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Privatization of South African Airways: Implications for Stakeholders

A Research Report

Presented to

The Graduate School of Business

University of Cape Town

In partial fulfillment

of the requirements for the

Master of BUSINESS Administration Degree

By

Simisani Kupe

Akintunde Okupe

December 2000

Supervisor: Professor Thomas Koelble

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Privatization of South African Airways: Implications for

stakeholders

Abstract

Key issues affecting stakeholders in the privatisation of SAA were identified using a

stakeholder analysis. It was concluded that organisational transformation, black

empowerment, employment equity and affirmative action present significant

opportunities for social welfare and upliftment of workers in the privatisation of SAA.

However, these issues have high possibilities for unfavourable outcomes. There are

strong indications that management issues such as profitability, operational

efficiencies, improvement of service levels, are likely to have favourable outcomes.

The study also shows that there are hidden cost implications to the government and

other stakeholders because of the need to create the proper competition, regulatory

and supporting judiciary system in order to form a free market that is conducive for

privatization. Further research into the costs of merging four corporate cultures,

supporting of black empowerment initiatives and welfare for redundant staff will be

important to determine the actual cost of privatization to government.

The emergence of a global economy presents significant threats to SAA management,

airline travellers and employees who will need to compete in a free market in which

emerging countries can not always cope with. Privatisation of SAA will therefore lead

to increased vulnerability of local stakeholders to global free markets and the strong

leadership managing the process will need to leverage the NEDLAC framework

agreement to manage stakeholders.

KEY WORDS: stakeholders, regulation, competition, globalization, emerging

market

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Preface

This report is not confidential, It may be used freely by the Graduate School of

Business

We wish to express our gratitude to the following people for their assistance and

support in the preparation of this report:

Prof. Thomas Koelble for his guidance and encouragement during the preparation

report.

We certify that except as noted above the report is our own work and that all

references are accurately reported

Simisani Kupe Ankintunde Okupe

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Privatization of South Africa Airways: Implications for Stakeholders

Contents

1.0 Introduction........................................................................................5

2.0 Problem Statement.............................................................................6

3.0 Research Methods ..............................................................................7

4.0 Literature Review ..............................................................................7

4.1 International Experiences in Privatization .......................................................14

4.2 Privatization in the developing World .............................................................18

5.0 The CASE .........................................................................................20

6.0 Findings.............................................................................................26

7.0 Discussion..........................................................................................30

8.0 Conclusions .......................................................................................36

9.0 References .........................................................................................38

List of Tables

Table 1: Key issues for stakeholder and parties affected.

Table 2: Comparison of the number of favourable outcomes compared to

unfavourable outcomes.

Table 3: SWOT Analysis of issues affecting the privatisation process of SAA.

List of Figures

Figure 1:Privatisation Options

Figure 2: Stakeholders Map for the privatization of South African Airways

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List of Appendices

Appendix A: Qualitative Data Sources

Appendix B: Quantitative Data Sources

Appendix C: Performance of privatized firms after Meggison et al (1994)

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Privatization in South Africa: Implications for stakeholders

1.0 Introduction

Privatization is a well-known and documented phenomenon in the world today.

International experiences have varied from resoundingly successful programmes such

as the programme initiated by Margaret Thatcher during the late seventies to early

eighties in the UK. The programme involved privatization of state enterprises such as

British Telecom, British Aerospace and British Rail. After selling these assets to the

private sector and deregulating the industries competition was stimulated, service

levels and operational efficiencies improved significantly, similar programmes took

place in the USA and France. However privatization programmes in countries such as

Chile and Mexico were not as successful, this was a result of the high levels of

government debt and currencies that depreciated significantly during that period of

time. The Russian programme that was designed to economically empower workers

and the general public ended in a disaster when corrupt officials abused a system of

distributing vouchers to the public to buy shares in privatising state enterprises. This

ultimately ended with ownership of the companies being in the hands of the same

corrupt officials who did not have the skills to efficiently operate the companies.

Privatization covers several subject areas and attracts a wide range of sometimes

conflicting views from managers, politicians, economists, merchant bankers, unions

and the public at large as a result it is a particularly relevant topic for research in

South Africa presently.

This research study is carried out to explore the broad environment in which

privatization is taking place in South Africa and takes into account the implications

for stakeholders when state owned enterprises (SOE) are transferred to the private

sector in emerging markets and or transitional economies. The purpose of the research

is to identify key issues and to arrive at conclusions regarding the implications of

privatization for stakeholders. The results are expected to be a basis for further

research into the management of stakeholder interests when state owned enterprises

are privatized in the Sub- Saharan region.

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Through systematic stakeholder analysis this study endeavors to interpret the

implications for stakeholders on the basis of worldwide experiences and similar

privatization programmes that have been embarked on in other countries. The study

takes a broad view of the environment and uses the key success factors to predict the

implications for stakeholders. The report focuses on privatisation and the

fundamental objectives of improving operational efficiencies by introducing the

private sector management skills and a free market place in which competition

stimulates better services as given by, Meggison (1994).

The South African Airways case is used to illustrate a practical scenario in which a

privatization programme is implemented in an emerging market.

2.0 Problem Statement

The research proposes that the political, competitive and regulatory environments as

well as domestic and international market conditions are critical factors that affect

stakeholders in the implementation of privatization. The transitional and emerging

nature of the sub-Saharan African economies in a globalising international

environment exacerbate these effects. The report shall suggest, with evidence, that

although internationally privatization has been used to solve economic problems such

as:

Reducing the subsidisation of state owned enterprises from state treasury.

Using the proceeds of the sales of state assets to reduce principal government debt

and interest payments.

Using the income created from a broader tax base for government spending in

areas such as social welfare.

These problems are characteristic of emerging economies and in particular developing

economies such as we have in sub-Saharan Africa. However, privatization may not

lead to sustainable outcomes due to the unfavourable competitive environment. More

specifically after analyzing the needs of SAA’s stakeholders the report will highlight a

potential for conflicting interests of stakeholders’ created by competing priorities such

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as the profit motives of investors and the welfare responsibilities of government. The

need for professional managers and workers to secure their future ahead of

privatisation particularly with specific regard to job security, remuneration and

operational control of the asset after privatisation. The question of service levels and

costs of the service are an important issue for consumers who are an important group

of stakeholders.

3.0 Research Methods

The research is based on extensive gathering and processing of qualitative and

quantitative data. The sources of data are secondary, publicly held information and

published literature from journals, company reports and personal communication with

stakeholders. Qualitative data sources are presented in Appendix A and quantitative

data sources are in Appendix B.

Limitations of the research

The following reasons constrained the use of structured research methods:

1. The sensitive political nature of privatization requires that only policy

information be made available to the public.

2. The details of the program are left open ended to allow for a public offer to be

made when the market is ready to realize an optimum value for the asset.

3. In the interest of transparency and fairness to bidders all details of the

privatization are confidential until terms of reference are drawn.

4. The advisor to the government who will write the terms of reference is still to

be appointed as such the process is at an early stage.

4.0 Literature Review

Privatization as defined in Goodrich (1990:3) is a process of reducing the roles of

government and increasing those of the private sector in activities or asset ownership.

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Some conceptions of privatization as in Kalderie, (1990:25) differentiate between the

reduction in provision of services (for example policymaking, deciding, buying,

regulating, franchising, financing, subsidizing) and the reduction in production or

operational activities (for example delivering, running, selling and administering.)

The purpose of privatization can either be improvement of management or efficiency

in the markets that they are operating. In privatizing production or services the

government may totally withdraw from a service that it has been providing and leave

it to free enterprise. It may be argued that this is real privatization because it places

service provision in the market place where market forces then decide what

businesses will exist.

Privatization can also be viewed in terms of different strategies and methodologies in

use. Figure 1 depicts the various options that have been used in privatization. The

stages and options that South African Airways has passed through are highlighted.

