Transnet and the state’s new spin on privatisation

The government’s draft plan for the beleaguered port and rail operator advances the ideal of an entrepreneurial state

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Last week, the state’s plan for Transnet came to light through its draft Roadmap for the Freight Logistics System in South Africa — a 124-page document outlining the various reforms that will be undertaken to rehabilitate the beleaguered port and rail operator.

The document, which is marked confidential but has reportedly been circulated among business and labour leaders, sets the scene for the private sector’s broader participation in the country’s rail network.

In one particularly interesting section, the document’s authors consider the state’s developmental role, which the government has been accused of disregarding in light of its efforts to push through a reform agenda which seemingly has privatisation at its heart.

The section borrows from economist Mariana Mazzucato’s idea of the entrepreneurial state, set out in her 2011 book of that name. 

In quoting Mazzucato, the document’s authors offer a new spin on the privatisation narrative which is certainly more palatable than the alternative — an enfeebled state at the mercy of a profit-hungry private sector. The question is, will the government genuinely pursue the entrepreneurial state ideal or will it be derailed as it endeavours to protect narrow interests?

This part of the roadmap contains an important admission — that the corporatisation of the country’s state-owned entities has failed. The push for corporatisation relied on the idea that it would lead to greater innovation and commercial agility, characteristics that are generally not ascribed to the state, which is all too often cast as inertial (as Mazzucato explains).

“While the corporatisation of SOEs was intended to enable them to remain agile and responsive to changing business environments, they have largely failed to keep up with the evolving dynamics of the sectors in which they operate,” the document notes.

“Rather than adapting and reforming to remain cutting-edge, they have stagnated and remained attached to business models that are increasingly unviable and abandoned by the rest of the world.”

These problems have slowed growth, deterred investors and placed extraordinary burdens on the fiscus, the document adds, noting that this reality has necessitated difficult trade-offs.

Elsewhere, the document focuses on dilemmas arising from Transnet’s corporatisation specifically — noting that, for much of its history, the entity has been governed under vague and often unfunded operational mandates. This pitfall of corporatisation has manifested in most of the other state-owned entities, including Eskom.

“In particular, Transnet has been expected to undertake explicit developmental mandates without explicit state subsidies to finance these mandates,” the document notes.

“This has created a tension between Transnet’s role as a profit-maximising corporatised entity, effectively operating on a commercial basis and its role as part of the developmental state … In short, it is unreasonable to expect an SOE to deliver on development objectives which are not commercially feasible without providing adequate funding.”

The document admits that years of underfunding have precipitated the current crisis. But it also advances the idea that the government has been left with limited options insofar as funding is concerned. 

For this reason, the plan sets forth mechanisms through which private sector funding can be leveraged. These include rolling-stock investments, concessioning and private investment in feeder and short lines, all of which come with certain caveats and risks.

As Mazzucato has explained, one of the key dilemmas set up by such financing regimes is that they have tended to socialise risks and privatise returns. This as the state — and the people whose interests it is supposed to be looking out for — is made to pay for market failures through bailouts or higher administered costs.

One example of how a state has paid for its dalliance with the private sector is seen in the privatisation of the UK’s rail network three decades ago. 

Although the Conservative Party has celebrated the success of the dismantling of British Rail, many consider the UK’s privatisation experiment a dismal failure. The privatisation of British Rail involved separating its infrastructure, rolling stock and operations.

As political economist Andrew Bowman noted in a 2015 paper, the companies that make up Britain’s privatised rail transportation system have benefited from extensive state subsidies, “which have allowed backers of privatisation among the train operators and the political elites to maintain their narratives about the promise and outcomes of privatisation”. 

Meanwhile, as private companies extract profits, train fares have risen rapidly — a fact which has caused the public to turn on Tory-backed privatisation.

Importantly, South Africa looks poised to repeat what is viewed as the fatal mistake committed in the UK — vertical separation.

Indeed, the treasury has already imposed a requirement on Transnet to implement vertical separation — the splitting of infrastructure and operations — in freight rail as a condition of funding provided in the 2023-2024 budget. Vertical separation is also being undertaken on the Passenger Rail Agency of South Africa’s network.

The roadmap even fesses to the fact that it would be technically more efficient to run a railway as a single entity but suggests that the benefits of greater competition outweigh this downside. This is despite a view that any efficiency losses associated with vertical separation are likely to be largest on the iron ore and coal export lines, which also happen to be among the most lucrative.

Mazzucato writes in her book that we live “in an era in which the state is being cut back”. 

“Public services are being outsourced, state budgets are being slashed and fear rather than courage is determining many national strategies. Much of this change is being done in the name of rendering markets more competitive, more dynamic.”

While it may be true that building partnerships between the private and the public sectors can be an important factor in fostering innovation and much-needed economic growth, it is key — as Mazzucato argues — to avoid past pitfalls in the process.

This requires building a state strong enough to shape markets, rather than one that will be cut down to size in the name of coddling investors. A bigger, bolder state will refuse to be backed into a corner.

Doing so will ensure that the risks, and the rewards, are equally shared and that growth is inclusive.

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