Clarification of Answer by
omnivorous-ga
on
24 Jan 2003 15:45 PST
Tom –
Stakeholders in privatization can be broken into several general
groups:
1. Government
2. Management
3. Investors
4. Labor
5. Suppliers
6. Others
The involvement by the stakeholders varies highly by country,
primarily due to the process involved, but also due to peculiarities
of each industry. In some cases, such as the de-nationalization of
oil and aluminum industries in Russia, the process was done swiftly
and with little input. In the case of western democracies, large
amounts of public debate preceded the process.
GOVERNMENT
----------------------
Government commitment to privatization starts the process,
particularly because enabling legislation is always necessary. And
even the private Reason Institute, which back privatization strongly,
notes that "privatization is a political process."
Reason Institute
"Privatization Center"
http://www.privatization.org/
A second reason is that government-operated concerns often don't
follow any form of standard accounting practice, as Yergin and
Stanislaw's book, 'The Commanding Heights,' notes in their account of
the U.K. efforts. Even British Telecom, which later became a star in
privatization, had books that were "a total mess."
PBS
"Comanding Heights: the Birth of Privatization"
http://www.pbs.org/wgbh/commandingheights/shared/pdf/ess_privatization.pdf
Modern privatization efforts really started with the success of the
Thatcher government in privatizing British Telecom in November, 1984.
The ability of the government to raise capital, while forcing more
competition into the market, made the process irresistible. Virtually
every country except Cuba, North Korea and Myanmar have been involved
in the process.
More than $1 trillion had been raised by governments by the end of
1999, according to Henry Gibbon in 'Privatisation International.' with
another $180 billion added in 2000.
France privatized 22 companies worth $12 billion during the 1980s
under Jacques Chirac. The subsequent Socialist government didn't
continue the process but didn't reverse it either. In the mid-1990s
the process continued in France, raised $7.1 billion in a France
Telecom IPO (October, 1997) and $10.5 billion in a secondary offering
(November, 1998).
According to Price, Waterhouse, the goals for the government have
been:
1. raise revenue
2. promote economic efficiency
3. reduce government interference in the economy and the drain on
treasury resources
4. promote wide ownership of shares
5. introduce competition
6. subject the enterprises to market discipline
Journal of Economic Literature
"State to Market: A Survey of Empirical Studies on Privatization,"
Megginson and Netter (June, 2001)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=262311
Government commitments to the process have been related to both
political considerations and the degree of market failure. In the
U.K., despite success in energy, water, rail and telecommunications
industries, the popularity of the National Health Care system has led
to relatively little activity.
And Poland's commitment to the process was strong, primarily as a
reaction to domination of the country's economy by the Soviet Union
until 1990 but also to preclude re-emergence of Communist government.
More than 5,300 state-owned companies were involved in the process
over the past 12 years, not counting retail businesses that have
totaled 100,000 companies in some estimates.
But the Polish process became so intricate that the Privatization
Ministry in the Treasury Department found itself having to explain
what was happening, particularly when unviable companies such as Hula
Batory, a steelmaker, were a candidate for consideration.
In Michel and Ngo's case study of the ministry, they quote Dr. Jerzy
Thieme, chairperson of the Steering Committee on Mass Privatization at
Poland's ministry, who discusses problems in implementation - - and
identifies the stakeholders who he thinks they need to reach in a
public relations campaign:
"This program is hard to explain even to a technical audience. We
should have left time for a comprehensive education and media
campaign. We should have identified who needed to understand the
program and how to speak to them in language they could understand.
Much of our key audiences include the general public, subgroups like
employees and managers, other agencies of government, the Parliament,
the media, foreign investors, and the international donors. I hope
that in the pressure to keep Poland moving toward its transition to a
market economy we don't forget this lesson. I think this is one of the
most important lessons for those considering similar programs in other
countries."
