Revitalising South Africa and embracing competition in privatisation

In the ongoing debate over South Africa’s economic future, supporters of socialist parties like the ANC and EFF express fear of privatisation. Economic historian Nicholas Woode-Smith argues for privatisation, contending that many state-owned enterprises are failing and burdening the economy. While critics argue the poor can’t afford privatisation, the article counters that the present socialist system also fails the majority. The key, it suggests, is not just private ownership but fostering competition, ensuring contracts are airtight, and allowing a vibrant free market to address societal needs.

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Calming fears about privatisation

By Ivo Vegter

Many people, especially among supporters of socialist parties like the ANC and EFF, are terrified of privatisation. Here’s the lowdown.

I recently posted a link to an article by Nicholas Woode-Smith, an economic historian and political analyst writing for the Free Market Foundation, entitled Privatisation necessary to kick-start SA’s recovery.

It makes an argument that to me, and presumably anyone on the classical liberal side of politics, seems like common sense.

Exhibit 1: Most state-owned enterprises (SOEs), including ones that are critical to sustaining a functioning economy, such as Eskom and Transnet, are rotten to the core, and failing dismally.

Exhibit 2: Government is the fundamental cause of most of our problems, because they either don’t act resolutely to fix problems, or because they burden society with ill-considered policies, incompetent functionaries, and corruption.

Therefore, the solution is to privatise many, or most, SOEs and civil service functions, and for government to get out of the way of private business.

To quote Henry David Thoreau: ‘Government never of itself furthered any enterprise, but by the alacrity with which it got out of its way.’

Benefits

One benefit to privatisation is to ease the burden these functions place on the fiscus, thereby liberating tax revenue for other purposes.

Another is that private entities enjoy proper incentives to deliver services, have access to market signals to identify the needs of the people, and are accountable for their successful functioning to shareholders, creditors, and even market competitors.

As Woode-Smith writes: ‘…government … rewards failure [with bailouts]. Private sector businesses have to do a good job, or they fail.’

Affording privatisation

Among the responses to my posting this article was one from a shadowy person with a disguised face going by a pseudonym. Mysterious!

‘The average South African cannot afford privatisation,’ he said.

To explain what he meant by not being able to afford it, he suggested asking someone who regularly takes public transport how much they spend on medical aid, private security and private school.

He believes that privatisation is ‘basically the same system we have now except you put profit hungry corporations in the mix’, to which he added ‘Come on’, followed by a series of emojis crying with laughter.

There are a number of misconceptions that need to be answered here, but any defence of privatisation would be incomplete without also addressing the elephant in the room: the many failures of privatisation attempts.

Affording socialism

Let us establish at the outset that South Africans cannot afford the present, socialist system of providing many public services, either. They’re not getting reliable electricity supply, water that is safe to drink, products that reach shelves on time, mail that gets delivered on time, quality healthcare without having to wait hours, days or months.

As pointed out above, all of these state-provided services are too expensive, which means tax money – not only from the income tax of rich people, but also the VAT that everyone pays – keeps getting poured into bottomless pits like Eskom, Transnet, SAA, the Post Office, decrepit clinics and hospitals, and the SABC.

That is money that could have been spent on better education, more housing, better healthcare, better basic services, and a better social safety net. The failure of government entities and services has a very real cost to poor South Africans.

‘Socialism has never conquered poverty. It has never competed with capitalism as a means of effectively allocating resources and promoting sustainable growth,’ wrote Charles W. Calomiris in an excellent essay for the Manhattan Institute, entitled Socialism: The Opiate of the Corrupt and Ignorant. If you still think socialism might be a nice idea, read it.

My enigmatic interlocutor labours under the misapprehension that services provided by the private sector are necessarily expensive, and that the poor could never afford them.

This is incorrect, on both counts.

Unfair competition

In service markets where the government competes by offering free services, the services offered by the private sector are usually more expensive than they would otherwise be, simply because the free service dramatically shrinks the potential addressable market, and therefore reduces economies of scale.

