Privatisation has been one of the pillars of the counter-revolution against development economics and government activism from the 1980s. Many developing countries were forced to accept privatisation as a condition for support from the World Bank while many other countries have embraced privatisation, often on the pretext of fiscal and debt constraints.

Privatisation generally refers to changing the status of a business, service or industry from state, government or public ownership to private control. It sometimes also refers to the use of private contractors to provide services previously delivered by the public sector.

Privatisation can be strictly defined to include only cases of the sale of 100%, or at least a majority share, of a public or state-owned enterprise (SOE) or its assets to private shareholders. The definition of privatisation in some contexts is so broad that it includes cases where private enterprises are awarded licences to participate in activities that were previously the exclusive preserve of the public sector.

Why the turn to privatisation?

The balance of payments problems arising from the oil shocks in the 1970s and the US Fed raising the interest rate to well over 20% precipitated sovereign debt crises in Latin America and elsewhere from the early 1980s, forcing many developing countries to seek credit support from the International Monetary Fund (IMF) and the World Bank.

The “neo-liberal” policy prescriptions of the World Bank and the IMF involved liberalisation, deregulation and privatisation. Collectively, they later came to be known as the Washington Consensus to refer to the common position of three institutions based in Washington DC — the US Treasury, the IMF and the World Bank.

Main arguments for privatisation

Privatisation was advocated as an easy means to:

1) Reduce the financial and administrative burden of the government, particularly in undertaking and maintaining services and infrastructure.

2) Promote competition, improve efficiency and increase productivity in the delivery of public services.

3) Stimulate private entrepreneurship and investment, and thus accelerate economic growth.

4) Help reduce the presence and size of the public sector, with its monopolistic tendencies and bureaucratic support.

Public or consumer welfare

Since a significant portion of state-run activities are public monopolies, privatisation will hand over such monopoly powers to private interests likely to use them to maximise profits. The privatisation of public services tends to burden the public, especially if charges are raised for privatised services that may not improve with privatisation.

Private interests are only interested in profitable or potentially profitable activities and enterprises. Thus, the government will be saddled with unprofitable and less profitable activities, reinforcing the impression of SOE inefficiencies. Consequently, privatisation may worsen overall enterprise performance. “Value for money” may go down, despite improvements used to justify higher user charges.

Privatisation in many developing and transition economies has primarily enriched a few with strong political connections who “captured” lucrative opportunities associated with privatisation, while the public interest has been increasingly sacrificed to such powerful private business interests. This has, in turn, exacerbated problems of corruption, patronage and other related problems.

Adverse consequences

Some other adverse consequences of privatisation include:

— The social and political implications of two types of services, one for those who can afford costlier, private — including privatised — services, and the other for those who cannot, and hence have to continue to rely on subsidised public services, for example medical services and education.

— The effects of minimal long-term investments by private owners narrowly focused on maximising short-term profits.

— Increased living costs as well as poorer services and utilities, especially in remote and rural areas, due to “economic costing” of services, for example, telecommunications, water supply and electricity.

— Reduced jobs, overtime work and real wages for employees of privatised concerns.

Flawed arguments

Arguments for privatisation can be refuted on the following grounds:

• The public sector can be more efficiently run, as demonstrated by Singapore, Taiwan and South Korea.

• Greater public accountability and a more transparent public sector can ensure greater efficiency in achieving the public and national interest while limiting public-sector waste and borrowing.

• Privatisation may postpone a fiscal crisis by temporarily reducing fiscal deficits, but the public sector would lose income from profitable public sector activities, and be stuck with financing and subsidising unprofitable ones. As experience shows, the fiscal crisis may even deepen if the new owners of profitable SOEs avoid paying taxes with creative accounting or due to the typically generous terms of privatisation.

• Privatisation gives priority to profit maximisation, typically at the expense of social welfare, equity and the public interest. It tends to adversely affect the interests of public-sector employees and the public, especially poorer consumers.

• Public pressure to ensure the equitable distribution of share ownership (for example “voucher privatisation”) may inadvertently undermine pressures to improve corporate performance since each shareholder would then only have small equity stakes, and would therefore be unlikely to incur the high costs of monitoring management and corporate performance.

• By diverting private capital from productive new investments to buying over public sector assets, economic growth would be retarded rather than enhanced.

Jomo Kwame Sundaram was United Nations assistant secretary-general for economic development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007

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