1. BCom Honours Financial Analysis & Portfolio Management Long Essay
Innovative Privatisation
A Possible Solution to Government Debt
Z. Christiaan Charimari CHRZVI002
12-22-2014
Supervisor: Gary van Vuuren
ABSTRACT: This long essay examines public debt and its detrimental impact on the
economy if left to rise beyond unsustainable levels relative to the gross domestic product. As
a result of the 2008/9 financial crisis, emerging market governments have been operating on a
significantly leveraged fiscal budget mostly as a result of the fiscal stimulus packages.
Subsequently, there are limited public funds that can be allocated to developing important
socioeconomic aspects of each nation. However, with privatisation government can improve
public finance health and the economy will improve as a result of enhanced allocative and
productive efficiency. This essay explores the various arguments for and against privatisation
and uses the robust literature to encourage the use of privatisation as a viable solution to
government debt.
KEY WORDS: Privatisation, Government debt, Private sector, Public sector

2. Plagiarism Declaration
1. I know that plagiarism is wrong. Plagiarism is to use another’s work and pretend that it is
one’s own.
2. I have used the Harvard convention for citation and referencing. Each contribution to, and
quotation in, this long essay from the works of other people has been attributed, and has been
cited and referenced.
3. This long essay is my own work.
4. I have not allowed, and will not allow, anyone to copy my work with the intention of passing
it off as his or her own work.
Signature ______________________________CHRZVI002

3. "In every great monarchy… the sale of the crown lands would produce a very large
sum of money which, if applied to the payments of the public debts, would deliver from
mortgage a much greater revenue than any which those lands have ever afforded to the
crown…When the crown lands had become private property, they would, in the course of a
few years, become well improved and well cultivated" (Smith, 1776, p. 824).

4. Contents
Introduction..................................................................................................................................................1
Literature Review.........................................................................................................................................3
Public debt ................................................................................................................................................3
Privatisation ..............................................................................................................................................5
Data & Methodology....................................................................................................................................8
South African Government Debt .................................................................................................................9
Addressing Government Liabilities............................................................................................................15
The Theory of Privatisation........................................................................................................................17
Proposed Arrangement..............................................................................................................................19
Outline ....................................................................................................................................................19
Regulations & Mandates.........................................................................................................................20
1. Equitable distribution .................................................................................................................21
2. The formation of cartels is prohibited........................................................................................21
3. Growth & stability.......................................................................................................................21
4. Transparency...............................................................................................................................21
5. Output.........................................................................................................................................22
6. Communal Support.....................................................................................................................22
7. Environmentally Friendly............................................................................................................22
8. State Approved Inputs ................................................................................................................22
Results.....................................................................................................................................................22
Implications.............................................................................................................................................23
Opposition..................................................................................................................................................25
Conclusion ..................................................................................................................................................26
References..................................................................................................................................................27

5. List of Tables And Figures
Table 1: Total National Government Debt (National Treasury, 2014)....................................................13
Table 2: State Owned Enterprises to be privatised. ...............................................................................19
Table 3: Impact on Government Debt. ...................................................................................................22
Table 4: Returns on Investment during 2013 – 2014 period..................................................................23
Figure 1: Countries gross government debt as a percentage of GDP, 2013.............................................4
Figure 2: Unemployment & Gini Coefficient (International Monetary Fund, 2013) ................................9
Figure 3: Emerging Market Public Debt..................................................................................................10
Figure 4: SA Public Debt Historic Timeline..............................................................................................11
Figure 5: Evolution of Public Finances (National Treasury, 2014) ..........................................................12

6. A.M.D.G
1
Introduction
The study of economics recognises two important influences that play pivotal roles in a nation’s
economy; the market i.e. private sector, and the government i.e. the public sector. The strength
with which one sector influences the economy depends on whether scarce resources are allocated
under a command, mixed or free market economy. A command economy lies on one extreme
end of the scale where the government or a central authority (usually appointed by the
government) controls the allocation of inputs into a production process, and also controls the
distribution of the resultant outputs. This is inefficient as the authorities are not able to calculate
accurately enough the quantity of inputs required to produce enough output for consumption
without overshooting or undershooting demand. On the other end of the scale lies a free market
economy where there is no regulation or control by the government and the private sector
allocates inputs and distributes output according to the demand of the consumers. To a greater
extent this is optimal as there is a small probability that deficit or excess output will be produced.
However, maximising efficiency is not synonymous with maximising national welfare and is
thus the main weakness of leaving the private sector to run the economy. In the middle of the
scale, but somewhat closer to the free market end, lies the mixed economy comprising mostly of
private sector catering for consumption demand coupled with public sector intervention that
includes regulation and provision of welfare and public goods.
The composition of the public sector varies from country to country however the main objective
is to provide welfare and public goods that are inadequately catered for by the private sector. If
these welfare goods were left to the private sector they would either be underprovided or too
expensive. As a result we see that most utility firms (especially water, electricity & sanitation)
and basic welfare goods (street lighting, sidewalks, education, and health) are government
owned. Besides catering for welfare and utility goods governments may deem it necessary to
enter into the private sector and compete in transport, finance and agriculture to name a few.
Public firms are collectively known as state owned enterprises (SOE).
For the government to fund their SOEs they rely on tax revenue, printing currency and public
debt. However relying on the last two sources of funding can be detrimental to the entire
economy. Additionally, SOEs are not the sole beneficiaries of the funding raised via debt as
other government expenditures arise in pursuit of economic and political goals. Typically
government debt arises due to decreased tax revenue, increased unemployment (loss of tax
revenue and increased unemployment benefits expenditure), war, and increased government
expenditure (to address welfare concerns and to stimulate growth). As public debt rises the
burden will begin to weigh down on tax payers, society at large and the overall economy. It is
therefore important to understand the levels of debt that will inhibit an economy to achieve target
growth rates and address welfare issues.
An interesting article in The Economist (2014) discussed how under-utilised state assets can be
sold to raise cash. However, it is not wise to simply transfer ownership of some strategic assets
from public to private sector as cases of monopolies and deadweight welfare losses may arise.
This is the main argument against privatisation and the reason why there has been a slowdown of
this phenomenon in developing economies. To a certain extent public assets that can be better
utilised in the private sector signal inefficiency and add on to the reasons why developing
markets are not competitive in the global economy. Vast amounts of resources and human capital

7. 2
lie dormant in African economies but can be effectively utilised under private sector
management and supportive government regulation.
Focusing on South Africa (SA) this long essay will discuss the negative impacts of public debt
and the benefits of lowering debt. Thereafter, the paper will look at sustainable measures,
particularly privatisation, that can lower SA’s fiscal deficit and perhaps couple this with an
investment strategy that will increase government revenue.
Firstly, a literature review shall unveil what scholars and institutions have written on public debt
and privatisation. This shall be followed by a brief section on the data used and methodologies
employed before going into the main body of the paper.

