Politics

Regulatory capture – SA after the sale of Eskom

In the 1990s, many countries in the former Soviet bloc, Latin America, Africa and Asia adopted, in varying degrees, reforms aimed at replacing state intervention with market-driven policies. This was deemed a resounding victory for neoliberal economics and market fundamentalists. Luigi Manzetti claims, ‘Theoretically, they were based upon the theories of neo-liberal economists such as Freidrich von Hayek and Milton Freidman.’

These ideas basically inspired the political agenda of the likes of Augusto Pinochet (Chile), Margaret Thatcher (UK) and Ronald Reagan (US) in the 1970s and 1980s. ‘By 1989, important international financial institutions (IFIs) such as the International Monetary Fund (IMF), the World Bank, the U.S. Treasury Department, and think tanks came to the conclusion that market reforms, based upon the same neo-liberal ideas, were the only way to revive the ailing economies of less developed countries,’ adds Manzetti.

John Williamson described this convergence of policy prescriptions as the ‘Washington Consensus’ since many of its proponents were based in the US capital. It is interesting to note that these ideas originally came into being in the late 1980s ‘as a set of policies to help Latin America to get out of a decade-long stagnation period’. What is intriguing though is that the very same Latin American economies, see Argentina, Ecuador and Venezuela, still face the same uncertainty as they did then.

Nonetheless, Washington Consensus policies propagated for economic deregulation, trade liberalisation and privatisation. In simpler terms, these policies sought to remove government control of the economy. One key and perhaps most controversial policy intervention the likes of Hayek and Friedman put forward was that ‘the divestiture of government- (or state-) owned enterprises (SOEs) would accomplish both economic and political goals’.

This article explores the privatisation outcomes in Mexico and also draws lessons from the sale of the large Mexican telecommunications company Telmex, an equivalent of Telkom in South Africa. As the talk of privatising SOEs gains momentum, this is a warning about throwing caution against the wind. Short-term focus of relieving pressure from the fiscus could have serious intended and unintended consequences that may easily result in regulatory capture and other political and socio-economic implications.

Although privatisation occurred in many sectors of the Mexican economy from airlines to telecommunications, I have deliberately selected the telecommunications sector. Many years after de-regulation, the telecoms sector in Mexico is in the hands of one powerful company called Telmex. It is therefore necessary to understand how this situation came about with a view of predicting what is likely to happen in South Africa when the SOEs such as South African Airways, Eskom, Transnet and Denel are finally auctioned in the market.

The argument for privatisation was that it would result in competition in the economy and this would eventually lead to better products, lower prices and greater attention to customers’ needs. The political argument was that there was a need to ‘deprive politicians of the discretionary power to favour powerful lobbies within the business and labour sectors and in the process, prevent them from engaging in corrupt and collusive activities’.

One would imagine that it was these reasons perhaps that compelled countries in Asia, Africa and Latin America agreed to these structural reforms in their economies. Nevertheless, the truth is that most countries were desperate to revive their economies, so the IMF and World Bank enticed them to embrace the new economic thinking at the time, without properly evaluating the consequences of these policies. One country that instituted large-scale privatisation was Mexico.

Mexico had state-owned companies in areas such as telecommunications, telephones, and water and sanitation, as it is presently the case in South Africa, regulated themselves under the supervision of a variety of government departments or ministries. However, the Mexican government faced severe budget constraints in the same way as South Africa at present. Subsequently, the US, the IMF and the World Bank pressured Mexico to privatise many of its public utilities.

According to Manzetti, the SOEs ‘were plagued by severe financial losses and were no longer capable of meeting basic investment requirements in service coverage and technology upgrading.’ As a result, Mexico became a guinea pig or test case for privatisation in Latin America and this sparked a huge debate ‘about the role of regulation in a market economy with or without privatisation’. Signs are all over to indicate that South Africa could be facing its pressures to privatise its own SOEs to reduce strain on the fiscus.

