PHM-Exch> Has Privatization Benefitted the Public? b7

[Claudio Schuftan]

From: Jomo <jomoks at yahoo.com>

*Has Privatization Benefitted the Public?*


*Jomo Kwame Sundaram*

KUALA LUMPUR, Malaysia, Apr 02 (IPS)  - In most cases of privatization,
some outcomes benefit some, which serves to legitimize the change.
Nevertheless, overall net welfare improvements are the exception, not the
rule.

Never is everyone better off. Rather, some are better off, while others are
not, and typically, many are even worse off. The partial gains are
typically high, or even negated by overall costs, which may be diffuse, and
less directly felt by losers.

Privatized monopoly powers
Since many SOEs are public monopolies, privatization has typically
transformed them into private monopolies. In turn, abuse of such market
monopoly power enables more rents and corporate profits.

As corporate profits are the private sector's yardstick of success,
privatized monopolies are likely to abuse their market power to maximize
rents for themselves. Thus, privatization tends to burden the public, e.g.,
if charges are raised.

In most cases, privatization has not closed the governments' fiscal
deficits, and may even worsen budgetary problems. Privatization may worsen
the fiscal situation due to loss of revenue from privatized SOEs, or tax
evasion by the new privatized entity.

Options for cross-subsidization, e.g., to broaden coverage are reduced as
the government is usually left with unprofitable activities while the
potentially profitable is acquired by the private sector. Thus, governments
are often forced to cut essential public services.

In most cases, profitable SOEs were privatized as prospective private
owners are driven to maximize profits. Fiscal deficits have often been
exacerbated as new private owners use creative accounting to avoid tax,
secure tax credits and subsidies, and maximize retained earnings.

Meanwhile, governments lose vital revenue sources due to privatization if
SOEs are profitable, and are often obliged to subsidize privatized
monopolies to ensure the poor and underserved still have access to the
privatized utilities or services.

Privatization burdens many
Privatization burdens the public when charges or fees are not reduced, or
when the services provided are significantly reduced. Thus, privatization
often burdens the public in different ways, depending on how market power
is exercised or abused.

Often, instead of trying to provide a public good to all, many are excluded
because it is not considered commercially viable or economic to serve them.
Consequently, privatization may worsen overall enterprise performance.
‘Value for money' may go down despite ostensible improvements used to
justify higher user charges.

SOEs are widely presumed to be more likely to be inefficient. The most
profitable and potentially profitable are typically the first and most
likely to be privatized. This leaves the rest of the public sector even
less profitable, and thus considered more inefficient, in turn justifying
further privatizations.

Efficiency elusive
It is often argued that privatization is needed as the government is
inherently inefficient and does not know how to run enterprises well.
Incredibly, the government is expected to subsidize privatized SOEs, which
are presumed to be more efficient, in order to fulfil its obligations to
the citizenry.

Such obligations may not involve direct payments or transfers, but rather,
lucrative concessions to the privatized SOE. Thus, they may well make far
more from these additional concessions than the actual cost of fulfilling
government obligations.

Thus, privatization of profitable enterprises or segments not only
perpetuates exclusion of the deserving, but also worsens overall public
sector performance now encumbered with remaining unprofitable obligations.

One consequence is poorer public sector performance, contributing to what
appears to be a self-fulfilling prophecy. To make matters worse, the public
sector is then stuck with financing the unprofitable, thus seemingly
supporting to the privatization prophecy.

Benefits accrue to relatively few
Privatization typically enriches the politically connected few who secure
lucrative rents by sacrificing the national or public interest for private
profit, even when privatization may not seem to benefit them.

Privatization in many developing and transition economies has primarily
enriched these few as the public interest is sacrificed to such powerful
private business interests. This has, in turn, exacerbated corruption,
patronage and other related problems.

For example, following Russian voucher privatization and other Western
recommended reforms, for which there was a limited domestic constituency
then, within three years (1992-1994), the Russian economy had collapsed by
half, and adult male life expectancy fell by six years. It was the greatest
such recorded catastrophe in the last six millennia of recorded human
history.

Soon, a couple of dozen young Russian oligarchs had taken over the
commanding heights of the Russian economy; many then monetized their gains
and invested abroad, migrating to follow their new wealth. Much of this was
celebrated by the Western media as economic progress.

***
---------------------------------------
Excerpt: To ensure public acceptability, some benefits accrue to many in
the early stages of privatization in order to minimize public resistance.
However, in the longer term, privatization tends to enrich a few but
typically fails to deliver on its ostensible aims.
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