Volume 10, No.5 - August 2001

Privatisation

Workers news

Mobilise for the national strike
Our experience with privatisation

Mobilise for the national strike against privatisation!
By Zwelinzima Vavi

We did not fight for liberation so that we could sell everything we won to the highest bidder!
On 2 August, negotiations on privatisation at NEDLAC reached deadlock. We have therefore called a two-day stayaway on 29-30 August, with regional actions on 16 and 29 August. Thereafter, if necessary, we will look at sectoral actions.

The negotiations at NEDLAC
COSATU filed its Section 77 notice of dispute at NEDLAC on 18 June. NEDLAC convened the first meeting at the end of June. Government was supposed to respond in two weeks; instead, it only came back to us after a month.
Government's position paper rejected every demand COSATU made. It refused to:

We met two more times with government, but it refused to change its position. Moreover, the Department of Public Enterprise (DPE) only sent two relatively junior officials and did not bring representatives of local or provincial government or the public service.

In these circumstances, the NEDLAC committee on Section 77 disputes declared a deadlock on 2 August. That means protected action is possible, with a two-week notice period.

What government says - and why we disagree
It is true that government generally argues that it will not privatise on a wholesale basis. Government documents use less controversial terms such as "restructuring" or "public-private partnerships."

Yet key policy documents point to an overwhelming belief in the effectiveness of markets and private managers. They regard privatisation as a way to compensate for recent budget cuts. But they don't propose strong regulatory structures or analyse the costs and benefits of privatisation.

Government's overwhelming support for privatisation contradicts the ANC's historically more cautious view. Since Ready to Govern in 1992, the ANC has called for a strong state, with restructuring based on evidence about developmental needs.

It argues that shrinking or expanding state control should depend on whether it will "strengthen the ability of the economy to respond to massive inequalities, relieve the hardship of the majority of the people, and stimulate economic growth and competitiveness."
Overall, government policies praise market forces while calling vaguely for regulation. Ultimately, these policies make three key assumptions:

The first assumption supposes that South African markets are socially efficient. This assumption holds neither in theory nor in practice.
South Africa has a particularly unequal distribution of income - estimated at the third worst in the world. But the market is only designed to reach those who can pay, not to raise living standards for the poor.

Massive income inequalities mean the market will not bring about long-run development. In effect, poverty in itself creates poverty, by lowering productivity and employment. The market cannot break this vicious cycle, since the poor majority cannot afford to pay the full cost of basic services. In these circumstances, private businesses cannot capture the full social benefits of providing services to the poor.

The policy framework for privatisation published by the Department of Public Enterprises argues that despite these shortcomings, as consumers exercise their market choices, the market will bring about efficiency. This will happen because "consumers may be prepared to accept a lower quality of service in exchange for a reduced price."

One wonders where the authors live. Few South Africans have the luxury of making choices about basic services. They must get them from the state or not at all.
Privatisation just to introduce competition may undermine industrial strategy, which often requires big companies. In contrast, for both Eskom and Spoornet, the push has been to fragment large and powerful entities into many small enterprises.

Privatisation also leads to inefficiency through mass retrenchments, as private managers close down less profitable operations. For instance, Telkom has lost over 15 000 jobs in the last three years, and the government's plans for Spoornet would have put 30 000 jobs at risk.

Unemployment rose from 16% to over 25% in the past seven years, and the formal sector loses thousands of jobs every year. The majority of the workers retrenched by privatised industries are less skilled, and many live in rural areas where unemployment is highest. In these circumstances, they cannot expect to find new employment.

The second assumption holds that regulation and contracts will overcome these market problems. But closer examination demonstrates that government is not serious about regulation.

Effective regulation requires appropriate targets, monitoring and feedback mechanisms, and capacity to enforce regulations. South Africa has inadequate capacity in all these areas. Most policies on privatisation are not linked to targets for service delivery, or the targets are inadequate and poorly publicised.

Finally, government hopes privatisation will make up for under-budgeting. Yet private investors will only invest if they can make a profit, either from government subsidies or higher tariffs.
If private capital were inherently more efficient than the public sector, it could still cut costs to the state. But almost no evidence exists that private managers are more skilled than public-service ones. Indeed, the experience with SAA and Telkom suggests the opposite.

The real problem lies in an excessively restrictive fiscal policy. This emerges from attempts to cut local government budgets and parastatal borrowing, as well as tight targets for the national budget.


Spoornet
Spoornet is the freight and long-distance passenger rail division of Transnet. Government announced its intention to concession two lines - Coallink and Orex. These two lines provide most of Spoornet's profits by transporting coal and iron ore.

That would have left the General Freight Business (GFB) running at a loss. However, GFB plays a developmental role by providing a relatively cheap form of transport, and by reaching remote rural areas.

