Concept and International experience of privatization
Concept and International experience of privatization
Bhakit Ram Ghimire
Advocate
call: 0977 9851044189
Concept:
Privatization is the
process of transferring an enterprise or industry from the public sector
to the private sector. The
public sector is the part of the economic system that is run by government
agencies. Privatization may involve either sale of government-held assets
or removal of restrictions preventing private individuals and businesses from
participating in a given industry. [1]
Privatization is an
ongoing trend in many parts of the developed and developing world. Proponents
of privatization maintain that the competition in the private sector fosters
more efficient practices, which eventually yield better service and products,
lower prices and less corruption. On the other hand, critics of privatization
argue that some services - such as health care, utilities, education and law
enforcement - should be in the public sector to enable greater control and
ensure more equitable access.[2]
The Role of the State
Since privatization is aim at reducing the role of the state,
and for the same reason expanding that of the private sector, it is useful to
recall the various reasons why governments have taken on the functions that
they do that are later targets for privatization. First, governments are expecting
to provide the necessary regulatory, legal, and security environment for the
private sector to undertake its functions. Devoted neoliberals see this as the
only major function that should be performed by the state. Crucial among these
functions is the need to guarantee property rights, free disposal of property,
and appropriation of the fruits arising from its use, and the facilitation and
protection of contractual obligations. The second function relates to the provisions
of pure public goods and services such as those related to security and
defense, basic health, education, and sanitation and water. The third function
concerns the provision of goods and services, such as the low level of
development, market failures, missing markets or value chains, the small size
of the local market, or excessive costs of production.[3]
Why
Is Privatization Important?
Since 1979, many
countries have embarked on the course of privatization which has changed the
economic landscape around the world. Privatization has spread too many
industries, including those that had never been privately owned. Privatization
has transformed command economies in post-communist countries into
decentralized ones. It has changed the political balance of power in many
societies and revolutionized global financial markets. Yet, the intellectual
debate on the benefits of privatization is far from over. The available
research shows that the impact of privatization on the privatized firms and on
the economy and society depends on many variables including political and
economic institutions. There are significant complementarities between
privatization and other reforms. It also matters how privatization is
structured and who the new owners are. In particular, there are substantial
benefits to opening up to foreign ownership.[4]
Two important
cases that are often referred to as evidence against privatization: Russia and
China. In Russia, privatization seems to have produced few benefits for the
privatized firms or for society, whereas China has managed to pursue a reform
package that has not so far included the mass privatization of state-owned
enterprises and yet has produced very impressive results. We argue that in both
cases–as well as in other controversial privatization examples such as Latin
America–the outcomes can be explained within the conventional framework once
one accounts for an appropriate counterfactual.
International
experience of privatization
The growing movement to privatize industries, services, and
agencies and the changed conception of government's role are products of
pragmatism: the state-owned sector is not working, and enormous subsidies to
maintain money-losing enterprises and services only get bigger. The conviction
is growing that private entrepreneurs can manage industries more effectively
and operate services more efficiently and at lower cost to the public than can
the government. Evidence supporting private enterprise over public ownership
has emerged in areas of every continent. Now summarizes some of the current
endeavors and successes of different regions.
Europe
Much has been said of the shining example of privatization
provided by the Thatcher government in Great Britain. Motivated by the desire
to promote public share ownership in divested state enterprises and to
introduce competition and market discipline into fields that had been
monopolized by the government, Thatcher's administration believes privatization
will bring both greater efficiency and widespread consumer benefits. The
program has resulted in more than 850,000 tenants becoming owners of houses
formerly owned by local government authorities; majority private control of
British Telecommunications achieved through share offering in a flotation
surpassed in size only by the sale of British Gas Corporation two years later;
and disposal of a variety of other enterprises ranging from road haulage to
hotels to an automobile plant. The new shareholders of British Telecom realized
in immediate profit on their holdings, and telephone service has improved
substantially under private management. Complete privatization, combined with
reduction of the government's share in other enterprises, netted nearly $30
billion within the eighteen months following divestment.