8. 3
Literature Review
Public debt
Public debt arises when the government spends more than it earns. More precisely public debt is
the total outstanding state financial liabilities that create the “primary legal responsibility to
repay the original amount borrowed and to pay interest” (Black, et al., 2012, p. 324). Barro
(1979) via the consumption theory (also referred to as the “tax smoothing” model), suggested
that government debt is a result of economic contractions during a time when government
imposes a constant tax rate against a constant rate of public spending. The slump in economic
growth reduces tax revenues leading to public revenue falling below public spending. However,
in their survey of the literature on government fiscal budgets, Alberto Alesina and Roberto
Perotti (1995) argued that public debt rises to levels too high to be explained by tax smoothing
models alone.
As an economy grows so does the public expenditure as the state provides welfare goods and
services to the growing population. As a result, over the years the composition of public
expenditure has transformed and expanded significantly as the government endeavours to keep
up with the growing and evolving socioeconomic needs of a developing nation (Alesina &
Perotti, 1996). Subsequently, it may be that the rate of transformation and expansion of state
spending is greater than the growth of state income resulting in an upward trending debt-to-gross
domestic product ratio (debt-GDP ratio). For instance in 1970 the average debt-GDP ratio of all
member nations of the Organisation for Economic Co-operation and Development (OECD) was
40.5% and 1990 this figure rose to 58.1%. In 2007 the OECD average debt-GDP ratio was sitting
at 74.2% and the financial crisis of 2008 pushed this ratio up to 108.7% (Kirchgassner, 2013).
The graph on the next page (Figure 1) ranks the gross public debt of 19 advanced and emerging
countries at the end of 2013 from highest to lowest. Advanced economies, hit hardest by the low
growth and large financial bailouts of the financial crisis, show the highest leverage with Japan
showing the highest debt-GDP ratio of almost 250%.
Not all schools of thought view public debt as being detrimental. Traditional theory supposes
that public debt is sustainable and beneficial if its growth rate is maintained below the GDP
growth rate. Keynesian economists encouraged the increase of debt financed spending during
times of high unemployment according to their countercyclical fiscal approach to economic
booms and busts. However, this increases the risk of inflation as the recovery may push the
aggregate demand beyond the full employment equilibrium. In fact the high inflation, high
unemployment period in the early 70s weakened the Keynesian economists’ consensus on the
“beneficial” impact of increased public debt financed expenditure on employment (Black, et al.,
2012).

9. 4
Figure 1: Countries gross government debt as a percentage of GDP, 2013
Gebhard Kirchgassner (2013) succinctly justified public debt in relation to the short, medium
and long term outlook. In the short term a public deficit is necessary to fund current expenditures
which cannot be matched by existing government revenue as public spending is more consistent
relative to the fluctuations in public revenue. In the medium term Kirchgassner (2013) takes a
Keynesian view where he deems public debt necessary so as to decrease the amplitude of the
business cycles. This anti-cyclical approach is aimed at maintaining a consistent and sustainable
aggregate consumption and investment expenditure thus ensuring a stable growth trajectory. In
fact, during economic crises larger deficits become acceptable but only as long as measures are
installed to ensure the relative success of the increased public spending strategy. The author also
emphasised the importance of maintaining a balanced budget in the medium term so as to avoid
growing public debt at a rate faster than the growth of nominal GDP. Lastly, in the long term
public debt is required to fund huge infrastructural projects where the current central
government, local government or public enterprise budget lack the capacity to do so.
Kirchgassner (2013) goes on further to highlight the importance of the state providing risk free
assets to the financial markets in the form of sovereign bonds. However, this should not be used
as a reason for government to incur additional debt over and above that necessary in the short,
medium and long run but should in fact be synchronised with state strategies so the sovereign
bonds issued are the ones funding the medium to long run state expenditures.
Existing theories have similar views on the consequences of public debt. For instance
monetarists and neoclassical economists believe a fiscal budget deficit caused by increased debt-

10. 5
financed state spending will lead to the crowding out of private investment which will dampen
economic growth. Monetarists see the mechanics of this phenomenon occurring via the increase
in aggregate demand due to larger government spending. This causes household income to
increase which in turn results in a greater demand for money. Monetarist assume that the supply
of money will not change in real terms, creating excess demand for money ultimately pushing up
interest rates. Higher interest rates dampen investment growth as loans for capital investment
become expensive. The neoclassical school of thought sees the crowding-out phenomenon
occurring when the public sector overwhelms the private sector in the competition for funding
and input resources (Black, et al., 2012). However, this is only one side of the coin as public
spending may actually lead to the crowding in of private investment. Public expenditure may
help establish infrastructure which private investors can use in their respective ventures thus
decreasing costs. Additionally, public expenditure may require the services and products of the
private sector which attracts investment as a result (Sundararajan & Thakur, 1980). Furthermore,
contrary to the monetarists view, the subsequent rise in interest rates may make investment
returns greater than investment cost as the private sector can utilise capital reserves to invest in
interest earning capital instead of taking out loans.
Privatisation
Privatisation refers to the transfer of function and ownership of the production of goods and
services from the government to the private sector. Privatisation is a term that was popularised in
the late 70s and early 80s and broadly relates to five main targets:
 the improvement of allocative & productive efficiency via competitive markets and stronger
incentives for managers,
 the enhancement of government fiscal budget via the reduction of government expenditure
and proceeds from sale of public assets
 the improvement of fiscal space enabling funds to be allocated to crucial welfare sectors
provided for by government
 the promotion of market deregulation, and
 driving capital market development, upscaling the level of share ownership (Mohan, 2002).
Amongst the supporters of privatisation there are scholars who believe that competition is the
important result of denationalisation as it improves market efficiency. However, this notion has
attracted contenders who argue that instead of privatising public firms the focus should be on
removing any limiting market regulations without changing public firm ownership. Eytan
Sheshinksi and Luis Lopez-Calva (1999) agree that competition increases efficiency but
highlight the fact that deregulation alone is not enough to foster its development and
sustainability. The existence of a SOE in a particular sector may create a market barrier for
potential competitors who want to enter even after relaxing market regulations. For instance
SOEs usually have supply-side economies of scale that force potential competitors to either enter
the market on a large enough scale so as to supress the fixed cost per unit of output or incur huge
sunk costs. Also as incumbents SOEs have preferential access to inputs, favourable physical
location and financial backing from the state which are all advantages unavailable to potential
entrants thus inhibiting the formation of a competitive market (Porter, 2008). Additionally,
natural monopoly conditions make it difficult to establish a sustainable and competitive market
using only deregulation, however complementing the accommodative regulatory approach with
privatisation favours the conditions necessary for a competitive environment (Sheshinski &
Lopez-Calva, 1999).

