Revisiting Privatization’s Claims

Jerri-Lynn here. This short post usefully debunks arguments advanced to promote the privatization fairy. The author’s reminds us that state ownership, when done properly, as in Singapore, can offer its own benefits and “ is recognized there as the reason for public accountability, better governance and management.”

By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at Inter Press Service

KUALA LUMPUR, Malaysia, Sep 4 2018 (IPS)– Several arguments have been advanced to justify privatization since the 1980s. Privatization has been advocated as an easy means to:
1. Reduce the government’s financial and administrative burden, particularly by undertaking and maintaining services and infrastructure;
2. Promote competition, improve efficiency and increase productivity in providing public services;
3. Stimulate private entrepreneurship and investment to accelerate economic growth;
4. Help reduce the public sector’s presence and size, with its monopolistic tendencies and bureaucratic support.

Moot case for privatization
First, privatization is supposed to reduce the government’s financial and administrative burdens, particularly in providing services and infrastructure. Earlier public sector expansion was increasingly seen as the problem, rather than part of the solution. Thus, reducing the government’s role and burden was expected to be popular.

Second, privatization was believed by some to be a means to promote competition, improve efficiency and increase productivity in service delivery. This belief was naïve, confusing the question of ownership with that of promoting competition.

It was believed that privatization would somehow encourage competition, not recognizing that competition and property rights are distinct, and not contingent issues. Associated with this was the presumption that competition would automatically result in greater efficiency as well as improved productivity, not recognizing economies of scale and scope in many instances.

Third, privatization was expected to stimulate private entrepreneurship and investment. There is also a popular, but naïve belief that privatization was going to stimulate private entrepreneurship when, in fact, the evidence is strong, in Malaysia and elsewhere, that privatization often crowds out the likelihood of small and medium-sized enterprises actually emerging to fill the imagined void, presumed to exist following privatization.

Admittedly, there is scope for new entrepreneurship with privatization as new ways and ideas offered by the private sector are considered – or reconsidered – as the new privatized entity seeks to maximize the profits/rents to be secured with privatization.

However, the private purchase of previously public property, in itself, does not augment real economic assets. Private funds are thus diverted, to take over SOEs, and consequently diminished, rather than augmented. Hence, private funds are less available for investing in the real economy, in building new economic capacities and capabilities.

Fourth, privatization was supposed to reduce public sector monopolies, but there is often little evidence of significant erosion of the monopolies enjoyed by privatized SOEs. Arguably, technological change and innovation, e.g., in telecommunications, were far more significant in eroding privatized monopolies and reducing costs to consumers, than privatization per se.

From the 1980s, if not before, various studies have portrayed the public sector as a cesspool of abuse, inefficiency, incompetence and corruption. Books and articles, often with clever titles such as ‘vampire state’, ‘bureaucrats in business’ and so on, provided the justification for privatization.

Undoubtedly, there were some real horror stories, which have been conveniently and frequently cited as supposedly representative of all SOEs. But other experiences can also be cited to show that SOEs can be run quite efficiently, even on commercial bases, confounding the dire predictions of the prophets of public sector doom.

Has privatization improved efficiency?

Although some SOEs have been better run and are deemed more efficient after privatization, the overall record has hardly been consistent. Thus, it is important to ascertain when and why there have been improvements, or otherwise. It is also important to remember that better-run privatized SOEs, in and of themselves, do not necessarily serve the national or public interest better.

Undoubtedly, most SOEs can be better run and become more efficient. But this is not always the case as some SOEs are indeed already well run. For instance, very few privatization advocates would insist that most SOEs in Singapore are poorly run.

As its SOEs are generally considered well-run, public ownership is not used there to explain poor governance, management or abuse; instead, public ownership is recognized there as the reason for public accountability, better governance and management.

Principal-agent managerial delegation dilemma

Hence, in different contexts, with appropriately strict supervision, SOEs can be and have indeed been better run. Privatization, in itself, does not solve managerial delegation problems, i.e., the principal-agent problem, as it is not a problem of public ownership per se.

With SOEs, the principal is the state or the government while the agents are the managers and supervisors, who may — or may not — pursue the objectives intended by the principal.

This is a problem faced by many organizations. It is also a problem for private enterprises or corporations, especially large ones, especially where the principal (shareholders) may not be able to exercise effective supervision or control over the agent.

Also, natural monopolies (such as public utilities) are often deemed inefficient due to the monopolistic nature of the industry or market. The question which arises then is whether private monopoly is better, even with regulation intended to protect the public interest.

The answer needs to be ascertained analytically on the basis of evidence, and cannot be presumed a priori. If an industry is a natural monopoly, what does privatization achieve? Often, it means a transfer to private hands, which can be problematic and possibly dangerous for the public interest.

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