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Mandela's Slow Motion Sell Off (Int'l Edition)


International -- Finance: PRIVATIZATION

MANDELA'S SLOW-MOTION SELL-OFF (int'l edition)

His challenge is to unload state behemoths and help make blacks an economic force

Just five years ago, Nelson Mandela's African National Congress chilled South Africa's private sector with talk of nationalization. Many of the ANC's leaders in exile, educated in communist-bloc or leftist Western institutions, believed that nationalizing South Africa's major industries would prove a powerful tool for bringing its core economy under the control of the black majority. They also agreed with the South African Communist Party that nationalization would help correct the great disparities of income and opportunity in white-run South Africa once the apartheid regime had been consigned to history.

Now that it's in charge, the ANC has changed its tune. In fact, since taking office, the Mandela government has been far more committed than its predecessors to liberalizing the economy by privatizing state-owned industries, lowering tariffs and subsidies, and promoting competition. Privatization is already under way (table). The government is offering equity stakes in the giant telephone company and the national airline to the private sector. Two smaller airlines and an auto transport network are up for outright sale.

Yet the Mandela government has not abandoned its ambitious social goals. It wants to keep the sale of state assets in the context of an overall economic restructuring that will help empower black business while improving efficiencies. So South Africa-style privatization is likely to be far slower, more complicated, and perhaps more innovative than programs in other countries. Each industry will have to be handled differently, says Ronald Roberts, a restructuring expert at Moseneke & Partners, South Africa's largest black-run corporate law firm. "Each [sale] won't see all the goals achieved."

JOB LOSS? Internal interests are already finding fault with aspects of the privatization program. Citing a pressing need for revenues to pay for the vast reconstruction required in the wake of apartheid, some observers are impatient with the lack of speed in selling assets while authorities tailor a privatization formula for each individual industry.

And unions, meanwhile, are worried about potential job loss as privatization goes forward. For example, Neil Morrison, general manager at Rand Merchant Bank in Johannesburg, says that despite heavy layoffs during the 1980s, Telkom still has five times more employees than foreign competitors of similar size. The potential for a further rise in South Africa's high black unemployment rate has caused the Congress of South African Trade Unions, one of the ANC's staunchest allies during the anti-apartheid struggle, to protest against recent announcements of state asset sales and even stage brief strikes.

But the criticism is unlikely to halt the privatization momentum, which has lately picked up steam. On Dec. 6, the government announced that it was pulling the plug on the state-owned synthetic-fuel producers the apartheid regime had built in case a disapproving world cut oil supplies. Mossgas, an oil-from-gas plant that is running out of reserves, will be offered for sale. In addition, last year's $305 million subsidy to oil company Sasol Ltd., which still receives "tariff protections" even though privatized in 1979, will be halved in 1996 and eliminated by 2000.

Then, First Deputy President Thabo Mbeki announced that a minority equity share, expected to be 15% to 20%, would be offered in Telkom, with the goal of attracting foreign capital and knowhow. Last year, when the government opened bidding on a contract to build 1 million new telephone lines with Telkom, it attracted 22 bidders, who clearly believe that expanding service to South Africa's poor may ultimately prove profitable. A partner could be announced as soon as February.

NOW BOARDING. Also seeking a capital injection through a minority shareholder is South African Airways. The carrier expects to benefit from a tourism- and business-travel boom as the country returns to the global fold. It already has marketing and reservation alliances with Lufthansa and American Airlines Inc.

Early indications are that there's plenty of interest among foreign investors--especially in these plum businesses. But few deals have yet been tested in the market, and investors may eventually insist on more conventional sell-offs that guarantee them higher returns.

Transforming inefficient state-owned behemoths into profitable private-sector companies is never easy--witness the former communist nations of Central and Eastern Europe. But in Africa, the history behind state ownership gives the process more ideological cross-currents. Many African states used nationalization to help shake off colonial control, and communist governments in particular believed it would protect workers.

In South Africa, the white-minority regime used the public sector to fortify itself against international economic censure with a produce-it-at-home strategy. This boosted employment. But because hiring practices were racist, only the lowest-level jobs went to blacks. For the most part, the state-owned companies are dominated by Afrikaners, the white descendants of the first Dutch settlers who became the stalwarts of the ruling National Party. Nevertheless, black workers at such companies, now largely protected by the 1.6 million-member COSATU, enjoy somewhat higher pay and greater job security than nonunion employees. These unionized workers are most likely to suffer from privatization, labor leaders say.

Such conflicts explain why the government is treading so gingerly and taking one industry at a time. "We have to avoid cookbook solutions," says Ronald Roberts, a restructuring expert at Moseneke & Partners. So the government is trying to devise privatization techniques that have not been seen in privatization programs elsewhere.

In Telkom's case, for example, Roberts says "a phone is more empowering than a share." So a strategic equity partner that speeds up service to poor blacks makes more sense than a public share auction of the entire company. On the other hand, Aventura, the state-run resort company, is small enough for a possible targeted sale to a black entrepreneur, or for a joint venture between a white backer and black management.

Eskom, the highly efficient electricity supplier, is a strategic asset that might well stay in state hands but could encourage small, black-run businesses among its subcontractors. In other cases, shares distributed to poor people after a mass education program could provide collateral for home or education loans.

Granting more government contracts to small business could play a substantial role in bringing blacks into the economic mainstream. "Look at how much contracting the government does. If black business could get even 20% of that a year, that would be real empowerment," says Loren Braithwaite, a lawyer with Msele Corporate & Merchant Bank, the country's first black merchant bank. Msele is part of a group bidding for a $2.8 million privatization-consulting contract the government is about to award.

Another version of privatization under Mandela would be land reform, designed to return property seized under the apartheid regime. State-owned land could become restitution for black property owners forcibly removed from "whites-only areas." Plans already call for turning some areas over to black farmers.

Given the vastness of South Africa's public sector, this is where government can have the most impact in correcting the economic imbalances that are apartheid's legacy. Government expenditure was 20% of gross domestic product in 1994, and there are 1.2 million public employees in a country of 40 million people. Yet balancing social goals with a commitment to opening the economy will require great care. What won't do, says Braithwaite, is "taking companies owned by everybody and putting them in the hands of a few, even if those hands are black." The ANC's approach is aimed at avoiding that mistake--while permanently disabling a former apartheid tool.By Drusilla Menaker in JohannesburgReturn to top


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