To reduce its losses,
Spain's National Industrial Institute has been ordered to reduce sharply the
number of companies it controls. The government plans to privatize national
energy holdings and is luring foreign interests from the United States, Japan, and
the rest of Europe. In 1985, West Germany stated plans for initial
privatization activities. Deregulation and the arrival of international
investment banks have opened up the bond market, though foreign investors are
not entirely assimilated.
French privatization was
launched in November 1986, only eight months after the election of a
conservative parliament. Projects have included a public offering of 50 percent
of Saint Gobain, a state-owned glass and special materials group. It's interesting
to note that when trading opened a month after the offering, shares were placed
18 percent above offer price.
Turkey has extensive
plans for privatization and the necessary legislation in place to dispose of a
number of state enterprises, but results thus far are limited to the sale of
toll-collection rights for a Bosporus bridge and the Keban Dam. Currently for
sale are state-owned cement and fertilizer companies, among others. For some
time Canada has been in the process of reducing the government's stake in some
of its Crown Corporations by selling them to the private sector; in particular,
the conglomerate Canada Development Corporation is now almost entirely in
private hands. In the past year, completed sales include Canadair Limited (the
state aircraft maker), some mines, two transport development companies, and an
airline.
Privatization in Britain
and elsewhere has not been without its critics. The British government has been
accused of selling national assets simply as a means of increasing revenues to
avoid the politically unpleasant necessity of raising tax rates. The
parliamentary opposition has vowed to reverse privatization if it should come
to power; but as the election of June 1987 shows, the political constituency
that benefits from privatization continues to grow, and it will be increasingly
difficult and costly to revert to government ownership.
The Less-Developed
Countries
Increasing interest in
privatization in the LDCs is reflected in the growing number of requests for
advice and assistance received over the past three years by the missions of the
United States Agency for International Development in establishing
privatization plans. indicative of LDC concern are the figures that emerged
from a cable sent by the U.S. Depart merit of the Treasury to all embassies
and missions in April 1985 seeking information on the status of privatization
efforts at each post. All but four of the nearly sixty replies received
indicated that divestment and privatization of state-owned industries and
services was of concern to their governments. The reason for interest most
often cited was the untenable financial pressures exerted by continued
subsidies. It was evident from the replies that one of the major obstacles to
more rapid privatization was simply a lack of knowledge about how to go about
the process. All too often, governments see divestment as the simple process of
announcing a willingness to sell and finding a suitable buyer at a price the
government is willing to accept. One of the more difficult tasks facing the
missions is to convince LDC governments that privatization can often be a slow,
frustrating activity.
Hand in hand with
privatization go assistance in developing capital markets, provision of credit
facilities, and reform of macroeconomic policies so that the private sector can
expand. Governments must be made aware that little will be gained from
privatization if industries are protected from market forces. In some countries
the private sector is not sufficiently developed to provide the domestic
financing necessary to buy state-owned firms. And there may be resistance to
allowing sales to private foreign investors where this is seen as leading
toward loss of national control over industrial development. Governments need
to be assured that this need not be the case. Examples of successful joint
ventures can be cited to allay these fears. Following are examples of some of
the projects that have been undertaken.
Asia
With some exceptions,
privatization in the developing world has been hampered by the lack of capital
markets, especially legal ones, and by severely limited credit facilities
available to the private sector. Privatization cannot take place unless there
is enough capital in private hands to provide potential buyers for state divestiture.
Substantial progress has been made in Southeast Asia in developing
sophisticated financial institutions; consequently, privatization has made
correspondingly greater progress there than in the rest of the developing
world. A second major difficulty faced by many countries is that there is no
real knowledge of the extent of the public sector: commitments have been made
by numerous ministries, without central coordination, and as a result the
government may find itself with a financial interest in enterprises over which
it has exercised no control.
In Southeast Asia,
Malaysia has shown an especially strong interest in privatization, in part
because of the examples furnished by Singapore and Hong Kong, and in part
because of the Prime Minister's interest. The government sold a minority
interest in Malaysian Airlines System and expects to relinquish majority
control by 1988. After revamping the fleet of the Malaysian International
Shipping Company, the government partially privatized it in late 1986, and facilities
at Port Kiang have also been sold to the private sector. Maintenance of the
Malaysian national air force is privatized. Much more ambitious is the proposed
divestment of the national telecommunications system, using the British
example. In this case as in others where international business is developing
rapidly, the government is faced with the prospect of investing heavily in the
modernization of the national communications system or having business bypass
it for more efficient private systems. Privatization is the logical
alternative.
