through high interest rates, and that the bank become, not only independent of parliament, but privately-owned. Today it is only one of five central banks internationally that is privately owned by some 670 shareholders.

De Kock later went on to earn notoriety, not only for presiding over the shift to neoliberalism in South Africa - well before GEAR mark you - and the regime of strangling interest rates, but for the illegal granting of a R1.1bn bailout by the SARB to Sanlam’s subsidiary, Bankorp, after the collapse of Masterbond, a mortgage finance company.

At the time, presiding judge over the Commission of Enquiry set up to probe the Masterbond scandal, Justice Nel, stated "The standards set by the Reserve Bank by its philosophy that ‘the end justifies the means’ and the apparent acceptance thereof by the auditors concerned ... could only have had a negative influence on the auditing profession in South Africa.” Having authorized this bailout and “saved” Bankorp, Sanlam successfully sold it to ABSA, today a home for retiring Reserve Bank governors, along with Goldman Sachs.

1985 was, of course, a bad time to enact any such radical changes as South Africa experienced widespread mass struggles. Money drained out of the country and South Africa was forced to default on its debt obligations to the IMF as well as establish a two-tier rand to halt the rot. But by 1989 this scenario changed and the privatisation of the Reserve Bank went through that year, which is the same year that Iscor was privatised.

In latter day South Africa, to the dismay of the markets that had factored in a half percentage interest rate cut, the SARB again held interest rates firm this year. And, at a repo rate of 6% with low inflation, South Africa has one of the highest real interest rates in comparison with our main trading partners.

Over the course of 2010, the rand has firmed against the dollar and the euro. With interest rates in Europe and the USA at near zero and kept there and, as fears of a double-dip recession abound, globally speculators are buying bonds in South Africa. Thus, driving the Rand up. For workers dependent on jobs in companies doing exports, the job losses have been simply disastrous. Even conservative research initiatives, like the recent OECD report - replete with all its reactionary calls for cutting social spending and curbing the power of trade unions - have warned of the consequences of the high value of the rand. Yet Gil Marcus and company are unrepentant.

The consequences for South African business are a double whammy -- the continued high cost of credit and the high value of the rand making exports less competitive. And the consequence for the South African state of the escalation of the bond market is increased debt. Today’s boom in bonds for speculators is tomorrow’s growing uncontrollable debt burden for the South African public.

While bonds can be a source of profits for speculators, they are just a form of borrowing for the issuer, namely, the South African state (and ultimately you and I, the public). Under globalisation, bonds are a form of borrowing that involves speculation in debt that - as has been shown in the Greek sovereign debt crisis - can lead to a constantly moving debt target and a country being entirely at the mercy of speculators.

Already speculation in bonds has increased by 90% on the JSE. In the first 6 months of 2010, bonds have overtaken equity as the main source of investment and the buyers of these bonds are largely foreign. The spectre of a sovereign debt crisis may not be far off for South Africa and the irresponsibility of the SARB is a lamentable feature.

CEOs may want to pause a bit and reflect on these two cases of privatisation and their effect on the “ability” of entities to “deliver essential services at competitive cost and with reliable efficiency.” The case studies of the commercialised parastatals, like the Eskoms and the SAAs, however do not provide an inspiring alternative.

But for the greater South African public, particularly those struggling for basic services and decent livelihoods, it raises the need to speak and campaign - not for further privatisation and commercialisation - but about how to extend public control and accountability over what is owned in our name, and how to take back the privatised entities under public control.

Should you wish to republish this SACSIS article, please attribute the author and cite The South African Civil Society Information Service as its source.

All of SACSIS' originally produced articles, videos, podcasts and transcripts are licensed under a Creative Commons license. For more information about our Copyright Policy, please click here.

To receive an email notification when a new SACSIS article is published, please click here.

For regular and timely updates of new SACSIS articles, you can also follow us on Twitter @SACSIS_News and/or become a SACSIS fan on Facebook.

Read more articles filed under Economic Justice.

Read more articles tagged with: privatisation, Eskom, Transnet, SAA.

You can find this page online at http://sacsis.org.za/site/article/525.1.