Privatization Options

Cowan (1990), Andic (1990) and Redwood described options for privatization

(1990). Divestiture consists of the complete or partial sale of state assets or total

liquidation of the assets of a state owned enterprise. Complete divestiture is the

outright and rapid sale of state assets with government withdrawing from all forms of

share ownership. Government subsequently acts as a regulator and draws up

competition laws. Partial divestiture is when the government sells some shares to the

private sector in order to create capitalist values in unions and co-operatives. Private

sector participation ensures greater controls over the production chain and may

increase the free play of market forces. South African Airways went through partial

divestiture when a twenty- percent stake was sold to Swissair in 1997. Asset

liquidation takes the form of a sale at market value of a hopelessly unprofitable state

asset whose services are usually state subsidized. This improves resource allocation as

taxpayers get a break from subsidizing the enterprise. Alternatively the state sells to a

sole buyer who assumes the entire enterprise.

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Figure 1: Privatisation options.

Contracting takes place when government retains ownership and contracts out or

outsources the management of the assets to a private sector partner who shares in the

risk of losses and brings in skills or technology. The contract is particularly favoured

in the least developed countries because companies in the private sector are prepared

to take the risks on the basis of their competencies either in technology or

management.

PrivatizationMethods

S AfricanGovt..

DivestitureAsset

LiquidationContracting

CompletePartialSAA -1997

Public SaleSAA - IPO Trade Sale Venture

CapitalTender

Contract

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Techniques of Privatization

Redwood (1989) identifies the private offer sale, the trade sale, the project or venture

financing and the tender for contract as four techniques that can be used in

privatization.

The public offer sale has government making a public offer for the sale of part of a

state assets /enterprise to minority shareholders. Government either retains the

majority shares holding or may sell the majority of shares. The method requires

measures such as corporatisation and commercialization that took place at SAA in

1990. Advisors to the government will draw the terms of the sale of SAA at a time

closer to the share offer. Shares have been reserved for various parties to invest as

means of economic empowerment or redistribution of wealth, in Russia vouchers

were given to the public to allow workers to have shareholding in private companies.

The trade sale is commonly used for assets that do not have a good track record.

Public offers for such companies show a poor response from the market. The

attractive part of the enterprise is usually its fixed assets for which the private sector

has an interest. The actual sale of the asset takes place either through a negotiated sale

with an interested party, or through a once off auction to find a preferred buyer.

Other forms of privatization are the venture capital or project financing. In areas

where governments need to deliver services but cannot meet the financial investment

required, private sector companies fund the projects in exchange for operating the

enterprise repayment for the service is made through income generated in the business

over an agreed period of time. For the tender or management contract government

draws the terms on which the service will be provided. Tenders are awarded for a

specific duration and a performance agreement, which gives the government rights to

enforce standards.

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Some Advantages in Privatization

Some motivations to privatize public enterprises are outlined by Marsdern P, (2000)

and Veljanoski C, (1990: 76).

Lowering costs: Proceeds of privatization can be used to fund capital projects or to

reduce taxes to stimulate national economic growth. Privatization can also save public

funds because private industries do not need subsidies from treasury.

De-politicizing business: Industries can be commercially rather that politically driven

by transferring them from government control to independent management. Private

firms are funded through capital markets on the basis of their long-term commercial

profits. Because they are controlled by the private sector and they have no access to

subsidies they are forced to exercise market discipline and to operate profitably.

Better quality of service: Firms in the private sector are forced to respond to

customer needs and have to be more efficient because the customer has a choice of

other products. A firm operating in the private sector wins business through providing

a good service. Regulation is normally achieved through quality of service, although

minimum standards can be legislated.

Better management: The private and public sectors have different management

cultures. In the private sector there is the tendency to reward the achievement of

commercial goals whereas the public sector often rewards seniority. Managers are

paid for the size of the department they head and the number of employees who work

under them, this system does not provide an incentive for management to create high

performance environments.

Labour relations: Private sector firms have better relations with labour, because they

operate on a profit basis, as such they can only concede to so much pressure from

labour. In the case of government it may be easier for workers to strike because

government has greater exposure to political pressure. Private sector incentive

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schemes in the form of share ownership, payment of dividends and bonuses ensure

that employees are highly motivated and this reduces the possibility of strike action.

Wider Share Ownership: The wider share ownership that results from sale of state

owned enterprises distributes the wealth of the country to people who would

otherwise not have had that opportunity in the free market. Shares are sold at either a

discount or under favourable terms, which are affordable to the public, and in

particular to lower level employees.

Restoring Profitability: The government tends to spend money in companies

because of political priorities and imperatives such as sheltered employment or

strategic importance of the service to a country. The private sector has experience in

turning around loss making firms and usually acts without similar constraints.

Replacing capital: The pressure of competing priorities in public funds causes the

replacement of equipment to take much longer than it should. Privatization of firms

allows the private sector to replace poorly maintained and out-dated equipment.

Two methods are used in this regard: this is either by the asset enrichment method

where the government endows the operation with equipment, which can be exploited

in order to re-quip. The government can alternatively build into the sale price the need

to re-quip the operation in a process called requirement to re-capitalize.

Competition and choice: The state is not good at containing costs, and these costs

are easy to pass on to usually captive customers of state owned enterprises. Privatized

firms are more efficient and they keep prices down. In the case of private sector

monopolies provision can be made to enforce certain price controls.

Some disadvantages of Privatization

Martin (1996) details some opinions of labour movements in South Africa and in

particular COSATU the largest union federation. COSATU is an important player in

South African privatization because the main union representing workers at SAA

SARHWU (South African Railways and Harbour Workers Union) is represented at

NEDLAC (National Economic Development and Labour Council). NEDLAC is the

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tripartite negotiating forum for the stakeholders in issues affecting unions,

government and business.

Privatization is also seen as part of the neo-liberal agenda that has been continuously

persued by capitalist and is applied wholesale without consideration for the specific

circumstances. Gray J, (1999:54) quotes New Zealand, Mexico and Chile where the

social consequences of privatization were adverse. As an underclass that never existed

before privatization emerged, the state was burdened with a larger welfare

responsibility and problems with crime corruption and poverty were exacerbated. For

example the response to the increased criminal element in New Zealand resulted in

the prison population being doubled, hence the budget for crime also had to be

doubled. This example demonstrates how an unsuccessful privatisation programme

can have negative social effects.

The Debt Trap: Privatization has been motivated by financial institutions in

particular creditor banks, who swap risky debts on their books for more tangible

assets with debt equity swaps. World Bank and IMF pressure on deficits and public

spending in the quest for global competitiveness have resulted in pressure on

governments.

Poor performance of public enterprises: Unions believe that the poor performance

of public enterprises has been used as a reason by the neo-liberals to make generalized

claims about the success of privatization and ignored the downside particularly those

cases where the same efficiencies have been achieved under state ownership.

Job losses: Unions and opponents of privatization allege (see Martin, 1996) that there

has been a consistent history of job losses after privatization all over the world. The

exception being the Asian tiger nations where there was a rapid growth in the

economy, which absorbed those, who were retrenched. COSATU in particular is not

convinced by arguments that long-term employment is improved.

Shifting of priorities: There has been a calculated and methodical approach to

privatization in which a sequential approach of cost cutting, optimizing cash flow and

finally balancing financing policies through cost of capital. This was all done at the

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expense of the customers because of the tendency for the end customer to either go

without a service or for the costs to be increased.

Restoring profitability: There appears to be no consistent record of privatized firms

making profits, the selection of examples has shown a lot of bias and financial

engineering which demonstrated that there has been very few cases where there was a

direct relationship between privatization and restoration of profits Martin, (1996).

Securing public interest: Corporate governance issues arise because of the need to

secure the public interest in a globalized economy. Social welfare takes a subordinate

role considering the fact that there is an overall focus on global interest which dictates

competitiveness as the main issue. This lowers employment and labour standards and

environmental protection and improvement.

4.1 International Experiences in Privatization

Meggison, et al, Randenborgh (1994), Andic (1994), Mandakovic and Lima, (1990).

researched cases of privatization around the world and also produced results for a sub

sample that represents conditions in the developing world. Most of the studies were

aimed at proving or disproving the hypothesis that privatization improves operational

efficiency.

Meggison et al (1994) used a sample of sixty-one companies over a period of twenty -

nine years in eighteen countries. (Proxies used to show success or failure are shown in

Appendix C). Mandakovic and Lima (1990) compared five public sector and five

private sectors companies using twelve different ratios over a period of seven years.