Thailand plans to
privatize its telecommunications system as well as its railroads and municipal
transport systems, but these plans have not yet come to fruition. The
government has resolved to curtail its involvement in the oil sector as well.
Formation of a privatization plan is now under consideration. The Philippines
government has launched a program to sell 36 companies owned by the National
Development Corporation, including refining and marketing companies, that were
taken over to prevent their collapse when they failed under private management.
President Aquino completely dismantled the energy ministry during her early
months in power, indicating her dedication to limited state control.
Among the less-developed
nations in the area, Bangladesh has taken a major step toward returning to
private ownership the jute mills, which were nationalized more than a decade
ago. More than 400 public sector assets have been divested, including
newspapers, a fishing fleet, chemical- and food-processing plants, and 8
percent of the government owned steel and engineering corporation. Four of the
six nationalized commercial banks were sold to the private sector. Since 1982
the country has begun deregulation of investment. Since the 1970s the number of
state-owned enterprises (SOEs) has dropped from 90 percent of industrial assets
to 40 percent. Food subsidies dropped from 12.5 to 8.5 percent of the national
budget between 1978 and 1985; during the same period agricultural subsidies
dropped from 10 to 2.4 percent.
In the Far East, Japan
has reduced its comparatively small public sector with the partial sale of
Nippon Telegraph & Telephone, and it plans to sell the national airline, railways,
and rhe tobacco monopoly. The government expects that competition will make
these firms more efficient and profitable. Finally, under the guise of
improving socialism, the People's Republic of China has initiated widespread
reforms in agriculture and industry aimed at improving individual incentive and
industrial productivity.
Latin America
Privatization has had a
somewhat checkered history in Latin America. In Chile, the military government
has long been committed to privatization: more than a decade ago, the bulk of
state-owned firms was sold to the private sector, and the public school system
was privatized. The results were not always good; many firms failed and had to
be rescued by the government. The experiment has served to strengthen the private
sector, however, and has led to the establishment of private pension funds
alongside the existing state fund.
In Mexico, President de
la Madrid's government announced the divestment of 236 state-owned companies
early in his term, but thus far fewer than fifty have been put up for sale
(although these include important hotels and auto-making firms). Questions have
been raised about the seriousness of the government's intent, since sale of
some obvious candidates has been refused based on the familiar argument of
strategic importance to national security. A major move was the introduction of
debt-free equity in the summer of 1986, equity with about $700 million already
approved and $500 million in processing. The program is considered a resounding
success.
In Argentina, the
civilian government is developing plans for privatization, but they are at an
initial stage. The YPF would like to transfer some producing oil fields but the
terms are still undecided, and some chemical assets have been put up for sale.
In late 1986 President Raul Alfonsin launched a program of improvement that
includes reducing his central administration, and he developed ?holding company
to run state enterprises by more market-oriented principles in tariffs and
employment. The law requires special congressional authorization for the sale
of major state companies (including YPF), but not for the sale of a number of
mixed capital enterprises.
Honduras, Belize, and
Jamaica have all tackled privatization aggressively during the past two years.
A variety of divestitures and leasing arrangements have been developed across a
wide range of industries and service sectors.
Africa
Privatization on the
African continent has been progressing more slowly in part because of financial
constraints, a lack of how-to knowledge, and political hesitation by
governments. In only three cities of sub- Saharan Africa-Abidjan, Nairobi, and
Harare-can there be said to exist a fledgling capital market. The pressure on
governments to reduce the burden of subsidies is growing; in some cases African
governments have been refused loans from commercial banks because their portfolios
are entirely committed to servicing tile debt and operating subsidies of the
public sector.
In West Africa, Togo has
made the most energetic efforts toward privatization. Run by a military
dictatorship, the country is extremely stable politically though it is one of
the world's poorest nations. It has no ,tock exchange, so SOE sales are
conducted through government negotiations. Buyers were first offered leasing
deals. which require less capital outlay than outright purchase; then sales of
assets became possible. Under tile direction of the minister of state
enterprises, all of the country's fifty-eight public sector enterprises are up
for disposal. The first project was tile sale of the state steel company, then
the state oil refining and storage unit was leased to a private U.S. firm. The
government has contracted European managers for some enterprises. Currently for
sale are a recording studio, a trucking firm, and a salt producing company.