Worldbank Institute
"Case study: Privatization in Poland," Michel and Ngo (undated)
http://www.worldbank.org/wbi/cases/indexpol.html
Poland's process was specifically oriented towards international
investors, as from the start the ministry had determined that for key
state utilities it would be essential to invest in obsolete facilities
and to attract partners with management expertise. And, of course,
there are biases in what foreign investors are sought. American firms
were highly sought - - while investment from neighboring Germany was
NOT encouraged.
University of Warsaw
"Privatization in Poland: the statistical picture" (August, 1993)
http://www.ciesin.ci.uw.edu.pl/poland/privatizationintro.html
Many key "tactical" decisions need to be made by the government,
including:
· who participates in revenues from the sale?
· how much of the firm is sold in the initial offering?
· what form should a sale take (partnership, sale to private firm,
maintenance of company as publicly traded firm)?
· what investments in the firm are required as a pre-condition of
sale?
· what property transfers to the company?
· are layoffs of redundant employees performed before or after the
sale?
· what continued oversight is maintained by the government?
· how can strategic assets be protected from foreign control?
· how is competition enhanced when a former state monopoly passes into
the private sector?
There are two notable examples of the influential role of government
in the process - - Russia's troubled transfer of ownership in major
natural resource industries and China's limited privatization process.
The three authors of "Russian Privatization: What Went Wrong?" are
scathing in their attacks on what they term a 'kleptocracy.' Black,
Kraakman and Tarassova write, "Russia accelerated the self-dealing
process by selling control of its largest enterprises cheaply to
crooks, who transferred their skimming talents to the enterprises they
acquired, and used their wealth to further corrupt the government and
block reforms that might constrain their actions."
They also argue that official corruption, a punitive tax system,
unwieldy bureaucracy and organized crime added to the poor
environment. All of which contributed to weak support for further
reform from voters. They conclude, "A principal lesson: developing
the institutions to control self-dealing is central to successful
privatization of large firms."
Stanford Law Review
"Russian Privatization: What Went Wrong?" Black, Kraakman, Tarassova
(2000)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=181348
Megginson and Netter note that Chinese law privatizes all but the
largest 300 enterprises but ensures that the government dominates the
decision-making by holding two-thirds of the shares in the hands of
the government or domestic financial institutions.
INVESTORS
---------
After the government, who's the second most-influential participant in
the process?
Obviously based on the experiences described above, it will vary by
country and process.
Poland actively sought international investment and participation,
even while discouraging participation of investment from neighboring
Germany. At another extreme, China is trying to encourage private
investment while the government retains overall control.
Megginson & Netter's excellent summary study notes several aspects:
· foreign ownership is provides greater performance improvement than
domestic ownership
· outsider control gets greater performance improvement than
management control
· firms controlled by non-employees are much more likely to
restructure
· new management invariably brings better performance
In an analysis of Hungary's privatization program, Peter Mihalyi
argues that international investment is a prime determinant in a
successful privatization program. Multinationals provided investment
in manufacturing and links to the outside world that seeded the
landscape for "portfolio" and startup investors. Mihalyi uses Hungary
as the economic example to prove that its performance is better than
surrounding countries.
Central European University
"FDI in Hungary" (2000)
http://www.ceu.hu/econ/economic/fdi_ceuwp.pdf
How is the influence of investors reflected in the process?
First in the level of interest. The 2001 privatization programs
dropped to $20 billion in the countries of the Organization for
Economic Co-Operation and Development (OECD), partly because of poor
economic performance at the end of 2001, "resulting in cancellation
and/or postponements of planned privatisations."
