Who Benefits from Privatisation?

Moazzem Hossain, Justin Malbon

• Publisher: Routledge
• Year: 2002
• Topic: Business
• eBook ISBN:
  9781134693870
• Subtopic: Business General
• Index: Business

This edited collection examines the impact of privatisation and the lessons to be learnt from it for the purpose of regulatory reform. The contributors analyse the benefits and losses of privatisation in a variety of countries from economic, legal and consumer perspectives and address fundamental questions such as whether private ownership necessarily leads to better incentives for management and productivity. The book contains illustrative case studies of the Australian telecommunications industry, the deregulation of the Swedish taxi and postal industries, Californian telecommunications industries as well as discussing consumer responses to the privatisation of key utilities in the UK. The impact of privatisation in developing nations is also addressed, with particular reference to India and Malaysia.

1

INTRODUCTION

Moazzem Hossain and Justin Malbon

The industrial policy issues of developed and developing countries have been affected by both trade liberalisation strategies prompted by the GATT Uruguay Round, the privatisation movement initiated in the UK and by the World Bank and the IMF. Like trade liberalisation, the privatisation agenda was endorsed by both the more developed and developing countries. Developing countries have adopted one of three basic approaches to privatisation: the ‘big-bang’ approach of Latin American and Caribbean countries, the ‘go-slow and institutional’ approach of the Asian and East Asian countries and the ‘marketisation’ political approach of the East European countries. The more developed nations, on the other hand, directed their strategies towards industries such as airlines, banking, post and telecommunications and utilities (electricity, water and gas). Most of the OECD nations are currently undertaking privatisation to achieve further economic development and are involved in various stages of full privatisation of the industries mentioned above.

Why, then, has privatisation been so widely and comprehensively adopted throughout the world? The rationale more commonly put is that privatisation will:

• raise funds and reduce borrowing to improve a nation’s effective economic management;
• increase efficiency at the enterprise level;
• reduce government and bureaucratic interference in the day-to-day business of an enterprise;
• increase the share in enterprise ownership;
• create competition in the market; and,
• promote discipline in the market place (Gould 1990).

Privatisation involves selling state-owned enterprises (SOEs) or government business enterprises (GBEs) and other government activities to the private sector (Edadan 1997). The purported aim of the process is to ensure a GBE operates on a commercial basis or is subject to fair competition (Treedson 1996). The most common privatisation mechanisms include direct sale of a GBE, public offer of a GBE, concession sale, joint venture, management buyouts, liquidation and lease (Thein 1990). In many nations, regulators have been established for the privatisation process to protect the interests and activities of three major players, namely consumers, privately owned new companies and governments.

In Australia three major GBEs were privatised, namely the national flag carrier (Qantas), a major bank (Commonwealth Bank) and most recently one-third of Australia’s telecommunications company (Telstra). At the state level the major utilities are either privatised or are being privatised. In April 1995 the Council of Australian Governments (COAG) adopted a package of proposals known as the National Competition Policy which were based on the recommendations of the Independent Committee of Inquiry into National Competition chaired by Professor Fred Hilmer (Hilmer 1993). The Hilmer recommendations, however, went beyond proposals for corporatisation and privatisation of GBEs, and recommended a range of microeconomic reforms which potentially reach into some core government activities.

The scope and rapidity of the privatisation process and its profound implications for the people prompted the editors to organise a conference entitled ‘Corporatisation and privatisation: In Whose Interest?’, held in March 1996 in which the experiences of a number of countries were reviewed. We decided to take a multidisciplinary approach to the topic, since privatisation involves not only economic rationalism but also raises legal and political issues. The conference considered the implementation of Australia’s competition policy and the experiences of New Zealand, the United Kingdom and Malaysia.

This book includes a number of papers from the conference as well as chapters solicited from commentators in Europe, the USA, South Asia and Southeast Asia. The title of the present book asks: who benefits from privatisation? Most chapters either directly or indirectly attempt to answer this question in light of the privatisation experiences of a number of nations.

Specifically, Chapter 2 argues that privatisation should not be confused with deregulation, as it has been in some countries, most notably New Zealand. Rather, privatisation offered a challenge for regulatory reform. privatisation highlighted the failure of the pre-existing regulatory system to pay sufficient regard to issues of efficiency and accountability. privatisation has not, however, been the panacea it promised. It delivered substantial amounts of public assets to private owners without sufficient regard being paid to the impact on consumers in remote areas and poorer consumers. There is very little empirical evidence to show that consumers overall have benefited from the process. The privatisation process does, however, offer the opportunity to learn from experiences around the world to introduce or refine regulation of utilities.