Some question the wisdom
of selling the state assets of developing countries to foreign investors, but
a good sign for Togo's economy is the flight of capital from neighboring
countries increasingly directed into Lome, the nation's capital. Privatization
is only one element of a national economic policy that is beginning 'o pay
dividends: Loine is the site of West Africa's first private offshore bank,
which will finance regional projects. And in January 1987, for the first time
in several years, the Togo government was not forced to reschedule debts.
Kenya's Task Force on
Privatization has for the past three years been examining the disposal of some
of the country's more than 400 enterprises in which the government has an
interest. Progress has been delayed because of political reservations about
selling enterprises to the only available buyers particular ethnic groups or
foreign multinationals.
More promising prospects
for Africa's immediate future appear to lie in leasing and management contracting
of state-owned firms, which would avoid political accusations of loss of
control. Leasing hotel operations has become common, as in the cases of Niger
and Tanzania.
Privatization as a
Reduction of Government Overload
A final theory justifying
privatization holds that privatization is desirable for its likely political
effect in deflecting and reducing demands on the state. In the 1970s, some
critics suggested that the Western democracies were suffering from an "overload"
of pressure, responsible for excessive spending and poor economic performance.
In that framework privatization represents one of several policies encouraging
a counterrevolution of declining expectations. In a similar vein, Stuart Butler
of the Heritage Foundation has argued that privatization can cure budget
deficits by breaking up the kind of public spending coalitions described by
public choice theory. Privatizing government enterprises and public services,
in this view, will redirect aspirations into the market and encourage a more
entrepreneurial consciousness.[5]
The political theory of
privatization has several different, overlapping elements. First, the
privatization of enterprises is a privatization of employment relations. The
advocates of privatization hope to divert employees' wage claims from the
public treasury, with its vast capacity for taxing and borrowing, to private
employers, who presumably will have more spine in resisting wage demands.
Moreover, the proponents hope for a trickle-down of entrepreneurship from the
newly privatized managers to the workers; for that very reason, privatizers
often are perfectly willing to sell to the workers, at an advantageous price,
whole enterprises or at least some proportion of the shares. In addition, by
shifting to private contractors even in a few selected areas, government might
signal a harder line on wage concessions and thereby weaken public employee
unions.
Second, the advocates of
privatization hope also for a privatization of beneficiaries' claims. Instead
of marching outside of government offices when things go wrong, the privatizers
want them to direct their ire to private service providers or better yet,
simply to switch to other providers. In other words, privatization could mean a
wholesale shift, in Hirschman's terms, from "voice" to ''exit"
as the usual and preferred tactic of coping with dissatisfaction.
Third, the privatization of
public assets and enterprises is also a privatization of wealth. Advocates such
as Margaret Thatcher want privatization to increase the proportion of the
population who own shares of stock and therefore take a more positive view of
profitmaking. "People's capitalism" is an old idea, but using
privatization of public assets to bring it about is new. Moreover, by privatizing
other assets such as public housing and Social Security trust funds,
privatizers hope to turn public claimants into property owners and engender in
them a deeper identification with capitalism. They expect the worker who
receives a retirement income from a private pension or individual retirement
account to have a more conservative view of the world than that of the worker
who depends on rent subsidies and a government check every month.
