Will Privatization save us money?

Published 8 years ago

South Africa has a history of underperforming state-owned enterprises, including the ‘big four’: Denel, Transnet, Telkom and Eskom. According to the National Planning Committee on the National Development Plan, these companies account for approximately 77% of employees in state-owned enterprises and make up about 91% of the asset base of the top 30 state-owned entities.

These entities have evoked discontent from the public, Eskom in particular. They have accumulated large losses, always ready to ask for a helping hand from the government. Like an absentee father who spoils his son to make up for the time he does not spend with him, our national treasury is only too pleased to support these enterprises in the form of bailout packages.

This has led to a call from certain factions for these state-owned enterprises to be privatized. A paper titled Privatisation and Nationalisation Cycles by Roberto Chang and others looks at a model built around a basic trade-off between equality and efficiency. It argues that greater equality is attained under public ownership of a natural resource or state assets, while more efficiency is achieved when the ownership and administration of the resource or company are in private hands.


The connection between ownership and the equality-efficiency trade-off is given by the set of incentives for the efforts that each regime provides to economic agents. However, it should be noted that greater equality does not necessarily translate into greater welfare. Imagine a situation where national income would be distributed equally among all South Africans. Equality would leave many worse off. Greater efficiency is required. The reality is that there are greater sets of incentives at play which drive efficiency when operating a privately-owned company, among them maximizing the profits and equity of the shareholders. The sets of incentives are not as strong in state-owned enterprises.

One source, who asked to be unnamed, says that during her time as HR Manager at the state parastatal, South African Airways (SAA), she had to deal with numerous high-level government officials dumping their family and friends résumés on her desk and instructing her to find positions for them within the organization. She says that most did not have the required skills and qualifications. It comes as no surprise that SAA is one of the most inefficient state-owned enterprises. Unfortunately for South Africans who pay taxes on their hard earned incomes, the government continues to bail out the airline with no regard for its dismal performance. These are some of the pressing issues that make privatization of state-owned enterprises attractive.

On the other hand, the breaking up of the Soviet Union led to the emergence of Russian oligarchs in the late 1980s and early 1990s, when state firms were privatized particularly in the oil, gas and mining sectors. These oligarchs emerged under Mikhail Gorbachev’s political movement for the reformation of communism, which is widely thought to be the proponent that led to the dissolution of the Soviet Union. Today, post-Soviet oligarchs usually include relatives and close associates of government officials and are among some of the wealthiest people in the world. David Satter, author of Darkness at Dawn, asserts that “what drove the process was not the determination to create a system based on universal values but rather the will to introduce a system of private ownership, which, in the absence of law, opened the way for the criminal pursuit of money and power.”

Privatization has challenges and opportunities, which if implemented properly would go a long way to correcting the inefficient operation of state-owned enterprises.


There needs to be a conversation surrounding the viability of privatizing state-owned enterprises and possible partnerships with privately-owned companies. If privatization is proven to be viable, it will go a long way to optimizing productivity and reducing costs, but perhaps more importantly it could reduce government bailouts and save taxpayers money.