3
The economic and social effects of restructuring
The consequences of restructuring can be explained in terms of their
impact on the firm, industry or sector, and broader economic impacts and social
impacts.
This makes it possible to assess the impacts and to distinguish the
relationships between them. It also becomes easier to ascertain whether these
differing impacts arise from different forms of restructuring strategies. To aid
the discussion that follows, the various government approaches are classified in
terms of their impacts:
|
Internal to the firm, industry or sector |
Broader economic impacts |
Social impacts |
| Enhancing efficiency and effectiveness of state
enterprises |
Reducing the public sector borrowing
requirement |
Ensuring wider participation in the South
African economy |
| Accessing globally competitive technology |
Attracting foreign direct investment |
Mitigating possible negative social impacts
arising from restructuring |
| Creating effective market structures in the
sectors currently dominated by state owned enterprises |
Financing growth and the requirements for
industrial competitiveness |
Promote sustainable employment, either directly
or indirectly, through improvements in the economy |
| Mobilising private sector capital and expertise |
|
|
Restructuring has been practised internationally for more than twenty years,
but there is still no consensus about its consequences. Although restructuring
has yielded generally positive outcomes for individual nations, most analysts
concede that there have been significant failures. These have resulted from
institutional arrangements within former SOEs, as well as structural problems
associated with the market environment in which they operate. Good restructuring
policy must therefore take both kinds of challenges into account.
There is a growing body of literature that describes the main benefits of
restructuring, indicating how both institutional and market failures can be
mitigated. Potential mechanisms for overcoming the problems are identified,
whereas specific concerns remain unanswered.
In this policy framework, therefore, it will be possible to identify
issues on which there is general consensus, that can be used as guiding
principles for the restructuring process, and also to note areas where there is
not enough consensus to suggest an unequivocal position on restructuring. In the
latter instances, it will be suggested that the state adopt a strategy that is
sensitive to the specific circumstances of individual SOEs and the industrial
sector of which they are part. Although some policy analysts would rather want
unambiguous policy prescriptions, this approach will enable Government to
proceed with restructuring within a more clearly defined set of parameters.
International experience with restructuring
The impact of restructuring SOEs can be understood when reflecting on the
international experience. In a far-ranging assessment, former World Bank Chief
Economist Joseph Stiglitz(1), acknowledges that
… Not only were the state enterprises inefficient, but their losses
contributed to the government's budget deficit, contributing to macro
instability. Privatization would kill two birds with one stone: it would
simultaneously improve economic efficiency and reduce fiscal deficits.
In the same paper, he observes that:
… In retrospect, the advocates of privatization overestimated the
benefits of privatization and underestimated the costs, particularly the
political costs of the process itself and the impediments to further reform
... The conditions under which privatisation can achieve the public objectives
of efficiency and equity are very limited.
He notes, in particular, that privatisation has been less successful where
private ownership has not been accompanied by greater market competition:
… If, for instance, competition is lacking then creating a private,
unregulated monopoly will likely result in even higher prices for consumers.
And there is some evidence that, insulated from competition, private
monopolies may suffer from several forms of inefficiency and may not be highly
innovative... There are strong incentives not only for private rent seeking on
the part of management, but also for taking actions which increase the scope
for such rent seeking.
Stiglitz concludes that there is still a case for privatisation, but that
much more must be learned about the manner in and extent to which governments
manage the process:
… The Washington Consensus is right, privatization is important. The
government needs to devote its scarce resources to areas that the private
sector does not and is not likely to enter … Government needs to focus its
attention on those areas that represent its distinct advantages, which
distinguish it from private organisations. But that having been said, there
are critical issues both about the sequencing and scope of privatization: even
when privatization increases productive efficiency, there may be problems in
ensuring that broader public objectives, not well reflected in market prices,
are attained, and regulation may be an imperfect substitute. (2)
Stiglitz states that many of the gains attributed to privatisation actually
occur prior to privatisation: “They arise from the process of corporatisation,
from putting into place effective individual and organisational incentives.”
Noting that there is a “continuum of arrangements” between public and
private enterprises, he argues that both corporatism, “which maintains
government ownership but shifts towards hard budget constraints and
self-financing”, and other performance-based government organisations that “use
output-oriented performance measures” are equally valid alternatives to
privatisation. Key to his argument are the dual themes of increasing competition
and managing the process of restructuring to ensure that rent seeking is not
promoted.
Other authors support the views of Stiglitz (and Rodrik) described above.