Sub-samples were created for other criteria such as partial divestitures (similar to

SAA after commercialization) and full divestitures (also comparable to SAA when

government sells its entire sell to the public) were examined. Other sub-samples were

done for non-competitive environments, which is the case in South Africa.

Profitability changes: The research indicated that in order to encourage managers to

provide non-market benefits, government often provides SOEs with a variety of

indirect subsidies, such as reduced prices on inputs and implicit guarantees to cover

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operating losses. On the other hand governments almost invariably withdraw their

guarantees of the SOEs debt after privatization and explicitly promise not to cover

operating losses.

The newly privatized firms are exposed to real threat of bankruptcy which also

motivates greater attention to firm profitability. Profitability ratios were measured

using three ratios: return on sales (ROS), return on assets (ROA), and return on equity

(ROE). As most governments expected, profitability increases after privatization

according to ROS and ROA. Results show for example that the mean increase in ROS

after divestiture is 2.49% and 69.1% of all firms experienced expanding profit

margins after privatization.

Efficiency changes: Due to changes in ownership structure of the firm, there is

efficient use of human, technological and financial resources. Shareholders carry the

risk of decisions made by management. In order to estimate efficiency in two

management periods, inflation-adjusted sales per employee (SALEFF) and net income

per employee (NIEFF) were used. The two measures show significant increases after

privatization. Sales per employee reportedly improved significantly by an average

margin of 10%.

Changes in Capital Investment Spending: Contemporary results indicated that

SOEs in the sample collected rarely made capital investments. Since most SOEs ran

operating losses in the past, these precluded them from making excessive capital

investment. After privatization most firms tend to have greater access to private debt

(especially through equity markets.) Moreover, if privatization is accompanied by

deregulation, high competitive cost is involved to sustain sales and profitability.

Privatization encourages productive investment free of political influence. It was

concluded that privatization promotes entrepreneurship, former SOEs have the

incentive and means to invest in growth options both at home and abroad.

Investment intensity was computed using two proxies, capital expenditure divided by

sales (CESA) and capital expenditure divided by total assets (CETA). CESA shows

significant increase for firms in competitive industries, for full divestitures, for control

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privatization. The increase in CESA is smaller and insignificant for firms in

noncompetitive industries.

Changes in Output: Although there is reason to believe that increases in profitability

and operating efficiency will naturally mean that there is increased output Boycko,

Shleifer, and Vishny (1993) argued that effective privatization will lead to a reduction

in output. This is based on the premise that artificial supply is eliminated by lack of

government subsidies. Tests carried out to confirm either of the two propositions by

Meggison (1994) reported a twenty four percent increase in output between the pre

and post divestiture periods. Output increases on all the sub- samples for competitive

and non-competitive industries, developing and non-developed countries and full or

partial divestitures.

Employment Changes: Unions expect decline in employment levels after

privatization. Tests carried out during the research work and the converse was found

to be true. This was examined by computing average employment levels for the pre

privatization and post privatization periods to determine changes in employment

levels after divestiture. It was observed that employment actually increased.

Changes in Leverage: While most governments do not place great priority on

improving the financial soundness of the newly privatized firms, most do expect

leverage ratios to drop after divestiture. This is due to the fact that most SOEs tend to

have high debt prior to divestiture, at least in part because they cannot sell equity to

private investors, and the only form of equity available to the firm are capital

injections from the government and retained earnings. Tests carried out using total

leverage measure; total debt to total assets (LEV), and long-term debt to equity

measure was also computed. Results showed a similar trend to other testable

predictions in that firms reduced their leverage overall. It was found that the changes

were however small to insignificant for those firms operating in non-competitive

industries.

Changes in dividend payout: Dividend payout, measured as a total dividend divided

by net income (PAYOUT) and dividend divided by sales (DIVSAL), increases

following privatization. The average dividend payout of the observed sample firms

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increases from twenty percent of profit to forty five percent after divestiture. It was

concluded that both ratios increases substantially regardless of industrial structure,

privatization method or stage of national development.

Ownership Structure and control structure: It was also observed that most firms

after privatization undergo turnover among their board of directors and top managers

with the majority increasing their board sizes. The research also indicated a forty one

percent turnover in the number of CEOs. Many new top officers were brought into the

companies during the preparatory period. It was concluded that the greater the

changes in the directorship correlated positively with a better operating performance

of the company. Changes in the firm’s ownership and control structure, rather than

mere government divestiture or cash infusions into the firm from shares issue seems

to be the driving force in expanding all of the improved results that were observed.

Government Subsidies: An attempt was made to determine the variability of

government subsidies before and after privatization. The research was made up of

information from the Economist, the Wall street Journal, The Financial Times and the

Euro Money.

It was noted that while government does subsidize SOEs at the early stage in the

organization life cycle, usually to cover operating expenses, this was not the case

when the firms were being prepared for privatization. The only exception to these is

the French companies nationalized by the Mitterand government in 1981. Mitterand’s

socialist government was elected on nationalization platform, embarked on a massive

program of investment subsidies during early 1980s. During the period 1981 to 1985,

the Mitterand government directly injected over FFr 40 billion into its newly

nationalized and existing SOEs.

After returning to power in 1988,the socialists continued to subsidize Frances

remaining nationalized companies, but the newly privatize firms were forced to

finance themselves. As with the majority of denationalized companies that were

examined, the privatized French companies prospered.

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Although empirical studies show that privatization increases profitability and

operating efficiency results for developing countries show that changes were found to

be small to insignificant.

4.2 Privatization in the developing World

As reported by the World Bank in a 1999 report privatisation transactions accounted

for US$66 billion dollars and US$49 billion in the years nineteen 1998 and 1999

respectively. Of this amount only 4 percent was in Sub Saharan Africa. It is predicted

that privatization programmes will accelerate in Southern Africa because of declining

foreign aid, the inadequacy of state support and for state revenues to fund national

budgets and current account deficits. SAA will be part of this programme and full

privatization will take place within the next four years.

Competition policy is particularly important to the success of a privatization

programme for developing and emerging economies. Findings by Oman, (2000),are

that, where such a policy is lacking and concentrated monopolistic and oligopolistic

structures of local economic and political power exist, rigidities that constitute a

major hindrance to development are created.

Despite the large size of the African continent in terms of population, its individual

nations are not. The size of the local markets in sub-Saharan Africa lends itself to be

an unattractive investment destination. Urban dwellers with spending power generally

form a small proportion of the total population. Large, emerging market investors,

therefore often overlook Africa and are likely to do the same with SAA because the

local market is saturated by at least five airlines that are operating. This situation

forces SAA to look for additional business from international travellers in order to be

attractive to international investors.

The perception is that most Africans, particularly those in rural communities, cannot

afford to pay the full economic costs of private infrastructure services. So, although

an "opportunity gap" may exist because few people have access to services, this need

may not translate into effective demand. This fact applies to SAA and there is need to

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take cognizance of the fact that air travel is limited to the top 15 percent of the

population with most travellers being business people. The international travel

markets to South Africa therefore are a key market to capture.

In moving from a state-dominated to a liberalized environment, African countries

need to redefine the rules of the game and create strong, independent regulatory

agencies. Foreign investors need reassurance that critical matters such as the currency

exchange rate increases will be dealt with in an impartial and professional manner.

The British transport secretary recently criticized the present airline regulatory

framework in South Africa because British Airways alleged that SAA had a protected

monopoly in air travel to South Africa.

State enterprises in developing countries usually have a history of financial losses,

overstaffing, and are burdened with excessive debts, which explains why they are sold

in the first place. It becomes difficult to convince investors that a company has value

when its financial records paint the opposite picture. These problems are particularly

evident at SAA substantial debts caused by government subsidies provided by

government through Transnet slowed down the process of commercialization. Stella

Sigcau (FM: 1998) the former minister of Public enterprises commented that the debts

are part of the factors hindering privatization.

Recently, war and political uncertainty have increased on the continent. The conflict

in the former Zaire and political problems in Zimbabwe, for example, resulted in

sensational media accounts and brought fear to international investors. Although

many African countries enjoy domestic peace and stability, a few bad cases create a

poor image for Africa as an investment destination. This effect on the currency will

impact badly on SAA. Political risks cause a part of the instability and depreciation of

currencies in the developing world.

