SAA and Eskom: throwing taxpayers' money into the abyss

South Africans in general and taxpayers in particular have become accustomed/hardened/seasoned to the perennial, colossal financial blunders otherwise known as South African Airways, our proud national airline, and Eskom, the state electricity generator.

We have fallen victim to the well-known psychological syndrome of apathy. We succumb to an overwhelming sense of helplessness because the situation seems so disastrous and irrevocable. We cannot even conceive of a feasible alternative.

The situation can be rectified. What is urgently required is the application of economically rational thinking. But first, it is necessary for us all to understand the magnitude of the calamity that these behemoths have visited upon South Africans.

When we study SAA, we find that the total amount of financial assistance received from taxpayers (directly from government and through Transnet) since its incorporation on 1 February 1934 amounts to R24.7 billion. These contributions could properly be termed subsidies as the funds were consumed by losses suffered by SAA.

In the past 10 years an estimated R1.8 billion per annum has been thrown into an abyss (regarded by certain naïve politicians as 'the proudly South African air carrier'). This includes the millions which were fleeced by so-called turnaround experts and political deployees appointed at both board and management level, all of whom have eventually ridden off into the sunset with saddlebags full of taxpayers’ hard-earned incomes, leaving SAA and South African citizens poorer than before. All this wasted expenditure on SAA has undermined competitive conduct in the airline industry and allows it to brazenly flout competition. In my opinion, its operation should be halted with immediate effect.

As regards ESKOM, in August 2013 this parastatal announced that its new power station Medupi would cost a maximum of R105 billion, excluding interest costs incurred during construction (IDC). The IDC is conservatively estimated at R30 billion, which increases the price of Medupi to R135 billion. This figure, however, excludes the cost of therequired flue gas desulphurisation (FGD) plant. For this, we have to add on yet another R10- to R15 billion. Thus, Medupi is likely to cost between R145 billion and R150 billion at least, around three times the original estimate of R52 billion announced by Eskom in January 2007.

In addition, economist Dawie Roodt has conservatively calculated that, as a result of Eskom’s inability to provide enough electricity, the economy as a whole loses at least R300 billion per annum. A damning statistic, especially when you think about the number of jobs that could have been created had sufficient power been available.

Despite these losses to our economy, the situation persists. Why? Because, besides the ideological commitments and patriotic sentiments with regard to the survival of state enterprises, SAA and Eskom provide employment opportunities and government tenders for favoured individuals and interest groups that have politically correct credentials.

To understand why state enterprises fail, we must begin by noting the fundamental weaknesses that arise from state ownership itself. State enterprises lack effective incentives for employees and management because the link between performance and remuneration is non-existent. If the enterprise proves financially unviable, the minister in charge and those involved in the business are not affected financially. Appointments and dismissals, as is all too evident, have more to do with political considerations than with performance. In the private sector, if you do not deliver, the business goes bust and you are out of a job.

It has been dramatically demonstrated over the years that no quantity or quality of business expertise thrown at state enterprises can salvage them and place them on a profitable footing. It is inherently impossible. Where state-run enterprises show improvement, whether financial or in terms of quality and efficient service, they should be bench-marked against private competitors in the same country, on a cost to capital basis. World experience will show that they will not measure up. The result would underscore my point. When things are in the hands of the state, they are in a hell of a state, my colleague Leon Louw once said.

In the case of SAA and Eskom, the solution is easy and could be a model for other state enterprises to follow. Liberate the capital locked up in these enterprises by allocating all shares to the people of South Africa. This would lead to the private sector taking over the airline, obliging it to compete fairly and equitably with other airlines. As to Eskom, dismantle the monopoly and allow people, as independent power producers, to generate electricity. These measures can be implemented at no cost to the taxpayer whatsoever. None whatsoever! And that can only be a good thing.

If further motivation is required to turn loss-making state enterprises into profitable, going concerns, ponder the opportunity costs of these projects in terms of how many RDP houses, hospitals and schools, roads and harbours, drinking water facilities, etc. could have been built with wasted valuable taxpayer funding. Think too of the many other state enterprises that have an insatiable thirst for the hard-earned incomes of beleaguered taxpayers.

It is amazing that government still defiantly allows these failing behemoths to exist, when the nation’s economy is shrinking, the unemployment rate hovers in the region of 40%, and to the extent that another African country has elbowed South Africa out of being in first place as the largest economy in Africa. South Africa is now the second biggest economy on the African continent. And, sadly, it is conceivable that our economy will be allowed to degenerate still further, thanks to government’s obstinate and errant policies.

Author Temba A Nolutshungu 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 Foundation.

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