Privatisation: Is the solution worse than the problem?

The ongoing debate on the future of government-linked companies (GLCs) and their management is complex and multifaceted. These articles contributing to this discussion are based on the third Tun Hussein Onn Chair lecture delivered by Jomo K Sundaram, now a member of the Council of Eminent Persons.

COMMENT | Privatisation has not provided the miracle cure for the problems (especially inefficiencies) associated with the public sector. The public interest has also rarely been effectively served by private interests taking over public sector activities.

More recently, growing concern over the adverse consequences of privatisation has spawned research worldwide.

As a matter of fact, both the IMF and World Bank have long been aware of such likely adverse impacts of privatisation. For example, IMF research acknowledged that privatisation “can lead to job losses, wage cuts and higher prices for consumers”. Similarly, World Bank research on Argentina, Bangladesh, Chile, Ghana, Malaysia, Mexico, Sri Lanka and Turkey found large-scale employment losses when big state-owned enterprises (SOEs) were privatised.

In the US, UK, Canada, Chile, Sweden, Russia, Poland, Ukraine, Bulgaria, China, Hong Kong, Malaysia, the Philippines, South Korea, Sri Lanka and Bangladesh, privatisation in 1999-2004 adversely affected female workers more. IMF and World Bank safety net or compensation proposals were either too costly for the public treasury or too administratively burdensome for many developing countries.

Diverting private capital from productive new investments to buy over existing publicly-held assets actually slowed, rather than enhanced, economic growth. This effectively involves significant diversion of potentially productive new investments as such resources are instead used to buy over existing assets, rather than to augment economic capacity. Instead of contributing to growth, this simply changes ownership.

Listing privatised SOEs on the stock market subjects them to short-term managerial considerations, for example, to maximise quarterly firm earnings. This often serves to discourage new investments for the longer term. Such a short-termist focus tends to marginalise the long-term interests of the enterprise, and the nation.

Thus, stock market listing may mean the introduction, perpetuation and promotion of a culture of short-termism. This is often inimical to the interests of corporate and national development more generally, and the improvement of economic welfare more broadly.

Furthermore, both evenly distributed as well as concentrated share ownership undermine corporate performance of the privatised enterprise, whereas SOE ownership would overcome such collective action problems.

Where the population has equal shares following privatisation - such as after ‘voucher privatisation’ - no one has any particular interest in ensuring the privatised company is run well, worsening governance problems. Thus, public pressure to ensure the equitable distribution of share ownership (such as voucher privatisation) may inadvertently undermine pressures to improve corporate performance.

As shareholders only have small equity stakes, they would be unlikely to incur the high costs of monitoring management and corporate performance. Thus, nobody has an incentive to take much interest in improving the operations or functioning of the company.

This ‘collective action’ problem exacerbates the ‘principal-agent’ problem as no one has enough shareholder clout to require improvements to the management of the privatised enterprise due to everyone having equal shares and hence modest stakes. Conversely, concentrated share ownership undermines corporate performance for other reasons...vatisation