Fisher & Sahay’s(3) review the impact of
privatisation and restructuring in transition economies after ten years. In
particular they emphasise that hard budget constraints are more important than
ownership, and that the scale and pacing of privatisation are significant. While
it is possible to privatise smaller-scaled enterprises relatively quickly,
larger enterprises may need more time so that the appropriate institutional
frameworks can be in place.(4) This point is also
made by Tornell,(5) who having reviewed the
experience of privatisation internationally, notes:
… During the last decade, … we have learned that simply transferring
the ownership of state owned enterprises to private hands, and breaking up
state monopolies does not automatically lead to higher efficiency …
privatisation without the implementation of the three reforms [discussed
below] … will simply replace government bureaucrats with private mafias
(i.e. private groups with the power to extract fiscal transfers). These
private mafias might behave more voraciously than the bureaucrats they are
replacing, reducing aggregate efficiency and further hindering the growth of
the competitive private sector. (6)
Tornell argues that it may be necessary to “privatise the privatised”:
… First, re-establishing property rights within each firm, so that the
new owners enjoy full residual rights of control in their firm. Second,
outside the firm, facing new owners with “hard budget constraints” so that
they do not have the power to either extract fiscal transfers, or obtain
bailouts. Third, establishing a non-corruptible judicial system, and
transparent bankruptcy procedures that are free from political pressures.(7)
The aspects around ownership, social impact and corporate governance are
returned to below. The literature thus far therefore quite explicitly states
that restructuring needs to take place in a context where the institutional
preconditions have been established so that market incentives can operate
effectively. This does not necessarily mean that other social and political
objectives should be thrown out but as will be argued below, these should be
dealt with separately from the need to ensure that the enterprises are operated
as businesses that respond effectively to market incentives. (8)
It is also clear from the international views that if the institutional
preconditions are not established, then privatisation may not only fail to lead
to restructuring, but could also result in even worse economic outcomes, with
privatised firms holding the economies at ransom. Monopoly power, political
influence and/or fiscal resources (extracted directly or indirectly) and
imperfect legal structures provide many opportunities for rent seeking and other
forms of corruption that could undermine any developmental agenda.
The literature also provides a useful indication of the appropriate
conditions under which privatisation and/or corporatisation may be successful. A
recent study of private participation in infrastructure provision by sector and
region shows that Latin America and the Caribbean accounted for 48 per cent of
all such initiatives between 1990 and 1998, East Asia and the Pacific for about
30 per cent, Europe and Central Asia for about 10 per cent, South Asia for 8 per
cent, the Middle East and North Africa for about 3 per cent and Sub-Saharan
Africa for only about 2 per cent.(9) These
statistics confirm the suggestion by other studies that restructuring is more
likely to succeed in medium to high income countries that have better developed
economic institutions than lower income countries.(10)
South Africa, like many countries in Latin America and East Asia at a
similar level of economic development, is therefore likely to have better
institutional preconditions for successful restructuring than many of its
African counterparts.(11) However, the
economic crises experienced by these more developed economies in recent years
have shown that even they suffer from institutional shortcomings that have
undermined international confidence in developing economies as a whole.
The literature also indicates that the telecommunications and energy sectors
have led private sector involvement in infrastructure provision between 1990 and
1998. Telecommunications, which accounts for 43 per cent of the initiatives, and
energy, accounting for 36 per cent, have been driven largely by technological
changes that have reduced sunk costs, allowed for the reform of market
structures and facilitated competition. By contrast, the transport and water
sectors, accounting for 17 per cent and 5 per cent of initiatives respectively,
have seen fewer technological changes and have experienced greater political
opposition and/or subnational government involvement.(12)
These trends reflect the South African reality to some extent, although they
suggest that more progress could possibly have been made in the energy sector.
Impacts internal to the firm, industry or sector
In terms of the impacts of restructuring internal to the firm, industry or
sector, it is generally agreed that there has been an improvement in the
efficiency and effectiveness of SOEs, and this has been reflected in improved
productivity, profitability, innovation and levels of investment.(13)There
remains some measure of disagreement as to whether these improvements occur
before or after the transfer of ownership, i.e. whether they are due to
restructuring prior to privatisation, or to the privatisation itself.
The relatively recent experience of privatisation and incorporation in
developing countries makes it difficult to assess the long-term impact of
microeconomic performance. Nevertheless, a study of the post-restructuring
performance of 79 companies in 21 developing countries indicates that average
profitability increased by 124 per cent, efficiency by 25 per cent, investment
by 126 per cent, output by 25 per cent, employment by 1,3 per cent, debt
leverage by -5 per cent and dividends by 44 per cent.(14)
In most cases, therefore, increasing market incentives in the operation of
public enterprises have had a positive impact. Some indicators (e.g.
profitability and dividends) have increased more than others (e.g. efficiency
and output), possibly indicating that the benefits of restructuring have been
more skewed towards the shareholders than towards customers. It is also worth
noting that, in line with Stiglitz’s arguments above, competition also seems
to impact on performance, especially in terms of investment that increased
significantly in such environments, but was “insignificant for firms in
non-competitive markets”.