Chapter 3 questions the theoretical claim that privately owned corporations will perform more efficiently than publicly owned corporations because of the way incentives for productive efficiency operate in each case. Whincop and Rowland argue that the relationship between efficiency claims and the governance of privatised enterprises, is poorly understood. They offer theoretical considerations for clarifying the relationship. In particular they deal with the relationship between the effects of capital and factor markets, the governance of corporations, and corporate law. Corporate law, they believe, is an essential influence on the governance and, therefore, the efficiency of a privatised corporation. Their analysis focuses on the changes that have taken place in Australia’s corporate law. These changes are significant because they suggest that the structure of corporate law is moving away from the norms by which it historically has been dominated. They argue that it is moving towards norms that are more typical of public law.

Chapter 4 investigates privatisation issues arising from Australia’s telecommunications industry. Before presenting a case study, Brown discusses privatisation’s theoretical contribution to the debate about economic efficiency and the fiscal imbalances of modern economies. In this part of the paper he finds that judging the benefits of privatisation is complex and is affected by a number of factors, including the profitability of the enterprise in the post-Privatisation period, the amount of underpricing of a privatised enterprise and the transaction costs during privatisation. Profitability in the post-Privatisation period can either be due to improved productive efficiency or to charging high prices. If the increase in profits results from the privatised firm charging higher prices, then allocative efficiency in the economy generally will decline. Underpricing and transaction costs will reduce the proceeds to the government from privatisation. Underpricing is likely to increase proportionally with the size of a public float and may occur because of restrictions on eligibility for shares and the perceived sovereign risk facing the privatised firm, but will be minimised by the use of tender process and the sale of shares in tranches. There will be a direct loss of national wealth to the extent of the premium on shares sold to foreign interests. In the second part of the paper, Brown examines the privatisation process and outcomes of privatisation of Australia’s telecommunications industry. The privatisation process began with the introduction of competition, initially in the value-added services, in 1991, creating a duopoly in mobile services. Subsequently, a licence was granted to a second general telecommunications carrier called Optus Communications, which competed with the government-owned carrier, Telstra. In the mobile services, however, a triopoly was created by granting a licence to Vodafone. Other competitors were granted general telephony licences in July 1997. Telecommunications policy since 1991 has largely been directed to bringing about ‘sustainable competition’ in the industry, which has involved the imposition of restraints on Telstra to prevent the abuse of its market power. By 1995, Optus had captured 14 per cent of both domestic (STD) and international (IDD) markets and 30 and 37 per cent of the mobile analogue and mobile digital markets, respectively. However, in the face of increasing competition, Telstra has been a leading performer among Australian GBEs. Telstra’s total revenues grew steadily over 1992 and 1996 from A$12.2 to A$15.2 billion (in nominal A$ terms), while after tax profit increased substantially from A$0.3 to A$2.3 billion. With Telstra’s economic performance in mind, Brown, in the third and final part of his paper, explores the outcomes of Australia’s privatisation of Telstra. He considers the asset value of Telstra, the savings in public debt interest, underpricing and transaction costs, foreign investment and allocative efficiency. He concludes that, from an economic perspective, there is little sense in supporting or opposing Telstra’s privatisation per se. The economic issues are complex and privatisation involves potential benefits as well as costs. The balance of benefits and costs depends crucially on the timing of the sale and the terms and conditions on which the sale proceeds, and, crucially, the regulatory environment created, the level of foreign interest and the achievable net sale proceeds. After Brown’s chapter was completed, one-third of Telstra was sold by public float in November 1997.