11. 6
Neo-classical theory suggests that in times of market failure public control may surpass private
control in fulfilling socioeconomic goals especially when no taxes, subsidies or regulation can
rectify the sub-optimal market. This is opposed by public choice theory and the property rights
school of thought. Public choice theory highlights that due to the numerous (and sometimes
conflicting) state objectives, SOE outcomes are sub-optimal as the focus on the core operational
objectives becomes blurred. The property rights school of thought argues that the SOEs suffer
from severe agency problems because the bureaucrats assigned to monitor the SOE do not own a
stake in the business and thus are unlikely to implement effective and enforceable monitoring
strategies. The lack of monitoring will result in managers performing sub-optimally
consequently reducing the entire entity’s level of efficiency. Additionally, government
ownership eliminates the chance of a takeover from a rival firm and the public entity is virtually
free from bankruptcy, further increasing the levels of complacency (Mohan, 2002).
Not all scholars are convinced about the ability of privatisation to improve welfare and
efficiency. For instance it would be extremely challenging for regulations or incentives to guide
denationalised entities on the path of sustainable risk, equitable welfare distribution or socially
integrated education. This is known as the Sappington-Stiglitz theorem (1987) which shows that
the success of welfare objectives occurs under restrictive conditions, far from the real market
conditions.
One of the recurring challenges facing literature on privatisation is the consistency of empirical
evidence that supports the theory. Case studies carried out after the divesture of public entities
confirm that external factors other than those found in theory play a huge role in influencing the
welfare and economic outcome. For instance following the privatisation that occurred in the UK
under Margaret Thatcher’s regime, Matthew Bishop and John Kay (1989) did a case study where
they analysed the performance of denationalised vehicle, energy, telecommunications and
transport entities relative to the performance of publicly owned postal, minerals and rail
companies. Over the course of their study the authors found that the performances of both public
and private entities improved, citing the threat of further denationalisation and the prevailing
business cycle at the time as the reason for the results.
Ahmed Galal, Leroy Jones, Pankaj Tandon and Ingo Vogelsang (1994) conducted a case study
of 12 denationalised firms that operate within telecommunications, aviation, transportation,
shipping and energy sectors in Mexico, UK, Malaysia and Chile. This ground-breaking study
was the first empirical analysis that measured the effects of privatisation on the five main
stakeholders involved (consumers, sellers, buyers, competitors and workers). Their goal was to
investigate the net change in welfare as a result of privatisation and they concluded that the
overall effect on welfare is undeniably positive. 11 of the 12 denationalised entities they studied
showed improvements in consumer, labour and competitor welfare as well as higher company
profits. A significant part of the success of privatisation in this study can be attributed to
idiosyncratic national factors and thus these ventures cannot be copied and pasted onto other
economies. Rather, the results provide legislators with evidence of what leads to success or
failure which is important in constructing policy recommendations.
In some cases the differentiation between public and private entities may be blurred. Stephen
Martin and David Parker (1997) put forward the notion that private and public sector companies
are more alike in behaviour and performance than they are different. They contended that
government influences operations and objectives of all types of firms in a collective manner.

12. 7
This is done via regulations, incentives and other legal obligations and restrictions.
Consequently, they are implying that no firm can completely escape government control and
supporters of privatisation should not only point to government control as the reason why SOE
underperform. The authors go on to challenge the proposed SOE weakness that the managers
incentives are not strong enough to motivate them to perform optimally. They contend that it is
possible that some SOE managers are noble and motivated enough to put the interests of the
market they are serving before their own.
The privatisation apologists believe strongly that the shift of assets from public to private control
will improve operational performance. However, Mohan (2002) argued that there is no
compelling empirical evidence or economic theory that backs this notion and that privatisation in
less developed nations will not increase efficiency due to the lack of law enforcement and
corporate governance. Fortunately, as an emerging market SA has managed to establish resilient
corporate governance principles in the form of King III. Good governance relates to a self-
regulating entity that monitors how closely it is complying with ethical and legal standards. Self-
regulation removes the state burden imposing external enforcement and reduces the cost of
monitoring and enforcing legal and ethical standards (PricewaterhouseCoopers, 2010).
Moreover, using the case studies to discover what works and what does not this paper will be
able to present a compelling argument for an innovative privatisation method that seeks to
address SA government debt sustainably without cutting off the public revenue stream from
SOEs.

13. 8
Data & Methodology
The focus of this paper is not to accurately forecast the empirical gains earned by government.
Rather this paper seeks to show the potential impact on government debt and the fiscal budget as
a result of privatisation. Subsequently, the assumptions made and methodologies adopted seek to
simplify the empirical aspect of the analysis so as to avoid eclipsing the principal purpose.
The potential SOEs to privatise were selected on the basis that they publish integrated financial
reports which is important as it allows for an audited valuation of each firm. Additionally the
entities’ business models had to be viable in a private sector setting which will allow for the
continued operation of the firm after denationalisation.
Under the Proposed Arrangement section the total asset and equity values used were taken from
the 2013 and 2014 annual financial statements of the individual SOEs. The first assumption
made is that the net asset value of each firm represents the potential monetary value government
can receive for the sale of the firm. Therefore the share value of each firm equals to the equity
value divided by the total number of shares. The number of shares were decided in the following
manner: if the equity value is less than ZAR500,000,000 authorise 100,000,000 shares; if the
equity value is greater than ZAR500,000,000 authorise 1,000,000,000 shares.
Secondly, the earnings per share (EPS) figures in table 3 are equal to the total comprehensive
income attributable to shareholders, stated in the corresponding income statement of each SOE,
divided by the respective total number of shares.
The nominal debt and GDP figures were taken from the 2014 Budget Review presented by the
National Treasury of SA. Unlike the total public debt, the nominal GDP figure was not explicitly
given and was assumed to be equal to total net loan debt divided by debt-GDP ratio.
The dividend pay-out ratio (DPR) was determined according to the potential dividend decisions
the board of directors can agree on. Each DPR figure represents the percentage of EPS to be paid
out to shareholders as dividends in a given financial year.
The percentage return per share of the privatised firm was simply calculated as the difference
between the current share price and the previous share price, plus dividends received all divided
by the previous price. The percentage return multiplied by the 2013 equity value multiplied by
30% (representing government ownership) would then give the numerical investment profit.