International experience is not conclusive about whether or not privatisation
is the primary impetus for the improvement of performance of firms and
industries, since it is not easy to distinguish between pre- and
post-privatisation impact in the studies reviewed. The theoretical argument for
ownership transfer has, however, been made in a less ambiguous manner. It is
argued that owing to information asymmetries (that is, differential access to
information) and contract incompleteness (i.e. all contingencies cannot be
specified contractually), full privatisation (i.e. complete transfer of
ownership) should be more efficient and effective than partial privatisation or
other forms of restructuring that do not involve equity sales.(15)
This is based on the assumption that restructured SOEs that are not fully
privatised may continue to be subject to political interference (i.e. management
will be guided more by political rather than economic or financial
considerations), and that they will continue to operate with “soft” as
opposed to “hard” budget constraints (i.e. the state will assist them if
they encounter financial difficulties). It is argued that without full
privatisation, the markets will remain doubtful of Government’s intentions,
which could lead investors to discount such restructuring initiatives on the
basis that they could be reversed.
Notwithstanding the number of existing studies, such arguments are not
supported by hard empirical evidence and, even in the cases cited, a large
number of competing interpretations remain. What these arguments do suggest,
however, is that these perceptions may not be valid to the extent that
Government is unclear about its restructuring programme, its relationship to the
enterprises and its commitment to introducing market incentives into the
operations of the SOEs. If, as envisaged by this policy framework, Government
can address these concerns by providing a clear signal of its intentions and the
parameters within which restructuring should take place (especially as defined
in the protocol of corporate governance and shareholder compact, as discussed
below), then the argument that full privatisation will have the greatest impact
on microeconomic efficiency is much less persuasive.(16)
Other restructuring approaches such as incorporation, outsourcing, joint
ventures and public-private partnerships may yield equal, if not better,
performance while also realising Government’s more developmental objectives.
The arguments for privatisation (either partial or full) are more persuasive
where the issues of investment and the introduction of new technologies are
concerned.
It is evident from most studies consulted that partial and/or full
privatisation often contributes both investment finance and technology which can
make SOEs more competitive. In the context of highly indebted SOEs with a
history of under investment (like those in South Africa), there is generally a
valid argument for equity sales. This can either be to a strategic equity
partner where technology and expertise are required, or through a public
offering if investment funds are needed. The case for some degree of ownership
transfer may, therefore, still be valid, even when the information and
contractual concerns can be addressed through other means.
The final point to note is that there is virtually unanimous support for
the argument that establishing competitive markets is the most important policy
component of any restructuring initiative. The failure to establish such
competitive conditions will, at best, lessen the full microeconomic improvements
and, at worst, lead to serious economic abuses of monopoly power. Early
attempts at restructuring in some countries sought to preserve the monopoly
status of some SOEs in the belief that this would make them more globally
competitive and/or increase their sale value. There has been little evidence,
however, that any positive impact resulting from such a strategy has outweighed
the consequences of failing to establish competitive markets. All commentators
reviewed agree that, coupled with the change in technology in the main
telecommunications and energy sectors, the establishment of competitive markets
should be a priority goal of any restructuring initiative.
Broader economic impacts (17)
The broader economic impacts of restructuring are those impacts that affect
the broader economy. These impacts are generally less controversial, largely
because they reflect some self-evident realities. In most instances, any
injection of financial resources (such as tax, dividends, or proceeds from
equity sales) will result in a reduction of the public sector borrowing
requirement which, in turn, will enable the state to prioritise other
expenditure or reduce its demands for borrowing. A lower borrowing requirement
should result in lower interest rates, which would stimulate investment and
contribute to economic growth.
Most proponents of privatisation argue that the greatest economic impacts
result from full privatisation. This is because the latter will provide a larger
injection of resources to the fiscus than a partial privatisation or other form
of restructuring (unless these approaches yield other returns to the state in
the form of greater tax returns or dividends, or increased deferred payments).
This argument can be demonstrated by means of a simple model, based primarily on
the assumption that a larger (rather than smaller) quantum of resources will
undoubtedly have a greater effect on the other variables described above.
However, such a model will not necessarily reflect the microeconomic impact and
the manner and timing in which other returns are made available to the state.
These concerns will be discussed below.
While many forms of restructuring can improve the efficiency with which SOEs
use resources, a process that involves a transfer of ownership can have
important additional macroeconomic benefits. These include:
- Fiscal impact (including lower costs of state debt and increased fiscal
resources for targeted expenditure)
- Financial market impact (including lower domestic interest rates and an
improved credit rating)
- Balance of payments impact (including increased foreign capital inflows
and a reduced forward book or increased foreign reserves)
An increased scale of privatisation allows for an accelerated reduction in
the level of state debt which, in turn, has a significant impact on the interest
costs of Government in subsequent years. With given deficit targets, a reduction
in debt service costs translates into greater resources for spending on social
services or infrastructure investment. Alternatively, it results in lower
revenue targets and greater discretionary spending by the private sector. It is
assumed that there is a net improvement in the fiscus as the sum of the
privatisation proceeds plus the net present value of the increase in future
taxation receipts (or decrease in subsidies) and reduction in state debt costs
exceeds the net present value of the sum of future dividend flows and tax
receipts.(18) The assumptions associated with
returns from equity sales proceeds, increased taxation and reduction in
subsidies are discussed further below.