When given the option of free government-provided education, for example, only the well-off will be able to afford a private alternative. That private schools are universally expensive, even on a playing field heavily tilted towards the government, is a myth, however. There are many private schools that offer low-fee, or even no-fee, education. Curro and Spark are two examples.

In the healthcare sector, private medical aids are expensive not because private sector services are necessarily expensive, and not only because they compete with free medical care provided by the government, but because it is literally illegal to offer low-cost medical cover to the poor.

That a service is provided by the private sector does not mean it has to be expensive. That private sector companies are ‘profit-hungry’ does not mean that their products have to be expensive, either.

Competition among multiple service providers erodes profits, drives down costs, incentivises innovation, and ultimately leads to the availability of low-cost options specifically aimed at the poor, especially in the absence of unfair competition from government.

It works in other industries. You can buy expensive designer dresses, sure, but you can also buy cheap clothing. You can buy high-end banking services, but you can also buy zero-fee accounts.

If spaza shops and taxis can keep their prices within reach of a poor population, then so can private companies that take over public services, and don’t get muscled out by taxpayer-funded government entities.

Vouchers

Either way, there’s nothing that says a privatised service must be paid for by the customer.

With all the money that is freed up by privatising state entities, the government can spend its budget on improved social welfare payments, or a voucher system specifically designed to pay for essential services like electricity, education, health insurance, or transport.

There’s nothing that says a country with a vibrant free market instead of decrepit, corrupt government services, cannot use tax revenue to offer a social safety net for the poor. In many rich countries, capitalist free markets pay for the prosperity needed to operate generous welfare systems.

When privatisation fails

A more interesting objection to privatisation is that many attempted privatisation programmes in the past have failed to have the desired outcomes.

In some cases, end-user prices have risen precipitously. In others, privatisation was merely a vehicle for corruption and crony-enrichment.

In places like Russia, privatisation created an entire firmament of corrupt oligarchs in charge of protected monopolies, producing not free-market capitalism, but cronyist exploitation.

Whole books could be (and have been) written about how to go about privatisation.

Simply selling off an entire SOE to a private investor is not going to fix anything. That private investor will be motivated only to maximise the profits they can extract from the entity, by cutting costs to the bone and raising prices as high as possible.

In fact, the only thing worse than a government monopoly on a service is a private monopoly on that service.

This is what happened with Telkom. The government brought in a ‘strategic equity partner’, whose only goal was to bleed Telkom dry, instead of building it up to be a modern telecommunications company.

Competition

The key to successful privatisation is competition. The objective should be to create a competitive market, with multiple companies competing to offer the services that the government entity once did.

And don’t just license one or two competitors. License anyone who wants to compete and meets the basic criteria for doing so.

With Eskom, for example, we want multiple companies generating electricity, and competing to offer the highest reliability and the lowest prices.

Creating a competitive market is often easy. Imagine private schools in the education sector, for example, competing for ‘customers’ (who technically will be the parents of learners).

Sometimes, however, it is hard. It probably would still be favourable to outsource services to private companies, so the government’s responsibility is limited to funding, but overseeing a sole agent or concessionaire takes effort.

Even in sectors that appear to be natural monopolies, such as the national grid, or water or sewerage reticulation, there is scope for privatisation. It might be difficult, but it can be done.

When establishing a private monopoly cannot be avoided, government needs competent people to draft airtight contracts, with pay-for-performance clauses and underperformance penalties, so that monopoly power does not result in poor-quality services or high prices.

Strong regulation is only required for monopolistic sectors, however, and government should oversee competitive market sectors with only light-touch regulation; the less the better.

The way out

Ultimately, while the government might choose to pay for public services, it should rarely, if ever, actually provide them. The less the government has to do, the better. And the more that gets done by a competitive free market, the better.

Distinguished but sadly departed economics professor once wrote that it would be better to distinguish not between privatisation and nationalisation, or the private sector and the public sector, but between competitive and monopolistic sectors.

Private ownership alone is not a necessary condition for success. It requires either a competitive market, or regulating a monopoly in cases when a competitive market cannot be achieved.

That is the way out of the socialist status quo that South Africans so clearly cannot afford.