14. 9
South African Government Debt
Although SA has achieved significant growth and development standards since 1994, this
multicultural economy is still battling against severe structural challenges that have led to high
unemployment and inequality relative to the global community. Internally, a significant portion
of employed individuals are not satisfied with the current wages and have a tendency to resort to
strikes that result in lost output. Additionally, substandard public service delivery and corruption
adds on to the negative influences keeping optimal economic growth at bay. Externally, the high
rand liquidity in the global currency markets and the volatile foreign appetite for SA assets
increases the risk of economic instability. For instance the capital outflows from emerging
markets in May 2013 and January 2014 proved detrimental to the rand, current account and
growth outlook (International Monetary Fund, 2013).
Figure 2: Unemployment & Gini Coefficient (International Monetary Fund, 2013)
Since independence the government of SA has endeavoured to establish a fiscal structure that
intends to manage public revenue and expenditure under a sustainable and anti-cyclical manner.
The state tries to emulate public expenditure in medium term as described by Kirchgassner
(2013). This is where government balances support for key socioeconomic programmes,
aggregate consumption and investment expenditure, in times of economic recovery, with fiscal
consolidation, as the business cycle approaches its peak so as. This anti-cyclical approach
ensures that the economy does not suffer the consequences of operating at either the bottom or
peak of economic cycles. This is more or less the approach of other governments in the same
peer group as SA such as BRIC (Brazil, Russia, India and China) and the Fragile Five (Brazil,

15. 10
Indonesia, Turkey and India) however the historical evolution of their public debts differ as
shown below.
Figure 3: Emerging Market Public Debt
Figure 3 above shows the 10 year government debt history of seven emerging market economies.
In the years leading up to 2009 all of the above nations, with the exception of China, had
declining debt-GDP ratios signalling strong fiscal space amongst the majority of the emerging
nations. However, as the impact of the global financial recession prompted these governments to
increase expenditure in the form of a fiscal stimulus so as to kick-start the economy into
recovery. This resulted in the slowdown in the rate at which fiscal space was strengthening, and
in some cases it resulted in the debt-GDP ratio increasing. Such was the case with SA, and
amongst its emerging market peers its debt-GDP ratio has been increasing at the fastest pace.
Currently, SA has the third highest debt-GDP ratio, behind Brazil and India.
Taking a closer look at SA public debt, Figure 4 below displays how government debt evolved in
relation to the important fiscal events throughout SA’s history. There is a lag of one to two years
between the event and the subsequent change in the debt-GDP ratio. Before independence,
government was able to strengthen their fiscal space despite social unrest and the rise in oil
prices which led to sharp rises in public spending.

16. 11
Figure 4: SA Public Debt Historic Timeline
SA can attribute the shape of its debt-GDP ratio time series to the former apartheid regime that
accumulated large budget deficits and public debt which was then taken on by the new
government after independence. Between 1992-1993 budget deficits peaked at 7.3% of GDP and
by the time the new government took over public debt was close to 50% of GDP. The
government pre-1994 took up the responsibility for improving the funding for a
ZAR1,000,000,000 Government Employee Pension Fund (GEPF) which catered for politicians
retiting from the apartheid public service. Additionally, the apartheid government accepeted the
obligation of debt accumulated by the then Transkei, Bophuthatswana, Venda and Ciskei states
and the self-gorvening territories. By 1995 this amounted to ZAR14,093,000,000, almost 6% of
gross loan debt in the 1994/5 financial year (Calitz, et al., 2010).
Coupled with the existing gross loan debt and the implementation of the Reconstruction and
Development Programme in 1994, government debt grew from 31.4% of GDP in 1989 to 47.9%
in 1996. However, as the new post-apartheid economy established itself, GDP growth overtook
public debt growth allowing debt-GDP ratio to decline consistently up until the global financial
crisis in 2007/8. The effects of the crisis filtered through to SA in 2009 and debt-financed
government expenditure began to increase in order to counter the economic slowdown. The

17. 12
strong fiscal space that had been developed between the late 1990s and 2009 and the low
international interest rates that prevailed at the time allowed government to deploy a large
stimulus (National Treasury, 2014). The stimulus package was approved under the assumption
that the resulting growth in the medium to long run would also result in the growth of
government revenue streams. However, efforts did not go exactly according to plan and this
resulted in the continued rise in public debt as the interest obligations of the large loans taken out
and the socioeconomic demands grew over the years.
Figure 5: Evolution of Public Finances (National Treasury, 2014)
In Figure 5 above the graph on the left shows the path of public revenue and expenditure since
the first government after independence. The sound management of government budget after
1994 resulted in the strengthening of SA’s fiscal space. This is shown by th narrowing of the gap
between public revenue and expenditures. Three years leading up to the global recession, SA
government managed to maintain a budget surpluss as a result of increased revenue that came off
the back of improved tax collection system. From 2000, the National Treasury expanded on the
work done by the Katz Commission, which began in 1994, and accelerated income tax reforms.
This allowed the expansion of the tax base subsequently boosting government income (Manuel,
2002). The graph on the left shows how government real public sector investment was one of the
beneficiaries of the government stimulus spending where it began to increase one year before the
onset of the financial crisis. Capital expenditure by government rose to levels hovering around
ZAR120,000,000,000 and although its growth has slowed down since the recession the SA
government has not managed to reduce this figure below ZAR100,000,000,000. Mainly, this
signals government’s commintement to the National Development Plan as infrastructural and
social investments that fall under government responsibility demand a significant amount of
resources amounting to approximately 13% of total cosolidated expenditure.
There is increasing pressure on the government to increase its level of involvement and
accountability in addressing the internal, socioeconomic factors holding SA’s economic
development back. However, the current Republic of South Africa Minister of Finance, Mr.
Nene, during the medium term budget policy statement on 22 October 2014, emphasised the