The consequence of using privatisation proceeds to fund Government’s
borrowing requirements is a reduction in the amount of new government debt that
needs to be issued in any given year. Reducing public sector borrowing should,
all other things being equal, translate into lower interest rates. However,
should there be a simultaneous fall in the demand for government bonds, then the
effect on interest rates may be neutral. The ultimate impact on interest rates
depends on the nature of the financial flows that take place. In a closed
economy, privatisation would result in a transfer of investment funds out of
bonds and into equity as investors take up holdings in the newly privatised
entities. In an open economy, however, much of the investment in privatised
firms is likely to be in the form of foreign investment. This constitutes
additional investment in the economy, which mitigates the domestic switching
effect. Institutional factors will also limit the extent of demand switching.
Certain institutions (such as pension funds) require a relatively constant
proportion of bonds in their portfolios for prudential reasons. Lastly, lower
interest rates can paradoxically result in an increase in the demand for bonds
if the decline in rates is interpreted as a sign of economic stability and lower
risk.
Another reason for expecting lower interest rates arises from a reduction in
the risk premium demanded on domestic debt. Higher capital inflows, increased
foreign reserves, perceptions of accelerated economic reform and potential
credit-rating upgrades can all contribute to significant reductions in a country’s
risk premium.
The current structure of SOEs is the outcome of a long period of isolated
development in which narrow “strategic” interests had preference over
broader economic and social development. Investment decisions that were not
always efficient or in line with development needs have left a legacy of poor
SOE performance and infrastructure backlogs. In addition, some SOEs do not have
access to global technology and skills, which makes them uncompetitive in a
rapidly changing world economy. Given the key role they play in providing
economic infrastructure for other sectors of the South African economy, this
situation is making our integration into the global markets all the more
difficult.
Many SOEs also have high levels of borrowings, which raises the overall level
of the South African public sector borrowing requirement. High borrowings
translate into high interest payments that affect profitability and, hence, an
inability to expand development opportunities.
Unfortunately, the state lacks the immediate resources to address these
investment and infrastructure backlogs. There is thus an inescapable demand for
new financing through different forms of domestic and foreign partnerships to
promote the infusion of new equity capital and technology. Although Government
is seeking a range of restructuring methods from corporatisation to management
contracts, strategic equity partnerships and public offerings, the South African
context of infrastructure backlogs and limited government resources indicates
that, in many cases, there will be some level of equity sales to provide
capital, technology and/or access to markets for infrastructure expansion. Given
the limited fiscal resources, further infrastructure investment can only be
achieved through an accelerated programme of the restructuring the SOEs and more
extensive use of public-private partnerships. Both types of programme should see
an increase in local and foreign direct investment.
Restructuring is expected to lead to increased capital inflows in the form of
both portfolio flows and foreign direct investment (FDI). FDI increases directly
as a consequence of ownership transfer. The prospects of higher FDI and foreign
exchange reserves alleviate balance of payments fears. Privatisation also acts
as a catalyst for subsequent FDI. Portfolio flows in the equity market may
respond to the prospect of falling interest rates, higher growth and the growth
of a utilities sector on the stock exchange. Higher capital inflows allow for an
increase in foreign exchange reserves (or, in South Africa’s case, a reduction
in the forward book). This improves investor confidence and reduces risk
premiums. The higher credit rating can thus translate into lower costs of
borrowing. Significant capital inflows and increased foreign reserves reduce the
possible constraint of the balance of payments on the pace of economic growth.
The capital account of the balance of payments is bolstered by capital inflows
associated with asset sales.
Pressures on the current account may increase following privatisation, owing
to higher import demand during infrastructure expansion and a rise in dividend
and interest payments to foreign institutions, but these are generally
outweighed by the scale of capital inflows.
Interest rates can therefore be expected to decline if the increased demand
for capital resulting from new infrastructure expansion under private ownership
is met by increased foreign capital inflows and limited investment switching
from debt to equities. The sustainability of lower interest rates, however,
depends on the degree to which the added stimulus to the economy is
non-inflationary, since inflationary pressures would require a tightening of
monetary policy and a consequent reversal of the interest rate gains. It is here
that the establishment of competitive markets is likely to contribute to
sustainable non-inflationary growth because of the assumed efficiency
improvements that arise from the microeconomic impact discussed above.
