SAA: Change the incentives
7 Nov 2017 - by James Peron
The mess that is South African Airways is widely known today. What many do not realise is that Yale University in 1944 published a little book which lays out the reasons for the mess. While it is true that the Ludwig Mises book Bureaucracy does not mention SAA by name, it does dissect the differences between “profit management” and “bureaucratic (or political) management”.
Mises argued that under each system of management there exist incentives. Managers and/or owners respond to those incentives. Transfer the bureaucrat to a system of “profit management” and his actions will change. Put a businessman in charge of a bureaucratic system of governance and he will act like all the bureaucrats before him. Change the incentives and you change the response.
It is not that Mises said there was no place for bureaucratic management, but government-owned businesses are not one of them. Selling police protection to the highest bidder is a problem, but selling airline tickets at a profit is not remotely similar.
Gordon Tullock, in his Politics of Bureaucracy, showed bureaucratic systems do not meet consumer needs. First, the structure is centralised with older superiors having control over their subordinates and, secondly, most subordinates are self-interested and unwilling to challenge their superiors. Profits play no part in this system so there is no counter-force encouraging individuals to promote new ideas. Thus, the same force, self-interest, encourages efficiency under profit management economy but discourages it under political management. Under profit management, self-interested individuals want to profit and can only do so by meeting the needs of consumers, more than by satisfying politicians.
In the delightful anti-racism film Zootopia, animals run the world. At one point, the lead character, July Hopps, goes to the Zootopia version of the auto licensing authority. In the film, the department is run by sloths incapable of doing anything quickly. It is a scene that invokes knowing laughter around the world, no matter the local regime. But with perhaps one exception.
New Zealand privatised the issuing of drivers’ licences to the local Automobile Association. They do the testing. I spent time there and wanted a local licence. First, I found I could go into the local office on a Sunday morning. The privately run department was open seven days a week. With no need for an appointment, I walked in and almost instantly was handed the written test. Once done, the test was immediately graded and after about a two-minute wait, I was told I had passed. The same clerk then used the camera installed at her station to take my photo and said I would receive the licence in the mail. The next afternoon, it was delivered.
I have dealt with bureaucratically managed licensing departments in both South Africa and the United States and seen more Zootopian-type service there than what I witnessed in New Zealand.
It is not that the people working in the US are bad people compared to those in New Zealand. It is just that the incentives are very different.
Some people make disparaging remarks about SAA that seem to imply the problem is “Africa”, or that inept “ANC” types are to blame. But the facts do not really support that theory. The very non-African, non-ANC British Airways, a state carrier for decades, was inept, badly run, losing money; displaying all the same faults as SAA – until it was privatised.
We can find the same phenomenon all over the world, whether it was Swissair, Air India, British Airways, Kenya Airways, Germany’s Lufthansa or dozens of other examples. We find, also, that after privatisation things improve. Of course, not all countries were willing to privatise their state-owned airlines. Ghana refused to privatise Ghana Airways and, in 2005, was forced to close it down due to “staggering debts”, according to David Lawrence at the World Bank.
It does not matter who runs the state-owned airlines. It is not an African thing, or an ANC issue. It is a matter of incentives. Lawrence said the mismanagement of state-owned airlines, no matter who was doing the managing, was universally a disaster: “An article in Handshake, IFC’s (International Finance Commission of the World Bank) quarterly journal, points out that overregulation, overstaffing, excessive debt, political interference and poor management are all too common. The authors, James Morley and Brian Samuel, describe the record of state-owned airlines as ‘abysmal’ and flatly state that ‘governments have no business being in this business’.”
Putting off privatising SAA is now threatening the entire nation. As Misheck Mutize, lecturer of finance at the University of Cape Town, warned in the Mail & Guardian: “The increasing inefficiency in state owned enterprises continues to put pressure on the country’s fiscus. This is not something it can afford. Ratings agencies have made it clear that they’re monitoring continuous bailouts and government guarantees. This is because they pose a serious threat to government’s fiscal balances and policy priorities.”
The real problem is that things are so bad that SAA is not just bankrupt, it is threatening to bankrupt the South African government as well.
Mutize offers one solution. “Some stateowned enterprises will need to be privatised. This is because they operate as monopolies in key sectors which is perpetuating gross inefficiencies. Only privatisation will end these distortions.” He says the country must root out the ingrained predatory state. Only then can investor confidence begin to be restored, recovery restarted and rating downgrades reversed.”
Or, as Mises might put it, it is time to change the incentives that encourage managers to do the right thing.
James Peron is the president of the Moorfield Storey Institute and author of several books including Exploding Population Myths and The Liberal Tide. He has written for numerous newspapers including the Johannesburg State, the Wall Street Journal (Europe), the Auckland Herald and others.