Is privatisation the only solution?

Is privatisation


Privatisation is one among several options for dealing with the undoubted malaise of many public sectors. There may well be instances where privatisation offers the superior option, but this should be the policy conclusion after serious consideration of all options available rather than the default option, writes Anis Chowdhury
THE latest Bangladesh Bank data revealing an alarming trend in the number of loss-making branches of six state-owned banks have led many observers to argue for privatising them. Privatisation is seen as the only alternative for stopping wastage of money from the public coffers.
Of course, there are many better ways to spend tax-payer money, like education and health, rather than help banks with proven track records of failure. But is privatisation the only alternative solution? Is it true that private banks have demonstrated greater efficiency and are also free from the political influence and corruption that plague state banks, as is often argued?
We have seen irregularities and fraudulent loan approval processes in the private banks as well. Millions of takas have been siphoned off by the directors/owners of the private banks and by people connected with them. The Basic Bank scam of Tk 4,500 crore involved loan approval without proper documentation and scrutiny. Premier Bank, Shajalal Islami Bank, Jamuna Bank, Prime Bank and South-East Bank were involved in the Tk 200 crore loan scam of the Bismillah Group. A credit card scam involving over Tk 10 crore was detected at United Commercial Bank. The Hallmark Group swindled about Tk 3.06 billion from Prime Bank, Tk 1.64 billion from the Jamuna Bank and Tk 1.469 billion from Shahjalal Islami Bank.
Everyone knows, the 2008–2009 global financial crisis was brought about by fraudulent transactions and risky behaviour of the private sector dominated financial institutions in the United States. On the other hand, Singapore and many other countries have highly efficient and profitable state owned banks.
Therefore, ownership is not the root cause of failure or inefficiency. Privatisation of state owned banks or for that state-owned enterprises is not the only solution to the problem.

Main causes of SOE inefficiency
UNCLEAR and contradictory objectives — eg, to simultaneously maximize sales revenue, address disparities, generate employment, etc — often led ambiguous performance criteria open to abuse. Often, failure on one criterion (eg, cost efficiency) was justified on the grounds of fulfilling other objectives (eg, employment generation).
Problems of coordination among various government agencies and inter-departmental rivalries also played a role. Some consequences included ineffective monitoring, inadequate accountability, or alternatively, over-regulation. ‘Moral hazard’ has been a problem too as SoE managements expected sustained financial support from the government known as ‘soft budget constraints’.
Many SoEs enjoyed monopoly or monopsony powers de jure or de facto, often providing cover for inefficiencies and other abuses. Many SoE managements lacked adequate or relevant skills but were constrained from addressing them expeditiously.

Privatisation will not necessarily overcome inefficiency
THE ambiguity of objectives is not necessarily due to public or state ownership per se. As the experience of some other countries shows, SoEs can be run efficiently, sometimes on commercial bases.
Privatisation also does not automatically solve the problem of the lack of managerial skills. Similarly, privatisation of SoEs which are natural monopolies (eg public utilities) will not solve the problems of inefficiencies due to the monopolistic or monopsonistic nature of the industry/market.

Flawed arguments for privatisation
THE arguments for privatisation can be refuted on the following grounds:
— The public sector can be more efficiently run, as demonstrated by some other public sectors, eg in Singapore, Taiwan and South Korea.
— Greater public accountability and a more transparent public sector can ensure greater efficiency in achieving the public and national interest while limiting public-sector waste and borrowing.
— Privatisation may postpone a fiscal crisis by temporarily reducing fiscal deficits, but the public sector would lose income from profitable public-sector activities and be left to finance and subsidise unprofitable ones. As the experience shows, the fiscal crisis may even deepen if the new owners of profitable SoEs avoid tax by using creating accounting.
— Privatisation would give priority to profit maximisation, typically at the expense of social welfare, equity and the public interest. It tends to adversely affect the interests of public-sector employees and the public, especially poorer consumers.
— Public pressure to ensure equitable distribution of share ownership (eg ‘voucher privatisation’) may inadvertently undermine pressures to improve corporate performance since each shareholder would then only have small equity stakes, and would, therefore, be unlikely to incur the high costs of monitoring management and corporate performance.
— By diverting private-sector capital from productive new investments to buying over public-sector assets, economic growth has been retarded rather than encouraged.

Can SOE inefficiency be improved?
IMPROVEMENTS in management generally reflect management initiatives encouraged, if not required by the national political leadership, and enabled by increased enterprise and administrative autonomy as well as new incentive systems, ie changes which do not require privatisation as a prerequisite, but can alternatively be achieved by greater decentralisation or devolution of administrative authority.
It is competition and enterprise reorganisation — rather than mere changes in ownership status — which are more likely to induce greater enterprise efficiency. Instead of a privatisation fetish, reformers should consider the variety of modes of enterprise reform, privatisation, marketisation and other measures as options in improving the public sector.
With such an approach, privatisation becomes one among several options available to the government for dealing with the undoubted malaise of many public sectors. After all, there may well be instances where privatisation offers the superior option (eg the Hungarian privatisation of retail shops), but this should be the policy conclusion after serious consideration of all options available rather than the default option it has been in recent decades.

Anis Chowdhury was professor of economics, University of Western Sydney, Australia during 2001–2012, and held senior United Nations positions in New York and Bangkok during 2008–2015.

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