No discussion of the broader economic impacts of restructuring would be
complete without some mention of the proceeds from restructuring and their
impact on the country’s macroeconomic situation. The Macroeconomic Policy Unit
of the Department of Finance has modelled some of these impacts. International
comparisons indicate that, as a benchmark, gross privatisation proceeds in
developing countries during periods of active privatisation have averaged 1,5
per cent of GDP per year.(19) In South Africa’s
case, this would translate into approximately R12 bn per year in 1999 prices. It
should be noted that there can be no certainty about the proceeds from
restructuring, as they depend on the form of restructuring, market sentiment,
timing and on what is happening in the global and local markets generally and
the sectors specifically.
While it cannot be disputed that increasing the financial resources of the
state through privatisation will have positive macroeconomic effects, it is
still not clear whether the best way in which this can be done is through the
divestiture of equity in SOEs. Proponents of such a course of action would have
to prove that there are no instances where continued state ownership can be more
beneficial than private ownership. As shown in the section on microeconomic
impact, considerable debate remains as to whether the competitiveness benefits
of restructuring arise prior to or after the sale of equity. If information
asymmetries and contractual incompleteness can be addressed, there is sufficient
support for the proposition that the state can benefit from restructuring
without necessarily following through with full privatisation.
In particular, it may be argued that in instances where the SOE value is
heavily discounted owing to poor performance, under investment and/or high debt
leverage, it may be reasonably suggested that the state should turn around the
SOE before it proceeds further with privatisation. Where such turnarounds are
feasible, the returns to the state from increased dividends, taxation and/or
deferred equity sales outweigh the returns from immediate privatisation. Since
there is no unequivocal evidence to support either option, it would be prudent
to argue that decisions to restructure and/or privatise will need to be dealt
with in each individual case. In some instances, especially those involving
small enterprises and non-core assets, there may be little value in adopting
this approach, but the restructuring and/or privatisation of major state
enterprises will need to be justified by a thorough investigation of the
options. On the basis of preliminary work done by Government, there is
sufficient evidence to suggest that a range of restructuring options beyond full
privatisation will yield the greatest economic value for the state.
Social impact
It is important not to conclude the discussion of the impact of restructuring
without considering the social impact. In this section, it will be argued that
the potential exists to generate higher “public good” outcomes with respect
to both micro and macroeconomic processes through continued state ownership of
SOEs, even if the immediate financial rate of return on SOE assets is lower. It
is suggested that the benefits of positive externalities realised under state,
worker or community ownership (and potentially forgone under private ownership)
may justify an ongoing public investment role.(20)
In these instances, the state may pursue such developmental objectives without
necessarily yielding to the past shortcomings of public ownership.(21)
Most of the issues discussed in this section arise from the changed economic
conditions under which the restructured SOEs would operate. Because of
sensitivities associated not only with potentially conflicting labour-management
relations, but also with maximising social welfare by accounting for public
goods and promoting black economic empowerment, the realisation of social impact
generally requires some political guidance. The two major social impacts
referred to in the international literature are employment (including wage or
salary level) implications and the effect of restructuring on the quality and
pricing of services. A third impact is the incorporation of public goods within
SOEs, so as to continue to utilise state assets for broader social objectives,
if transparency and rigorous cost benefit analysis justify this. Finally, issues
of “economic empowerment” (as they are defined here) arise. Although in some
respects these issues are unique to South Africa, there are also important
international experiences concerning diverse forms of restructuring in
post-socialist societies. In general, the theory of public goods, as discussed
below, covers these objectives. It should, however, be stressed at the outset
that the social and empowerment objectives should not be seen as distinct from,
but as complementary to, the micro- and macroeconomic objectives.
Dealing with the most controversial impact first, it is universally agreed
that the immediate impact of restructuring involves employment losses. What is
not always evident is whether the longer-term benefits of restructuring in the
form of more efficient firms and a more competitive economy create more
employment than was initially lost through restructuring. Even in cases where
restructured firms shed labour in the short term, this does not necessarily make
labour worse off as a group.(22) Other medium- and
longer-term benefits for labour may include the appreciation in the value of
shares acquired in the restructured enterprises and, more importantly, improved
economic conditions that permit re-absorption into the job market. In the long
run, restructuring can produce new employment opportunities owing to the
probable expansion in output.
Nevertheless, some declining sectors will experience an irrevocable loss of
jobs. However, where restructuring brings about significant efficiency
improvements and new technology, the result is often the development of new
niche industries able to absorb retrenchments in other areas. The lags involved
in structural adjustment are such that, even though restructuring may not have
an adverse effect on sectoral or total employment in the long run, there may be
workers who suffer temporary unemployment. The state has a role to play in these
circumstances by ensuring that measures are put in place to mitigate the social
impact of privatisation, such as retrenchment packages, unemployment insurance
and job reskilling. This will be discussed in more detail in the section on
social plans.
