Commanding plights

SCOOPING up gems from the beaches that form part of one of the world’s richest diamond deposits ought to be about as profitable as, well, scooping up diamonds from a beach. Yet South Africa’s state-owned diamond miner, Alexkor, has managed to make a hash of it. Over the past decade it has posted losses more often than profits and has needed frequent bail-outs.

Evidence of its staggering incompetence can be found in nearby Port Nolloth, a town of a few thousand souls who huddle between icy Atlantic winds and the Namaqua desert, yet drive a surprising number of luxury German cars. This is because as many as half of the diamonds it mines there fail to make their way onto Alexkor’s income statement, according to diamond-industry insiders. (The government says that only 10% are stolen.)

One old wheeze for getting gems out is to smuggle homing pigeons into the mine and then send them winging their way home carrying cargoes of rough diamonds. Security guards apparently cottoned on after they found one poor bird so heavily overloaded that it was trying to hop back to its coop. Until then few had bothered to ask why the tiny towns nearby had no fewer than six pigeon clubs. The mine’s managers wring their hands, spend more on security and forecast a return to profitability, only to rack up more deficits.

In this it is not unique. South Africa has more than 700 state-owned firms, though only a few count for much. The biggest include Eskom, the power monopoly, Transnet, the railway and ports monopoly, South African Airways (SAA) and Denel, an arms firm. Between them they account for at least 5% of the country’s economic output. Yet these behemoths are mighty drags on growth. During the global commodity boom before the 2008 financial crisis South Africa’s mines struggled to expand because underinvestment by Transnet had led to bottlenecks at ports and on the railways. Some reckon the country’s coal and iron ore mines could have increased their exports by as much as 50% had they had the means to get their minerals out to international markets.

Chronic underinvestment by Eskom, meanwhile, has led to rolling power cuts that have slashed productivity in factories and mines (as well as irritating South Africans, who like light in their homes). Power shortages contributed to the dire economic news released on August 25th showing that the economy had shrunk at an annual rate of 1.3% in the three months to June. This will be a problem for some time to come: foreign investors wanting to build power-hungry factories have been asked to come back in a few years. Few will bother. Some economists reckon that if Eskom and Transnet were better run, the country could be growing at up to three times its current sickly rate, optimistically forecast to hit 1.5% this year.

Many state-owned firms are also racking up large losses (see chart) and guzzling subsidies. Petro SA, a national oil company that wants to build the largest oil refinery in Africa, will in fact gain a superlative even if that plan doesn’t go ahead: it is about to post a loss of about 15 billion rand ($1.1 billion), the largest ever by a state-owned company in South Africa.

SAA, meanwhile, has soaked up more than 30 billion rand ($2.3 billion) in bail-outs over two decades. In the process it has managed to smother domestic competition: ten of the 11 private airlines that opened after South Africa’s skies were deregulated in 1991 have gone out of business.

Instead of learning the obvious lesson—that the state is not good at running businesses—the South African government seems keen to double down. In mining, for instance, ministers talk about having a state-owned firm take over existing mines that are cutting jobs or going out of business because of low commodity prices. Instead of “unpatriotic” capitalist mines, the government would like more state-owned ones. “We think we should give it a push and see if it works,” says Ngoako Ramatlhodi, the minerals and energy minister.

His policies reflect a wider shift in the government’s move away from markets and towards a “developmental state” in which the government owns “strategic” industries and uses them to pursue goals other than profitability.

When white rule came to an end in 1994 the government of Nelson Mandela inherited a siege economy, full of state-backed firms whose job had been to soften the pain of sanctions by pursuing self-sufficiency. (Sasol, for example, made petrol from coal and natural gas.)

The new African National Congress (ANC)-led government swiftly lowered import tariffs and sold stakes in firms. Investment flowed in. Aeroporti di Roma bought a fifth of the national airports company, Swissair took a similar stake in SAA and investors paid $1.2 billion for a chunk of Telkom, the phone company.

Yet this dash to privatisation soon slowed, because of opposition from the Congress of South African Trade Unions and the South African Communist Party, both of which are allies of the ANC. By 2007 privatisation fell victim to political infighting within the ANC as an alliance of unionists and leftists ousted then-president Thabo Mbeki and backed his replacement by Jacob Zuma, the current president. In return, the left got policies committing the governing party to “strengthening the role of state-owned enterprises”.

Since then the left’s grip on government has grown ever tighter. The finance minister, Nhlanhla Nene, has been sidelined. Most new plans for the economy are now drawn up by two communists, Ebrahim Patel, the economic development minister, and Rob Davies, a trade minister who doesn’t seem to think much of trade. Their model is China. An ANC policy document gushes that the economic “leadership of the Communist Party of China...should be a guiding lodestar of our own struggle.” Many in the ANC like the idea that the ruling party should control businesses directly, and China’s recent troubles probably won’t change their minds.