18. 13
importance of the SA government limiting their current expenditure and strengthening state
revenue streams so as to reduce the budget deficits over the next two years. The National
Treasury of SA plans to re-establish sustainability of public finances so as to strengthen fiscal
space (National Treasury, Republic of South Africa, 2014).
Table 1: Total National Government Debt (National Treasury, 2014).
The table above summarises SA national debt in 2013/14 and shows forecasts for the next five
years. Gross loan debt is forecasted to return to its all-time high of close to 50% last experienced
in 1995 largely driven by growth in domestic debt. Foreign debt over the medium term will
largely focus on funding foreign currency interest payments and principal repayments. However,
the growth of foreign debt is estimated to be less than the growth of domestic debt hence the
decline of the foreign debt as a percentage of gross loan debt. Going forward the National
Treasury seeks to curb the budget deficits by limiting government expenditure to
ZAR4,400,000,000,000 over the next three years. Although they will continue to spend on key
socioeconomic goods and services such as the mandates laid out in the National Development
Plan, the Treasury will reduce expenditure ceilings so as to avoid the rise in deficits which will
accumulate as debt over the medium to long run. Despite the impending measures put in place to
address budget deficits and public debt, SA’s debt-GDP ratio is forecasted to rise beyond the
2013/14 45.9% level which is to a large extent detrimental to the economy (National Treasury,
2014).
The negative impact of a rise in SA’s debt-GDP ratio stems from the relationship between debt-
GDP ratio and sovereign spreads in a country. Nazim Belhocine and Salvatore Dell’Erba (2013)
used a panel smooth transition regression model on 26 emerging market countries and concluded

19. 14
that as debt-GDP ratio rises above 45% sovereign spreads increase in elasticity. Their study
uncovered that the sensitivity of emerging market sovereign credit spreads, at a debt-GDP ratio
of 45% or more, can reach a maximum elasticity of 54 basis points for one percentage point
change in the debt ratio. This is a huge risk factor especially for SA as its economy is largely
influenced by the flow of capital into and out of its financial market. One of the key determinants
of the direction of capital movement are interest rate spreads. Volatile spreads lead to volatile
capital flow, both in terms of quantity and direction. The SA national treasury forecasts total
gross loan debt to continue increasing beyond 45% of GDP which translates to higher spreads.
Higher spreads signal high default risk which weighs down on the sovereign credit rating,
ultimately deterring potential investment. Allowing the debt-GDP ratio to remain at these
dangerous levels will not bode well for SA’s economy. Belhocine and Dell’Erba (2013)
emphasised the importance of fiscal prudence to maintain public debt below 45% of GDP which
may avoid a detrimental rise in sovereign spreads.

20. 15
Addressing Government Liabilities
The unique nature of each country’s economy and its corresponding fiscal space makes it
difficult to create a generic solution to government debt for all countries. Thus, attempts to
address public debt must take into account the idiosyncratic factors influencing the growth of
debt in a particular country. However, despite the differing characteristics of public debt amongst
the nations in the global community, there are fundamental objectives that are necessary in
curbing public debt. The state must ensure that public revenues exceed public expenditure. Not
only will this remove the need for public sector borrowing requirement (PSBR) to fund budget
deficits, it will also allow annual budget surpluses to build-up over time, thus expanding fiscal
space by lowering government debt. Fiscal space is the “room in a government’s budget that
allows it to provide resources for a desired purpose without jeopardizing the sustainability of its
financial position or the stability of the economy” (Heller, 2005, p. 32). The key to a sustainable
fiscal space is that government must be capable of funding short, medium and long term
expenditures as well as honouring the cost of debt without significantly increasing state liabilities
(Heller, 2005).
The indicator used to measure the relative success of debt reduction policies is the debt-GDP
ratio and the decline of this ratio is the objective ceteris paribus. The most common method used
by governments to reduce budget deficits and diminish the build-up of public debt is fiscal
consolidation. Under this strategy governments seek to cut government spending however this
will reduce GDP in the short run which will increase the debt ratio first before it gradually
declines over the medium to long run. As the budget balance improves the state credit profile
will also improve thus causing sovereign interest rates to decline. Lower interest rates will also
encourage investment and consumption spending supporting increased economic growth further
decreasing the nation’s debt ratio. However, fiscal consolidation must be partnered with an
expansionary monetary policy so as to counter the growth dampening effects of reduced
government spending (Abbas, et al., 2014).
Currently, the South African Reserve Bank (SARB) is employing a monetary contraction policy
characterised by an elevated repurchase rate (repo rate) which is the “rate at which the private
(sector) banks borrow rands from the SA Reserve Bank” (South African Reserve Bank, 2014).
The SARB raised the repo rate from 5% to 5.75% over the last 12 months in an effort to curb
inflation and limit the foreign risks its economy is prone to importing. Thus, fiscal consolidation
will worsen its prevailing low growth rate and cannot be pursued under prevailing conditions as
a viable debt reduction solution. An approach that addresses government liabilities without
jeopardising the growth potential is what is relevant to SA. Privatisation is one such approach
and if executed in an innovative manner, can raise productivity levels and subsequently elevate
the economy’s rate of expansion. Additionally, the proceeds from the sale of public assets can be
used to repay a portion of the outstanding debt. Both effects will result in a lowered debt ratio
and a sturdier fiscal space.
Even after addressing government liabilities going forward the state must sustain a healthy debt
balance by ensuring that public expenditure and revenue is aligned over the medium to long
term. One effective method of achieving this is ensuring that the impact of public expenditure
(especially debt-funded spending) will bolster socioeconomic growth such that GDP growth
exceeds growth of public debt. Government must opt for ventures that support employment,
investment and consumption expenditure, ultimately leading to improved economic growth.

21. 16
Shifting public funds from political objectives, which yield no real positive impact on growth, to
focus on the abovementioned GDP components will strengthen the fiscal multiplier and improve
the economic well-being of the nation. The enhanced consumer and investor confidence as a
result of government funding worthwhile projects will eventually lead to increased tax revenue
further bolstering government budget and in the long run limit the growth of public debt.
However, not all state funded ventures are successful and debt-funded projects run the risk of not
returning the desired revenues giving rise to a weakened fiscal financial position. Thus
addressing government liabilities is important as this contributes to the long run growth of the
economy. Deficit spending, characterised by PSBR, shift resources from future consumption to
present consumption as the expanding budget deficit will need to be financed by higher tax rates
and lower government expenditure in the future. The increased tax burden for future generations
will mean that a relatively larger proportion of their income will be used to repay past
government deficits. Consequently, future economic growth will not be robust as there will be
low consumption growth and the private sector facing larger corporate taxes will be discouraged
from increasing investments. Thus, reducing budget deficits and ultimately public debt will
ensure equitable distribution of income over the medium to long run. Not only will reduced
annual PSBR lower the growth of public debt, it will also reduce the future debt repayment
obligations. As a result government will not need to raise taxes significantly and they may
maintain current public spending further supporting future economic growth. Additionally future
generations will be able to enjoy a relatively larger proportion of their income allowing
expenditure, wealth and investment to grow sustainably over time (Sargent, 2014).

