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.