SAA flies in the face of the poor

In a letter published in Business Day (Gleason’s axe grinding aerobatics, Sept. 06), Ms Siza Mzimela, CEO of SAA, attempted to justify SAA’s poor performance. Her quoting of losses posted by internationally operated airlines is simply a red herring. Privatisation accommodates both profits and losses. It is a system that rewards the former and penalises the latter and thereby encourages healthy competition – something that is sadly lacking as far as SAA is concerned. There is no need whatsoever for a government to be involved in the airline business. A national airline caters exclusively for a country’s elite and receives special privileges which distort the market and prevent real businesses from competing effectively.

World Bank research into privatisation trends over the period 2000-2008, revealed that the total value of privatisations in 2008 (during the height of the financial crisis), despite having declined sharply from the previous highs of 2006 and 2007 was still higher than in any other year since 2000, except 2005. Moreover, the World Bank found, “The crisis itself has created pressures for privatization as increased government spending and declining revenues have led to growing budget deficits”. Developing countries use privatisation as a tool to improve the productivity of state enterprises, which, typically, is two to three times lower than that of private firms and to reduce the fiscal burden of loss-making firms. The reason why developing countries actively pursue privatisation is not hard to understand: privatisation works!

For example, Boubakri and Cosset analysed the financial and operating performance of a large sample of newly privatised firms drawn from a wide set of developing countries. Their study demonstrated “significant increases in profitability, operating efficiency, capital investment spending, output (adjusted for inflation) and employment, and a decline in leverage and an increase in dividends”. The authors conclude, “Thus ownership seems to matter. Privatization brings with it private owners who place greater emphasis on profit goals and carry out new investments that increase output and employment. Efficiency improves as a result and profitability follows”.

It is not only developing countries that understand the virtues of privatisation. In the first year of Maggie Thatcher’s government (1979) 33 state owned enterprises (SOEs), all later to be privatised, absorbed £500m of public funds as well as more than £1bn in loan finance. By 1987, these same 33 companies were contributing £8bn a year to the Treasury in share sales, tax receipts and dividends. Under Mrs Thatcher’s leadership, the United Kingdom climbed from 19th to 2nd place in the OECD rankings.

The problem with all SOEs is that they lack any economic incentive to be profitable and many of them have a monopoly on the services they provide. In the case of South Africa’s airline sector, which allows some real enterprises to compete, SAA has repeatedly been caught engaging in uncompetitive practices. And this sort of behaviour will not change as long as SAA has access to a bottomless well of funding (the taxpayers, ie, you and me) and for as long as the Minister of Public Enterprises thinks that a “national carrier” is a “strategic asset”.

SAA is a perennial loss maker. Over the financial period from 2000/01 to 2010/11, SAA posted a cumulative loss of R11.664bn rand. To add insult to injury, in May this year, Public Enterprises Minister, Malusi Gigaba, said, “SAA needed to be recapitalised (it requested between R4bn and R6bn) by the state (read taxpayers) to allow it to renew its fleet of aircraft and roll out its African aviation strategy”.     

Why are private airlines not given this special treatment? They also serve the public interest so should they not also be given the chance to expand their operations into the rest of Africa or wherever? No private sector operation could ever survive incurring losses like SAA’s over such a sustained period. If you managed your household finances like that, you would probably have been thrown in jail by now with the rest of your family trying to make do in a miserable situation.

Why does government not leave the business of business to business and get on with addressing more pressing issues – such as creating an enabling environment in which real businesses can function profitably and competitively? The billions of rand used to date to bail out the losses incurred by SAA is money that the government could have spent on improving the lives of the poor and maintaining national infrastructure.

The cost of the economic opportunities lost because of the money swallowed by SAA is simply staggering. The chance to turn this parastatal around still exists. SAA, its subsidiaries and sister outfit, South African Express, should all be auctioned off. The government will receive funds from the sale and a new source of tax revenue will be created. There is no time like the present. Whatever money the government receives now for SAA should be seen as a bonus considering the poor macroeconomic forecasts.

Through the decades, successful privatisation has shown that private sector managers who are free to innovate and use their initiative, manage businesses more effectively than public sector officials. An economic system where individuals and private enterprises have the freedom to make decisions produces more efficient results than one in which government constantly interferes. This is not because people are always rational and seldom make mistakes, but rather because most people are more rational and make fewer mistakes when their own interests are at stake, than when they are well-intentioned government officials.

Private companies, no matter their size, are subject to a ruthless discipline: if they do not make a profit, they face insolvency or being taken over by more efficient competitors. Firms, as long as they are not protected by government-granted monopolies or taxpayer-guaranteed finance in order to survive, are compelled when in competition with all other existing and potential suppliers to provide a profitable and efficient service to customers. Government needs to start exposing public enterprises to potential competitors and stop using taxpayers to pay for their mistakes if it ever wants to change poor management to good management and see an improved service being offered to all customers – rich or poor.

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