22. 17
The Theory of Privatisation
The transfer of function and ownership of the production of goods and services from the
government to the private sector can take four forms: share issue, direct sale of public assets to
private investors, voucher privatisation and privatisation from below. Voucher privatisation is
where citizens are allocated vouchers representing a stake in a public entity. Privatisation from
below is the setting up of a new private business in a previously publicly governed industry. This
paper focuses on privatisation via share issue as it will allow for the calculation of the returns on
each share issued after one year. If the state chooses to offer shares at a fixed price investors
apply for the desired number of shares. However, if the share issue is done via a tender offer the
potential investors bid for their preferred number of shares at their desired share price. Share
issue privatisation is a more controllable method of privatisation where the government can set
the pace of privatisation and accept bids only from investors who meet the desired criteria
(Gratton-Lavoie, 2000).
Theory shows that government revenue should not be the only indicator that measures the
success of privatisation, rather success must be related to the objectives. Firstly, allocative and
productive efficiency manifests itself in the increased resourcefulness under private ownership.
As a result the denationalised entity will churn out increased output at a lower cost enabling
managers to charge lower prices. Secondly, privatisation will show the confidence the state has
in the private sector in providing for the needs of the population. Ultimately, privatisation can be
viewed as private sector empowerment, elevating the level of investor confidence in the
economy. Lastly, using the proceeds from public asset sale to repay debt obligations will
improve the health of public finance and strengthen the state’s fiscal space. Subsequently,
government will have more resources to allocate to more pressing socioeconomic issues like
education, health and regulatory monitoring and enforcement instead of business ventures which
are better undertaken by the private sector (Sheshinski & Lopez-Calva, 1999).
Other drivers of efficiency in privatised firms other than profit incentives are market dynamics
which instil discipline and sound management as publicly traded firms are exposed to the threat
of a takeover should they underperform. Equally, poor performance will erode the value of
equity via the decline in share price. Furthermore, debt markets can encourage managers to
employ sound financial strategies to increase the credit rating and gain access to low interest
loans. Consequently, denationalised entities will be more efficient and will have stronger
safeguards as they do not have the government funding to cushion them against financial
meltdowns. Additionally, the removal of government’s duty to financially back failing public
entities will reduce the burden on taxpayers who may have to face higher future taxes to fund the
financial bailouts of SOEs in distress. In fact government can expect higher tax revenue without
raising taxes. This is because there will be more profitable, private businesses than before and
the rise in consumption and possibly employment associated with the newly privatised entities
will also add on to state tax revenues (Sheshinski & Lopez-Calva, 1999).
Ownership is the source of capitalist incentive to innovate. This is because the owner of the
resources bears the direct losses and the profits (without any middlemen to claim a share of the
pie) and is inclined to reduce the former and increase the latter (Shleifer, 1998). Managers of
public firms do not have the same incentives primarily because they view bankruptcy as a
relatively minor risk due to the implicit government backing. Consequently, SOEs can raise
production output or the number of people employed beyond their capacity, breaching optimal

23. 18
efficiency levels. On the other hand management of privately owned companies have bankruptcy
as a real and important risk which prompts them to pursue innovative strategies and investments
that are feasible, sound and efficient (Sheshinski & Lopez-Calva, 1999).
Lastly, one must be careful not to fall under the impression that certain SOEs are too important
or strategic to privatise. In fact, there is more reason to privatise important entities as they will
operate much more efficiently (productive and allocative efficiency) and be exposed to more
innovative approaches offered by the unregulated thinking of entrepreneurs (Edwards, 2009).

24. 19
Proposed Arrangement
Outline
This arrangement is based on a simple model that has two main objectives: to reduce public debt
and to enhance government revenue. This is achieved by selling 70% of SOE ownership to the
private sector and using the proceeds to repay public debt obligations. State revenue streams will
be enhanced by the earnings from their 30% ownership of the newly privatised business.
According to the argument built in previous sections the SOE will be theoretically more efficient
and thus will earn higher profits. Coupled with the fact that the state is not obliged to provide or
guarantee funding for operations post privatisation, the 30% stake becomes a lucrative state
asset. The results of the proposal will have positive externalities associated with it that have a
favourable effect on GDP. The privatisation of state assets is accompanied by enforceable
regulations and mandates so as to decrease the probability of a market failure.
The public assets considered for sale were chosen in such a way that the change of ownership
will not hinder the government’s national regulation and welfare provision duties. Furthermore,
the public entities were selected on the basis that their business models can operate effectively
under private sector management. Listed in Table 2 are the nominated parastatals that can be
privatised.
Table 2: State Owned Enterprises to be privatised.
The above asset and equity values were taken from the SOEs’ respective 2013 financial
statements. This model uses the share issue privatisation method where each parastatal has been
allocated a number of shares and the share price will equal equity divided by authorised shares.
SA’s capital markets are developed enough to cater for the issuance of the shares and world class
international brokers are available locally to mediate the transactions.
The government will retain 30% ownership of each parastatal after sale leaving 70% up for sale.
The buyers of the remaining 70% can be categorised into 2 groups; private investors and the

25. 20
general public. A minimum of 51% of public shares will be sold to private investors and should
there be any remaining stock it can be issued to the general public. The 30% control will allow
the state to monitor the management of the business and take part in the hiring or the dismissal of
the executive personnel who make the financing, investment, operating and dividend decisions.
However, government controlling 30% is to a larger extent passive, allowing the private sector to
operate efficiently, independent of political intrusion.
Prior sections of this long essay discussed in detail that although market mechanisms are
optimal, maximising efficiency does not equal welfare maximisation. This is why government
role in the economy is critical in keeping market failure at bay. As a part of the privatisation
deal, the government will hold a long position on call options that allow them to purchase 21%
of the issued shares back from private investors. Private investors automatically become the call
underwriters from the onset of the deal and the strike price will equal the initial public offering
price shown in Table two. Should the accompanying regulations and mandates fail to keep
market failure at bay the government can exercise the call options which will increase their stake
to 51% and regain control of the entity in an endeavour to address the deviation from welfare
maximisation. It can be assumed that the reestablishment of state control will result in welfare
retracing to pre-privatisation levels, as at 2013. It is assumed that should the call options expire
without being exercised the same amount of new call options will be issued without delay and
the strike price will equal to the current share price on the date of renewal.
Once the market failure has been addressed and the Minister of Finance deems the market failure
to no longer be a threat to national welfare the Treasury may sell shares from their holding back
to private investors until they are left with the initial 30% stake. In this case it may be wise to
select different private investors and/or put in place measures that will prevent a similar market
failure. The repurchase of shares from the National Treasury by private investors will be
accompanied by new call options issued to the state with the strike price at the equity value per
share at that time.
Regulations & Mandates
The key part of this framework are the accompanying regulations and mandates (over and above
existing free market regulations & mandates) that seek to prevent market failure and encourage
welfare maximising production from the newly privatised entities.
Firstly, the Competition Commission South Africa (the Commission) will monitor the newly
denationalised firms and enforce the regulations and mandates that apply to them. The
Commission is a legal organisation the SA government created in terms of the Competition Act,
number 89 of 1998. This organisation is empowered to “investigate, control and evaluate
restrictive business practices, abuse of dominant positions and mergers in order to achieve equity
and efficiency in the South African economy.” (Competition Commission South Africa, 2014)
Secondly, one member of the board of directors must be a government official. He will be a non-
executive director who will have a limited role in managing and creating company strategies.
This is to minimise government’s influence on company operations but still allow for effective
monitoring. Thus, the government official’s non-executive director role will only be to ensure
that the strategies and policies being proposed by the board of directors do not violate mandates
or regulations that govern the operation of the newly privatised SOE’s. Should a potential
strategy being considered by the board of directors contravene regulations and/or mandates, the

