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Cape Town – The South African government has a number of options to raise money for the fiscus and plug budget holes if it chooses to go the route of private sector participation, says emerging market economist Peter Attard Montalto of Japanese bank Nomura.
In recent weeks there has been increased talk of the sale of state assets in a bid to inject capital into specifically South African Airways (SAA) so that the cash-strapped national carrier can repay its loans.
“But we need to be clear what private sector participation actually is,” says Montalto. “With over 700 state-owned entities under inspection by National Treasury for greater private sector participation, there is a wide variety of potential outcomes, all anathema to those who oppose this.”
Options for private sector participation
Public sector participation, according to Montalto, could mean a number of things.:
It could come down to the outright sale of majority or total equity control to the private sector and strategic investors, which will amount to "real" privatisation. This could take place through a sale to the private sector and private equity or initial public offering (IPO) shareholdings by asset management.
“A complex relationship could develop if the government remains the single largest minority shareholder and the Public Investment Corporation (PIC) would also likely buy a significant stake perhaps giving a public sector majority,” Montalto says.
The “outright sale” could also include a sale to the PIC, which would amount to “fake” privatisation and would simply mean moving assets around the broader public sector balance sheet. “Issues of rent extraction and patronage would not necessarily shift,” he notes.
Private sector participation could also include minority stake sales with the likelihood of continued government control and influence. “In such an instance it would be harder for the private sector to influence or appoint management.”
In addition, it could amount to “outsourcing”, which could create more opportunities for rent extraction or black economic empowerment fronting.
Montalto notes that there are over 700 SOEs to “choose” from for greater private sector participation, which may seem like a lot on the surface. However, many of these are technically SOEs but are in reality more like licensing or research authorities, and would not normally be entities that could issue equities.
“The biggest SOEs are obviously the ones that could theoretically raise the most money for National Treasury, namely Eskom, Transnet, SAA, Denel, Alexkor, SABC and the South African Post Office and Sanral.”
These SOEs are however equally the hardest to privatise, given governance issues as well as particularly focused political and ideological sensitivity, and it is unlikely that government will sell equity in each of these entities.
“What Transnet has done, for instance, is to spin off branch rail lines to industry to own a form of privatisation, though we believe most such easy wins have been completed there now. SAA has been hunting for strategic partners for the past five years but with only theoretical interest given its management and political interference,” Montalto says.
Equity sales in Eskom itself are impossible in the short to medium term, but converting older power stations into joint venture entities with the private sector may be a more likely route.
Each of these "major" SOEs could see share sales to PIC as a "fake" form of privatisation, which would allow the status quo to continue, but real privatisation is problematic.
Easy wins
The only thing that exists as an “easy win” for private sector participation is the government’s 39.29% stake in Telkom, currently valued at around R13.4bn, Montalto says.
“However, there is still considerable reluctance in the ANC to remove this, both directly in terms of the ideological issues of ownership but also strategically as a potentially slippery slope to other future sales.”
Once the “low hanging Telkom fruit” is picked, government is likely to create private sector partnership through “transfers within” the state.
“We think a sale of some part of the Telkom stake is more likely to occur but with the PIC playing a large role. The PIC could transfer more allocation into lending into SOEs but it could also take equity ownership in Eskom (or a nuclear subsidiary with Rosatom) as part of nuclear procurement," Montalto says.
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