Unlocking South Africa’s potential: The case for privatisation

South Africa is facing a general collapse of state capacity. SOEs are not delivering on their mandates: Transnet is not meeting its obligations to operate South Africa’s ports and rail network, Eskom is failing to provide electricity, and municipalities are not maintaining roads or providing water and sanitation. Clearly, the public sector has failed in economically sensitive areas. MPIYAKHE DHLAMINI, contributing author* to the Free Market Foundation, believes that to fix these problems we need to bring in the private sector.

Bringing in the private sector, if done correctly, would have many benefits. It would allow greater competition, thus providing an incentive to improve, instead of the current situation where the failure of companies like Eskom and Transnet is bringing the entire economy to a standstill. With more competition, those who need to offload their cargo at our ports can do so, while those who need electricity can get it from someone ready to provide the service.

Apart from competition, bringing in the private sector would also bring in non-government sources of investment into infrastructure like roads, rail, energy, and ports. South Africa’s fiscal situation has deteriorated to an extreme level. Revenues can only improve meaningfully if the economy grows meaningfully, but that cannot happen while critical network industries like transport and energy, as well as municipal infrastructure, are collapsing.

To the extent that the problem can be solved by investment, the government cannot provide this investment without reducing spending on areas like health, education, and grants. Everyone knows this is not politically feasible for the government, so the investment has to come from the private sector. To attract private capital, the owners of said capital need a way to deal with the risk, meaning they need to have greater control.

If the government wants private investment in Eskom’s power stations, for example, or in building new power stations, private investors should be able to run the power station without interference and set the price at which they sell electricity into the grid. Government regulation should be minimal and focus only on safety and protecting the environment – not achieving socio-economic objectives.

Bringing in the private sector would also bring greater efficiency. Private parties have to make a profit; they cannot rely on gaining political control over taxes to make up for bad management. If a private company fails to consistently make a profit, it cannot rely on bailouts from the National Treasury and will eventually die.

When it comes to SOEs like Transnet and Eskom, the government should simply privatise assets – making sure, of course, to avoid replicating current monopolies by not selling an SOE’s assets to one group of private investors. 

South Africa’s state-owned giants can be privatised in various ways. One potentially attractive way would be to simply give shares in the company to its employees. Of course, the employees are unlikely to have the money to capitalise the company if necessary, so they would most likely need to sell their shares. This would again run the risk of the shares ending up with one group. So the best way to privatise, in my opinion, is to auction off the assets belonging to each SOE separately. 

In the case of Eskom, it would continue running the transmission grid, but power stations would be sold off individually. The part of the distribution grid owned by Eskom would be auctioned off piece by piece, based on locales that make sense. Government would need to ensure that separate companies are bidding for these assets and that they don’t have significant overlaps in ownership.

The same goes for Transnet. The rail network can be sold off, and the ports too. The current idea to bring in private operators without changing ownership of these assets does not provide enough assurances to the private investor for the risk they would be taking. The rail network can be sold off in sections that make economic sense, for example the Joburg-Durban line as one entity.

When it comes to seaports, can the government sell off docking berths and continue owning the port, or does it need to sell the whole facility? In each case the option that makes the most economic sense must be chosen.

In terms of local infrastructure, municipalities must also consider privatisation. To the extent that they are unable to maintain their water and electricity infrastructure (much of the distribution grid is owned by municipalities) then they would have to sell it to the private sector. The private sector would need to find a way to monetise municipal roads, for example, whether via tolls or some other means that make sense for each situation.

When privatising municipal infrastructure, the principle is that any tax revenue generated from economic activity on infrastructure formerly owned by a municipality should go to that municipality. This revenue dimension is the main reason why municipalities might be reluctant to privatise. Going forward, we need to find a more permanent solution. Perhaps it makes more sense for local governments to get a greater share when revenue is split between them and national and provincial governments.

Institutions including public schools and hospitals can potentially be run at the local level, so why should we pay a provincial and national bureaucracy for these? What value does this extra bureaucracy add? In fact, this is true for most things, excluding the military, border control, and foreign affairs.

Privatisation is an idea for which the time has come. Argentina’s new president, Javier Millei, has made similar proposals in his country. Maintaining government monopolies at the expense of the economy when the government is failing to provide the services makes no sense. South Africans need to provide an answer for the more than 40% of able-bodied adults who are unable to find jobs. That answer will need to include the economic growth that privatisation would enable.

* The original version of this article was first published by BizNews on
19 December 2023