DECONSTRUCTING THE PRIVATIZATION SCAM – A VERY BRITISH DISEASE

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In Ethiopia, the next big item for sale is the Ethio Telecom. The Prime Minister is excited about it, his advisors are committed to it, and the World Bank is doing the advising. The justification for privatization, in this case, the transfer of public asset to international private investors, is that these private companies do better work, cheaper and more efficiently than the government. In theory, the idea of privatizing public goods and services to reduce costs makes sense. There is a deeply ingrained belief that privatization – selling off or otherwise abandoning a particular activity, and let the private sector handle it – leads to a smaller government that will reduce costs to the taxpayers. But do private companies really do a better job than the public sector? Does privatization really save the government money?
In a 2017 article the Australian analyst David James wrote “It is increasingly evident how pernicious the privatization myth is. Two recent examples have underlined it: the failings in Australia’s privatized energy grid and the usurious pricing in airport car parks. Both examples demonstrated that it is folly to expect a public benefit to inevitably emerge from private profit seeking.”
Over the last decades, there have been numerous examples that prove privatization has resulted in higher costs and consequences when the government turns over public services to a for-profit company. Take the case of Kenya Telecom – and here I will let you read a 2012 article by The East African
Telkom Kenya was privatised at a huge social and economic cost. When the privatisation process started in 2005, the company had a total of 17,480 employees. In 2006, it implemented the biggest retrenchment programme in Kenya when the company sent a total of 7,307 workers home at one go.
Several more have been sent home since. The upshot is that an organisation that used to employ thousands of citizens now has a workforce of a mere 1,649.
Billions were spent on the process of privatising Telkom Kenya. The process of restructuring the company and unbundling it from Safaricom cost Ksh84 billion.
The government had to pay Ksh8 billion ($96 million) towards offsetting the liabilities of the pension scheme. It also undertook to pay a Ksh5.8 billion ($69 million) loan advanced to Telkom by a consortium of local banks to meet retrenchment costs. In all, the government had to pay Ksh13.8 billion ($166 million) in retrenchment costs.
Furthermore, the government undertook to pay Ksh15 billion ($180 million) in tax arrears to the Kenya Revenue Authority.
All this was done in the name of cleaning up Telkom Kenya’s balance sheet to prepare it for privatisation. Clearly, the experiment has not worked.
The political support the company continues to enjoy despite the fact that the privatisation project has not met its objective will no doubt fuel suspicions about the ownership of the company and its links to the political elite
On paper, the Kenya government with a 49 per cent in the company, is technically a minority owner. Yet this is not the picture you find when you examine closely disclosures in the accounts of France Telecom.
For instance, in its own accounts for the year 2010, France Telecom discloses that it owns only 40.3 per cent of Telkom Kenya, implying that its stake is, in reality, smaller than the government’s shareholding in then company.
It is clearly a very convoluted if not complex shareholding structure. Technically, the majority 51 per cent stake is in the hands of one entity known as Orange East Africa, a special purpose vehicle created by France Telecom and a Dubai-based private equity firm, Alcazar Capital.
France Telecom declares in its accounts that it owns only 78.5 per cent of Orange East Africa. Alcazar Capital says it invested $59 million in the deal, putting its stake at 15 per cent.
Clearly, the mathematics just doesn’t add up.
Now let’s go back again to Kenya, and look at the first airline ever to be privatized in Africa: Kenya Airways (KQ). In 1995 KQ was Sub-Saharan Africa’s third-largest airline when privatized (advised by IFC). Today it’s facing “imminent collapse”. We read that overseas banks have even carried out inspections of Kenya Airways’ planes in preparation for repossessing them, should new financing not come through for the airline.
Basically our neighbor’s experience in this area has nothing to envy.
Unable to find a fatal flaw (emphasis on FATAL) in our telephony service network or even our airline, the opponents of public service forces manufactured a fake flaw: the ‘debt’ flaw. By cooking the books with this false entry, the public telephony opponents have been able to wail that our Telecom is broke and continuing to bleed money, endangering taxpayers with a massive bailout. Who would believe that the Telecom monopoly in Ethiopia today is losing money, unless it was purposely set to do so (i.e. corruption, inefficient management, money laundering, fraud etc.)
There are several fallacies in the pro-private business argument. One is the claim that business is efficient whereas government is not. It is true that government is often not especially efficient, but that does not mean the converse applies. Business is often spectacularly wasteful to the extent that most companies go out of business within a decade if they are subject to genuine competitive forces. That, indeed, is why purchasing public assets is so attractive: competition is either weak or non-existent.
So why is this Prime Minister, his minister of finance, and supporters keep flinging this efficiency and ‘debt’ falsehood far and wide? Listen to yourself, you too have been caught up in their fairy-tale, you too have swallowed it whole and routinely repeat it unedited and in unison.
We all understand the Federal Government has an unprecedented national debt of almost USD 30 bl. All measures to improve the situation, including privatization, must be on the table if the country is to prosper. At the same time, those drivers of privatization should recognize that some services and assets cannot be outsourced or sold without drastic harm. I hope that the privatization myth, which has dominated over the last 5 years here in Ethiopia and perhaps some 35 years or so globally, will increasingly be exposed as the scam it is. Today there are push to re-nationalize Kenya Airways in Kenya, British Rail in the UK (read the latest about British Airways), and in many other countries. When these means of production are socialized the benefits grows to all, including all businesses. Now, there are certainly instances where choosing privatization makes sense. The privatization of government breweries was one good example; the privatization of government owned hotels was another one. There were also some lesser businesses that may have benefitted by privatization.
So let’s not get absorbed by the privatization mania, and the willingness of politicians to pander to privateers’ sentiment. There is no reason for Ethiopians to tolerate such a degree of nonchalance about ownership and control over vital infrastructure and public services. We should resist this plan, stop this so flagrant rip-off that’s being presented as our only option….before it’s too late!