This political theory of
privatization, like the economic and sociological theories, contains empirical
predictions as well as normative judgments. The predictions concern the
probable effects of privatization on political consciousness and action; the
normative judgments concern the desirability of weakening the political
foundations of public provision. Empirically, it seems unlikely that
contracting-out, vouchers, and other arrangements for paying private providers
will reduce pressure on government spending; the contractors are as likely as
public employees to lobby for larger budgets.53 However, some forms of
privatization may, indeed, change the underlying political values,
understandings, and capacities for action in society. Turning public tenants
into private homeowners, public employees into private employees, and Social
Security beneficiaries into investors in private retirement accounts could very
well change their frame of social and political thought. These prospects raise
rather different issues from the usual efficiency-minded discussions of privatization;
they demand that we consider the meaning of privatization not only as a theory
but also as a political practice.[6]
Critics
of Privatization
Nonetheless,
at the start of the twenty-first century, privatization has been challenged on
all fronts. On theoretical level, advances in the New Institutional Economics
which have attempted to show that the ideal relationship between these two
sectors cannot be settled a priori and universally for all time as its
advocates are prone to imply, but very much depends on the specific social and
economic circumstances prevailing in a given country. Similarly, Bruce
Greenwald and Joseph Stiglitz have shown that the presumed efficiency of
the market is highly compromised by the existence of externalities, imperfect
information, and imperfect markets.[7]
At the empirical level there is now substantial evidence that the presumed
efficiency and growth benefits of privatization have not been forthcoming, and
that in general, privatization, more often than not, has tended to result in
increasing unemployment and inequitable access to key assets and social
services. With respect to the role of the state, various studies of the roles
undertaken by government in a number of countries, particularly in East Asia,
have shown that government involvement in the economy has yielded major
long-term social and economic benefits in these countries. More generally,
there is an emerging consensus that it is the quality of the state rather than
the fact that assets are owned by the state that matters more, and that for
developing countries with extensive market and information failures the state
should play an important role in promoting equitable development over the long
run. At the political level privatization has been challenged by workers affected
by attendant retrenchments and the restructuring of internal and external labor
markets consequent upon privatization that has resulted in increased worker
vulnerability, and by consumers who have often been negatively affected by
increased prices based on cost recovery pricing regimes instituted as a
consequence of privatization, or by reduction in service provision arising from
"efficiency enhancing" measures as a consequence of privatization.[8]
In developing countries in
particular, privatization appears to have resulted in the weakening of the
state without the necessary substitute in form of a strengthened private sector
emerging. This outcome has occurred while growth has become elusive, and while
large segments of the population are being socially and economically
marginalized and excluded. The euphoria over privatization, if there was ever
one, outside of the Bretton Woods Institutions (the World Bank and the
International Monetary Fund) and the prospective beneficiaries among a narrow
circle of prospective domestic and foreign entrepreneurs, is diminishing as
countries seek to find more creative ways of combining the activities of the
private and public sectors in a manner that maximizes inclusive growth and
generalized welfare gains in the long term. In addition, lessons from the past
have been drawn upon to stipulate other conditions under which privatization is
likely to succeed.[9]
Some of these conditions relate
to process, by requiring that stakeholder involvement be undertaken; the
legal/regulatory environment, by requiring that an appropriate legal and
regulatory environment needs to be in place prior to privatization to avoid
abuse of the process and outcome by benefiting entrepreneurs; to the need for
an overall development strategy within which privatization initiatives are
undertaken is important especially for developing countries; to the need for
social protection, by requiring that social safety nets be in place to protect
the losers resulting from privatization; to the need for viable capital
markets, by requiring that a country ensure that efficient capital markets are
in existence before state assets are privatized.
[1]
Hanke, Steve H., ed. Privatization
and Development. San Francisco: International Center for Economic Growth, 1987.
[2] "Chicago May Privatize Midway." Airline Industry Information.
6 March 2006.
[3]
Hanke, Steve H., ed. Privatization
and Development. San Francisco: International Center for Economic Growth, 1987.
[4] Starr, A Response to Mensch and Freeman, 3 Tikkun 31
(Mar./Apr. 1988).3 A. Hirschman, Shifting Involvements: Private Interest and
Public Action 121-22 ( 1982) .
[5]
Powell & Friedkin,
Politics and Programs: Organizational Factors in Public Televislon Decision
Making, in Nonprofit Enterprise in the Arts 245-69 (P. Dimaggio ed. 1986
[8] Van
der Hoeven, Rolph, and Gyorgy Sziraczki, eds. Lessons from
Privatization: Labour Issues in Developing and Transitional Countries. Geneva:
International Labour Office, 1997.
[9] Lindenberg,
Marc, and Noel Ramirez, eds. Managing Adjustment in Developing
Countries. San Francisco: International Center for Economic Growth,
1989.
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