Sweets for my sweetheart
LAST MONTH South Africa suffered the
indignity of being rebuked, in effect, by the sole United Nations
agency it chairs, the UN Conference on Trade and Development, which
attributed the downturn in foreign direct investment to Africa
exclusively to South Africa’s failure to sustain the momentum of
privatisation. Despite the often grandiose declarations on the matter
emanating from Jeff Radebe’s ministry of public enterprises, the rebuke
was deserved for the privatisation process is already a mess and could
well be headed for complete disaster.
Thabo Mbeki first announced the government’s intention to privatise in
late 1995. However the then minister, Stella Sigcau, did so little
about it that the Presidential Review Commission recommended that her
ministry be abolished — one of its many recommendations to be ignored
by government. In 1997, declared the “year of decision” for the sale of
state assets, progress continued to be slow. The same was true of 1998,
“the year of delivery”. True, a number of radio stations, 30 per cent
of Telkom and part of the Airports Company were sold off by the
departments of communications and transport, but Sigcau’s ministry
managed just three sales, all to local buyers. These were Sun Air,
which collapsed; Aventura, which was cancelled; and Denel’s Sybase, a
deal shrouded in controversy over an alleged assets give-away. There is
every reason to doubt Radebe’s claim that the whole privatisation
process will be completed by 2004.
Consider the following:
Sun Air was sold off in 1997 for just under R100m, 75
per cent of it to two black empowerment companies, Rethabile and CNI,
neither of which had any experience of airline management. They failed
to carry out a number of elements of the sale agreement, among them the
establishment of an employee share ownership scheme. The airline folded
after 21 months and Rethabile/CNI have bilked on a debt of R20m to
government.
In February 1999 the management contract for the state diamond company
Alexkor was awarded to Nabera, a private consortium
headed by Jeff Radebe’s wife, Bridget. The bids of two far more
experienced diamond groups, most notably a consortium led by De Beers,
were turned down, provoking a storm of criticism that the decision was
political. When Nabera failed to come up with the R120m it had to
produce by June, the government merely extended the deadline. It
finally agreed to renegotiate Nabera’s contract so that the company
would not have to put any money on the table at all: it would be hard
to find a more exact definition of a sweetheart deal.
Meanwhile the new management has shown itself to be woefully
incompetent. Security at the mine was said to be so poor that a
substantial proportion of its gem production was being stolen. It then
emerged that Alexkor was spending almost R4m a year on the salaries and
travel expenses of two of its board members who had full-time jobs
elsewhere. By this time the mine was losing R5m a month and a
government audit was ordered, at which a number of board members simply
took flight, the board fell apart and Bridget Radebe resigned. The mine
workforce is running down; the company has posted a R65m loss and the
mine’s complete closure now seems near. The mine union says that about
R500m in new investment is required but the idea that any bank will
lend this sort of money to Nabera seems preposterous.
In another clear sweetheart deal Aventura, which
consists of 15 major holiday resorts, was sold off to Cosatu’s
investment arm, Kopano ke Matla in 1998 for R93m. A far better bid from
Phalafala Leisure Consortium was turned down, the idea being to buy off
Cosatu’s opposition to privatisation. From the outset the deal was
clearly irregular: Kopano was first chosen as the preferred bidder and
the financial arrangements only then worked out and announced eight
months later. Kopano’s business plan was to steer the somewhat tatty
resorts further downmarket to make them affordable to Cosatu’s members.
In fact Kopano was also a front for the Malaysian billionaire, Dato
Samsudin, whose Samrand, together with New Republic Bank, was putting
up the money. But then Samrand pulled out, NRB went bust and Kopano
failed to make its promised payment of R25m at the end of March 1999.
Government, clearly desperate for the deal to succeed, announced that
JCI and Absa had stepped up to loan Kopano the money but this was
hurriedly denied by both, forcing the government to cancel the
sale.
Phalafala declared that Aventura had been so badly managed in the
interim that if the government now wanted them to run the resorts it
would have to pay Phalafala rather than vice versa.
This looks right: Aventura’s debt had zoomed from R64m to over R90m in
a year and a R2m annual profit had been turned into a R2.5m loss. Staff
morale was poor and a number of key managers had left. The banks
holding these debts began threatening foreclosure, which forced
government (ie the taxpayer) to assume responsibility for the debts and
losses. The government has now handed the management contract over to
Protea Hotels for five years and accepted that Aventura is now
unsellable until the mess is sorted out.
