The slow process of dispelling ANC illusions about privatisation

RW Johnson writes on govt's expressed desire to bring R100bn of private money into Transnet

It was with considerable aplomb that Pravin Gordhan, the Minister for Public Enterprises, and Portia Derby, the CEO of Transnet, told us this week that they are seeking R100 billion of private money to put into the port of Durban alone, with other huge amounts doubtless needed for the other two large ports, Cape Town and Ngqura (Coega).

All three of these ports came in the bottom four of the recent World Bank study of 351 ports worldwide, reflecting just how desperately uncompetitive they have become under ANC rule. There is also the small matter that Ngqura/Coega was built purely as a political decision by the ANC in an attempt to boost the Eastern Cape’s economy. The private sector was always sceptical and believed that this port was in the wrong place.

It is worth looking carefully at this initiative for virtually all the SOEs are in desperate need of more money and the government doesn’t have it. At Eskom, for example, Andre de Ruyter is talking of how the private sector might be brought in to make Eskom a leader in “green energy”. The obvious way out of this mess is to privatize the SOEs but this is, of course, a hyper-sensitive subject within the ANC alliance.

Cosatu’s remaining strength depends heavily on public sector unions and these are extremely strong within the SOEs where the unions have not only managed to obtain sky-high salaries and perks but have feather-bedded these enterprises with lots of extra and unnecessary jobs. The unions are well aware that privatization would mean downward pressure both on job numbers and salaries and that any private owner would not accept the degree of union dominance which is now quite ordinary within SOEs. So Cosatu is very frightened by any mention of privatization. And since the SACP depends on its strength within Cosatu the SACP feels the same both for reasons of ideology and self-interest.

Yet quite what Gordhan and Derby envisage is unclear: they say only that they want to invite the private sector to volunteer how it might “participate”. They were unable to say how the ownership of the new facilities thus financed would be split between private and public. As with the suggestion that the private sector might like to finance the government’s infrastructure programme, these are brightly put forward as “investment opportunities”, almost as if the government is doing the private sector a favour by allowing them to invest in these wrecked SOEs.

Popo Molefe, the chairman of Transnet, was clearer: “There has always been a lot of noise when we talk about private sector participation with people saying we are privatizing public assets. In reality that is not what we are doing. We will continue to own those assets.” Molefe also added that because of the country’s successive credit downgrades “funding has become very expensive”, so the aim was instead to “unlock capital from inside our country”. This was clearly assumed to be cheaper, though there would be no reason for that to be so unless those who put up the money are rewarded with ownership.

There were several other clues. Ms. Derby said that Transnet was already deep in discussion with the unions. “We are still in negotiations so it’s a constant discussion, working with the unions to arrive at ultimately what would be an ideal partnership.” Pravin Gordhan added that their proposal would create more jobs and would “create opportunities for black businesses”.

Several key points need to be made.

First, Transnet is talking of a huge expansion of container facilities at Durban. It is claimed that Durban currently handles 2,9 million containers a year (though World Port Source puts the number lower) and the aim is to increase that figure to 11 million by 2032.

Second, the troika which has brought Durban to a point where it is 351st out of 351 consists of Transnet management, the Department of Public Enterprises and the unions. These are exactly the three parties coming up with this new plan. Potential investors should take careful note of the role thus being allotted to them. Given that they are the make-or-break partner they might have expected that they would be the first to be consulted but in fact they are the last. Any plan which satisfies Cosatu will require that private investors have as little management control as possible, no matter how much money they put in.

Third, despite what Gordhan says, it is not clear that black businesses have much of a role to play. Transnet needs R100 billion and there are few, if any black businesses able to come up with billions of Rands.

Fourth, Transnet has been notoriously corrupt and much of that corruption has been associated with BEE companies. With sums as large as R100 billion being thrown around, the sharks will already be circling.  

Fifth, Popo Molefe talks as if there are enormous amounts of investment capital in South Africa looking for investment opportunities inside the country. The opposite is the truth. The government’s behaviour over the last three decades has scared investors badly. For some time now they have been investing abroad in almost panic-stricken fashion. Anyone who is willing to make large fixed investments within South Africa has to factor in the risk they are taking by putting their capital at the mercy of the ANC government.

