Ideas & Debate

State entities can attain profit without being sold

road

A road construction project. FILE PHOTO | NMG

Summary

  • Transparent institutions and arrangements, such as public auctions and open, competitive bidding for contracts have often been compromised by secret and informal collusion.
  • Typically, those with political connections and insider information are better able to secure lucrative contracts and such other business opportunities.
  • Greater public transparency and accountability were expected to promote greater efficiency in achieving the public interest while limiting waste and borrowing.
  • But contrary to such claims, privatisation itself does not ensure transparency and accountability, or address corruption.
  • As it is rarely implemented on an arm’s length basis, it may also contribute to other problems including new types of corruption.

At the risk of reiterating what should be obvious, the question of private or public ownership is distinct from the issue of competition or market forces. Despite the misleading claim that privatisation promotes competition, it is competition policy, not privatisation, that promotes competition.

Instead, privatisation has typically been accompanied by collusion, which undermines competitive pricing. Formal and, more commonly, informal collusion is rife. Informal collusion is more likely among those involved in public or transparent bidding to provide privatised or contracted-out services.

Transparent institutions and arrangements, such as public auctions and open, competitive bidding for contracts have often been compromised by secret and informal collusion. Typically, those with political connections and insider information are better able to secure lucrative contracts and such other business opportunities.

Greater public transparency and accountability were expected to promote greater efficiency in achieving the public interest while limiting waste and borrowing. But contrary to such claims, privatisation itself does not ensure transparency and accountability, or address corruption. As it is rarely implemented on an arm’s length basis, it may also contribute to other problems including new types of corruption.

Hence, privatisation does not enhance efficiency except to augment profits. The public sector can be more efficiently run as is done in some economies. Hence, the challenge is to ensure that the public sector is better run. Greater public accountability and a more transparent public sector can help ensure greater efficiency in achieving the public and national interest while limiting public sector waste and borrowing.

Correlation does not imply causation. An enterprise may be better run after privatisation due to managerial reforms, behavioural changes or organisational improvements. But if such improvements could have been achieved without privatisation, then one cannot conclude that privatisation is needed to bring about desired reforms.

It is important to consider the organisational and managerial reforms including incentive changes, which might be desirable to achieve superior outcomes. One should not assume that privatisation is the answer regardless of the question or the problem at hand.

After all, many state-owned enterprises (SOEs) were set up precisely because the private sector was believed to be unable or unwilling to provide certain services or goods.

In many instances, the problems of an SOE are not due to ownership per se, but rather to the absence of explicit, feasible or achievable objectives, or the existence of too many and often contradictory goals.

In other cases, poor managerial and organisational systems flexibility, autonomy and needed reforms as well as cultures supportive of them may be the key problem. Such reforms may well achieve desired objectives and goals or even do better at lower cost, thus proving to be the superior option.

Many SOEs have undoubtedly proven to be problematic and inefficient. However, privatisation has not proved to be the universal panacea for the myriad problems of the public sector that it has been touted as. As such, the superior option cannot be presumed a priori, but should instead be the outcome of careful consideration of the nature and roots of an organisation’s malaise.

Parastatal reform

SOE reform is often a superior option for a variety of reasons although there are no ‘one size fits all’ solutions regardless of circumstances. Problems need to be analysed in context and solutions cannot be assumed in advance.

It would be erroneous to presume that public ownership is always a problem. There may be other problems which are not going to go away without properly identifying and resolving them.

Desirable changes, resulting in improved performance and outcomes, may take place following the privatisation of a particular SOE. But even this does not mean that privatisation per se is responsible for these improvements unless state ownership itself has blocked needed changes, in which case there may well be compelling cases for privatisation in such situations.

Another alternative, of course, is government or public procurement. Generally, public-private partnerships (PPPs) are much costlier than government procurement. With a competent government, government procurement is generally more efficient and much cheaper.

Yet, international trade and investment agreements are eroding the rights of governments to pursue government procurement.

With a competent government, an incorruptible civil service and competent accountable consultants doing good work, efficient government procurement has generally proved far more cost-effective than PPP alternatives.