OECD
"Recent Privatisation Trends in OECD Countries" (June, 2002)
http://www.oecd.org/pdf/M00031000/M00031987.pdf
In the case of U.K. water privatization, share prices were clearly
lowered to make disposal of the assets possible, according to Charles
Howe's analysis:
Universities Water Information Network
"The Effect of Privatization on Public Services: the Case of Urban
Water"
http://www.uwin.siu.edu/ucowr/updates/pdf/V117_A9.pdf
In more than one case involving water systems, private investors
withdrew or were tossed out of projects because the returns weren't as
expected. In 1999, British firm Biwater withdrew from a Zimbabwe
project; in Argentina a dispute over a privatization contract ended up
in a lawsuit involving Vivendi and the government:
Nadir.org
"Problems with Privatization of Water Supply & Sanitation"
http://www.nadir.org/nadir/initiativ/agp/campanas/water/txt/2000/03waterprivatization.htm
Investors face a full range of issues with the other stakeholders, as
a case study on privatization of the electrical system of Moldova
indicates. This case, outlined by U.S. Agency for International
Development, has very typical factors common to all privatizations:
· pricing to consumers
· status of previous obligations
· debt of existing organization
But it also adds other factors unique to the business, including the
future of thermal energy development; dealing with interconnections
with Romania; and subsidies for social protection.
U.S. AID also sponsored another study done by Carana Corp. in Egypt on
privatization efforts, which yields interesting information on why
offerings fail. The study covered 34 enterprises, of which 10 were
sold and 12 more "in progress."
Each of the unsuccessful offerings had multiple problems, in Carana's
opinion including price, packaging, prolonged negotiations, disclosure
issues, technical complications, and uncertainties over
land/labor/government issues. They maintain that proper due diligence
by the SELLER is critical, as is the necessity to negotiate
professionally and quickly.
Carana Corporation
"Getting the Deal Done" (May 7, 2000)
http://www.carana.com/pcsu/
MANAGEMENT
-----------
Polish law gives three participants the ability to start the process
of privatizing a company, putting them in a very strong position.
* the company's board of directors
* the employee council
* a state ministry
Company management in Poland becomes dominant in the process as it
continues, according to this ILO study:
International Labor Organization (ILO)
"Enterprise Privatization and Employee Buy-outs in Poland," R. Schliwa
(Jan. 24, 2000)
http://www.ilo.org/public/english/employment/ent/papers/ippred2.htm
In a 1995 International Labor Organization survey of 20 firms which
were privatized, outside investors were present in only 20 percent of
the cases. Workers savings plans could be used for financing and in
fact provided 50-100% of the capital in all 20 cases. When completed,
debt financing for the companies was heavy, at 80% of total assets.
Russian imperative for rapid privatization (1992-93) put local
managers and employees in charge through attractive pricing and
government loans. However, weak legal structure for investors, and
the state's ability to loan transferred 12 major energy companies into
private hands and replaced state monopoly with a market oligopoly.
Though the academics and consultants often note the necessity of
management change after privatization, in many cases in the
industrialized world, the changes came before an IPO. As Yergin and
Stanislaw note with British Telecom, the process began with new
managers at the top of the company to prepare it for the eventual IPO.
Similar action was taken at France Telecom and Deutsche Telecom to
bring in senior management familiar with operation of public
companies.
LABOR
----------
Every study has shown that government enterprises are over-staffed and
that following privatization employment is reduced and productivity
increases. So it's not unusual that labor has a say in how the
process happens. Labor participation is "key" to the success of
programs, according to World Bank analyses of privatization.
Some of the most-dramatic changes have been in rail transportation,
including Ferrocarillo Argentina, where labor productivity increased
by 370%, enabling the passenger/freight service to decrease employment
from 92,000 to just under 18,000, while service actually expanded:
HongKong Legislative Council
"Overseas Experience in Privatization of Railway Transportation"
(October, 1999)
http://www.legco.gov.hk/yr98-99/english/panels/tp/papers/tp28073.htm
Employment falls -- sales grow but not enough to offset significant
gains in productivity, so there is a net loss of employment.
One example of the reaction against privatization is in France, where
C.G.T., the union of civil servants, protested the privatization at
France Telecom. The union continues to argue against further
privatization, mobilizing a protest in October against government
plans to spin out
Electricité de France, Gaz de France, the two biggest utilities, and
to further reduce the state's stake in Air France.