The biggest privatisation, the sale of 30 per cent of
Telkom to the SBC/Telekom Malaysia consortium in 1997,
was hedged around with such elaborate conditionalities that other
would-be bidders such as Deutsche Telkom and France Telecom simply
backed away, leaving SBC/TM as the sole bidder. The strong impression
among Telkom middle management is that the arrangement is not working:
there is a sense of lack of direction and drift at a time when around
the world the telecommunications industry is changing at lightning
speed. Telkom is overstaffed and many of its employees have very low
productivity levels, resulting in absurdly high labour costs. Key
personnel have left and some believe that SBC/TM have no interest in
improving the situation. If Telkom continues to run down, after all,
they will ultimately have to pay a lower price for buying it out
completely. A further 10 per cent is now being sold off to the unions,
staff and black empowerment groups but this merely amounts to the
government giving away money to its friends for none of these partners
brings any expertise, capital or new technology to the table. This has
led Alistair Ruiters, head of the Competition Commission, to warn of
potentially dire results: “At the prices that telecoms infrastructure
is being offered we are concerned that South Africans will not benefit
from the Internet and e-commerce revolutions.”
The second biggest privatisation, the sale of 20 per cent of
South African Airways to Swissair in 1999, was only
made possible because Transnet accepted responsibility for R1.5bn of
SAA’s debt and the government accepted responsibility for another
R1.3bn. Even so American Airlines, Lufthansa and Singapore Airlines all
pulled out of the bidding shortly before the deal. British Airways, for
its part, has repeatedly said that it would be an interested bidder
either if it could obtain 51 per cent or even a share in a private
consortium which held 51 per cent. But the key issue is whether
management control is to be in public or private hands: Swissair has an
option to buy another 10 per cent, with 5 per cent to be offered to
black empowerment groups and 5 per cent to the state’s National
Empowerment Fund. Meanwhile, although SAA has been hauled round into
making a tiny profit after repeated losses, its value is falling all
the time due to its aging fleet, which it cannot afford to replace.
What it desperately needs is a major international partner, which will
help it buy new planes and integrate it into its networks, a role
Swissair is unlikely to play. The longer such a deal is put off, the
less the airline will be worth.
The sale of the state forestry unit, Safcol, repeats
all these mistakes. The big international groups able to provide new
capital, expertise and technology delays have all been chased away by
conditionalities and long delays. Ludicrously, the state wants to
retain management control in key areas even after the assets have been
sold and insisted that bidders act under conditions of secrecy that the
prospective buyers have termed “restrictive and ridiculous”. The result
is that the only bidders are locals and the forests will realise a far
lower price than was hoped.
The conventional wisdom is that President Mbeki has been extremely
shrewd in putting Communists like Radebe and his chief adviser, Ian
Phillips, in charge of privatisation since this blunts political
attacks on the policy, but the price is that the policy is being run by
people who do not really believe in it. The key objectives should be to
get the best price for the assets, produce the maximum inflow of
foreign investment and ensure that all the enterprises concerned are
well and profitably run. Instead American investors were shocked
recently to be told by Phillips that these were not the objectives of
privatisation at all and that a task team was being sent to the UK and
US “in order to educate the markets”. What they need to be educated
about, quite clearly, is that large amounts of these assets are to be
handed over to the government’s friends in sweetheart deals that all
too often end in disaster and that the government is desperately
insecure about allowing management control to be handed over to the
private sector.
One understandable reason for this reluctance to relinquish control is
the fear that private managers would render their enterprises
profitable by job-shedding. The answer to this is not to be found by
placing restrictions on individual enterprises — making it impossible
for anyone to restructure — but at the macro level. A successful
privatisation programme ought to be the kick-start to a larger inward
movement of foreign investment that would produce more jobs overall.
Meanwhile, it would do a lot for foreign investor confidence if
government stopped trying to control the whole process by secretively
picking and choosing its favourites. Each enterprise ought to be
floated on the stock market in a fully transparent way. As it is,
Radebe’s ministry behaves as if it still has not properly understood
what privatisation is all about. Radebe revealed the absurdity of the
situation in his speech to the Pan-African Investment Summit in
September where he announced that “We do not agree with the view that
we should sell off state assets completely, or even in part, as a
matter of principle.”
Presumably this is why he refuses flatly to sell any part of the
national electricity supplier, Eskom, which would sell easily and for a
great deal. The speech contained a long paean of praise to the virtues
of state ownership and suggested that the remedy for current problems
lay in a much stronger monitoring capacity by the state of parastatal
management, with a reduction in the autonomy of their boards of
directors — exactly the opposite of privatisation.