Should South Africa Privatize Under-Performing State Entities?

Should South Africa Privatize Under-Performing State Entities?

Talk of privatizing state-run companies has long been a polarizing topic in South Africa, but President Jacob Zuma paid for a report, released on the weekend, that recommends the country do just that.

South Africa should sell equity stakes in some state-run companies to improve public finances hit by a weak economy, according to the report. It’s a move that would be a departure from the ruling African National Congress’s stance since coming to power in 1994. The ANC has long said that state companies should not be sold off, Reuters reported, according to NewsDay.

Eskom, the country’s struggling power utility, and national carrier South African Airways, are the two public utilites whose financial struggles have caused the most controversy. Both are seen seen as huge drains on public funds.

Analysts often say that Eskom and SAA should be privatized, according to Reuters.

In July the government sold off its stake in mobile phone firm Vodacom to bail out Eskom. The government said at the time Eskom needed $1.27 billion to keep the lights on, eNCA reported.

Eskom has been described as one of the world’s largest monopolies. Check out some pros and cons of privatization in this AFKInsider report.

South Africa has about 300 state entities.

“Governance, ownership policy and oversight systems were found to be inadequate” in state-owned companies, the report said, and recommended the government sell underperforming companies either fully or partially, according to Reuters.

The opposition Democratic Alliance welcomed the report and urged Zuma to set a deadline for the privatization process, starting with the companies that are “financially malfeasant,” BusinessTech reported.

“Specifically, South African Airways (SAA), that continuously run at a loss and have become dependent on bailouts at the expense of the taxpayer. This is the same for Eskom who at present is requesting tariff hikes in order to fulfil its mandate to supply electricity to the South African people,” said Natasha Mazzone, Democratic Alliance Shadow Minister of Public Enterprises.

COSATU, the Congress of South African Trade Unions, said Feb. 5 it will fiercely oppose any talk of privatizing Eskom, PoliticsWeb reported.

“Government cannot afford to outsource its developmental role to the private sector,” said COSATU spokesman Sizwe Pamla in a prepared statement. “The private sector is not driven by any need to serve the poor but by their desire for profit maximization.”

State ownership is critical for black people to participate in the economy in a democratic South Africa, according to COSATU. “Only the state has the capacity to extend basic services and to poor black communities,” Pamla said.

COSATU advocates that the government abandon a massive proposed nuclear energy program and invest instead in renewable energy, recycling and environmental programs.

The government said in May that South Africa needs up to eight new nuclear power plants and is in the early stages of a long procurement process to add 9,600 megawatts of power by 2030, IndependentOnline reported in May.

The new nuclear plants will cost up to $63 billion US.

“The solution to Eskom is to clean up its wasteful expenditure, proper funding from the state, renewable energy, cancel the nuclear madness, affordable tariffs for lower- and middle-income families and higher tariffs for the high energy users, who consume the bulk of our electricity,” Pamla said.

In his annual state of the nation speech, Zuma said the government must cut spending in the face of an economy weakened by a global slump in commodities and an inefficient power sector.

Analysts said it’s unlikely South Africa will sell key state assets, Reuters reported.

Privatization “will apply mostly to smaller parastatals and is unlikely to shift the dial on Eskom,” said Peter Attard Montalto, an emerging market economist.

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