Estimates from the model discussed above indicate that, for the three
restructuring options, combined employment effects can vary from overall job
losses, despite indirect job gains, to significant overall employment gains
arising from efficiency gains in other sectors.(23)
The restructuring process should not only attempt to limit the number of job
losses, but also to develop new employment opportunities. It is likely that the
expansion of some key sectors – especially telecommunications and perhaps
defence – would lead to additional employment opportunities being created as
the economy seeks new technological niche markets to exploit.
The second social impact to be considered is the effect of restructuring on
consumers. It is here that the question of increased competition becomes
particularly relevant. International experience indicates that in cases where a
public monopoly has been converted into a private monopoly and/or insufficient
conditions exist for creating a competitive market, the full benefits of
restructuring have not been realised.(24) Either
the full benefits of improved microeconomic performance have not been achieved,
or, where they have, these have been largely retained as monopoly rents by
management and/or the shareholders. It is important therefore to acknowledge
that privatisation, especially when it occurs in a non-competitive environment
– such as exists in most sectors in which South African SOEs operate – can
lead to monopoly pricing, underinvestment (and/or disinvestment) and other forms
of rent-seeking behaviour.(25) Although regulation
has been proposed as a means to address the problem of monopolies, international
and local experience with such forms of regulation would suggest that regulation
is not very effective in curbing monopolistic behaviour in an environment in
which alternative pricing cannot be established.(26)
One of the major aims of restructuring should be to meet the needs of
consumers by providing them with improved access to higher-quality, reliable
services and/or lower prices. It is assumed that where customers have a choice
between competing service providers, service levels are more likely to increase
and prices are more likely to fall than under monopoly conditions. Local and
international experience suggests that consumers derive a range of benefits from
competition.
Where consumers have a choice, they may elect not to use a supplier or
producer who does not offer good service or charges higher prices. It is also
assumed that competition in the market will encourage innovation, as different
suppliers or producers that offer similar products will be forced innovate to
ensure that their product is distinguishable from others. Competition also
enables consumers to make their own trade-offs between price and quality of
service.
Price-sensitive consumers may be prepared to accept a lower quality of
service in exchange for a reduced price. Other consumers may be prepared to pay
a premium for a high level of service.
While regulators are often charged with regulating prices and regulating
access to the market, they are rarely charged with ensuring quality of service
to consumers. If Government therefore intends to ensure that consumers benefit
from the restructuring of state assets, then it will need to make certain that
service costs and quality are covered by regulation in non-competitive
environments. Price regulation will usually ensure that excess profits are not
being charged. Comparisons should therefore be made between the economic
performance of the monopoly and comparable industries locally and abroad.
Even where there is a natural monopoly, there may still be areas where
competition can be introduced in the vertical chain of production. Competition
in supply or in the retailing of the product may be possible. Consumer
protection can also be encouraged through the truthful and adequate disclosure
of information by state enterprises. Disclosure of information ensures greater
transparency and accountability.(27)
The third social impact of restructuring is the issue of public goods and
services. The theory of public goods posits that, in a market system, certain
goods and services are not produced or consumed with sufficient quantity and
quality to maximise social welfare. The result is a form of market failure.
Usually Government, or its agent (often an SOE), is required to produce such
goods or services. Although public goods can be observed and measured, they have
two theoretical characteristics: “non-rival consumption” and “non-exclusion”
from consumption. Non-rival consumption means that the consumption of a public
good or service by one person need not diminish the quantity consumed by anyone
else. (28) The principle of non-exclusion means
that it is impossible to prevent other citizens from enjoying the benefits of
public goods, regardless of whether they are paid for. This is important, as
Government gradually determines the nature of social policy, and distinguishes
between necessities guaranteed by the state, versus luxuries for which people
must pay.(29) (For instance, a new national water
pricing policy, for instance, assures a supply of 25 litres of water to everyone
for free.)
These aspects of public goods are crucial to an SOE’s view of a
cost-benefit analysis of the goods and services it delivers to the public. The
more the characteristics of public goods of, for example, telephone, electricity
or transport, the more it makes sense for Government to assess to what degree
these SOE goods or services can be considered socially “necessary”, as
opposed to being “luxury” goods or services that can be left to the market
to provide. If SOEs produce necessary goods or services or if they have a
substantial “externality” effect, i.e. the consumption of the goods or
services has a positive (or negative) impact (e.g. pollution), upon those who do
not consume them, then Government will need to take a more active role in
defining and regulating their production and consumption in the public interest.(30)
How Government chooses to ensure their production will be determined by social
policy, as distinct from the economic operations of the SOE.
For many public goods, consumption becomes as important as production. For
example, simply establishing an SOE to generate electricity, invest in new
telephone exchanges or provide transport options is not sufficient. It is
crucial to tap into the vast “social capital” that exists among South
African consumers of these services, namely trust, horizontal community
information and democratic development processes. The objective here is for any
new SOE investment in infrastructure associated with a public good or service to
become a much more integral part of the South African social fabric.(31)
Government must therefore help establish and sustain such relationships, as they
cut across all SOEs. Economists have only lately begun to recognise the value of
“human capital” (particularly through long-term state investments in health
care and education); likewise, a new interest in maximising social capital is
increasingly seen as an extremely cost-effective way in which to increase the
returns on development investments.
