PHM-Exch> Privatization Promotes Collusion and Corruption

[Claudio Schuftan]

From: Jomo <jomoks at yahoo.com>


*Privatization Promotes Collusion and Corruption*

*Jomo Kwame Sundaram*

KUALA LUMPUR, Malaysia, Apr 23 (IPS)  - 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 privatization promotes competition, it is competition policy,
not privatization, that promotes competition.

Privatization the problem, not the solution
Instead, privatization 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 privatized or contracted-out
services.

Transparent institutions and arrangements, such as public auctions and
open, competitive bidding for contracts, have often been compromised by
secret, 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, privatization 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, privatization does not enhance efficiency except to augment profits.
The public sector can be more efficiently run, as 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.

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

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

After all, many 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, often contradictory goals.

In other cases, poor managerial and organizational systems, blocking
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, privatization has not proved to be the universal panacea for the
myriad problems of the public sector 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
organization's malaise.

SOE reform or government procurement often superior
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 a
priori.

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 privatization of a particular SOE. But even this does
not mean that privatization 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 privatization 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 and an incorruptible civil service, and competent accountable
consultants doing good work, efficient government procurement has generally
proved far more cost-effective than PPP alternatives.

***
---------------------------------------
Excerpt: Privatization is expected by many to promote competition and
eliminate corruption. In practice, the converse has been true as
privatization beneficiaries have successfully colluded and engaged in new
types of corruption to maximize their own gains.
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