The UK experience of privatisation of utilities is considered from the consumers’ point of view in Chapter 5. Meek argues that when the Thatcher administration embraced the privatisation strategy it promised that privatisation would introduce greater competition in the utility industries making the industries efficient which in turn would bring prices down. In brief, privatisation would deliver consumer benefits. In practice, however, the goal of consumer benefits was either suspended or abandoned entirely due to priority given to other objectives. In fact, competition in the domestic market was actually prohibited in the gas, water and electricity industries when they were privatised. Consumers experienced limited competition in the telephony sector in the outset. In the absence of competition the government turned to regulators. The regulators were given statutory powers to impose price controls on the privatised monopolies and were expected to wither away when competition developed. In this context Meek examines the performance of several utilities, post-Privatisation. British Gas (BG) was privatised in 1986, but competition was initially limited to very large users and then gradually extended. British Telecom (BT) was privatised in 1984 and is currently in competition with various national and local companies. Despite the growth in competition, all companies depend on interconnection agreements with BT. Water was privatised in England and Wales in 1989. No attempt has been made to introduce competition at the domestic user level; however, competition is encouraged for very large industrial users. Electricity was privatised in 1990 and 1991. While competition has so far been limited to large commercial users, it will be extended in 1998 to domestic users. In the second part of his chapter, Meek explains the major barriers to competition in the various utility industries. These are: dominance of incumbent firms, the restriction upon consumers gaining appropriate market information on services and prices, and the excessive regulatory powers in the hands of regulators. He finishes this part by highlighting the impact of regulatory mechanisms on vulnerable and disadvantaged consumers. In the final part, Meek makes some observations about the future direction of the privatisation movement in the UK. He observes that, with all their limitations, the regulators have won a number of important battles over the years. The gas regulator has managed to ensure that the gas price formula is targeted to benefit domestic users, the telecommunications regulator has established a range of comparable performance indicators for the consumers to compare costs of calls under various companies, and has ensured that various options and ranges of services are available to consumers so that more households now have access to phones at affordable rates.

Chapter 6 examines the Californian experience of exposing the telecommunications industry to competition and regulatory reform and proposes regulatory reforms which should be made in the light of that experience when California exposes the electricity industry to competition. His primary concern is to ensure that the market mechanism, which is claimed will deliver greater consumer benefits than a regulated monopoly, function effectively, particularly for residential consumers. The problem for residential consumers is the lack of meaningful information available for them to make rational choices about which ‘competitive’ services they should use. The costs involved in gathering and making sense of the information will outweigh the benefit of obtaining the information unless the regulatory parameters are set correctly. Shames outlines a wide range of regulatory and other options to ensure that market information is available to consumers in a meaningful and cost-effective way.

Bengtsson, Marell and Baldwin present two Swedish case studies on deregulation in Chapter 7. The case studies address two industries: taxi cabs and postal communications. Before providing the empirical analysis, the authors offer a theoretical basis to explain how business-induced barriers can become a major hindrance to achieving privatisation goals. They discuss ways of identifying business-induced barriers and resource advantages and describe theoretically how barriers to entry affect the intensity of competition in both pre- and post-deregulation stages.

In their empirical analysis Bengtsson, Marell and Baldwin first consider deregulation of the taxi-cab industry in Sweden which took place in 1990. Deregulation was extensive in comparison to the deregulation of the industry in a number of American cities, and of local and regional bus traffic in the UK. The primary purpose of the taxi-cab deregulation in Sweden was to guarantee free entry into the market and to generate healthy competition. Deregulation also introduced free price-setting and the abolition of the maximum fare rate. Their case study results suggest that immediately after deregulation prices rose sharply, but began to fall within a year of deregulation. They note that customer loyalty to an established company is greater than to a new entrant. The case study on the postal industry begins with the observation that the Swedish Post Office has been a monopoly business for more than 300 years. The industry was subject to competition in 1991 when a duopoly was introduced. The introduction of the duopoly was instrumental to a deregulation of the postal service in 1993. The outcome of the deregulation has been positive. Prices have dropped markedly where competition exists. The third and final part of the chapter attempts to analyse the relationship between entry barriers and deregulation outcomes. In the prederegulation period the postal industry enjoyed the following entry barriers: monopoly operation, advantages of scope, economies of scale and customer loyalty. The taxi-cab industry enjoyed the entry barriers of company familiarity and monopoly operation in designated areas. The study found that in the post-deregulation era the postal industry is still enjoying the same entry barriers it had during the prederegulation period except that deregulation has brought competition regarding some products and some locations, and as a result led to price reductions. This was at the expense of price rises in low population areas outside Stockholm and other metropolitan cities. In the taxi-cab industry, post-deregulation prices dropped for subsidised trips negotiated by the public sector; however, for the privately paid trips, prices either have increased or remained the same. The authors conclude that in their view some features of predatory pricing can be observed in both industries in the post-deregulation period. Therefore, the deregulation measures are not consistent with the goal of attaining operative efficiency and gaining intense competition within the industry. This is due mainly to the existence of business-induced barriers that existed even after deregulation.