Finally, on May 21 this year the Cosatu unions (notably the dockers’ union, the South African Transport and Allied Workers Union) tried to prevent an Israeli ship from entering Durban harbour, an action co-ordinated with BDS. South Africa has normal trade relations with Israel but the unions wished to impose their own foreign and trade policies on the government. Edwin Mkhize, the Cosatu secretary for KZN, said “We want to force the Transnet not to allow Israeli cargo vessels into our harbour.” Investors might particularly note the phrase “our harbour”. The unions are used to calling the shots.

When Thatcher first launched a wave of privatizations in Britain in the 1980s it was soon observed that many of the companies concerned had many loss-making units and that anyone who took them over would immediately want to shut down all such units, which meant labour lay-offs and bruising battles with the unions. No one in the private sector had any appetite for that so in effect the government had to carry out this slimming-down process itself with all its attendant woes, in order for the company to be marketable.

It is likely that anyone taking over a South African SOE – or even part of one - will face the same tribulations but private investors here might make a different calculation. Would anyone trust Transnet and the DPE to carry out a ruthless slimming down process? Given the deference to the unions of both these bodies, no one in their right mind would trust that. On the other hand, anyone who takes on such a task on their own will want complete management control.

Of course, we have already seen one attempted privatization, at SAA. This is a very curious business indeed. It should probably be entitled Privatization by Someone Who Doesn’t Like or Believe In Privatization. We are told that 51% of SAA will be owned by the Takatso consortium which consists of Global Aviation (of which no one has ever heard) and Harith General Partners. Harith is headed by Jabu Moleketi, an SACP member, a former deputy Finance Minister and also a former chairman of the Public Investment Corporation.

There has been extensive controversy about this because the PIC provided the initial seed money with which Harith was set up and the PIC still owns 30% of Harith. Harith’s chief executive was Tshepo Mahloele, formerly a PIC senior executive and, apparently, a contributor to ANC funds. An inquiry into Harith noted that it charged very high fees and had apparently been run in order to enrich its employees rather than its investors.

[The Takatso Consortium's reply, taking issue with these points, can be read here. - Editor]

All of which looks rather as if a large effort has been made to keep SAA within the ANC family, in which case this is a bogus privatization. Certainly, the government has not mentioned any other bidders for SAA and the process by which Takatso was chosen was completely non-transparent. Yet we know that Ethiopian Airways was a potential bidder, that it had the necessary capital and that it has vast and successful aviation experience. How could anyone think that the puny little Takatso consortium was a superior partner to that?

In general deep scepticism exists as to whether Takatso will really be equal to the task of relaunching SAA. Takatso has talked about investing R3 billion in SAA (a tiny amount in airline terms) but as yet no purchase price for its 51% share of SAA has been mentioned. So how can Takatso possibly have been selected as the successful bidder if something as central as the price to be paid is still to be settled? Doubts also exist as to whether Takatso really has R3 billion to invest, let alone further money with which to buy its 51% share.

In addition the re-launched SAA is expected to run at a loss for several years and Takatso is unlikely to have sufficiently deep pockets to finance that. And as a recently put together consortium it is most unlikely that Takatso would be able to borrow to cover that period.

What is certain is that this flimsy and question-begging answer to the SAA problem will not be any sort of model for Transnet, Eskom, Prasa or any of the heavyweight SOEs. They are going to need really serious money – many hundreds of billions – and only a very few companies anywhere have those sorts of resources.

Instead of looking at this as a wonderful opportunity for investors it would be sensible to realise that the government is going to have to work very hard to make sinking R100 billion into Transnet an attractive proposition for anyone. Instead of wasting its time consulting the unions about their wish-list for South Africa’s ports, the government would have been wiser to draw up a short list of companies big enough to take on this Herculean task and talk to them about what it would take to attract their interest in such a proposition. This is what it is going to come down to in the end.

Probably things will need to get worse before the government begins to realise just how weak its hand is. Instead of flattering itself that it is offering the private sector glittering opportunities for investment and then drawing up lists of conditions that bidders must fulfil – no redundancies, special deals for BEE companies and all the usual bells and whistles – the government will have to face some very stark facts.

These include:- It has run all these SOEs into the ground. It has made hideously unwise decisions about them for decades. The SOEs have far too many staff and they are often ludicrously overpaid. The unions in the SOEs have been spoilt silly and are far too big for their boots.

The SOEs have seen horrific levels of corruption and far too many BEE companies have been able to secure sweetheart deals from them. In a word, these companies are basket-cases and if the government can find any private investors willing to take them off their hands, clean them up and run them properly, they should be thrilled.

R.W. Johnson