26. 21
non-executive director representing the state may offer suggestions and insight as to how to
modify the strategy. If the board fails to agree on the revised strategy, the state representative
must take the proposed strategy to the Commission who will then issue a ruling as to whether the
strategy is viable subject to set regulations and mandates.
1. Equitable distribution
This regulation ensures that the products and services produced by the privatised firm are readily
and equally available to the entire nation. Thus the firm cannot discriminate in the distribution of
the product of service and must serve all citizens fairly unless legally instructed not to do so.
Additionally, the prices charged for the goods and services must not be exorbitant and will be
subject to review by the state that will use the pre-privatisation prices as a benchmark for
comparison. In the review the state shall take into consideration the input prices, inflation and
demand for the good or service in question. This does not necessarily imply a price ceiling but
more of a price guidance.
2. The formation of cartels is prohibited
Denationalised entities may neither merge nor collude with one another with the aim of creating
a monopoly or to promote a mutual interest that does not seek to benefit the welfare of the
nation. Likewise privatised entities may not merge or collude with an already private entity for
the abovementioned reasons. Any proposed mergers, acquisitions or joint ventures must first be
brought before the Commission who will then either approve or dismiss the case.
3. Growth & stability
Denationalised companies must pursue welfare maximising operations oriented for growth and
stability. That is privatised bodies must ensure that output does not become erratic as this may
disrupt social and economic activities. The idiosyncratic risks imposed on growth and stability
may come in the form of financial and operational risk and measures must be put in place to
prevent or minimise the impact of such threats.
Thus, non-financial privatised entities must aim to achieve a debt ratio of not more than 60% and
financial privatised firms must not breach 80%. All entities must aim to maintain a current ratio
of two or more. These ratios seek to provide a synopsis of the company stability to the
management and the public. In this scenario it is not wise to focus comprehensively on
improving profitability and efficiency ratios as it may shift the emphasis away from welfare
maximising production and output. The debt and current ratios merely provide an early warning
mechanism should businesses deviate from the desired target range thus allowing management to
assess the drivers of each ratio and swiftly prevent potential instability.
4. Transparency
Denationalised enterprises must publish annual and interim results showing financial and
production figures particularly highlighting operational processes, the quantity of output & hours
of service produced, financial statements, salary packages and environmental activities.
Published information must be audited by both state-mandated and private auditors so as to
bolster authenticity.
Transparency of the operations and impact of newly privatised firms will help management and
the public to track their performance. The state its citizens will be able to voice their concerns or

27. 22
praises over denationalised entities’ processes and results. Consequently, firms may use this
feedback effectively to improve unfavourable performance or to amplify valued performance.
5. Output
Production output of goods and services must not fall below the average level attained under
state control. This regulation especially applies to utility companies and public good providers
who have an obligation to ensure that output is not hindered in quantity or quality.
Entities that are responsible for the national provision of utility and public goods must
collaborate with Statistics South Africa so as to accurately measure population size and growth.
This will enable businesses to model how they should grow output so as to cater for the demand
derived from the population statistics.
6. Communal Support
Privatised enterprises must contribute to the development of the communities from which they
operate from. Opportunities and provisions in terms of employment, education, charity and
conservation projects must be offered to the surrounding community. Not only will this develop
the surrounding stakeholders but it will be positive for the business too. Contribution of social
development will increase company reputation, staff morale & skill, teamwork and reduced
marketing costs. The entity will become more attractive to investors and thus increase the value
of the share price and improve its credit rating. Moreover, communal support will enable the
business to increase welfare provision over and that of its core production (The Institute of
Chartered Accountants in England and Wales, 2008).
7. Environmentally Friendly
Operational methods selected by management must not produce excessive negative externalities
that will influence the production or consumption possibilities of individuals and other
businesses. Denationalised must invest in researching and developing sustainable,
environmentally friendly ways of operation.
8. State Approved Inputs
Denationalised entities may only use state approved resources in the production of the final good
or service being offered to the final consumer. This will ensure that the quality of the
socioeconomic welfare is not compromised.
Any welfare deteriorating breach in the abovementioned mandates for two consecutive quarters
will result in government exercising their call options to increase their shareholding to 51%.
Results
The model assumes that the entire revenue from the privatisation will be used to reduce the SA
government public debt stock.
Table 3: Impact on Government Debt.

28. 23
The table above shows the improvement in SA’s public debt as a percentage of GDP as a result
of the proposed privatisation agreement in 2013. Had the government agreed to sell 70%
ownership in all of the SOE’s in Table two, debt would have decreased from 40.00% to 28.25%
of GDP, expanding the SA government’s fiscal space.
Table 4: Returns on Investment during 2013 – 2014 period.
Table 4 shows the returns on the state’s 30% ownership in the denationalised entities. The
different dividend pay-out ratios signify the varying dividend decisions that can be chosen by the
respective board of directors thus altering the potential return earned. The government could
have potentially boosted their budget revenue annually by a minimum of 0.03% of GDP.
Moreover, the beauty of this arrangement is that all the government has to do is maintain their
investment position without having to actively adjust their asset holdings and they will earn
profit in perpetuity.
As long as SA’s economy continues to expand and top management aim to maximise
shareholder value and cater for existing and potential welfare demand it can be reasonably
assumed that the above profits will grow over time.
Implications
On a microeconomic level one can expect improved service delivery as the entities will not want
to disappoint customers and lose out on revenue. Moreover, shareholders will encourage the
board of directors of the denationalised entities to focus on producing welfare maximising output
and charging fair prices. This is because every person in the nation consumes the welfare good
and service and it would be in the owners’ and staff members’ best interests to operate and make
decisions in a welfare maximising mentality.
The insulation of SOEs from market forces as a result of implicit government backing leads to
complacency within SOE operations (Khoza, 2009). Therefore, it would be reasonable to expect
improved overall economic efficiency and sound governance as the lack of government

