Trade and Industry

Thursday, 01 December 2005

Working Paper 6 - 2005: Determining an Appropriate Methodology for an Economy-wide Study of the Impact of Restructuring and Privatisation on the SA Economy

  • Year: 2005
  • Author(s): Dirk van Seventer; Richard Goode
  • Countries and Regions: South Africa

Since 1994, some restructuring of state-owned enterprises (SOEs) has taken place in South Africa (SA), which has included elements of corporatisation and commercialisation, as well as partial privatisation. The Government has committed itself to more reform. This is an ongoing process, and to inform this process an investigation into its economy-wide impacts in SA has been suggested.

Such an investigation would benefit from a two-stage approach, starting with a scoping exercise that aims at assessing relevant international experiences and the most appropriate methods to be adopted for the actual analysis, which is to take place in the second stage. In this report we undertake the following:

  • A review of selected approaches adopted internationally towards modelling the macroeconomic impact of privatisation and restructuring.
  • A review of existing and current work in SA that will be useful in determining the macroeconomic impact.
  • A review of the data requirements of the various options, and the current availability of data in SA.

In spite of the main interest being an economy-wide impact analysis of restructuring and privatisation, the main drivers of any macroeconomic or economy-wide impact analysis of restructuring and privatisation are to be assessed at the micro level. Given bottom-up inputs from the micro scoping analyses, the challenge then is to consider appropriate ways of undertaking an economy-wide impact analysis.

Restructuring and privatisation is an ongoing process, with some milestones having been achieved while others are lagging behind the initial schedule. It is not easy to establish a definitive point at which, or period in time during which, a particular process of restructuring and privatisation was undertaken, sealed and closed off. In most cases, the reforms in SA focussed on corporatisation of the SOE, which was poorly sequenced with the introduction of new, more appropriate regulatory frameworks and regulatory institutions. Changes to the market structure, aimed at introducing competition, have not played a significant role in this process. The result has been ineffectually regulated public monopolies, which are detrimental to consumers and the economy at large.

Consequently, given the dearth of actual reforms, there is perhaps little that can be learnt from an economy-wide impact analysis of these rather convoluted and limited restructuring processes. Instead there may be greater interest in the economy-wide implications of more stylised type of processes. We think it is important to ask a number of 'what if' questions while keeping everything else constant. With this 'tool', the relevant stakeholders (policy-makers, union representatives and business) will perhaps find it easier to assess the likely impact of major policy choices with regard to key industries. In the past, these discussions were often based on rather dogmatic conjecture, with the direct impact of restructuring (such as employment losses in Telkom) the dominant concern, with little appreciation of the broader, economy-wide consequences.

Moreover, the stylised approach allows for comparative scenario analysis, which will provide valuable insights into the inevitable trade-offs in reform processes. It will, for instance, be possible to rank the scenarios with respect to certain critical variables, be these employment, prices or other policy variables, so that informed decisions can be made regarding the preferred road ahead. This approach will provide a 'menu of options' to form the basis of discussion between Government and other stakeholders, hopefully preventing a focus on direct employment effects unbalanced by the costs of inefficiency commonly associated with restructuring debates.

In addition, the economy-wide modelling framework proposed will allow for anomalous economic events to be excluded from the analysis so that the impact of reform can be discussed in the absence of events that may have exaggerated or mitigated SOE restructuring and may well have resulted in unexpected and unpredictable economic outcomes in the opposite direction of the intended reform.

If we were primarily concerned with stylised reform scenarios, a casual interpretation would imply that we take a forward-looking view (as it will be difficult to explain a 'clean' stylised scenario of reform that has taken place in the past) for which the modelling exercise produces an outcome that is radically different from what has been observed. Typically, exogenous economic events may have thrown a spanner in the works, and for the sake of comprehensive reporting, these other events also need to be taken into account in the analysis, both at the micro and the macro level. Although this is in itself an extremely important exercise and it was indeed one of the objectives of Chisari et al (1999) to show the interplay between major external shocks and reform in Argentina, the interpretation of the ex-post impacts of reform becomes considerably more complicated, as it will be difficult to separate out the impact of reform from the impact of exogenous shocks.

The above also suggests that as drivers of economy-wide policy options, the micro studies should stick to stylised representations of the reform that is still to take place. In the SA context the proposed sectors of relevance are electricity, transport (ports and rail) and telecommunication.

In terms of the organisation of this report, we start with a review of national and international analyses that offer accounts of economy-wide impact assessments of restructuring and reform. This is followed by the scoping of a number of micro-level case studies in the SA context. In section 4 we attempt to pull together the findings from the scoping of case studies at the economy-wide level by giving an indication as to what is possible with the current modelling frameworks available for SA in terms of an impact assessment of restructuring and reform of SOEs. We end with a conclusion.