In the absence of an effective domestic capital market, investors have to come up

with more cash to pay for privatized enterprises to meet investment costs. This

precondition creates a poor environment for investors particularly for those who

intend to provide foreign direct investment. Other financial issues, such as exchange

rate instability and the lack of currency convertibility, also reduce the attractiveness of

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privatization in unstable economies. An overseas listing for SAA may become

necessary because of these conditions. SAA may however not be able to cope with the

pressures of international business unless a strong team of expatriate managers is

recruited.

Studies carried our on privatization in developing countries such as those of Boubkrai

2000, Andic (1989) and Cowan (1990) identified obstacles to privatization in

developing countries. By using financial ratios Boubkrai showed that the

improvements in operating efficiency and profitability were much lower in

developing countries and in certain cases insignificant.

5.0 The CASE

Background to South Africa Airways

South African Airways was founded in February 1934, and operated as a government

department under the department of civil aviation until April 1990 when it was

incorporated into Transnet a newly founded parastatal organization which operated

under a government legislated monopoly. Other transport related government entities

that were incorporated are the railways (also called Spoornet) the habour and sea

transport (now called Portnet) the road haulage called Autonet and other smaller ones.

After change of government in 1994 pressure for government to follow free market

policies and to reduce government subsidies a process of privatization was initiated at

Trasnet. This involved corporatisation and commercialization as means of

restructuring state owned enterprises ahead of privatization or complete divestiture by

government through an initial public offer (IPO).

Transformation of South African Airways was part of the greater changes in South

Africa and included increased autonomy from Transnet, employment equity, black

empowerment, promotion of Trade and Tourism, and most importantly the return to

profitability.

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This initiative was a government policy decision that was made under difficult

economic conditions due to pressures caused by escalating budgeting deficits, lack of

avenues for the private investors, an unbalanced capital market and inefficiency in

state enterprises. The Transport sector under which SAA falls needed greater

effectiveness and efficiency to better meet the needs of different customer groups both

locally and globally.

Transnet governs SAA with a mandate from government through the Minister of

Public enterprises. SAA is a division of Transnet and this relationship is burdened

with substantial financial liability carried by SAA. In 1997 SAA’s balance sheet

showed a two billion rands interest free loan from Transnet whose repayments were

costing the airline about R13 per million per month. In addition foreign and domestic

loans of R1.7 billion, SAA also had pension fund debentures of R260 million, as

undisclosed liabilities to its pensioners. The loans had been accrued by of the old SA

Transport Services (SATs), Transnet predecessor. Although there was an intention to

privatise SAA it could only be a saleable assets if a way were found to deal with

airlines portion of Transnets debt and pension fund liabilities. Eight billion five

hundred thousand rand was raised to finance Transnets fund deficits. Government had

yet to come up with a formula for unloading the remaining three billion two hundred

thousand rand deficit on pension funds (FM, 1998).

To transform the working environment Transnet had plans to be representative of the

demographic profile of the country. SAA set affirmative action targets for a five years

period in which to achieve equity at the work place. An important objective was to

create properly trained black managers at all levels. In a Financial Mail report (May,

2000) six black managers opposed to Coleman and his management style, made

allegations of discrimination at SAA. This was an indication of the difficulty of

transforming and managing the different cultures. Support for Coleman from the

managing director of Transnet appears to have diffused a situation that could have

divided the management team.

It was also a government objective to achieve black economic empowerment through

the restructuring and privatization of state owned assets. For that reason SAA had

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acquired a 21 percent stake in SA Express the airline founded by black owned Thebe

Investments. SAA was also trying to create black entrepreneurs as business partners,

for example an association with FABCOS a black business movement that runs a

travel agency. This was a way of helping black business to enter the travel sector.

Affirmative procurement had been firmly established in areas such as catering, and

supplies from black business.

Government initiated transformation of SAA and implementation took pace through

the Department of Public Enterprises and Transnet. The process was initiated under

Minister Stella Sigcau and then handed over to Jeff Radebe who assumed the Public

Enterprises portfolio in 1998. The composition of the Transnet board of directors was

changed during the corporatisation phase to introduce private sector experience in

preparation for the commercialization of SAA.

At SAA Coleman Andrews was brought in from the United States to lead the

commercialization phase of the transformation process. Coleman Andrews is an

experienced professional with a track record in the Airline industry. He got a

recreational pilot’s license in 1973 at the age of 19. Five years later, with a BA cum

laude from Dartmouth College in the US, he joined California- based consultancy

Bain and Company, which was expanding into airline turn around. Eight years later,

he joined the airline industry proper as CE of World Airways and later became

chairman in 1998, amid controversy over the company’s performance, to become the

CE of SA Airways. Andrews has Republican Party connections: at the age of twenty-

one, he spent two years as staff assistance in President Gerard Fords White House. He

later earned an MBA from Stanford University .He has chaired the advisory board of

Washington based conservative think tank Empower America.

The current international marketing strategy of the South African Tourism will add to

increased output of SAA. South Africa Tourism aims to grow a number of

international visitor’s arrival as well as export earnings, co-operate with all

stakeholders to promote a suitable national tourism culture and environment. A one

hundred and fifty five million rand international marketing campaign was launched in

November 1999 between the private and public sector to pool resources together to

kick-start South Africans Tourism promotion for the new millenium. The Tourism

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industry is expected to increase with depreciation of the rand because international

visitors have a favourable exchange rate.

International Air Transport Services

Golich, V (1990) defines three basic concepts in public policy language. Airline

regulation normally refers to economic regulation where government involvement is

in the safety regulation, air traffic regulation and antitrust monitoring. Airline

privatization refers to the shift from production of goods by the public sector to

production of goods by the private sector. To complete the process removal of any

form of regulation by government to an extent that regulations on landing, gateway,

capacity, frequency and other rights become subject to market forces. In the airline

industry the most visible component has been the private ownership of Airlines.

Airline management responds to market forces after privatization.

Competition in the International airline Industry.

Competition in the international Airline industry is characterized as given in Golich V

(1990) by trading blocks and projectionist policies. Common practices and policies

are the industry’s bilateral agreements that create hubs for passenger and cargo

routing, domestic regulatory systems that protect local and regional airlines through

ancillary domestic market restrictions. Airline subsidies create imperfect competition

and introduce unprofitable routes that can be operated through unfair pricing policies.

The control and ownership of landing and gateways has been used to create

monopolies, which are difficult to break through antitrust laws. Landing frequencies

are a particularly sensitive area because there is a limit on the allocation of flights

landings, this creates an unfair advantage in cases where the industry is regulated

because there is a tendency to favour the government owned airlines.

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Objectives of Stake holders in Privatization

The main stakeholders in the privatization of South African Airways are the

government, Transnet, the management of SAA, the employees, buyers of the service

and shareholders be they private individuals or alliance partners. Proponents of the

privatization are Government, Transnet and the management of SAA and the buyers,

employees and shareholders are parties who will be affected by the process.

Their objectives and expectations for the process are discussed:

In the policy framework document presented in August 2000 the minister of public

enterprises Jeff Radebe stated that the purpose of restructuring is to stimulate

investment, create a comprehensive regulatory framework, protect consumers, deliver

a reliable infrastructure to support trade and industry and increase social spending.

The economic benefits expected from this process are to improve corporate

governance and market discipline in the SOE environment and create greater

management accountability through performance agreements. SAA also needs to

access private equity partners who can provide finance, expertise, and technology.

An agreement was reached between NEDLAC government, labour and business

before the process of privatization (SALB: 1996). This constituted an important

precursor to the process because it meant that government had buy in from

representatives of all the important stakeholders. The main issues covered were set to

ensure the participation of labour in policy formulation processes to ensure that

workers’ conditions of employment were protected and that after restructuring every

effort would be made to retain employees. Equivalent social plans to the jobs lost

would have to be met by government. Further agreements regarding empowerment

were that the processes redistribute wealth, boost small and medium business. As

already mentioned this was an area in which SAA was already active. This agreement

was favourable to SAA because it did not place any restrictions on ownership.

