Thursday, March 27, 2014

Ownership and empowerment.

The fallacy of seeing the two as synonymous.

In the days when our pet dogs were allowed to run free, there was that comic scene where a fox terrier is chasing a bus and someone asks what the little rascal would do with the vehicle once it had caught it.

It’s an appropriate analogy in response to President Zuma’s latest push for broader black ownership after the election and for those populists who seem to think that owning the means of production is a panacea to eliminating poverty and wealth disparities. It reflects a dismal ignorance of history and is an extremely reckless political ploy. So far, efforts to change the ethnic base of private ownership have done little to eliminate wealth disparities – indeed they have made them worse.

Conversely, those that scoff at the red berets and their antics may just be misjudging the level of envy and resentment that already exists and the extent to which these emotions are fuelled further by rhetoric. There is already a dangerous emotional overload in the current elections.

But then, one has to concede that the soil for such ferment has been fertilised no end by misconceptions on both “sides”. This goes much deeper and is more powerful than the reality of the politically loaded slogans of “unemployment, poverty and inequality”.

The power of ownership is firmly cemented as an absolute in all mainstay political theory. Ownership, it is automatically assumed, gives one ultimate control. The question then is simply who should own. At one extreme political ideologists argue that it should all be in the hands of private sector, and on the other that it should all be in the hands of the state. It’s only when one gives a human face to these institutional concepts that severe practical flaws in the theory become evident: who is the private sector and who is the state? Of course, the belief that ownership gives one ultimate control is a myth. It not only comes with demanding responsibilities, but also with social constraints, rules and regulations. And as private companies soon discover, ultimate control lies in the hands of their users or customers and not shareholders.

But the most important question of all is why do they own? There can only be two answers: for self-gain or for service to others: for survival or empathy.

I have already argued extensively for greater recognition of the inherent and implied service motive or the empathy base in the private sector. We have done this sector no favours by putting virtually exclusive emphasis on the profit motive as some kind of golden calf. At the same time, I have always defended profit as an essential tool in enhancing efficient use of resources particularly capital, and ensuring competition, and freedom of choice. Profit maximisation is a different thing altogether, and often leads to market failures that give an excuse for state intervention.

Even market orientated economies recognise the need for state intervention “when markets fail`”. This is clearly open to wide interpretation and will forever be a subject of debate and opportunistic agitation including political power play. State involvement through direct or part ownership is generally justified when government alone has the necessary resources to provide essential services. Add BEE into the mix and you have a toxic contaminant.

State owned enterprises exist throughout the world, including highly developed Western economies, and some are just as productive and efficient as their privately owned counterparts. They are mainly to be found in infra-structural sectors such as transport, communications, energy, and health care.

South Africa’s biggest and most influential SOEs are in energy (Eskom), Telecommunications (Telkom), Broadcasting (SABC), and transport (Transnet; SAA, and Sanral.)

After the wave of privatisations worldwide from the 70’s, continuing today in many previously communist regimes, these enterprises also largely adopted “commercial” practices, giving due recognition to the need to generate earnings and not rely on taxpayer funding. This is the perfect example of the vital role of profit, not as an end in itself (which would be unacceptable given their largely protected monopoly status) but to ensure maximum efficiencies and productivity.

On the surface, then, SOEs should perform as well and as efficiently as their privately owned counterparts: servicing their markets through the best use of resources. Yet they don’t, particularly in South Africa. It may be a sweeping generalisation, but few would disagree that they are among the worst performing businesses in the country. It was ironic that a mere few weeks ago, we faced forced power outages. My pet peeve at present is with Telkom, whose large promise, and exasperating, dysfunctional call centre has left me involuntarily twitching my ears.

So much has been written about their failures that it would be superfluous to go over them again. Of course, everyone has a view on the cause. Perhaps in part it is their “commercialisation” which has made them adopt many of the bad behaviours of their survival peers in the private sector, including outrageous levels of executive pay and marginalisation of labour. But paradoxically it has not prevented many of them from being on the edge of insolvency.

Without the profitability mandate being met, one would at least have expected their service mandate to be impressive. But it is the worst. Then one can only hold the owner, the government, accountable. If a state owned enterprise fails in profitability and above all in service, the motive behind and validity of government ownership becomes highly questionable.

Yet, the populists want more.

While nationalisation, particularly of mining, may be a dead subject to the elite, it is very much alive in populist politics. In order to underscore its stupidity even to those who want ownership, I extrapolated a contribution account, reflecting wealth creation and distribution for the industry as a whole.


As the graphic shows, nationalisation of mining will bring the state only the 8% from dividends (5). It cannot escape supply costs (1) and capital expenditure (2) which is the lifeblood of mine survival. It most likely will succumb to labour pressure which will increase the employee share, obscuring efficiencies and ultimately forcing taxpayers to sustain operations.

Nationalisation may nearly double the government’s revenue from mining but in return it has to manage the mine, run all the risks associated with mining, and use taxpayer’s money for development. The latter demands high risk private capital and not what would be tantamount to reckless use of taxpayers’ money

As they say: “Be careful what you wish for. You may just get it!”

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