Time Magazine (International)
"The Future is Calling" (April 26, 1996)
http://www.time.com/time/international/1996/960422/privatization.html
Similar protests have been raised by air traffic controller unions in
the U.K., Canada and the U.S., who are unconvinced that privatization
will advance any part of their role in assuring safety:
Air traffic control privatization:
Air Wise News
"U.K. Proceeds with Part-Privatization of Air Traffic Control" (Jan.
31, 2001)
http://news.airwise.com/stories/2001/01/980969845.html
In other countries, labor involvement is formal and well-recognized,
even if it fades later in the process. In Poland, Sliwa's analysis
for the ILO says that "the most important task of the employee council
is to prepare the employees of the company for privatization."
Duties Sliwa sites include:
-- explaining why privatization is being done;
-- presenting advantages and risks;
-- formulating the company's objectives in privatization;
-- defining social objectives;
-- discussing with potential investors;
-- sharing information with employee counselors from other companies;
-- managing expectations and any apprehension vis-à-vis privatization;
-- acting as an intermediary between the board of directors and the
workforce.
In this critical analysis, the most-devastating critiques of
organization and its impact on safety comes from union members and
managers, who contend efficiencies resulted in un-trained workers in
maintenance and train operation, leading directly to a pair of fatal
accidents in the U.K.
Creative Resistance
"Derailed: the U.K.'s Disastrous Experience with Railway
Privatization" (Jan. 1, 2002)
http://www.creativeresistance.ca/awareness/2002-jan01-uk's-disastrous-experience-with-railway-privatization.htm
SUPPLIERS
----------
There has been little written about the role of suppliers in
privatization. In fact, in many cases privatized industries have been
vertically-integrated and upon privatization they are split up to
create more competition and to rationalize them economically. This is
the case with the British Rail industry and even with court-mandated
breakups such as the split of American Telephone & Telegraph in the
United States.
This study on the privatization of health care systems in Chile,
Columbia and Poland introduces a wide range of participants in the
process, from insurers to doctors. Thomas Bossert makes it clear that
in a complex delivery system of health care involving doctors,
hospitals, insurers careful attention needs to be paid to incentives
for efficiency and structure of an effective payment system. Failing
to do so, he warns, will ultimately erode public confidence in the
system.
Harvard School of Public Health
"Privatization for Payments: Lessons for Poland from Chile and
Columbia," Bossert (March, 2000)
http://www.hsph.harvard.edu/ihsg/publications/pdf/No-77.PDF
OTHERS
-------------
More peripheral to the task are non-governmental organizations, which
often supply the rationale for the process and give governments the
willingness to act. Among the leaders would be the World Bank, which
has pushed privatization as a way of reducing government spending - -
and has provided the funding to plan and execute it.
Others include organizations such as the World Water Council (WWC),
which argues that solutions to water supply are best handled
privately. "The public sector proved not to be efficient," Ismael
Serageldin, a former World Bank vice-president and member of the WWC,
said at an international conference in 2000. Serageldin blames
government for failing to treat water as an economic good, like oil.
Multiple problems result from having state agencies run the water
supplies, including loss due to theft, leakage and poor accounting.
Additionally, state-owned factories are often prime polluters of water
supplies, he argues. Yet another source of waste are major
hydro-electric projects which prove to devour capital and change the
ecology.
Embassy of Jordan
Jordan Times (March 20, 2000)
http://www.jordanembassyus.org/03202000007.htm
Serageldin is even harsher on other aspects of government water
management, contending that subsidies work to benefit the wrong
population; dams and other major projects end up having huge negative
returns from pollution or environmental damage; and that innovations
in plants and aquifer management can't come from governments.
World Water Council
"A Water Secure World" (Feb. 15, 2000)
http://www.serageldin.org/CommissionReport.pdf
One final group with an interest in the process is primarily in former
Communist countries, which nationalized industries without
compensation. In Czechoslovakia 10% of the state property had
restitution claims against it from the earlier nationalizations.
Best regards,
Omnivorous-GA
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