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Management of South African Airways

The goals of management at South African Airways are to improve service levels by a

(65%) sixty five percent as compared to the period after commercialization. It is also

believed that there is (70%) seventy percent in the value of the asset that can be

unlocked due to privatization. In a report (FM, 2000) Coleman Andrews stated that in

terms of service levels SAA is rated as number thirty five in the world. Privatization

would improve this rating to between fifth to seventh in the world in a period of five

years.

Competition and the Regulatory Environment

The interaction of competition authorities and regulators in promoting competition

varies from country to country, and sometimes even within a particular country. SAA

is presently operating under a regulated monopoly, which is designed to give SAA

time to develop sufficient management skills, acquire equipment and technology

before full deregulation of the airline industry. The question of the monopoly was

criticised by Hain (2000) while speaking on behalf of competitors such as British

Airways, Oman (2000 ) also showed that regulated environments are a common

hindrance to successful privatization in developing countries.

Competition policy remains the responsibility of the Department of Trade and

Industry, the Department of Public Enterprises seeks to play an advisory role in

relation to policies associated with each of the relevant sectors in which SOEs will be

active. The policy recommendations by the Competition Commission and Department

of Trade and Industry indicate that the Competition Act will eventually allow for

concurrent jurisdiction to prevail in all regulated industries. Competition authorities

will investigate abuses of dominance and other restrictive practices in consultation

with the regulator. In the longer term, regulators could concede jurisdiction on

competition matters to competition authorities and only consult on other regulatory

decisions.

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6.0 Findings

PEST Analysis

The PEST analysis adopts a global perspective and identifies the critical political

economic social and technological factors that define the environment in which

privatization is taking place. The analysis identifies environmental factors that

influence the strategies and how they impact stakeholders at one level and at another

identifies trends and developments that arise in the new scenario and how they affect

stakeholders. Results are presented in Figure 1.

The above analysis will be used to arrive at conclusions drawn on the key issues

facing stakeholders in the privatization at South African Airways

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Figure 1: Stakeholders Map for the privatization of South Afric

South African Govt.

Stop subsidies to public sector

Debt Relief

Cash flow to treasury

Trasnet

Debt payment

Corporate governance

SAA (Pty.)(Ltd.)

Privatization

World Class Airline

Autonomy

Alliances Partners

International hub

Technology transfer

Equipment replacement

Swissair

Strategic Partner

Shareholder (20%)

Customers

Tourist industry

Business Travelers

Management

Efficiency

Profitability

Minister of Public Enterprises

Major shareholder (80%)

Seller of Asset

COSATU

Job security

Conditions of work

Technological

Technology

transfer

Political Factors

Govt. Restructuring

Competition

policy/Regulation

Tripartite Alliance

Black empowerment

Economic Factors

Emerging market

Non-competitive markets

Monopolistic market

Low purchasing power

Weak domestic capital

Social/Cultural

Sheltered employment

Cultural transformation

an Airways

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Stakeholder Analysis

Table 1 represents the key issues that were identified as being important for the

stakeholders in the privatisation of SAA. An impact assessment was carried out for

each of the issues identified in order to determine if the parties affected would be able

affected favourably or unfavourably.

The results are presented in Table 2 and shows the number of issues in which each

stake holder is expected to experience positive outcomes and the number issues where

outcomes are likely to be negative.

Table 1: Key issues for stakeholder and parties affected

Parties Affected

Key Issue South African

Government

Transnet Management Employees Shareholders Buyers

Transformation - - - -

Profitability and

Efficiency

+ + + +

Competitiveness + + +

Leadership + + + +

Social Welfare - - - - -

Shareholding + + +

Tourism + + +

Globalization - - - -

Pricing + + -

Employment Equity + + + +

Key

+ Favourable outcomes

- Unfavourable outcomes

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Table 2: Number of issues affecting stakeholders with favourable outcomes compared

to unfavourable outcomes.

Stakeholder Gvt Transet Management Employees Shareholders Consumers

No of Issues 10 7 8 5 3 3

Favourable

Outcomes

7 5 6 3 3 2

Unfavourable

outcomes

3 2 2 2 0 1

SWOT Analysis

Table 3: SWOT Analysis of issues affecting the privatisation process of SAA

STRENGTHS WEAKNESSES

Leadership

NEDLAC Agreement

Emerging market setting

Regulated industry

Monopoly

Social welfare costs

OPPORTUNITIES THREATS

Transformation

Profitable and efficient enterprise

Employment Equity

Empowerment

Global competition

The process has strong leadership and there is relatively sufficient consensus and

framework in which to operate, this is a very favourable management key success

factor and can be to leveraged to drive the process to success.

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The SWOT Analysis shows that some of the key issues affecting employees and their

welfare at the work place have a high likelihood of unfavourable outcomes. This

indicates that although privatisation appears to be well conceived there is also the

threat that should it not succeed management and employees are at risk of their

expectations not being met. This result is believed to the fact that the opportunities

that are likely to benefit them are expected to have unfavourable outcomes.

The weaknesses of the process are all related to the external environment which

stakeholders have no control of. Managing of those types of problems will be largely

out of the control of the stakeholders as such it is likely that should the external

environment be unfavourable at the time of privatisation stakeholders will experience

unfavourable outcomes, this factor presents a significant risk factor.

7.0 Discussion

Impact assessment

An impact assessment of the ten keys issues identified in the stakeholder analysis

three appear to standout as the most challenging. The most difficult management

issues identified in the process of privatising SAA are transformation of the

organisation, provision of social welfare and meeting the challenges of global

competition. The process however appears to have strong leadership, very high likely

hood to achieve the operational efficiencies, profitability and service levels. The

modernisation of the fleet and creation of alliance partners is expected key to

implementing this strategy.

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PEST Analysis

Political Factors

The South African political environment is highly influenced by a single dominant

party that is made up of a tripartite alliance between the ANC, SACP and Labour

unions. This alliance is critical for the incumbent government to remain in power. The

framework agreement supports the process and has to hold until privatization is

complete. Should the alliance be disbanded there is a serious threat of change of

government and there will be a need to re-negotiate the entire terms of the

privatization process.

The South African government is under pressure to accelerate black economic

empowerment. Privatization needs to incorporate business and professional

opportunities for formerly disadvantaged local people. This is an important ANC

government deliverable to the electorate. The political pressures on SAA to provide

opportunities for black entrepreneurs are in direct contradiction to the principles of

free enterprise. This condition of the NEDLAC agreement may be difficult to achieve

in light of the fact that SAA managers will be answerable to shareholders that are

driven by the profit motive. Support for small businesses in order to redistribute the

wealth of the country is therefore going to be a secondary issue in the privatization of

SAA.

The question of decision making and the ownership of the process of privatization of

SAA may be very slow because of the number of negotiating parties involved.

Although the decision to privatise SAA was made by government there is still

consultations which need to be made and in this respect SWISSAIR the a strategic

partner owning 20% of the company and a further first right to refusal on another

10%. There is a clear potential for conflict of interest between SWISSAIR and

government when considering the list of promises that have been made to the labour

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unions by government. The question of economic empowerment, employment equity

and affirmative action and minimisation of job losses are not a priority to the strategic

partners. When considering the hidden cost implications of these promises it can be

concluded that for government as a stakeholder there is a risk of not being able to

satisfy their objectives.

The advisors to the government and the banks that sponsor the IPO are normally

international players who have reputations to protect and loyalties to their own

business partners in the rest of the world. These partners include the IMF and World

Bank whose policies encourage privatisation as an additional incentive for attracting

foreign direct investment. Given this scenario there is additional pressure on the

government to comply with what the advisors and bankers recommend even at the

expense of the local stakeholders such as workers manager and even alliance partners.

The most serious doubt and potential conflict for the government is that privatisation

processes are so highly influenced by the expectation that compliance with advisor’s

recommendations will bring in more foreign direct investment. There is however no

proof that compliance leads to more investment, this problem has been viewed with

suspicion. This is particularly considering that the IMF sponsored structural

adjustment programmes which were complied with in such cases as the ESAP

(Economic Structural Adjustment Programme) in Zimbabwe in 1992 did not bring a

flood of foreign direct investment.

