Alec Erwin, Minister of Public Enterprises
There is no economic theory of any note that does not incorporate the concepts of public and private goods . Even at its height, neoclassical economics acknowledged that certain production processes and therefore products exhibited externalities.
Public Goods
Historically, from a more practical point of view, the largest category of public goods have been those with large externality effects – transport, telecommunications, roads, sewerage and water systems, health care and education – where market conditions would lead to under-investment if the private sector were to be the sole providers .
An externality is a value addition or destruction emanating from the production or consumption of the product that producers cannot really recover or allow for in the price of the product produced . Road users add value in a host of different ways but how would we charge each user for that value? An educated person will add value to many other enterprises that would be very difficult to capture in the price you charge for the person’s education.
The real benefit is to the overall economy and society , in fact the activity is elemental to the functioning of that society and economy – hence the reason it is essentially a public good . These forms of public good tend to serve economies over long periods. As the volume of usage of the service or infrastructure rises it becomes easier to exact user charges that will not impact adversely on the economy thereby creating a revenue stream .
Rate of return not high
This income stream is steady and reliable because the asset is so central to the economy but the rate of return is not high . In general such long time horisons are not attractive to the private sector in a capitalist system because the capital market prefers shorter payback periods . For these reasons it has been the state that has stepped in with systems of taxation to provide these public goods . The provision of public goods has been an essential part of state formation and, indeed, of civilisation as it is the basis for social and economic development. So important changes in the overall political economy had to occur before the private sector became interested in these long-term revenue flows and before the state saw it fit to allow the private sector into these essentially public goods .
On the value destruction side the examples of the wider environmental, economic and social impact of excessive destruction of natural forest or drug production or pollutant by-products are in the same category in that they force, in responsible societies, a public intervention.
What were the key changes in the political economy ?
As capitalism developed, the quantum of investment funds grew and new investment needs arose . New societal needs and expectations arose. The introduction of mass pension systems meant that these funds needed long term and stable income sources, as did large insurance companies . The size of enterprises grew and multinational corporations developed massive surpluses that had to be invested under pressure of the harsh laws of accumulation and profitability enforced by capital markets . These factors lengthened the investment time horisons and the private sector began to move toward an interest in investing in public goods. This was and is not some newfound altruism and public spirit. It is hardnosed commercial pressure . This happened as the state began to experience systemic problems in taxation and the operation of the public sector that impelled it toward finding new ways of funding, managing state enterprises and the public sector .
There will be those who point to the railroads in the United States (US) and much infrastructure construction in Africa where the private sector was involved. But this illustrates a very important tension between the public and private sectors. If the private sector sees an economic opportunity it will seize it and if it can capture the value addition for itself it will build the requisite infrastructure . However, in the above two examples a profound misunderstanding will arise if we ignore the fact that the state’s role was to provide the cavalry, army and gunship to seize the economic assets for appropriation by the private sector. If the private sector had to negotiate with the people that owned the assets at the time and provide them with the benefits of the infrastructure then the private sector would not have built that infrastructure . History and ideology may sometimes conflate the rapaciousness of imperialism with the benefits of market economies but intellectual honesty and sound economic policy in a democracy cannot.
What is the tension?
It is that the private sector is inexorably impelled toward appropriating value for itself – that is why it is a private sector and that is why it is imbued with a feverish and oft times self-consuming dynamism. This has a number of effects when the private sector gets onto the terrain of public goods. They will tend to ‘cherry pick’ i.e. seek out the most profitable opportunities, maximise the rate of return, avoid externality type costs and seek to shorten the payback period – all sensible commercial practice for a private corporation. However, this can create many public problems. It can mean that the overall infrastructure or delivery system can be weak and badly integrated or that important communities are under serviced or poorer persons are impoverished further because the cost of necessities is rising. The fragmentation of the US rail system, the pricing problems of the United Kingdom water system or their safety problems in rail are an example of this tension at work.
Public-private Partnerships
Accordingly economic imperatives drove governments and the private sector, each for their own reasons, into seeking partnerships but in turn the success of such a partnership required new conceptions of regulation to manage the partnership . This is essentially a deal between public and private that tries to ensure that public objectives are met and that the role of the private sector is beneficial and not a ‘cherry picking’ operation. It should be stressed that this cannot be conflated with competition law, which relates to market structure and market practices. The regulation we are talking of here is a complex system that really attempts to establish and then monitor a very detailed compact between two different financing and operational systems – public and private . Experience and operational efficacy in regulation is an evolving art and an art we are new to in South Africa . The interrelationship between regulation and competition law is an important area, which we do not have the time to canvas here.
It is important to understand why states in the developed capitalist economies began to seek out this growing appetite for long-term investment on the part of the private sector. There are a number of reasons for this and time prohibits their full exploration now. However, as incomes rose and expenditure and investment patterns changed the burden of public financing grew and the choices wealthier citizens wanted became more diverse and particular.
Rigid public sector
The public sector, in its then form, placed too much burden on the state budget and the public sector was not responsive enough to changing demand patterns in the economy – it was rigid and bureaucratic in the face of these challenges. Ways had to be found to inject new dynamism into the provision of public goods and reduce the fiscal burden. Some radical governments such as those of Margaret Thatcher and the late Ronald Reagan, fired up by hungry private sector interests, commenced a fire sale. Others such as the Scandinavians moved more systemically and sensibly as the process was led from the left and not the right. Soon perestroika emerged in the Soviet Bloc that explored the problematic within the context of planned economies with major political economy effects. However, either way the lessons of the need for regulation were learnt and new systems evolved.
In the ANC’s Department of Economic Policy, we studied and debated these developments carefully and after much debate the basic approach – although not the operational experience – was captured in paragraph 4.2.5 of the RDP in the following way :
4.2.5. In restructuring the public sector to carry out national goals, the balance of evidence will guide the decision for or against various economic policy measures. The democratic government must therefore consider:
4.2.5.1. increasing the public sector in strategic areas through, for example, nationalisation, purchasing a shareholding in companies, establishing new public corporations or joint ventures with the private sector, and
4.2.5.2. reducing the public sector in certain areas in ways that enhance efficiency, advance affirmative action and empower the historically disadvantaged, while ensuring the protection of both consumers and the rights and employment of workers.
I hope it is evident from this brief theoretical detour that the simple notion that the private sector is more efficient and that the state should leave everything to it, is fundamentally flawed in terms of theory, policy and citizen welfare . The distinct problematic of the efficiency and dynamism of the public sector is facilitated by the correct macroeconomic framework, the corporate structures and the managerial practices within state-owned enterprises. This is true when we look at the overall efficiency of the private sector as well. Given the different economic location of the enterprises there are important corporate and managerial differences between public and private enterprises. The managerial science of the public sector and the private sector has a great deal in common but they are not identical.
What can be distilled from this review of the situation is that all states are increasingly confronted by the need to create a new relationship between the public and private sectors of their economy. This is driven by opportunities for financing, technology and human capital partnerships between the state and the private sector. These opportunities emanate both from the investment calculus in world capital markets and the need for a new dynamism in highly developed public sectors. However, the partnerships have to be located within sophisticated, adaptive and administratively strong regulatory systems.
This is an extract from Minister of Public Enterprises, Alec Erwin’s, Budget Vote Speech, June 14 2004