Chapter

Comment

Editor(s):
Saíd El-Naggar
Published Date:
June 1989
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No doubt, Sir Alan Walters paper is interesting and has a wealth of information. It is very stimulating to read. However, the paper is rather weak on Arab countries. Perhaps a study of the attempts of Egypt to privatize and more recent attempts (1988) by Sudan to do so could have made the paper more balanced and more useful.

Though it is difficult to have any basic disagreement with the content of the paper, the presentation of it could have been more helpful and more useful for the purpose of the seminar. Instead of first giving a comprehensive and basic overview of privatization, the paper has gone too quickly to its defense. Perhaps it may be worthwhile here to ask what are the basic objectives of such an overview? An overview should help in formulating a general and clear understanding of the basic issues and problems in the first place or during the seminar and ultimately lead to better government policies and more effective implementation. As this is the real end product of the seminar, the overview should be operational and comprehensive to show policymakers or governments how to achieve privatization. Another question emerges here: how could such a comprehensive and operational overview be organized or presented? Such an overview should serve as a general framework for privatization and might be organized as follows:

  • Objectives

  • Means

  • Conditions for success

  • Advantages (or gains) and problems.

Objectives

Do governments operate by principles or objectives? This is not a question of semantics but a serious attempt to find an approach to formulate an overview of privatization. Which are easier to identify, are operational, and can better help in policy formulation—objectives or principles? Here, also, the overview should be comprehensive in that not only should it discuss the objectives actually attempted but also all the possible objectives of privatization. If the analysis is limited only to actual examples, our knowledge will be severely limited. All the possible and important objectives of privatization should be tackled.

Furthermore, one can imagine a case or an example in which there is a conflict between principles and objectives. In considering the principle of economic efficiency, which can mean

  • an increase in output from existing inputs (which means a reduction in per unit cost);

  • a reduction in inputs required to produce existing outputs (which also means a reduction in per unit cost); or

  • an improvement in quality of output, including reduced waiting lists, or some combination of all three,

the objective of the government may be the availability of certain necessary goods (for example, bread, edible oil, sugar, or soap). Privatization can make such goods more easily available to all consumers, but costs may rise by a certain margin (for example, 10 percent). Costs in the public sector are often artificially low—by not including all costs or by using book values instead of market prices or replacement values. However, if the costs of the public sector are lower, the government should not privatize because the principle of economic efficiency is breached; even the private sector can make the necessary goods available to all consumers in all parts of the country, at higher but reasonable prices.

However, it may be claimed that the availability or reduction of waiting lists is a part of the economic efficiency principle. If this is so, then the economic efficiency principle, because it is very broad, can contain certain contradictions. It is worthwhile to note that the third element in the economic efficiency principle mentioned above implies that quality can be improved or waiting lists can be reduced, but at a higher cost (although it does not mention existing inputs). To reconcile these contradictions, priorities or weights should be assigned to the different elements of economic efficiency. This brings us back to the objective(s) of the government.

It is clear from the above discussion that it is simpler, more realistic, and more operational to think in terms of objectives rather than principles.

Means

At the beginning, the paper mentions that the “main purpose is to examine the principles, practices, and record of the deregulation and privatization movements of the 1980s.” Obviously, “practices” does not mean here “means.”

Again, as part of a systematic framework, the overview should have provided a comprehensive treatment of the means of privatization, because the success of privatization or of its objectives depends to a large extent on the means adopted to achieve it. Deregulation and the sale of public property—as means of privatization—have been well covered in the paper. However, to make the paper a really comprehensive overview, other means—whether actually attempted or not—should have been analyzed. It must be emphasized here that the comprehensiveness of the overview does not mean the inclusion of all the details but the main aspects of privatization already mentioned above.

Conditions for Success

It is equally important for policymaking that the conditions for the success of privatization be discussed. There may be some controversy over the significance of the various conditions, but such a discussion can definitely be an aid to policymaking, and, furthermore, any disagreement about the importance of the different conditions can be explained or clarified through the discussion. No section in the paper deals with the conditions for the success of privatization in their own right. Such a section is necessary in an overview, because it tries to answer crucial questions: Can any country attempt privatization and can it succeed? Here is a summary of some of the conditions:

  • The creation of an economic environment that is hospitable to private ownership. This involves the review of taxation and property rights, etc.

  • The establishment of public information to help sell privatization to the public and private sectors.

  • The formulation of a plan of privatization that is executed by well-trained specialists.

  • The clear definition of targets for privatization can reduce risks and enhance success.

  • The selection of techniques and strategies that will maximize the support of the political constituency.

  • The preparation of public enterprises for privatization is a necessary condition for success, especially if it does not involve large investment. Here the question may be: Why invest to dispose of them? The reason is that the sale price may be even higher. Even if it is not, the high running costs, which are wasted year after year, can definitely compensate for such investment in the long run (see the final comment below).

Advantages (or Gains) and Problems

The advantages (or gains) or benefits from privatization have been dealt with in more than one place in the paper and both directly and indirectly. However, the treatment of problems or demerits of privatization received much less attention because the paper was generally on the defensive about privatization. To give a more balanced treatment of privatization and a more useful overview, it would seem better to devote a separate section to such aspects to provide room for systematic and adequate treatment of them.

The problem of privatization arises partly from the nature of the liberalization associated with it and partly from the prevailing conditions, for example, attitudes, laws, taxation, and vested interests. However, some of these problems or contradictions can easily be settled. The question may require study and legislation, or perhaps more training.

One of the problems of privatization mentioned in the paper is the delicate issue of foreign governments acquiring a substantial stake in important projects or national industries. Obviously, governments can pass legislation to block any substantial increase in a foreign government’s share of investment, to prevent the creation of monopolies. However, this may prove more difficult than it seems, especially for Third World countries, because of their weak economic positions and the prevailing international economic and political problems.

Furthermore, privatization may take place simply as a political bribe, whether at below current real value or not, and should therefore be carried out under a well-established law and approved by the appropriate organs of the state.

Although it is true that governments may sometimes give away public property below its real value or almost free for political reasons, in some genuine cases this can be defended on the basis of the relative relationship between variable (circulating) capital and fixed capital. If a losing public enterprise has a relatively small amount of fixed capital (for example, a trading enterprise), it is better for the treasury to sell it even at less than its real value, because the accumulation of loss over the years is several times the loss on fixed capital.

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