Under the presidency of Raul Salinas from 1988 to 1994 Mexico underwent a radical shift in economic policy. Following the 1982 financial crisis, the US granted Mexico an emergency loan package to help the country avoid bankruptcy. Nevertheless, there were strings attached to this loan because it gave the US latitude to force the administration of President Miguel de la Madrid (1982-1988) to cut government expenditures and attempting some minor privatisations.

However, it was under Salinas that ‘the thrust of market reforms, with strong hacking from the United States, the IMF and the World Bank (the latter two provided both economic and technical assistance) began to truly reconfigure the Mexican economy’. Salinas was keen to see Mexico join the North American Free Trade Agreement (NAFTA) and removing economic barriers was one of the pre-conditions for acceptance. In addition, the government introduced the state divestiture programme that was supposed ‘to modernise the country’s economy and improve its efficiency in allocating resources’.

The effects of NAFTA (now called the United States–Mexico–Canada Agreement or USMCA) on the Mexican economy, many years after the country’s admission in 1994, are well documented. Deregulation for internal and external convenience altered Mexico’s economy for good. It did not come as a surprise when Mexico re-committed to a toxic USMCA relationship in 2018 because its economy is dangerously tied to the US economy. Removal of barriers allowed US companies not only to destroy key sectors of the economy but also to replace Mexican companies with the exception of Telmex.

Telmex was created in 1972 with exclusive control of the telecommunications sector in Mexico. The company was later beset with massive problems including high deficits due to low tariffs, limited coverage and an increasingly outdated technology due to lack of investments. Mansetti reasons, ‘As the fiscal deficit reached 5% of the gross domestic product in 1989, privatising Telmex offered Salinas an opportunity to raise some badly needed funds.’ Salinas also wanted to signal to the international investors that Mexico was ready for foreign direct investment (FDI). This now sounds familiar to most South Africans.

To make Telmex financially attractive, the government increased tariffs in the same way as Eskom constantly want price hikes. Analysts have consistently argued that South Africa had the lowest electricity tariffs in the world. Sean Moolman argued in 2017 that Eskom had obtained a 350% increase in a decade and had dramatically outpaced inflation since the first load-shedding crisis in 2008. The Salinas administration wanted to sell Telmex as a vertically integrated company with exclusive monopolistic conditions on all services.

Manzetti says that ‘international investors had openly contradicted the government’s stance on the monopoly concession even before the Telmex sale.’ They favoured the option of breaking up the company into smaller, regional operators, to keep investment, labour and operating costs down.

The idea of breaking Eskom to three companies is not new. One commentator suggests that this proposal first came up with the apartheid government in the late 1980s when the first state-owned companies like Yskor and Sasol were sold. In the case of Telmex, however, the company was left intact and the new owners would have the privilege of taking over a true monopoly.

Salinas wanted to ramp up political support and to gain popularity in Mexico because his leadership was being questioned. Firstly, he preferred ‘a domestic investor under very lucrative conditions, he could bring into his camp what was likely to become a major company that would surely contribute generously to his Institutional Revolutionary Party’s electoral campaigns for years to come’. The Institutional Revolutionary Party was in charge of Mexico for an uninterrupted 71 years from 1929 to 2000 and again from 2014 to 2018.

Secondly, he wanted to please the Telmex union which would retain its bargaining power and workforce. Thirdly, by keeping the company in Mexican hands Salinas would appease both left-wing political parties and the nationalistic faction within his party, which were both ideologically against foreign investments. These two points indicate that Eskom could be sold to a South African should it be wholly privatised to placate alliance partners and trade union bosses. The argument would be that the new owners will not contribute to job losses and that the company would remain ‘proudly South African’.

The only issue that would frustrate such an approach is that coal is under pressure due to commitments to the Paris Agreement on Climate Change. Already there are discussions on discarding coal altogether in favour of other sources. Nonetheless, anyone who acquires Eskom would take over a vertically integrated company and this will give him or her an expansive infrastructure and a secure market.

