Thursday, 29 May 2008

The effect of privatisation

When I did my MBA at Cranfield University (then called Cranfield Institute of Technology) in the UK in 1991/1992 I said that electricity and other infrastructure like railways should NEVER be privatised. And that competition should be allowed. No one listened to me. I was only 28 years old and privatisation was in fashion!

The reason that they should not be privatised is because private enterprise seeks to make a quick return and "knows" that if it leaves infrastructure alone, eventually the government will have no option but to renationalise those assets to pump in the required investment. Another reason is because of something called "externalities." This is where one person pays for someone else's travel. eg I go from London to Birmingham on the express. A small part of my ticket pays for a train to run on a line in the North West of England. I'm happy to pay that because one day I might need to use that line. This happened to me twice a year when I lived in England.

On the other hand, a privatised railway cuts the "inefficient line" and the losers are the commuters.

Another reason I don't like privatisation is because the public pay for the company in the first place, so the public own the industry/company. Then the industry/company gets sold to private investors who pay for it again, but often at a substantial discount to its real value because government tends to pay less than private enterprise (although this is changing) and because government "companies" tend not to make a profit - and those selling companies will tell you that profit is (usually) very important when you want to sell a company. Also when a company is renationalised, the public end up paying for it again. And sometimes costs are pushed up by 60%! Sound familiar. Even in South Africa, where the government owns 100% of Eskom, for the past decade, profits have been key to management thinking, so directors and senior management rather paid themselves big bonuses instead of investing in infrastructure. So now at a time when Eskom is being "renationalised" the directors keep their bonuses and huge salaries and the man in the street, you and I, pay for their mistakes and for new equipment.

Two years ago when we had our first load shedding, I did a comparison of South Africa's energy infrastructure compared with Israel's. We are told that a country needs a 15% power margin. Israel had that. But Israel had something even more important. 30% more manpower per megawatt. This costs money and reduces bonuses!!

In my ideal world, public transport and electricity would be free (at least for work related travel) and would approach 100% efficiency if possible. This would allow commuters and business to know that their staff will always be on time. 96% efficiency on the Northern Line when I lived there meant that about 10,000 people were late every day amounting to Billions of lost revenue for the Tax man and / or stress for the commuter costing the British government more in Health and hospital payments. Look how the health system has started crumbling since privatisation took place there.

In my ideal world, government would deregulate industries so that companies like Telkom and Eskom have competition, instead of being monopolies. Barriers to entry would be reduced and the only problem would be capital, not "laws" as well!! We really need this now as people like me put in solar panels and wind turbines and would love to supply energy to the grid, perhaps on a small scale. But perhaps I have enough money to pay for all the houses in my neighbourhood to have solar and wind power and therefore I can run a "power station." Laws should not prevent me from doing this.

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