Public-private partnership will not save SAA

One of the obstinate problems in the South African economy is the failure of state-owned entities (SOEs) for reasons we are all familiar with, including public ownership inefficiency and financial drain.

This is a weakness is derived from political interference, lack of agency and poor management.

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South African Airways (SAA) provides a useful example of a situation where management inefficiencies have led to untenable financial loss that requires regular bailouts.

However, SOEs cannot shoulder the blame alone. While internal factors can explain their failure, particularly in the case of SAA, government involvement in an industry it had no knowledge of must be shouldered by policymakers and the ideologies of the ANC and its alliance partners.

The idea that in a transitional economy SOEs are there to be used to achieve nationalistic goals has engendered a ‘not meant to make profit anyway’ attitude that has justified levels of relaxed and less-than-effective performance, monitoring and accountability that would not be tolerated in the private sector.

Corrupt deals stage-managed by the ruling elite

These arising-from-within issues have made most SOEs in SA unable to self-sustain because state ownership so often correlates with waste of resources, politicisation and corrupt deals stage-managed by the ruling elite.

Furthermore, behaviour, governance and performance in the private and public sectors are different – not because of the environment they operate in (SAA operates in the same space as private airlines) but because of lenient monitoring within entities that are under state ownership.

Privatisation is often put forward as a way to fix poor performance in SOEs, as is the case with SAA.

In an opinion piece published by Moneyweb on October 3, Fedgroup CFO Sheldon Friedericksen suggests that public-private partnerships (PPPs) can work if done right, specifically when it comes to the funding of entities like SAA.

The issue of trust

His argument is optimistically grounded on the notion that trust is the missing key – and that, once found, will unlock new levels in the PPP relationship that can revive the economy.

I may be too jaded to have such optimism, possibly from witnessing how full government ownership originally intended to deliver socio-political benefits became a golden-egg-laying goose benefitting only a few.

We should take a moment to remember what happened in the classic fable by Aesop.

The farmer, initially so delighted by his unexpected and seemingly never-ending windfall, grew impatient because the goose gave him just one golden egg each day. It occurred to him that he could harvest all the eggs at once by cutting the goose open. And so he killed it.

He destroyed that which was profitable.

Similarly, a PPP will not save SAA because of the strong and ubiquitous arm of politics. Just as the farmer couldn’t help himself, neither will our politicians

Interference

Even with a pledge of non-interference, different factions of the ruling party, whether within government or on the outside, will be overcome by the need to use the PPP for power demonstration and financial gain.

We can see it without having to think too hard – from determining the appointment of the private partner of a particular SOE to influencing the procurement of services and deciding who gets to lead the enterprise.

They might feel be pressured to agree to such a partnership because the kitty has run dry and they are in need of a good many golden eggs, but they do not really want to share ownership of the goose.

Some readers might cite the success of the minimal privatisation of Chinese SOEs and how they were able to reform as proof that PPPs can work. The danger lies in ignoring that the reform aspect of the SOEs in China has largely been achieved through incentive contracts and the streamlining of governance.

Moreover, one must consider the role of the political leadership of China in ensuring that the corporatisation of its SOEs works.

In China, there is no room for murmurings or underperformance – once the government has declared its intentions, its word becomes law.

The perceived success of Chinese SOEs is widely debated and shaped by individual perspective and particular lines of argument. In South Africa, there is no recovery for the opportunity costs of government-controlled companies.

Hope versus evidence

We can see the logic and we can even hope for the best, but we have the evidence.

Perhaps more than any other example, SAA demonstrates that state ownership is synonymous with poor governance.

Without firm principles and the systems and processes needed to keep them robust, mismanagement is tolerated and the entity becomes a fertile ground for fiscal abuse and corruption.

This strengthens the argument for policy design that will unburden National Treasury, and thus the taxpayer, of the need to carry the load and pay the price for the folly of state ownership.

The amount of money required to sustain the operations of SAA and other SOEs contributes to the decline of the economy, as noted by the rating agencies. Moreover, their poor performance has resulted in the decay of the infrastructure of many SOEs – defeating the purpose they were intended to serve.

From the outset, SAA had a utopian quality in that most South Africans could not afford to make use of its services. It then became utopian for the unnecessary jobs it supported, the questionable deals made in its name, and the seemingly sensible deals that were thwarted by those seeking to enrich themselves.

Its likely failure could probably be seen in the mid 2000s. Today its collapse is possible.

All I have to say with some certainty is that a PPP isn’t going to save it.

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