Privatisation is a highly-charged political process that often does not result in economic goals that are usually advanced by its proponents – such as creating competiveness, cheap prices and improved governance. The coal versus nuclear debate came up a few years ago but it quickly moved to Russia, which at the time was also accused of influencing the US elections. Global political dynamics triumphed and no nuclear plant was built in South Africa.

In an opinion piece in the Business Day (26/04/2019), Des Muller, an engineer with experience in thermal, renewable and nuclear, argued that the Zuma administration ‘would have saved us from our electricity crisis … and would contribute to growth and jobs.’ He added that gas turbines and modular reactors ‘are an optimum replacement for our old decommissioned coal power plants.’ The energy resource plan has stayed largely the same and coal still dominates energy production.

Coal provides the country’s base-load and renewables only contribute less to electricity generation in South Africa. Increasing the share of nuclear in the energy mix and decommissioning of old coal power plants could be interpreted as a signal that the new investors would need to build nuclear power plants and, or gas distribution networks to secure a base load.

The monopoly will stay intact, but the only difference is that it will be in the private hands. Other players will continue to be accommodated via the IPP arrangement while the monopoly would control distribution. In this way, the Eskom privatisation would gain support from the IMF and the World Bank, among others, because it would have been said it will create a competitive environment in the electricity sector.

When justifying its decision to support the Telmex privatisation in the manner Salinas pushed for, the World Bank argued, ‘sector solutions are shaped by the country’s political institutions and electoral arrangements, the interests of constituency groups and the role of the government judiciary.’ At the end of the day, two Mexican entrepreneurs expressed interest to buy Telmex, namely, Roberto Hernandez of the investment bank Acciones y Valores de Mexico (Accival) and Carlos Slim, owner of Grupo Carso.

Both Hernandez and Slim were close to the ruling PRI. In fact, Slim had been involved in the NAFTA negotiations and had been an outspoken endorser of Salinas’ economic reform agenda. It did not come as a surprise when Slim won the bid. Slim is now not only the most powerful Mexican but he also ranks amongst the richest people on earth.

Today Telmex owns 90% of the telephone lines in Mexico City and 80% of the lines in the country. Moreover, its mobile service company Telcel equally dominates the market by up to 80 percent. Over the years, the company has grown to become a multinational with operations in Argentina, Chile, Colombia, Brazil, Ecuador, Peru, Venezuela and other countries in Latin America.

Slim is often referred to as a de-facto Mexican minister of telecommunications. No wonder his company retains a status of a monopoly and continues to milk the Mexican public. Slim’s acquisition of Telmex allowed him to make large profits in a very quickly and granted him tremendous political and economic clout in Mexico. Judith Mariscal and others state that Slim’s company Grupo Carso in the 1990s accounted for about 40% of Mexico’s stock exchange worth.

The money of the Mexican citizens was given to Slim who in turn has become a monster that regulates himself at the expense of the very same citizens whose asset was taken away from them. In 2009, for example, Guillermo Ortiz Martinez, the then governor of the Mexican Central Bank, ‘accused Telmex of systematically obstructing competition, forcing consumers to pay some of the highest rates in the world and creating a serious impediment to economic growth.’

Anyone who takes over Eskom will also gain unfettered power to control energy production and prices. Eskom will act like an unregulated monopoly for many years to come.

Slim has maintained a powerful position that has gone far beyond what Salinas had anticipated. It does not matter which political party or president is at the helm in Mexico, Slim’s interests are well protected more than what anyone can imagine. There are valid reasons why Slim has been able to convince Presidents Ernesto Zedillo (PRI), Vincente Fox (PAN), Felipe Calderon (PAN), etc. to continue Telmex’s dominance of the telecommunications sector in Mexico from 1994 to date.

This is understandable because government is literally in the mercy of Telmex. The company owns Mexico’s telecommunications sectors from telephones to internet. Telecoms and energy are nerve centres that can easily be manipulated against any government. Eskom’s privatisation could take away power from government to regulate energy prices. In addition, whoever has control over energy can dictate to the country whatever he or she desires.

By Siyabonga Hadebe 

Image by Andreas Lischka/Pixabay

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