How not to privatise

IN MANY countries it remains a topic for hot debate: how big should the role of the state be in the economy? Put differently, should the state divest itself of monopolies like the post office, the railways, the national air carrier, etc, or is it better to keep them in state hands?

This is very relevant for South Africa, which is ruled by a political party which – rightly or wrongly – professes to be to the left of the political spectrum, and therefore is theoretically opposed to privatisation.

Whoever wants to make a study of the question can do no better than look at the Netherlands' experience with its railways system.

After 1945, the political left was continually on the attack, while centrist and conservative parties were forced to defend and react. However, after the Thatcher years in Britain (which were essentially continued by Labourite Tony Blair’s “Third Way”), a new type of thinking also blew over the North Sea to the Netherlands.

In 1994 a coalition of the economically right-wing liberals and traditionally leftist Labour Party took over the government in this country. Compared to the 1970s, parts of Labour made a sharp right-wing turn, and adopted privatisation almost as a holy grail.

Several state enterprises were privatised, including the railways. This meant, firstly, that the system was split in two: ProRail, which would take charge of the infrastructure – the rail system and stations – and the Nederlandse Spoorwegen (NS), which would utilise the rails as a client of ProRail and pay for the right to run trains on them.

There was also a second element. To a limited extent, other privately-owned companies would be allowed to run trains. This applied to the high-speed connections with Germany and France, while private companies were also given the right to run trains on some trajectories at the periphery of the country.

Political compromise without business sense

This was essentially a political compromise between the “new right” in the Labour Party and the liberals on the one hand, and Labour’s still powerful left wing, which was opposed to privatisation, on the other.

Like many political compromises, it made no business sense. It was a half-cocked privatisation.

Firstly, the NS remained the big guy in the railway business. Its “competitors” were given mere crumbs.

But there was more. When a separate high-speed rail from Amsterdam to Brussels was being planned, the NS officially had to put in a bid, like other companies, to exploit the trajectory. It bid much more than others and won the contract.

The problem was that this left rather little money to purchase the high-speed trains themselves. And therefore, the choice fell on the Italian manufacturer AnsaldoBreda, which had no experience in the matter and a very bad name in the manufacturing of trams and buses.

The NS leadership was repeatedly warned against the Italian company, but as AnsaldoBredas' bid was the cheapest, they were chosen.

The problems started early. The first trains already had to be delivered in 2006, but repeated hitches caused a delay till 2012.

Service a catastrophe

When the service started at last, it was a catastrophe. The trains’ computers crashed repeatedly, so that many trains were either cancelled or late. An uproar followed.

The cherry on the cake was when a plate underneath a train fell out on a day when the temperature was far below zero. It transpired that just about everything that could go wrong, did.

That was the final straw. The NS cancelled the contract and sent the trains back to Italy.

There is a lesson to be learnt here about privatisation. That lesson is not that privatisation per se is wrong, but that it should not become an ideology as such. And when it is done, it should be done properly, not half-cocked like in this case.

When you privatise, you should also keep certain things in mind.

Number one, you cannot privatise on a playing field which is not level. A truly free market demands honest conditions for competition. Don’t put the former state company in a commanding position vis-à-vis the newcomers.

Profit plus excellence in service

Secondly, never forget that profit should go hand in hand with excellence in service. A railway company’s main purpose in life is to provide an efficient transport service to move passengers and goods from point A to point B, something which is by the way essential for an expanding economy and growing prosperity among a country’s inhabitants.

And that, in turn, is good for social and economic stability.

In South Africa, we are governed by a party which identifies itself in public with socialist principles. In practice, it pursues a different direction.

In spite of public pronouncements, the main strategy appears to be the enrichment of a small elite, including those in government.

And therefore, it will privatise or nationalise to serve those interests, not those of the people at large.

The point is that, like what happened in the Netherlands in a different way, the South African government’s economic policy is directed by political considerations. Sound economic principles rarely come into it.

Is it a wonder that South Africa, which has so much potential, has still not really taken off after 1994?

* Leopold Scholtz is an independent political analyst who lives in Europe. Views expressed are his own.