On the other hand, many goods or services produced by SOEs should rather be
considered necessities or, more accurately, “rival” and “excludable”
goods that have such small externalities that the private sector could have a
greater role in their production. For historical reasons, many such goods or
services, (e.g. air travel for elite consumers or businesspeople), have been
produced by South African SOEs instead of private firms. It is now the time to
remedy this situation more coherently, where possible, by assuring that decisive
asset restructuring occurs more rapidly where the goods are of a non-strategic
character.
In short, Government will need to define more carefully the pricing,
distribution, consumption and even the very nature of goods or services that
SOEs produce, by means of an overarching framework defining the nature of public
goods. For it is the very “public” character of SOEs that distinguishes them
from private suppliers. Since the usual means by which Governments intervene to
enhance public goods and positive externalities (or to limit external costs like
pollution) include direct production, regulation, subsidisation and taxation,
such a framework will ensure that the best combination of these techniques is
more effectively deployed in future. Government will need to take a firmer
stance than it has to date in ensuring that public interest is met through the
production and consumption of public goods and services. Aspects of regulation,
to this end, are discussed in a subsequent section.
Lastly, there is the issue of empowerment, defined in its most general sense
to involve greater participation of those historically disadvantaged in the
economy by race, gender or disability (whether as shareholders, workers or
consumers). These issues are discussed in more detail below. At this stage, it
is important to recognise that the form in which restructuring takes place will
determine the effectiveness of empowerment. The international experience also
offers a mixed picture of empowerment. For example, the situation in Eastern
Europe generated similar patterns of disadvantage as in South Africa by
excluding a large proportion of the population from effective economic
participation. Attempts to promote popular shareholding (“voucher capitalism”)
and worker participation have had limited success. They may also have
contributed to the failure of these countries to realise significant micro- and
macroeconomic benefits from restructuring.(32)
An important lesson from the international experience, however, is not to
disregard these critical issues of social impact, but to account for them in a
more transparent manner. This would mean that Government’s intention of making
SOEs more responsive to market incentives (i.e. promoting microeconomic
efficiency and effectiveness) should not be undermined by other social or
political obligations to preserve employment and/or deliver services
uneconomically.
Such social responsibilities could rather be dealt with directly through
subsidies and/or social programmes that are fully accounted for in the budget.
Or, if a regulatory approach is adopted that explicitly sets prices on an SOE's
product so as to achieve other social goals, this should be made clear within
published price or tariff schedules.(33)
Social objectives should also be made transparent through their explicit
inclusions in the “shareholder compact” discussed below. The management and
boards of the restructured SOEs would then be less susceptible to external
influence, budget constraints would remain hard, and the state could demand
performance improvements (reflected in tax receipts or dividends) sufficient to
cover the additional subsidy burden of explicitly addressing the social impact.
As far as broadening access to ownership in the economy is concerned, Government
will need to examine the international experience further. Evidently, broader
opportunities for meaningful participation will have to be created by increasing
the range of restructuring options implemented.
Conclusion – factoring the impact into restructuring
approaches
The discussion in the three previous sections described the main impacts of
restructuring internationally and showed how this experience could help shape
the approach to restructuring in South Africa. While there is a growing
understanding of restructuring, there are still many areas that remain
unresolved.
Nevertheless, the growing consensus on the issue allows Government to
pursue an accelerated programme of restructuring that should incorporate the
following principles:
- The promotion of competition and competitive markets should be an
integral element of any restructuring strategy to ensure that the
benefits of restructuring (such as efficiency gains) translate into lower
prices, higher quality goods and services, and wider coverage. This should
be undertaken within an appropriate regulatory framework where necessary. In
addition, where there are social needs that will not be dealt with by a
competitive market, government intervention will be necessary.
- Although the scope for promoting competition has increased with
globalisation and technological change, in those business areas where
competition is not feasible, a regulatory framework needs to accompany any
restructuring initiatives. Residual natural monopolies are those
businesses for which, owing to their nature, it is not feasible to have more
than one firm within the industry. Examples of these are usually network
industries, like power transmission, where it would not make sense to have
two networks serving the same market. The establishment of such regulatory
regimes should help ensure that these residual monopolies do not distort the
development of competitive markets in the non-regulated sectors of the
industry. The regulatory framework must be consistent, manageable,
appropriate and without red tape.
- Government should clearly spell out its intentions and envisaged
relationship with the restructured SOEs in individual shareholder
compacts with enterprises, in the corporate governance framework for all
SOEs, and in a clear policy framework and programme for restructuring. If
Government’s intentions are clear, the performance of individual SOEs will
be easier to assess, enabling the state (as shareholder) and investors alike
to make more appropriate investment decisions.
