Privatisation programmes come in diverse
forms and it is not always easy to determine their success or failure. Studies
of the UK
experience suggest mixed results. Some privatised companies achieved a highly
successful turnaround, notably British Telecom and British Airways, but the
verdict on the privatisation of British Rail, the water industry and the health
service is far less flattering._12 The Economistdescribed the privatisation of
British Rail as a disaster. Experience also differs between countries. In a
highly generalised way, one might say that privatization has been successful in
the UK while unsuccessful in
Russia.
The effects of privatisation can be
evaluated under several headings: effects on
efficiency, effects on
government revenue and effects on income distribution.
A key consideration is the effect of
privatisation on efficiency, i.e. on measured
labour productivity or,
better still, total factor productivity. The resultant fall in
unit costs can be passed
on to the consumer in terms of lower prices and better
quality. In the UK, telephone
charges fell by 35 per cent in real terms between
1984 and 1994, whilst
electricity prices for business fell by 30 per cent during the
period 1990_–_99.
According to the US
Department of Justice Antitrust Division
Annual Report 1994,
increased competition in the US
telecoms industry hastened
the introduction of fibre
optic technology and spurred an increase in technological
innovation. Electricity
charges also declined in real terms. As a general rule,
experience shows that the
more competition in the privatised companies the
greater the likelihood of
a positive outcome. This is just as economic theory
would predict. A policy
environment that encourages long-run investment in the
privatised companies is
also important.
The effect on government revenue
is more complex than might appear. In the
case of an outright sale,
the gain to the state cannot be equated with the sale
price. The state has just
replaced one asset with another. To calculate the net financial gain to the
state, we must compare the present value of the stream of net revenue expected
from the firm had it remained in state ownership with the proceeds from the
sale. The price paid for the company is thus a crucial variable. If
under-priced, the privatisation programme could end up worsening instead of
improving government finances in the long term. Also there must be some
assessment of how this extra cash accruing to the government is being used. It
is being spent on building up military power or on consumer handouts or on
long-term investments for the future?
Last, one must consider the income
distribution effects. There are at least four
parties to consider: the
state, employees of the privatised firms, the consumer, and
the new owners. The mode
of privatisation has an important bearing on the
outcome. Share flotation
is one mode, often associated with a certain predetermined
allocation to existing
employees.Direct sale. Management buy-outs are another possibility. In each
case, careful analysis is needed in order to assess the resultant income
distribution effect. It is obviously easy for the state that is strapped for
cash to be induced into selling too cheaply.Also shares can be sold too cheaply
to the public in order to curry popular favour or to ensure that the flotation
will be a ‘success’, as happened in several Western European countries.
There is little doubt that in most
instances privatisation has brought benefits to
the consumer, not just in
terms of lower price but also in terms of improved
quality of service and
efficiency. There are many areas of the economy to which
the ethos of a state
company is particularly unsuited and where privatisation has
yielded unambiguous
benefits. Examples are state-owned hotels and restaurants
or manufacturing
industries, where quickness of response and an entrepreneurial
approach is especially
important. State farms, created on the grounds of
economies of scale, have
never become successful enterprises. To some extent,
governments have voted
with their feet. The number and scope of privatisation
programmes around the
world shows that finance ministries are convinced that
the potential benefits
exceed any potential losses. Experience to date would
support this verdict. But
it will take time before the dynamic efficiency effects of
privatisation can be fully evaluated.
