Revisiting privatisation’s claims

Privatisation, in itself, does not solve managerial delegation problems, ie the principal-agent problem, as it is not a problem of public ownership per se.

KUALA LUMPUR: Several arguments have been advanced to justify privatisation since the 1980s. Privatisation has been advocated as an easy means to:

1.    Reduce the government’s financial and administrative burden, particularly by undertaking and maintaining services and infrastructure;

2.    Promote competition, improve efficiency and increase productivity in providing public services;

3.    Stimulate private entrepreneurship and investment to accelerate economic growth; 

4.    Help reduce the public sector’s presence and size, with its monopolistic tendencies and bureaucratic support.

Moot case for privatisation
First, privatisation is supposed to reduce the government’s financial and administrative burdens, particularly in providing services and infrastructure. Earlier public sector expansion was increasingly seen as the problem, rather than part of the solution. Thus, reducing the government’s role and burden was expected to be popular.

Second, privatisation was believed by some to be a means to promote competition, improve efficiency and increase productivity in service delivery. This belief was naïve, confusing the question of ownership with that of promoting competition. 

It was believed that privatisation would somehow encourage competition, not recognising that competition and property rights are distinct, and not contingent issues. Associated with this was the presumption that competition would automatically result in greater efficiency as well as improved productivity, not recognizing economies of scale and scope in many instances.

Third, privatisation was expected to stimulate private entrepreneurship and investment. There is also a popular, but naive belief that privatisation was going to stimulate private entrepreneurship when, in fact, the evidence is strong, in Malaysia and elsewhere, that privatisation often crowds out the likelihood of small and medium-sized enterprises actually emerging to fill the imagined void, presumed to exist following privatisation. 

Admittedly, there is scope for new entrepreneurship with privatisation as new ways and ideas offered by the private sector are considered – or reconsidered – as the new privatised entity seeks to maximize the profits/rents to be secured with privatisation. 

However, the private purchase of previously public property, in itself, does not augment real economic assets. Private funds are thus diverted, to take over SOEs, and consequently diminished, rather than augmented. Hence, private funds are less available for investing in the real economy, in building new economic capacities and capabilities. 

Fourth, privatisation was supposed to reduce public sector monopolies, but there is often little evidence of significant erosion of the monopolies enjoyed by privatised SOEs. Arguably, technological change and innovation, e.g., in telecommunications, were far more significant in eroding privatised monopolies and reducing costs to consumers, than privatisation per se.

From the 1980s, if not before, various studies have portrayed the public sector as a cesspool of abuse, inefficiency, incompetence and corruption. Books and articles, often with clever titles such as ‘vampire state’, ‘bureaucrats in business’ and so on, provided the justification for privatisation. 

Undoubtedly, there were some real horror stories, which have been conveniently and frequently cited as supposedly representative of all SOEs. But other experiences can also be cited to show that SOEs can be run quite efficiently, even on commercial bases, confounding the dire predictions of the prophets of public sector doom.

Has privatisation improved efficiency?
Although some SOEs have been better run and are deemed more efficient after privatisation, the overall record has hardly been consistent. Thus, it is important to ascertain when and why there have been improvements, or otherwise. It is also important to remember that better-run privatised SOEs, in and of themselves, do not necessarily serve the national or public interest better.

Undoubtedly, most SOEs can be better run and become more efficient. But this is not always the case as some SOEs are indeed already well run. For instance, very few privatisation advocates would insist that most SOEs in Singapore are poorly run. 

As its SOEs are generally considered well-run, public ownership is not used there to explain poor governance, management or abuse; instead, public ownership is recognized there as the reason for public accountability, better governance and management.

Principal-agent managerial delegation dilemma
Hence, in different contexts, with appropriately strict supervision, SOEs can be and have indeed been better run. Privatisation, in itself, does not solve managerial delegation problems, i.e., the principal-agent problem, as it is not a problem of public ownership per se.

With SOEs, the principal is the state or the government while the agents are the managers and supervisors, who may -- or may not -- pursue the objectives intended by the principal. 

This is a problem faced by many organizations. It is also a problem for private enterprises or corporations, especially large ones, especially where the principal (shareholders) may not be able to exercise effective supervision or control over the agent.

Also, natural monopolies (such as public utilities) are often deemed inefficient due to the monopolistic nature of the industry or market. The question which arises then is whether private monopoly is better, even with regulation intended to protect the public interest. 

The answer needs to be ascertained analytically on the basis of evidence, and cannot be presumed a priori. If an industry is a natural monopoly, what does privatisation achieve? Often, it means a transfer to private hands, which can be problematic and possibly dangerous for the public interest.

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.