An IFC study reveals the irrefutable links between politics and privatisation Reg Rumney reports
Privatisation is always political, despite its economic benefits being widely accepted, note the principal authors of an International Finance Corporation (IFC) study of privatisation.
Privatisation Principles and Practice is timely in the light of the renewed pressure for privatisation to reduce government debt in South Africa, and the release of guidelines for restructuring state enterprises by the Public Enterprises Ministry at the end of August.
Economic benefits cited include securing the best price for the sale, that is raising money to pay off government debt, but it is clearly not the main or most important benefit in the eyes of the authors. More importantly, privatisation aims to improve company efficiency and performance and make governments, consumers, employees and investors better off.
One benefit stressed by the authors is enhancing the supply of domestic and international capital.
“Faster rates of privatisation are associated with broadening and deepening the supply of domestic and international capital.”
The IFC is the private sector arm of the World Bank, charged with encouraging productive private enterprise in the developing world. The publication is in a sense the summary of its involvement over a decade in privatisation exercises.
The privatisation revolution, say the authors, has been huge. Apart from the “voucher-based” transfer of assets to citizens in Eastern Europe and the former Soviet Union, the IFC has recorded around 2 300 transactions in more than 60 developing countries between 1988 and 1993.
Around 57 percent of privatisations took place in Latin America and the Caribbean. Few have occurred in Africa and the Middle East, note the authors.
The word, popularised in Britain by the sale of British Telecom in 1984, is no longer solely associated with the rightwing politics of former British Prime Minister Margaret Thatcher.
Yet privatisation in the UK was overtly political, as it has been in the former Soviet Union. There will undoubtedly be political aims in any South African privatisation, probably the preferential sale of assets to blacks.
Proponents of privatisation in South Africa are well aware of the political impediments as managers and employees of state enterprises resist change.
Accommodating political objectives and overcoming political impediments have economic costs. The authors list these as: lower purchase prices for the privatised enterprise; reduced competition for the sale; lost access to markets; and continued inefficiency after privatisation.
The IFC tries to maximise the economic benefits, but also to make the transaction succeed despite the political constraints — “to do the doable”.
But does it work?
Two-thirds of the privatised firms in which the IFC has been involved saw profitability improve after privatisation. Only three saw it worsen. The authors admit analysis of overall economic effects is beyond the paper’s scope, but nevertheless say “snapshot” judgments on overall economic gains of 53 of the IFC’s privatisations suggest around 70 percent resulted in net economic gains, and less than 20 percent indicated net welfare may have worsened.
“In many cases, the economic benefits for the country are directly associated with the enterprise’s performance — turning around a struggling state-owned enterprise, improving technology and profitability, and enabling it to grow and generate export earnings. In infrastructure, expanded and improved services for consumers are usually seen.”
The authors note that often it has not been privatisation that has failed, but investment post-privatisation.
In the 33 percent of cases where privatised enterprises have closed, or performed fair to poorly, the authors remark the poor performance was probably no worse than it would have been had the enterprise not been privatised, though project investments have not generated economic returns.