Corporate governance in South Africa is being aligned to international standard, the

King Report of 1990 guides reporting structures and business ethics, which result in

transparency and accountability of business leaders. During corporatisation Transnet

introduced a diverse board of directors with substantial private sector experience. This

is an important part of the restructuring and is key to government and private

managers achieving their objectives with respect to profitability and efficiency of

operations. Unions on the other hand will lose bargaining power as decisions become

more driven by market forces. Under these circumstances a clear trade off exists for

workers because the private sector offers better income and skills training than the

public sector. Considering that sheltered employment in the public sector is also

attractive, staying at SAA may require a mind shift among employees in order to

adopt a private sector culture.

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Because the world is experiencing convergence of economies and transnational

corporations are becoming homeless, competition will move from domestic or local to

international arena. The need to compete in the international arena, will reduce the

bargaining power of stakeholders such as government, unions, and consumers

considerably and they will be exposed to the forces of the free market economies.

The short-term profit orientation of international investors is not in the interests of

local stakeholders such as government and management. Large-scale movements of

capital which local stakeholders have no control over will leave South Africa and

developing countries particularly vulnerable.

Economic and Factors

Evidence from Oman (2000), Megisson et al (1994) Boubakri et al (2000) show that

the competitive and regulatory framework in the developing and emerging markets

are a hindrance to successful privatization. For privatization to achieve many of its

objectives government will need to change the laws of the country to follow

international practice of free market policies. To develop the necessary competencies

additional expenditure will be required to set up the competition, regulatory and

judiciary system to support a free market economy. The South African public sector is

already financial strained and other competing government responsibilities have

priority. For that reason there is reason to believe that competitive and regulatory

conditions will not meet the expectations of the international investment community.

A substantial risk of failing to achieve other economic objectives exists because

research from privatization in emerging markets show that improvements are

marginal. A substantial growth in the economy typical of the Asian tiger countries

needs to accompany privatization for it to be successful. This is not the case in South

Africa and therefore operating performance maybe poor and opportunities for creating

more jobs may not arise as is expected. If employees end up without work there is a

possibility that government will be required to meet the cost of retrenched workers as

outlined in the NEDLAC agreement.

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Private sector managers are also at risk of not achieving performance objectives

because of political and economic factors out of their control such as in the Ugandan

Railways case (Geald, 1999) where corruption and mismanagement interfered with

operations to an extent that the company became dysfunctional.

SAA is presently being sued by competitors who allege predatory behaviour such as

adopting unfair price competition strategies that resulted in the insolvency of Sun Air

who declared bankruptcy in 1999. British Airways who are restricted to seven

landings a week claim that the regulations in the industry are creating a monopoly for

SAA in international travel. This situation may attract international attention and

result in retaliatory actions from other countries. Should this happen SAA would lose

the attractive international market because of restrictions imposed on it. It is therefore

inevitable that the restrictions will need to be removed. In this case management may

not have enough time to prepare for international competition.

Social and Cultural

.

Transformation of SAA can be seen as a transition from the public sector to the

private sector and merging of three corporate cultures, that of white Afrikaners, new

management from international partners and shareholders and black management due

to affirmative action. The diverse management team will need substantial time to

function effectively. Strong professional ethics will be required to form a cohesive

team. Recent reports of conflict between Coleman Andrews the CEO and senior black

managers have resulted in the first signs of a power struggle within management. For

managers as stakeholders there are serious implications in that the power to operate

according to strict profit motives is not possible until they take into account the

strength of the affirmative action managers and their corporate culture.

Theory regarding privatization and the management of change proposes that for such

a process to be successful the organization will require a dedicated and well respect

leader who can bring in all the stakeholders aboard. For all the stakeholders the

critical issue becomes who is in a position to lead and can take ownership of the

privatization of SAA. There are several possibilities that can satisfy this role, this can

either be at government level in which case it is the Minister of Public Enterprises Jeff

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Radebe or at corporate governance level that would be either Prof. Louise Tager or

the managing directors designate, Mafika Mkwananzi. For professional managers the

issue of leadership and the mandate to respond to market forces is critical, as

stakeholders they will be seriously constrained if they need to consult too many

parties before implementing strategies. Coleman Andrews has demonstrated

capability in this regard, however he appears to need support from government or

Transnet. The sustainability of his commercial achievements beyond his tenure have

been questioned.

Boubakri et al (2000) concluded that the ownership structure is not an important

factor in the achievement of profitability and efficiency. For the government as a

stakeholder mechanisms to transfer ownership through the purchase of shares by the

general public is required to achieve mass redistribution. The only visible change in

ownership has been to a minor black elite, because trickle down theories have proved

to be ineffective in redistributing to the underclass. The issuing of shares through

vouchers and other preferential schemes have also been ineffective in New Zealand

and Russia. A new and innovative scheme to enable the underclass to own shares will

be required this is considering that the underclass do not have disposable income to

invest in the shares. Black entrepreneurs will also need training and support to supply

services to a SAA after privatization, as a result the NEDLAC agreement seems to

ignore an important part of the requirement for empowerment through the private

sector.

Tourism, the biggest growth industry in South Africa, has potential for generating

much needed foreign currency for the government If SAA can deliver the required

levels of service and enhance the competitiveness of the tourist industry, this is an

area in which government can realise benefits. Problems are however expected to

arise because of the monopoly that SAA has on routes. Deregulation may force

pricing structures to be reviewed and this will affect profit margins that are already

strained. Indirect stakeholders such as the travel and tour industry are also likely to

pressurize the government. The scenario described above points to the fact that the

monopoly will need to be removed to achieve goals of the tourism industry.

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Technology Transfer

The transfer of technology and revamping of SAA’s ageing fleet is the most universal

benefit for all the stakeholders, and presents itself as a win-win situation for

government, management, buyers and unions. The improvement in operations will be

highly determined by the ability to take advantage of the convergence of technologies

to manage the booking systems and create further alliances in virtual space. On-line

and real-time communications with travel agents and tour operators facilitate the

objective of making South Africa an easily accessible destination for overseas tourist.

will be a key benefit for customers. The streamlining and standardization of the fleet

is going to reduce costs of maintenance, training and operations which will help

reduce the cost of travel to the consumer.

8.0 Conclusions

The research project shows that in the case of privatisation of SAA ten management

issues have been identified as critical for stakeholders. Impact assessment shows that

the process has strong leadership, and there is a high possibility of achieving

operational efficiencies and profitability, improve service levels for the tourist

industry. However external forces such as globalisation and competitiveness in

international market present significant threats. Social welfare objectives are also

likely to be difficult to achieve considering that there are significant conflict of

interests among the different stakeholders.

The cost of privatization through commercialization, corporatisation, and a public

share offer has hidden costs that include time, that need to be investigated further to

determine the actual cost of privatization to government and stakeholders.

The NEDLAC framework agreement that binds the government to provide welfare for

those workers who are laid off and to cater for emerging entrepreneurs has training

and welfare costs which have to compete for funds in a constrained government

budget. There is a high likelihood that most of these conditions of the ground rules

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will not be met. This problem is likely to affect the tripartite alliance and alienate an

important section of the electorate for the incumbent government.

The regulated airline industry in South Africa is leading to a monopoly that is creating

unfair price advantage to air travel and competitors on routes to and within South

Africa. This advantage is unsustainable in a global economy and will have to be de-

regulated. Bargaining power of the South Africa government, SAA management,

employees and local shareholders will be lost to the free markets and global capital

further investigations to determine the desirability of such a situation in a vulnerable

emerging market is required.

The leadership of SAA will have to be visionary and dedicated to align the goals of

four different cultures which are stakeholders in the privatization of SAA, This is

expected to be a critical success factor in creating a diverse team which can be

effective in competing internationally. Further investigations into the cost of merging

the four cultures will be needed as part of the financial cost to privatization in order to

determine accurately the operational efficiency and profitability of privatizing SAA.

It is recommended that further more detailed research using conventional methods

after the privatization process has been completed will yield more insights that are not

available at this stage.

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9.0 References

Andic, F “The Case for Privatization: Some Methodological Issues” in (eds) D.J.