- Government should explore options to enhance productivity,
profitability, investment and innovation. This will often entail equity
sales (full or partial privatisation) in order to access additional funding,
technology or markets. Where this is not required, other approaches such as
corporatisation, joint ventures, employee participation schemes and
community partnerships may be more beneficial. In instances of partial
privatisation, other partnership arrangements may also be adopted.
- Government should maximise the optimal return to the shareholder (fiscus),
whether through the proceeds from equity sales, dividends and/or tax returns.
By adopting this optimal approach, Government can maximise its long-term
returns on its shareholding by trading off short-term gains from equity
sales in depreciated assets for medium- to longer-term gains (dividends,
taxes, deferred equity sales) from successfully restructured SOEs.
- To ensure that the elements of public goods and services delivered by SOEs
are still accounted for, restructuring proposals should assess their
impact on overall social welfare. Such an analysis should address the
costs and benefits to society, both direct (e.g. immediate impact on pricing
or employment) and indirect (e.g., social costs from non-delivery of certain
essential services or the impact of unemployment on specific communities).
Apartheid concentrated people, as opposed to infrastructure and services, in
the geographical areas of the former Bantustans. Consequently, the Northern
Province, KwaZulu-Natal and the Eastern Cape are the most affected by
structural poverty. The analysis should therefore consider such regional
variations, as well as the impact that the restructuring process will have,
for example, on the rail and road transport networks, and electricity and
communications roll-out.
- Government should be transparent in addressing its social objectives
(social plans, employment creation, price subsidies, optimisation of public
goods, empowerment, etc.), allowing stakeholders to reach agreement on the
logic and methods of the restructuring process. Such transparency will
enable both Government and the restructured SOEs to better account for their
individual actions towards meeting their objectives, and to ensure that poor
performance can be both identified and remedied. Government will continue to
monitor and evaluate the implementation of applicable laws, in particular on
transparency and on the management of public finances.
There are various approaches that Government could use to achieve these
objectives. These approaches can be classified into three interrelated
categories: those internal to the industry or sector to which the enterprise
belongs, those that relate more broadly to the economy, and those that relate to
the achievement of social goals. The approaches Government adopts are related to
its overwhelming electoral mandate and are defined by the dynamic relationship
between its responsibilities to all South Africans and to the region as a whole.
Within each industry or sector, Government aims at enhancing the efficiency
and effectiveness of SOEs to secure services and infrastructure delivery at an
optimal cost and level of service. This requires access to globally competitive
technology to ensure that they are able to provide the best available and
affordable services.
Appropriate market structures should be created within the sectors currently
dominated by SOEs to ensure encouraged effectiveness and efficiency. Private
sector capital and expertise should be mobilised and structured in such a way
that the aims of Government are achieved.
SOE borrowing represents a significant portion of debt in the broader
economy. Government wishes to lower the public sector borrowing requirement,
which includes SOE borrowing, primarily to release interest commitments for
greater public benefit. Currently many SOEs are highly geared – their level of
borrowing is very high relative to various other financial measures, including
their earnings before interest and taxation. Foreign direct investment needs to
be attracted into the country to provide access to markets and technology, and
to finance growth and the requirements for industrial competitiveness. If
Government is to promote development, then it also needs to restructure the
economy.
In terms of approaches to addressing social issues, Government needs to
ensure wider ownership and participation in the South African economy.
Government needs to improve service delivery in terms of cost, quality and
access, and to promote human resource development, including the development of
management skills for SOEs. Comparative assessments of restructuring and
privatisation initiatives indicate short-term job losses in some sectors,
resulting from over-employment, or from the enterprises responding to new
challenges.
South Africa is currently undergoing rapid changes, particularly in the
secondary or the manufacturing sectors. The emergence of small, medium and micro
enterprises as an important component of the sector reflects a shift in the
industry’s organisation and also impacts on the nature of the labour market.
The new economy has also had an impact on the nature of work and on the job
opportunities linked to its emergence. Tourism, as a new industry linked to the
recreation and environmental sector, has also emerged as a new role-player in
job creation. Government has noted these new contexts, and aims at mitigating
the short-term negative impacts through a conscious and viable social plan
programme. Thus, Government recognises the need for promoting the creation of
sustainable employment either directly or indirectly through improvements in the
economy, as well as through immediate alleviation programmes to ensure that the
short-term losses do not become a longer-term reality. Expanding the scope for
employment in general and in new areas, in particular, remains a key objective
of government policy.
The discussion of the impacts of restructuring has also highlighted a number
of important methodological considerations that will be dealt with in more
detail in the chapter on improving the restructuring process. Of importance here
is that restructuring proposals should clearly identify and describe the micro
and macroeconomic and social impacts so that stakeholders can weigh up the
various restructuring options.
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