Transport union SATAWU argued that Coallink and Orex should be retained in an integrated, state-owned Spoornet. For one thing, the two lines made Spoornet as a whole financially viable. Internationally, most rail freight operations have some type of cross financing between lines.
In contrast, the state's proposals fell into the classic mould of selling off the most profitable activities while retaining social responsibilities - and costs - in government hands.

Ultimately, a joint labour-government task team embarked on a detailed financial analysis of the proposals. The task team has not yet finalised its recommendations.
Yet it became clear that in the longer run, it would cost the government money to concession the two lines - both to give profits to the private company, and to support the GFB. Moreover,

Spoornet would lose up to 30 000 jobs.
Government's carelessness about privatising appears from the fact that basic economic research into the concessioning was not completed until labour insisted.

Electricity
The current proposals for restructuring the electricity industry are peculiar. These proposals meddle with the parts of the sector that work well by international standards, while leaving fundamental problems unsolved. The results could be soaring costs for households, a slowdown in electrification, and may undermine investment in the industry.

No-one denies that South African electricity is amongst the cheapest in the world. But many local governments, especially in the former homelands, cannot afford to maintain, much less extend, electricity systems. Moreover, around 2010 South Africa will need new generating capacity as demand exceeds current supply.

Government's response to these problems seems driven largely by the blind commitment to free markets described earlier. Government's proposals will:

The shortcomings of these restructuring proposals reflect the broader shortcomings of South African markets.
First, in distribution, the establishment of REDs ignores the huge inequalities left by apartheid. If REDs have to compete for skills and funding as well as wholesale electricity, the poorer provinces will come off worst. The government has agreed to a national holding company to support the weaker REDs for at least six years.

Still, it is not clear if this national holding company can counteract the negative effects of regional competition.
Within regions, if REDs have to maximise profits, only regulation can force them to maintain services to the poor. Establishing a regulatory framework able to monitor services and set appropriate targets will certainly cost more.

Second, in supply, government has not been able to give COSATU any evidence that private generation is either necessary or likely to be cheaper than Eskom production. As far as COSATU can tell, no serious study has been done to back up this assumption. The risk is that, without detailed investigation, South Africa could licence private producers and down the line face demands for tariff increases.

Third, the proposed tariff system would end the cross-subsidisation of households by industry. This would result in increases of between 20 and 50 percent in the cost of electricity to households. This proposal is already being implemented under the name of the Wholesale Electricity Pricing System (WEPS).

In this context, it is worth noting that the international experience of privatising electricity has often been disastrous. A study by the Public Services International Research Unit (PSIRU) gives examples from, amongst others, New Zealand, Australia, the United States (US), the United Kingdom, Argentina, Brazil, the Dominican Republic, Moldova and Kazakhstan. For example:

Telecommunications
Privatisation has affected telecommunications in two ways: the sale of 30 percent of Telkom to US and Malaysian investors, with a further 20 percent planned for an IPO; and the liberalisation of the telecommunications market, initially to cellphone operators and more recently to a fixed-line competitor and the Internet.

Again, a naïve belief in the efficiency of private companies and the market appears to drive these policies.
International experience shows that introducing competition increases costs for the poor, lowers costs for business and the rich, and means relatively slow improvement in access.

In the past three years, the price of local calls, which the poor use more, increased in real terms by around 35 percent. In addition, basic rental costs are high. In contrast, the price of domestic long-distance and international calls dropped.

Rising costs for local calls and basic rentals have pushed telephones beyond the reach of most South Africans. Many connections are terminated every year, largely because users cannot pay. Thus, in the year to March 2001, Telkom provided 620 000 new connections while 220 000 lines were terminated.

The regulatory framework seems unlikely to ensure affordable universal access. It does not set any time frames, and considers households to have access if they are less than half an hour away from a telephone. The latest policy directions give only the vaguest guidelines on universal and affordable access.

Telkom itself has been commercialised and partially privatised. The foreign partners only have a minority share in the company. Yet, it has become clear that on key issues - including investment and employment - they have effective veto power.

As noted above, the company has also lost thousands of jobs. Downsizing seems largely an attempt to slim the company down for its IPO. In the past three years, Telkom has lost around a third of its labour force. The retrenched have mostly been unskilled African workers, many in rural areas where no other job opportunities exist. With unemployment already at record levels by world standards, the IPO is being bought at a high cost.

In short, privatisation in telecommunications has followed the classic path: worse services for the poor, high job losses, and improvements only for formal business and the rich.
For this reason, COSATU argues that new competition should be allowed only at the top end of the market, where the market would function efficiently to provide better services. The state, through Telkom, must take direct responsibility for achieving universal and affordable access.

Water
Water supply is one of the main areas facing privatisation at local government level. Examples from developing countries, including South Africa, show that water privatisation leads to higher prices and worse services, while the state still provides the investment finance.

