Global Agenda: The limits of privatization

The evidence against state ownership of economic enterprises is pretty overwhelming.

british airways 88 (photo credit: )
british airways 88
(photo credit: )
In financial and economic circles, it is politically incorrect to be against privatization, or even to raise doubts as to its efficacy. In all the ranking and scoring tables used to measure the economic environment and level of development of sovereign states, the more privatization the country has engaged in the higher the score it will achieve. The greatest sin of the new wave of populist-leftist regimes in South America, such as in Venezuela and Bolivia, is that they favor state ownership of key firms and industries. The evidence against state ownership of economic enterprises is pretty overwhelming. But does that mean that the converse is equally clear-cut - that private ownership is desirable, good and should therefore always be the goal? The short answer is no. The long answer starts with the fact that things are not so straightforward. What kind of private ownership is envisaged, how is it to be achieved and should the terms vary from industry to industry - are some of the basic questions to be answered. These questions are by no means new. They have been a key part of the global privatization debate for at least 20 years, since the move from public to private ownership began to get underway in earnest. They remain unresolved, but what is worse is that they tend to get ignored or marginalized in a binary process wherein public = bad and private = good. The most important area in which the debate still rages is that of monopolies, especially as regards "utilities" - electricity, water etc. The problem here is obvious and was identified very early on: if the entity in question is either a "natural" or a regulatory monopoly, what benefit is there in making it a privately-owned one rather than having it controlled by the state? This question, in fact, opens a Pandora's box of complicated issues, including the relative merits of deregulation and privatization, the inter-relationship between the regulatory regime in monopolistic industries and their ownership (private or public) and the balance between the demands (and "rights") of shareholders, employees and customers (the general public, in the case of large monopolies such as utilities). Not only is it facile to pretend that privatization is a panacea for all companies in all sectors and market structures, it is now increasingly clear that it is dangerous. Interestingly, the primary evidence for this comes from the UK - a country, which ever since the days of Margaret Thatcher, has been seen as a pioneer and a paragon of privatization. The incidence of serious accidents on the country's rail system has highlighted the fact that investment in the rail infrastructure (lines, signaling systems, stations, rolling stock etc.) has been consistently insufficient. This provides ample ammunition to both the pro- and anti-privatization camps because the neglect was a prominent feature of the state-owned era, and hence a strong force behind privatization. But it has continued (or even worsened) in the post-privatization period, thereby fuelling the fear that short-termism is an inherent feature of private ownership. And that's even before the discussion moves to intangibles such as service, punctuality and the like. Last week's near-collapse of a different segment of the British transportation infrastructure - air passenger transport - provided another fascinating insight into the limits of privatization. In the wake of the foiled mega-attack on numerous transatlantic flights leaving Britain, security procedures were abruptly ramped up to unprecedented (and absurd) levels. [Pause, for Israelis to smirk quietly]. The result was huge queues and enormous disruption, with massive cancellation of flights - notably of the privatized, competitive and profitable British Airways. This upheaval was the direct result of the failure of the privatized airport operating company, BAA, to invest in either equipment or personnel needed to handle a security emergency. Since BAA has an effective monopoly on air travel out of London, it has no incentive to do so as the losses caused by the delays will be borne by the airlines (and their hapless passengers) - not by the airport operator. These are dramatic examples. Let's note again, however, that the biggest source of complaint and concern regarding privatized sectors is in the "classic" utilities - electricity and water. This is true in the UK and in Europe, generally. But the overall picture that is emerging across Europe and the world seems to be that while privatization offers an effective solution to many of the ills generated by public ownership, it leaves some problems to fester and actually exacerbates others, as well as creating some new ones. It, therefore, may be that, in both theoretical and practical terms, privatization is reaching the limits of its usefulness - and now needs to be complemented by new structures of ownership and management.