Gayle J.N.Goodrich, 1990,Privatization and Deregulation in a Global Perspective :NY

"Quorum Books 37-39

Boubkrai, N. Cosset, J. (1999), “Privatization in the developing countries, An

Analysis of newly privatized firms” Public Policy for the Private Sector. Washington

World Bank Group.

Boyckco M, Shleifer A Vishny R.W.(1996) “A Theory of Privatization” The

Economic Journal. 106

Cowan L.G. 1990. “Privatization in the Developing World” New York, Praeger

Gray J. 1999, “False dawn, Delusions of global capitalism” London, Granta

Publications.

Geald J. 1999 “Privatization of Uganda Railway Corporation” Contemporary Issues

in Social Science and Business, Graduate School of Business University of Cape

Town

Hadebe J, 2000. “An Accelerated Agenda towards Restructuring of SOE Policy

Framework” Ministry of Public Enterprises, Government Printer , Pretoria

Letwin, O. “Privatizing the World, A study of International Privatization in Theory

and Practice” London Cassel Educational Limited

Lloyd T. 2000 “SA Airways: Coleman’s Red Hot Touch” Financial Mail 18th April

2000

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Kolderie, T. “Privatization: The two different Concepts of Privatization” in (eds) D.J.

Gayle J.N.Goodrich, 1990,Privatization and Deregulation in a Global Perspective :NY

Quorum Books 27- 31

Marsdern P, 1992 “The Ten Objectives of Privatization” Adam Smith Institute

Martin, B. 1996. “Privatization: Rethinking union strategy” South African Labour

Bulletin Vol. 20 No 2

“Mcgregors Privatization in South Africa 1987”, Juta & Co Ltd.

Megison W. L. Nash R. C. Netter J.M. and Poulsen A.B. (1998): “The choice of

Privatization”, working paper, University of Georgia, Athens.

Meggison W.L, Nash R.C, Randenborgh M 1994 “The Financial and Operating

Performance of Newly Privatized Firms An International Empirical Analysis” Journal

of Finance

“Privatization: Slow progress maybe another hurdle for Investors” Financial Mail 26th

March 1999

“Privatization: Setting the ground rules” South African Labour bulletin Vol. 20 No 2

Qqubule D. “Privatization: Why SAA is still stuck on the tarmac” Financial Mail

24th April 1998

Redwood, J. Privatization: A consultant’s perspective” in (eds) D.J. Gayle

J.N.Goodrich, 1990,Privatization and Deregulation in a Global Perspective :NY

"Quorum Books 48-53

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Web Sites

www.ifc.org

www.dpe.gov.za

www.worldbank.org

www.fm.co.za

www.cosatu.org

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APPENDICES

Appendix A: Qualitative Data Sources

Appendix B: Quantitative Data Sources

Appendix C: Performance of privatized firms after Meggison et al (1994)

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Appendix A

Qualitative Data Sources

Sources of information used are published documents and personal communication

with Department of Public Enterprises and the government IPO offices, SARHWU

the main trade unions at SAA and corporate Communications Department at SAA.

3.1.1 Published Information

South African Government Policy documents from:

Department of public enterprises

IPO offices

COSATU Resolutions, National Congress Mmabatho (1998).

The South African Labour Bulletin

Published research from World Bank group Finance, Private Sector

Transnet Annual Reports 1997, 1998, 1999,

Various published financial and economic journals on privatization.

Personal and Telephonic Communication

:

1 Prof. Louise Tager, Chair of the Board of Directors Transnet

2 Mr. Carel Mulder Director of Communications Transnet

2 Mr. Fani Zulu Director of Communications, Department of Public Enterprises

3 Mr. Andrew Zima, Secretary General SARHWU

4 Mike Fabrious Cape Tourism Board

5 Prof. Ernie Heath, Department of Tourism ,University of Pretoria

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Appendix B

Quantitative Data Sources

Historical performance figures of privatize State Owned Enterprise are well

documented as in Meggison et al 1994, Boubakri 1999. Performance criteria such as

profitability, output, capital investment, government subsidies, employment levels,

and managerial ownership before and after privatization were used to measure

operating efficiency and profitability. This information was collated and used to

show trends in the international experience.

A sample of sixty-one privatized firms operating across twenty-one sectors world

wide, has been used as a benchmark to show variations in the performance .on the

basis of the methodology and techniques used for privatization. The data was further

separated depending on the type of privatization be it partial or complete divestiture.

Statistics for developed countries and developing countries are also separated. The

data used consists of median values of seven different indices with a total of thirteen

different proxies. These indices are presented in Table B1, B2

Selected quantitative data extracted form the Megisson 1994 and Boubakri, 2000 was

used to show performance of privatized firms on the basis of the key environmental

issues that affect stakeholders.

Data is presented for the following variables.

1. Competitive and non-competitive industries. The performance between those

firms that operated in regulated and those operating non-regulated domestic

markets.

2. Full and partial divestiture refers. Firms in which the government in the first

instance sells its entire stake in the firm and the second instance is when a fraction

of the shares were sold. .

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Appendix C

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Comparison Of Performance Changes Following Privatisation For Full Versus Partial

Government Divestiture

This table presents comparisons of performance changes for companies

undergoing full privatisation (where the government sells off its entire

ownership interest) versus those undergoing only partial privatisation, where

the government only sells of a fraction of the shares it owns. The table

presents, for each empirical proxy, the number of useable observations, them

mean and median values of the proxy for the three-year periods prior and

subsequent to privatisation, the mean and median change in the proxy’s value

after versus before privatisation, and a test of significance of the median

change. We employ the Wilcoxon rank sum test (with its z-statistic) as our

test for significance for the change in median values. The final two columns

detail the percentage of firms whose proxy values change as predicted, as

well as a test of significance of this change. The predicted direction of change

is based upon the expectations that governments adopting privatisation

programmes have regarding how the firm will change after it is privatised, as

well as upon the theoretical models discussed in the text. Sales efficiency

uses inflation-adjusted sales figures divided by the number of employees

each year. Deflated sales per employee is normalised to equal 1.000 in year

0 so other year figures are expressed as a fraction of per capita output in the

year of divestment. Real sales levels are computed similarly.

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Performance Variables and

Subsamples Examined N

Mean

Before

(Median)

Mean

After

(Median)

Mean

change

(Median)

Z-Statistic for

Difference in

Medians

(After-Before)

Percentage of Firms

That Changed As

Predicted

Z-Statistic for

Significance of

Proportion

Change

1. Return on Sales

Full divestiture companies

Partial divestiture companies

23

32

0.0537

(0.0538)

0.0561

(0.0429)

0.0765

(0.0611)

0.0824

(0.0594)

0.0228

(0.0164)

0.0263

(0.0128)

2.114b

2.160b

78.3

62.5

3.286a

1.461

2. Sales efficiency

Full divestiture companies

Partial divestiture companies

14

21

0.9396

(0.9321)

0.9670

(0.9640)

1.048

(1.042)

1.072

0.1082

(0.1110)

0.1052

(1.112)

3.010a

2.360b

(0.1305)

92.9

90.5

6.230a

6.321a

3. Capital expenditures to sales

Full divestiture companies

Partial divestiture companies

16

27

0.0873

(0.0612)

0.1344

(0.0823)

0.1997

(0.1071)

0.1507

(0.1350)

0.1124

(0.0226)

0.0163

(0.0130)

2.82a

1.045

87.5

55.5

4.536a

0.575a

4. Real sales

Full divestiture companies

Partial divestiture companies

23

34

0.8759

(0.8624)

(0.9140)

(0.8996)

1.188

(1.158)

1.108

(1.100)

0.3120

(0.2333)

0.1937

(0.1689)

3.726a

3.026a

87.0

67.7

5.264a

2.200b

5. Total employment

Full divestiture companies

Partial divestiture companies

15

24

44,520

(37,870)

38,560

(14,360)

50,710

(45,730)

38,510

(15,000)

6,188

(1,754)

-55

(37)

1.164

0.071

73.3

58.3

2.043b

0.828

6. Debt to assets

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Full divestiture companies

Partial divestiture companies

22

31

0.6940

(0.7640)

0.6396

(0.6240)

0.6753

(0.7071)

0.6114

(0.0634)

-0.0187

(-0.0233)

-0.0283

(-0.0234)

-1.558

-1.793c

72.7

71.0

2.394a

2.572a

7. Dividends to sales

Full divestiture companies

Partial divestiture companies

14

25

0.0049

(0.0010)

0.0173

(0.0086)

0.0321

(0.0242)

0.0289

(0.0177)

0.0272

(0.0190)d

0.0116

(0.0086)

3.200a

3.363a

92.9

88.0

6.228a

5.847a

a Indicates significance at the 1 percent level b Indicates significance at the 5 percent level c Indicates significance at the 10 percent level

d Indicates that the difference between the median changes in dividend policy for companies undergoing full privatisation is

significantly larger than for firms undergoing partial privatisation, at the 10 percent significance level.

