Privatisation needs careful thought

03 May, 2019 - 00:05 0 Views

eBusiness Weekly

Over the decades the Government has acquired ownership of a fair number of businesses and utilities, sometimes deliberately but sometimes almost by accident, and despite talk over the same decades about possible privatisation or partial privatisation little action was taken outside Dairibord and Cottco.

Now under our economic reforms action will be taken, but the Government is being very careful about not trying to have one single model. This is important. Some State-owned enterprises can just be sold off; they only came under State ownership as a temporary solution and have no core importance to the running of the State. At the other extreme are units that provide public services that really should remain under State ownership although it might be just be possible to have a highly-regulated monopoly; but even there, care needs to be taken and the costs of policing a monopoly might be higher than the costs of running a parastatal.

In between these extremes there are a lot of enterprises that can be re-organised, merged, separated and all or parts sold off in whole or part.

Sometimes looking at how a particular enterprise came under State ownership might be helpful. The railways provide a curious example. The British South Africa Company set up the original railway companies and there were more than one, because Cecil Rhodes wanted to use other people’s money to open up the country. The financing was complex with each section of track under first mortgages and second mortgages issued by the company that owned the particular section.

In the late 1920s the two main companies, Rhodesia Railways that owned the main line from Mafeking to Kabwe and Mashonaland Railways that owned the main line from Mutare to Bulawayo plus the main line from Kabwe to the Copperbelt plus some spurs, were amalgamated and the debt was consolidated, the final sale of debt pushed through a couple of weeks before the markets collapsed with the advent of the Great Depression to the great relief of the BSA Company. The depression and the Second World War cut revenues so the Godfrey Huggins government at the end of the war was able to nationalise the railways at modest cost. The bondholders wanted out.

Efforts were made some years ago to turn the railways back into a set of separate companies owning the track and running the services but this was poorly thought out and not really pursued. Electricity again just grew. Harare and Bulawayo City Councils built their own power stations and gradually expanded them.

The Government set up the Electricity Supply Commission to service the rest of the country, although it was buying electricity wholesale from the two cities before it built its own station at Munyati, and then Kariba South power station was built under ownership of Capco. By the early 1980s there was a dogs breakfast with Capco selling wholesale maximum demand power direct to the ESC and the two biggest cities, they in turn retailing energy to their consumers, and Mutate and Gweru buying wholesale power from the ESC to retail energy to their residents. As Kariba South could no longer carry the full load Capco had the three small thermals recommissioned and bought power from the two cities to sell back to them while ESC worked its own station to top up its Capco supply.

The temptation to rationalise was irresistible and Zesa was formed, combining the six entities but shedding the Capco Zambezi water regulation to the Zambezi River Authority. It was simpler but the endemic interference of the First Republic caused problems. The later split of Zesa into four function-related companies simply generated a lot of extra managers but no extra kilowatt hours, which presumably is why there is now a radical re-examination of the whole structure in progress.

The Industrial Development Corporation is the holding company for quite a few bits and pieces. The IDC was originally set up as a sort of venture capital unit, helping to create new industries, cull the duds and then make a killing from the successes when these were floated on the stock exchange or sold off privately. The cash from sales was then supposed to be re-invested in a new set of enterprises needing help with a start-up and so on in a virtuous cycle. AT UDI the system changed as the IDC took over organisations that would otherwise close under sanctions or which were failing. But it kept them.

Car assembly is one example. In the early 1960s, thanks to new tax formulas, Ford opened the Willowvale assembly plant and the British Motor Corporation the Mutate plant. At UDI these were closed so the IDC moved in. At independence Ford had zero interest in coming back, so the IDC kept Willowvale, while the BMC successor, Leyland, moved back into Mutare.

When Leyland collapsed under Margaret Thatcher’s reforms the Mutare plant was sold to Zimbabwean business people. In retrospect it is a pity the IDC did not unload Willowvale in the same way while it was still profitable. In any case the IDC needs to return to its proper function of being a provider of venture capital and management skills, nurturing new companies and then selling them off at a decent profit and reinvesting in a new generation of new industries.

The Second Republic’s ethos is to interfere less in State-owned enterprises and stop micro management. But that still means that the enterprise must be in good shape to start with. And that, as we all know, is not given.

But when the Government is looking at what it needs to keep and what it needs to sell it also needs to keep moving away from over-simple models and all-or-nothing policies.

One of the more fascinating successes of Government intervention in the last few months is urban public transport. Kombi owners were demanding huge increases in day rentals from the operators, the drivers. Drivers in turn were having to cover those extra costs and then also wanted to boost their profits by similar percentages. Fares were appalling.

The intervention consisted in putting Zupco back into the picture, although Zupco was far too small to even think about restoring its old monopoly. Imaginative management brought in private bus operators, as a sort of Zupco franchise holder but with fares adequate to make moderate profits. The fleets of Zupco and franchise holders were still too small, but the intervention and the competition it generated was above a critical mass and forced the kombi owners and drivers to cut their fares to compete. We now have a mixture of Zupco buses, franchise service buses and kombis moving the commuters, but at affordable fares and everyone making rational profits. The system might look messy; but on the other hand it works. One day we will probably have heavy academic papers, or even a PhD thesis, by theoretical economists explaining why it worked.

But in the meantime we have a model that can be applied. This is possibly why we now hear of Silo, the processing, wholesale and retail arm of the GMB, planning something similar for essential food items. Silo is careful not to suggest it seeks a monopoly.

What it is planning is a sort of Zupco-type intervention, taking enough market share, what is hoped is the critical mass, to make the markets work properly and eliminate profiteering without eliminating private sector outfits and retaining the profit motive so everyone makes fair profits but cartels are shattered.

As this works it must start helping the Government decide where it needs to be able to have muscle in the form of a State-enterprise to force markets to behave, where it can manage markets through a regulator, and where it can take the backseat. Each case will be different. We need imagination and innovation at all economic levels, public and private, and most importantly a culture of looking at results, not ideology.

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