Now they tell us: Privatization is no panacea
By MADELAINE DROHAN
Wednesday, August 6, 2003 - Page A13
Finally, someone has come to their senses at the World Bank and admitted that letting the private sector run things does not always produce better results than leaving them in public hands.
For an organization that has spent two decades pushing privatization with something akin to religious zeal, this amounts to a crisis of faith.
And it has implications, not just for developing countries that are forced to swallow World Bank prescriptions if they want Western aid, but also for developed countries like Canada who still have government assets -- like water utilities and electricity systems -- left to sell.
They might want to read a new report, Private Participation in Infrastructure in Developing Countries, available on the World Bank Web site, before they rush the last few bits of family silver to market. This report looked at the results of the massive influx of private investment in developing countries in the past decade, which averaged $60-billion (U.S.) a year between 1990 and 2001. Toll roads in Mexico, mobile phone systems in India, power distribution grids in Brazil, and water utilities in Latin America were among the 2,500 projects built or purchased with these funds.
While by no means a blanket condemnation of privatization, the report found that private ownership did not automatically solve problems in government-run enterprises.
In the best cases, private companies introduced better management, replaced outdated water pipes or transmission lines, and reduced swollen payrolls, although layoffs were unpopular. These changes often led to better services.
But privatization sometimes replaced some forms of corruption -- awarding jobs to cronies and pilfering by employees -- with others, such as allowing friends and relatives to buy lucrative companies for a song. It has had a negative impact on the poor when new owners raise rates to pay for improvements and make a return on their investment. And it has reduced public accountability. Consumers can threaten not to re-elect a government that fails to provide adequate services. They have a harder time holding private companies to account. A Latinbarometer poll that covered 17 countries in 2001 found that 63 per cent of respondents felt they had not benefited from privatization.
Investors aren't universally happy either, some because they went into the exercise with unrealistic expectations of profit, others because governments have backtracked on their promises or meddled with new and confusing regulations.
The report found that the most difficult enterprises to privatize successfully are traditional monopolies that sell essential services to consumers, such as water and electricity. This is partly because it is difficult to introduce competition into such markets, and partly because governments have traditionally subsidized these services. Ontario residents currently enjoying capped electricity rates will understand.
Moving such services to the private sector doesn't get around the problem of payment. Consumers either have to pay through their taxes, or through higher fees to a private company. And this can be politically charged. One of the best known failures highlighted in the report is the Cochabamba water concession in Bolivia, which was forced to close after only six months after residents mounted violent protests against fee hikes.
The World Bank report concludes that selling a water or electricity system to the private sector does not solve the essential problem -- which is how to pay for such systems in the first place.
In both the developed and developing world, companies are losing their appetite to buy government assets. Privatization in rich countries peaked in 1998, when it reached $100-billion. In Canada, the peak was in 1995, when the equivalent of $4-billion (U.S.) of government assets was sold.
Why are these sales dropping? The easy sales have long since been made. The stock market is in the doldrums, making it difficult to raise funds. And there have been some bad experiences such as Air Canada, now teetering on the brink, and British Airways, also in dire shape. There are others.
Most alarming for the advocates of privatization are the de facto renationalizations taking place. The government of New Zealand, for example, rescued its privatized airline, Air New Zealand, last year by buying back 80 per cent of the faltering carrier. In Britain, the government was forced to put Railtrack, which owns the railway tracks, under administration after the private sector proved it couldn't run a railway profitably. It had been in private hands for only four years.
While the era of mass privatizations, best symbolized by Margaret Thatcher of Britain, may have run its course, no one is suggesting we are entering a new age of public ownership. What the experience to date does teach us is that there are limits to what the private sector can and should do. Not every public service should be a candidate for private ownership.
This is an important message for federal, provincial and municipal governments contemplating what to do with their remaining assets. What they have left are the tough ones to sell to the private sector. Before they arrange another sale, they should contemplate the lessons highlighted by the World Bank report.
Madelaine Drohan is the author of Making a Killing: How and Why Corporations Use Armed Force, to be published this fall.