29. 24
guarantee inhibits complacency within the privatised entity. Privatisation will remove any
commitment by the government to bailout underperforming businesses, compelling companies to
secure relative capital safety and lean more towards less risky strategies that are not pursued for
political reasons. Additionally, without government insulation firms will have to maximise
resources for their intended purpose so as to meet debt and supplier obligations.
The removal of implicit government guarantee increases the level of competition faced by
denationalised entities thereby leading to the development of innovative processes, products and
services. Additionally, “privatisation would spur economic growth by opening new markets to
entrepreneurs” (Edwards, 2009, p. 74). As a result once given the opportunity entrepreneurs can
reinvent the wheel in welfare provision. Their innovations will leak out to other industrial
players, adding fuel to the engine driving economic growth and development.
The positive microeconomic implications may encourage other investors to pursue similar
ventures in the welfare provision industry (e.g. utilities, energy and transport sectors). This
increase in competition will lead to increased variety faced by the end consumer and overall
wellbeing of the target market as a whole. Furthermore, increased variety also relates to
increased institutional diversity where before SOE’s had similar risks and weaknesses as they
were under one ultimate authority. However, with privatisation the new leadership of the
business can focus on and minimise the risks and weaknesses associated with centralised control.
Denationalised entities have a higher chance of meeting their socioeconomic objectives post-
privatisation as they will receive less pressure from politicians seeking to promote personal
interests. Some politicians with influence over SOEs are not interested in revenue or output
maximisation but remaining in power. These individuals only derive utility from expenditure
aimed at increasing employment so as to gain favour amongst the people and ultimately raise the
number of votes they receive during elections (Boycko, et al., 1996).
On a macroeconomic scale, this arrangement will have positive implications for GDP via
government expenditure and ultimately the fiscal multiplier effect. Improving the state’s fiscal
space and boosting budget revenue allows for increased expenditure aimed at addressing social
development and economic growth. This targeted expenditure will have a greater effect post-
privatisation as the state will not be responsible for any funding or backing of the vast amounts
of previously privatised entities. The government will then be able to focus more intimately with
other issues that are holding SA’s development back instead of being side tracked by SOE
operations. Furthermore, with the increase in production output, SA can consider exporting the
welfare goods and services to the less developed neighbouring countries and bolster the
deteriorating current account. Lastly, the reduction in public debt will encourage rating agencies
to revise SA’s credit outlook upwards. At 30% debt of GDP SA may see its rating improve from
a stable to a positive outlook.

30. 25
Opposition
For a long time until the final three decades of the 20th
century, the mechanisms through which
public financial health and the overall economy would improve as a result of privatisation were
not fully understood by the majority of policy makers and academics alike. Even to this day, it is
difficult to accurately measure the individual effect of privatisation on GDP, employment and
fiscal health because there are other equally relevant economic phenomena occurring
simultaneously. This led to a fear of the known unknown which gave birth to minds that opposed
privatisation (Sheshinski & Lopez-Calva, 1999). In the 1940s Nobel Laureates namely Maurice
Allais, Arthur Lewis and James Meade, all advocated for government ownership of natural
monopolies to avoid the potential exploitation of the monopoly power and any market related
exploitation that may arise (Shleifer, 1998).
Opposition usually arises when certain strategic services are to be privatised. Take postal
services for example; government ownership is supported so as to encourage the delivery of this
service to regions that have low populations. If this service was to be privately owned
communities in these low density areas may be neglected as businesses concentrate service in
high density areas where profits are relatively more probable and consistent (Tierney, 1988).
Another point raised by anti-denationalisation supporters is the private sectors ‘blind’ pursuit of
profits. In a bid to lower costs managers of privatised entities may opt for cheap resources
compromising the quality of the good or service delivered to the final consumer (e.g. cheap
water treatment chemicals or uneducated labour). However, the presence of competition will
give rise to innovative production methods and ensure that the best resources are used so as to
attract more customers (Shleifer, 1998). Thus, this argument against privatisation is only relevant
where natural monopolies are privatised and lack competition to deter the use of low quality,
cheap production inputs. It is thus necessary to accompany the privatisation of natural
monopolies with regulatory measures that only allow the use of state approved production
inputs.
Private ownership improves efficiency as the shareholders are more engrossed in the activities of
their firm as they want to ensure that their investment bears fruit. Consequently, private
shareholders will implement effective and enforceable monitoring strategies that will motivate
management to maximise inputs so as to meet the firm objectives. However, the agency
relationship that still exists between owners and management in the private sector. Acquisitions
of corporate vehicles, ostentatious head offices, expensive business trips and generous salary
packages are some of the many actions management may take that are misaligned with the
purpose shareholders appointed them. In some instances, management may forgo worthwhile
projects because they do not want to jeopardise their job if the project fails weakening the
argument for privatisation (Correia, et al., 2011).

31. 26
Conclusion
Yes it is possible that the positive changes in efficiency as a result of privatisation maybe
insignificant, however, even if the SOE continue operating and growing as they did under public
control, the government budget and public debt stand to benefit from privatisation. In turn, a
healthier net loan debt value and an improved fiscal budget will have undeniably positive
implications for the nation’s economy and overall welfare. This is because the state will have a
greater financial capacity to pursue more important social investments instead of funding
businesses which can be operated by the private sector. This is the division of labour on a
national scale: allocating the duties of service of goods production to the private sector and
giving the state the responsibility of social development, creating and policing regulations that
govern the country.
For the SOEs that are not sold government should consider setting financial benchmarks that
track the private sector and limiting the political influence managers are exposed to. Not only
will this improve operations and decision-making, it may well result in natural privatisation (The
Economist, 2014). Moreover, because of the vast literature available on this topic, privatisation
should not be feared but embraced as we have a plethora of theory and case studies that policy
makers can use to create and improve proposed denationalisation ventures. It would not be wise,
given the numerous privatisation successes that have been studied and documented, to
completely close out the possibility of improving government fiscal space. This paper has shown
the positive effects of a strong government budget on a nation’s economy and the potential
solutions to some of the challenges laid out by the National Planning Commission in the
National Development Plan.

32. 27
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