In Chapter 8, Goh and Sundram provide an assessment of Malaysia’s privatisation experience. Malaysia announced its commitment to a privatisation strategy in its privatisation Master Plan (PMP) in 1991. By 1994, the government was able to earn a one-off revenue of about RM2,063 million from divesting shares of enterprises to the public. One of the most important features of the Malaysian privatisation agenda is to further inter-ethnic wealth distribution by way of ensuring Bumiputera participation in share acquisition of at least 30 per cent. The postal services were corporatised in 1992. Since corporatisation, the postage rates for small parcels with weights exceeding 100 grams have increased tremendously. The objective of faster delivery remained unattainable. In some cases the delivery time has even increased during the Postcorporatisation period. The authors note several adverse outcomes of privatisation, including the pricing structures of privatised industries such as Highways, Passenger Railways, Medical Stores and Telecommunications. The authors argue that there is considerable scepticism about the benefits of privatisation in Malaysia. In most cases the transfer of ownership brought high user costs and reduced quality of services. The privatisation process adopted by the government lacks accountability, which has contributed to its poor outcomes. The objective of inter-ethnic redistribution of wealth has, however, been achieved as a substantial amount of wealth has been shifted to the Bumiputeras.

Chapter 9 does not address the issue of privatisation directly but quantitatively analyses the outcome of economic reforms (Privatisation being one of the reform measures) in the Indian manufacturing sector. Mukhopadhyay argues from a macroeconomic point of view that the major goals of economic reform measures were not achieved, even after five years of their introduction. In terms of GDP growth, the objective of 7 per cent sustainable rate of growth was not achieved. The economy has failed to achieve positive revenue results, when judged by the tax-to-GDP ratio. Exports and industrial growth have had mixed fortunes. After an initial surge, export growth has declined in recent years (a 6.2 per cent decline occurring during the first ten months of 1996-7). The most alarming development is the shadow of recession which hovers over the industrial sector. Mukhopadhyay quantitatively examines this by employing an econometric model of private consumption behaviour. His investigation shows that private consumers have postponed their consumption for the future owing to higher real interest rates. To avoid such an environment the author makes the following recommendations to the Indian authorities: first, the real interest rate (lending rates) should be reduced by lowering the inflation expectation permanently during the transition of liberalisation and privatisation; second, various uncertainties that are associated with the non-transparent nature of economic policies should be minimised as early as possible; finally, maximum priority should be given for removing infrastructural bottlenecks.

In Chapter 10, Hossain examines telecommunications privatisation in India. The Indian telecommunications market is the world’s second largest, after China. India’s expansion programme of its existing network will need around US$22.5 billion of investment over the next five years. To attract such a huge investment capital the Indian authorities have brought substantial reform measures within the industry. These are: complete freedom of telecom equipment manufactures, privatisation of services, and liberalisation of the rules relating to foreign investment and technology imports. The production line of telecom equipment is now being freed for private production. The telecom services were privatised particularly for value-added services such as Cellular, Pager and e-mail services. Foreign carriers including AT&T, BT, Sprint, Telstra and Deutsche Telekom have invested jointly with Indian counterparts in v...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• TABLES
• FIGURES
• CONTRIBUTORS
• PREFACE
• 1: INTRODUCTION
• 2: GAINING BALANCE ON THE REGULATORY TIGHTROPE
• 3: ‘PLUS ÇA CHANGE…’: THE EFFECTS OF MARKETS AND CORPORATE LAW ON THE GOVERNANCE OF PRIVATISED ENTERPRISES
• 4: THE ECONOMICS OF PRIVATISATION: CASE STUDY OF AUSTRALIAN TELECOMMUNICATIONS
• 5: PRIVATISATION DOESN’T NECESSARILY EQUAL COMPETITION: THE UK EXPERIENCE
• 6: PRESERVING CONSUMER PROTECTION AND EDUCATION IN A DEREGULATED ELECTRIC SERVICES WORLD: CHALLENGES FOR THE POST-MODERN REGULATOR
• 7: BUSINESS-INDUCED BARRIERS IN EXPLAINING THE EFFECTS OF DEREGULATION: TWO SWEDISH CASE STUDIES
• 8: PRIVATISATION IN MALAYSIA: A SOCIAL AND ECONOMIC PARADOX
• 9: QUANTITATIVE ANALYSIS OF ECONOMIC REFORMS: OUTCOMES OF THE INDIAN MANUFACTURING SECTOR
• 10: LIBERALISATION AND PRIVATISATION: INDIA’S TELECOMMUNICATIONS REFORMS
• 11: THE OTHER SIDE OF THE NATIONAL COMPETITION POLICY DEBATE: PERSPECTIVE ON THE PUBLIC INTEREST AND COMMUNITY SERVICES
• 12: CAUTIONARY REFLECTIONS ON THE PRIVATISATION PUSH
• APPENDIX