South Africa faces particular challenges around water. Water provision in South Africa lags behind many middle-income developing countries. About 86 percent of South Africans have access to improved water, compared to 95 percent or more in Uruguay, Cost Rica and Malaysia.

Government policies generally say that regulations and contracts will compel private owners to meet social needs. Almost invariably, however, in the Third World private service providers renegotiate the developmental requirements after a year or two of their contracts.
This is exactly what has happened in the Dolphin Coast in KwaZulu-Natal. The municipality signed a contract with a foreign-owned water company, Siza, in 1999. Just a year later, Siza demanded renegotiation. It argued that it had a R12-million shortfall because demand for water was lower than expected. The contract provided for renegotiations if returns were above or below the expected rate.

Specifically, the renegotiations provided:

Siza's five-year investment will drop to R10-million from R25-million.
Clearly the company's need to maintain a particular rate of return has become the main consideration. Equity, meeting needs and ensuring access for all have taken a back seat.

Problems have also been experienced with the privatisation of water in Nelspruit. Its municipality signed a 30-year contract with Biwater. Since the

n, there has been little progress in meeting contractual obligations. Residents complain about high and confused billing, disconnections and leaks. It also turned out that Biwater did not have the funds to meet its promises on investment.

Eventually, it fell back on the public sector.
In November 2000, the Development Bank of South Africa announced it would loan R150-million to Biwater to carry out the investment programme.
All in all, both practical and theoretical analyses demonstrate the shortcomings of privatisation. Our actions in the next few months must ensure that South Africa adopts more sensible policies in the future.


We did not fight for liberation so we could sell everything we won to the highest bidder!
Privatised services won't serve the poor!
Make the economy create jobs - Stop privatisation!

All workers in Wits, Western Cape and Northern Province - join protests on 16 August
All workers in Mpumalanga, KwaZulu Natal, Eastern Cape, Northern Cape/Free State - join protests on 21 August
Mobilise and join the national stayaway - 29-30 August

Contact your regional office or COSATU local for details.

 

Don't we need to restructure the state? Isn't COSATU protecting its members' jobs at the cost of the broader public?

COSATU has always called for the transformation of the state. We inherited government structures designed to serve a minority and oppress the majority. We need new systems to extend quality services to black communities, establish participatory democracy in all spheres of government, and drive economic development.

Our quarrel is not with restructuring as such, but with privatisation - where government seems to think the only way to achieve change is to bring in the private sector.

Won't the strike harm South Africa by scaring off foreign capital, leading to a drop in the rand?

If government wants to stop the strike, it should start negotiating seriously.
More fundamentally, experience all over the world demonstrates that the only way to attract large sums of foreign capital is to bring about economic growth. And the countries that have succeeded have gone against the wisdom of the international bankers - countries like China and South Korea.

The measures government insists on to reassure foreign markets - including privatisation and budget cuts - undermine domestic investment and our economy as a whole. The only capital they can attract is short-term, portfolio investment in stocks and bonds. Those resources leave as fast as they come, causing economic havoc. For instance, foreign portfolio investment dropped from R80 billion in 1990 to R11 billion last year.

Selling off state assets may bring in foreign buyers, but it doesn't increase total investment. We need to find ways to build a robust economy on the basis of our own
resources and expertise. Only then can we expect foreign capital to accelerate growth. That is why COSATU demands sector job summits and other measures to build the economy.

Does the strike mean the Alliance is over?

The Alliance is like a marriage: every disagreement doesn't mean a divorce. Besides, the majority of ANC members support our position on privatisation.

But government says it consulted COSATU on its policy framework?

It's true the DPE consulted COSATU on its policy framework. Then it ignored virtually everything we said. For that reason, when the policy framework was published, we objected to it publicly. There are clearly many officials in government who think that bureaucrats in backrooms can make good policy. More listening and less talking would have given us a better policy on privatisation - and less conflict now.

The South African National Civic Organisation (SANCO) shall be joining the Congress of South African Trade Unions (COSATU) in their protest of the South African Government's plan to unilaterally restructure State assets, in particular that of the electricity sector, in Pretoria on a Thursday, the 16th of August.

We as SANCO maintain that the dangers of selling of state assets, especially those that are an essential service, in a developing country like South African far outstrip the meagre benefits of privatisation. For too long international capital has held a threatening stance that instructs our democratic state to liberate our markets, so that there can be international investment. However, with all the concessions that we as a country have undergone, we still await this investment. Recent examples even in the strongest of capitalist countries, like the United States, ha shown that one cannot privatise an essential service like electricity, the motive will always be regarded as prime as opposed to the provision of the service.

We maintain that government cannot abdicate its responsibility of providing the essential services and welfare to all South Africans, and therefore we as SANCO shall march in solidarity with the workers in our country against the privatisation of state assets and in support of the Freedom Charter and its aims and objectives!

For further information you are welcome to contact Donavan Williams on (011) 838 0303 or mobile telephone number 083 680 9599