Public enterprises, guided by “mean-wellers”, are prone to disaster

15 November 2017
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Given the interminable bad news South Africans are receiving about their state-owned enterprises (SOEs), such as the huge SAA losses, frequent cost increases at ESKOM, and poor management and losses experienced by a long list of SOEs, it might be useful to look at the disastrous experience of the UK government when it misguidedly entered into the field of enterprise.

In his book They Meant Well: Government Project Disasters, Professor David Myddelton explained why well-meaning politicians and government officials so often get involved in grandiose projects, only to make a hash of them and cost taxpayers huge amounts of money. He described in detail six British government project disasters, the massive cost overruns, and the reluctance of politicians to pull the plug on their mistakes.

The author, because currency debasement makes comparisons of money amounts over time inexact, provided a best attempt at comparing the costs of the projects over the 85 years of their implementation by using the Retail Price Index. He pointed out that comparing costs of projects during the 250 years between 1660 to 1914 would have been comparatively simple: the purchasing power of the pound, except for a brief period during the Napoleonic wars, remained relatively stable. The currency debasement commenced almost precisely from the time John Maynard Keynes made the foolish comment that, “A preference for gold currency is no longer more than a relic of a time when governments were less trustworthy in these matters than they are now.”

Currency debasement caused the pound’s purchasing power to halve between 1945 and 1965, halve again between 1965 and 1975, again between 1975 and 1980, and yet again between 1987 and 2007. The conversion rate used in the book equates the purchasing power of £1 spent on the government airship programme in 1922-30 to £44 in 2007 and descending rates for the projects undertaken in between. In effect, Myddelton inadvertently described seven project disasters in his book, the seventh being government currency mismanagement. Since 2007 when the book was published, the pound and rand have declined further and the figures have therefore been adjusted to 2016 rates for this article.

Two airships were built in a 1924 “Government Research, Experiment and Development” programme intended to pave the way for commercial passenger transport across continents. The R.100 was to be built by the private Vickers company, the R.101 by the Air Ministry’s Royal Airship Works. The R.100, after seven test flights totalling 150 hours covering 7,000 miles, successfully flew over the Atlantic to Canada and back at the end of July 1930 despite serious problems experienced with the ship’s outer covers.

The political pressure for the R.101 to demonstrate its capabilities then became intense. Problems with its outer covers were worse and it was not adequately tested or flown at full speed in bad weather. It left for India on 4 October 1930 with 54 people on board, including Lord Thomson, the Secretary of State for Air. The ship encountered bad weather over France, crash-landed and burst into flames, with only six crewmembers surviving the disaster. The programme was terminated, having cost £130 million (R2.21bn), two-thirds more than the original budget of £76 million (R1.33bn) (all costs in 2016 pounds and rand).

The Tanganyika (now Tanzania) groundnut scheme, begun in 1946, was supposed to supply Britain with 600,000 tons of groundnuts per annum and produce a saving of £318 million in the nation’s food bill. Politicians and planners ignored inadequate rainfall data, the absence of a pilot project, transport and supply deficiencies, the difficulties related to bush clearing and many other practical problems. The scheme envisaged clearing 3.25 million acres of bush of which half would be planted to groundnuts every year on a rotation basis. After numerous attempts to salvage the project, which had produced a relatively small quantity of groundnuts, the Overseas Food Corporation, the responsible government agency, was dissolved. National prestige delayed the termination of a project that ended up costing the taxpayers an estimated £1.46bn (R25.48bn). The disastrous approach and massive loss is uncannily like the SAA debacle.

Of the six project disasters, the costliest was the use of nuclear plants to generate electricity. A nationalistic decision to build Advanced Gas-cooled Reactor (AGR) nuclear power stations, developed by British scientists, in preference to the American-built Light Water Reactor added an estimated extra cost of £15.9bn (R277bn). Not only did they cost more, their total output was 40 per cent below target capacity. The cost of electricity produced with nuclear power was at least 25 per cent more than that produced using fossil fuel. Add the prototype Fast Breeder Reactor, developed at a cost of £9.5bn plus £15bn for decommissioning incurred when it was closed down, and the total estimated “loss” on the nuclear programme amounted to a staggering £40.7bn (R709bn).

Britain’s decision to partner France in building the Concorde supersonic aircraft had more to do with national prestige than economics. It was never a real commercial venture and no airline other than Air France and British Airways purchased the aircraft. It took 13 years to design and build, twice as long as planned. Put into service in July 1972, the last flight of this beautiful, fast, but uneconomic aircraft took place in October 2003. The venture cost English and French taxpayers an estimated £12.2bn (R212bn). 

London’s Millennium Dome, originally budgeted to cost taxpayers £630 million, finally cost double that amount, depriving charities of £920 million in lottery money (in 2017 pounds) utilised by government to pay the costs of the Dome. Instead of the expected 15 million visitors, there were 5.5 million in the year 2000. Tickets sold brought in £69 million instead of the budgeted £173 million. Total cost to taxpayers, £255 million (R4.43bn). 

These British experiences demonstrate why governments should not attempt to run businesses. One of SA’s bottomless pit ventures, SAA, would long ago have been out of business but for the “prestige” of its backers. SA citizens would be far better served if all public enterprises, including health care and education, were to become private entities in one massive give-away by the state, transferring the assets or their proceeds to citizens in a broad-based programme to “right the wrongs of the past”. Whether or not this is done, productivity and service delivery could be improved in all areas of activity in which public enterprises operate by opening them to free competition. 

Sir Frank Lee, Permanent Secretary of Britain’s Ministry of Food wrote about the groundnut scheme: “Our standing as an imperial power in Africa is to a substantial extent tied up with the future of this scheme. To abandon it would be a humiliating blow to our prestige everywhere.” Sir Frank obviously did not realise that the only way to stop Africans from laughing at the madness of the “imperial power” was to abandon the scheme forthwith. Similarly, the SA government could rid itself of many of its troubles if it were to withdraw entirely, at all levels of government, from business, leaving business to businesses and purchasing services for the poor from competing private providers.

Author Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

 

 

Comments on Public enterprises, guided by “mean-wellers”, are prone to disaster





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15 Nov 2017, 22:07 Rory Short Eustace I agree, governments should stay out of business, the mindsets required for the two different fields are completely incompatible.