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Comparisons of Performance Changes Following Privatisation for companies

Operating in Competitive Industries Versus those Operating in Noncompetitive

(Regulated) Industries

This table presents comparisons of performance changes for companies in competitive

industries (those that are subject to international product market competition and

relatively little domestic regulation) and non-competitive industries, defined as those

industries (principally utilities) that are relatively free of product market competition

and are subject to rigorous domestic regulation. The table presents, for each empirical

proxy, the number of useable observations, the mean and median values of the proxy

for the three-ear periods prior and subsequent to privatisation, the mean and median

change in the proxy’s value after versus before privatisation, and a test of significance

of the median change. We employ the Wilcoxon rank sum test (with its z-statistic) as

our test for significance for the change in median values. The final two columns

details the percentage of firms whose proxy values change as predicted, as well as a

test of significance of this change. The predicted direction of change is based upon

the expectations that governments adopting privatisation programmes have regarding

how the firm will change after it is privatised, as well as upon the theoretical models

discussed in the text. Sales efficiency uses inflation-adjusted sales figures divided by

the number of employees each year. Deflated sales per employee is normalised to

equal 1.000 in year 0 so other year figures are expressed as a fraction of per-capita

output in the year of divestment. Real sales levels are computed similarly.

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Performance Variables and

Subsamples Examined N

Mean

Before

(Median)

Mean

After

(Median)

Mean

change

(Median)

Z-Statistic for

Difference in

Medians

(After-Before)

Percentage of Firms

That Changed As

Predicted

Z-Statistic for

Significance of

Proportion

Change

1. Return on Sales

Competitive industry firms

Noncompetitive industry firms

41

14

0.0512

(0.0427)

0.0663

(0.0620)

0.0809

(0.0583)

0.0771

(0.0715)

0.0296

(0.0164)

0.0108

(0.0057)

3.07a

0.879

70.7

64.3

2.92a

1.116

2. Sales efficiency

Competitive industry firms

Noncompetitive industry firms

25

10

0.9325

(0.9375)

1.014

(1.034)

1.069

(1.076)

1.046

(1.048)

0.1362

(0.1305)

0.0318

(0.0353)

3.875a

0.612

92.0

70.0

7.740a

6.230a

3. Capital expenditures to sales

Competitive industry firms

Noncompetitive industry firms

36

7

0.1145

(0.0644)

0.1290

(0.1206)

0.1751

(0.1226)

0.1372

(0.1217)

0.0606

(0.0192)

0.0081

(0.0012)

2.286b

0.254

69.4

57.1

2.532b

0.382

4. Real sales

Competitive industry firms

Noncompetitive industry firms

39

18

0.8853

(0.8702)

0.9273

(0.9167)

1.130

(1.147)

1.161

(1.053)

0.2451

(0.2333)

0.2335

(0.1342)

4.124a

2.3086b

76.9

72.2

3.990a

2.105b

5. Total employment

Competitive industry firms 26 41,310

(23,310)

43,650

(23,800)

2,336

(391)

0.381 61.5 1.210

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Noncompetitive industry firms 13 39,940

(59,980)

42,300

(55,130)

2.367

(205)

1.048 69.2 1.502

6. Debt to assets

Competitive industry firms

Noncompetitive industry firms

36

17

0.6081

(0.6231)

0.7768

(0.955)

0.5734

(0.5988)

0.7746

(0.9034)

-0.0347

(-0.0355)d

-0.0022

(-0.0098)d

-2.33b

-1.325

69.4

76.5

2.532b

2.5b

7. Dividends to sales

Competitive industry firms

Noncompetitive industry firms

30

9

0.0128

(0.0049)

0.0130

(0.0057)

0.0260

(0.0176)

0.0435

(0.0434)

0.0132

(0.0082)d

0.0305

(0.0310)d

3.764a

2.606d

86.7

100.0

5.91a

149.9d

a Indicates significance at the 1 percent level b Indicates significance at the 5 percent level c Indicates the difference between the median changes in the competitive and non-competitive industry firms is significant at the 5 percent level.

d Insufficient number of observations for formal test of significance.

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Comparison of Performance Changes Following Privatisation for Companies

Headquartered in OECD Countries (Industrialised Countries) Versus Non-

OECD (Developing) Countries

This table presents comparisons of performance changes for companies headquartered

in industrialised countries that are members of the Organisation for Economic

Cooperation and Development (OECD) versus companies headquartered in

developing (Non-OECD) countries. The table presents, for each empirical proxy, the

number of useable observations, the mean and median values of the proxy for the

three year periods prior and subsequent to privatisation, the mean and median change

in the proxy’s value after versus before privatisation, and a test of significance of the

median change. We employ the Wilcoxon rank sum test (with its z-statistic) as our

test for significance for the change in median values. The final two columns detail the

percentage of firms whose proxy values change as predicted, as well as a test of

significance of this change. The predicted direction of change is based upon the

expectations that governments adopting privatisation programmes have regarding how

the firm will change after it is privatised, as well as upon the theoretical models

discussed in the text. Sales efficiency uses inflation-adjusted sales figures divided by

the number of employees each year. Deflated sales per employee is normalised to

equal 1.000 in year 0 so other year figures are expresses as a fraction of per-capita

output in the year of divestment. Real sales levels are computed similarly.

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Performance Variables and

Subsamples Examined N

Mean

Before

(Median)

Mean

After

(Median)

Mean

change

(Median)

Z-Statistic for

Difference in

Medians

(After-Before)

1. Return on Sales

OECD country firms

Non-OECD country firms

44

11

0.0510

(0.0405)

0.0714

(0.0637)

0.0699

(0.0542)

0.1201

(0.0949)

0.0189

(0.0137)

0.0487

(0.0292)

2.130b

2.445b

2. Sales efficiency

OECD country firms

Non-OECD country firms

32

3

0.9560

(0.9401)

0.9580

(1.0280)

1.0660

(1.065)

1.0270

(1.0260)

0.1099

(0.1128)

0.0689

(0.1305)

3.656a

0.267

3. Capital expenditures to sales

OECD country firms

Non-OECD country firms

36

7

0.1134

(0.0728)

0.1347

(0.0460)

0.1336

(0.1226)

0.3507

(0.1148)

0.0202

(0.0133)

0.2161

(0.0551)

1.877c

1.099

4. Real sales

OECD country firms

Non-OECD country firms

47

10

0.9049

(0.8808)

0.8690

(0.9179)

1.126

(1.078)

1.205

(1.198)

0.2213

(0.1883)

0.3360

(0.2774)

3.963a

2.650b

5. Total employment

OECD country firms

Non-OECD country firms

36

3

43,400

(21,360)

10,280

(10,270)

45,750

(24,380)

12,650

(11,440)

2,344

(168)

2.369

(1,167)

0.668

1.336

6. Debt to assets

OECD country firms

Non-OECD country firms

41

12

0.7036

(0.7334)

0.5207

(0.4719)

0.6904

(0.6693)

0.4587

(0.4312)

-0.0133

(-0.0203)

-0.0620

(-0.0278)

-1.361

-2.628b

7. Dividends to sales

OECD country firms 29 0.0076

(0.0044)

0.0255

(0.0169)

0.0179

(0.0093)

4.281a

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Non-OECD country firms 10 0.0280

(0.0088)

0.0431

(0.0304)

0.0151

(0.0177)

1.835c

a Indicates significance at the 1 percent level b Indicates significance at the 5 percent level c Indicates significance at the 10 percent level

d Insufficient number of observations for formal test of significance.