Academic journal article The McKinsey Quarterly

Rethinking Privatization

Academic journal article The McKinsey Quarterly

Rethinking Privatization

Article excerpt

Wholesale divestiture is not the only -- or necessarily the best -- means of transforming state enterprises in Asia

WITH PRIVATIZATION a priority for many governments worldwide, the World Bank's recently published privatization case studies and policy report are particularly timely.(*) And their conclusion -- that privatization improves performance, creates incremental wealth, and distributes benefits to investors, governments, and customers in a fairly equitable way -- will presumably act as a further spur to privatization. The policy report certainly calls for large-scale and urgent divestiture.

Asia's prosperous and fast-growing economies, often heavily influenced by government control and state enterprise, would appear to be ideal candidates for full-scale privatization. Yet Asian countries' frequently ambitious plans and rhetoric seem at odds with the reality of slow progress and hesitancy. There are certainly some substantial examples of privatization in the region, but many more initiatives are simply property or asset sales, or involve the transfer of only minority ownership, with the state remaining in effective control.

Our discussions and work with governments across the region suggest they are looking for a richer framework for thinking through the process of industry and enterprise transformation, with full-scale privatization as simply one of the options available to achieve such transformation. The policy debate needs to shift, it would seem, toward a fuller assessment of the efficiency and service improvements that can be achieved in a particular industry, the desired industry and competitive structure, and the consequent role of state enterprise and the private sector. In addition, a broader set of options needs to be considered for private-sector involvement in existing activities and/or future expansion, including full and partial privatization, concessions, partnerships, and contracts.

World Bank endorsement

As The Economist observed when the World Bank study of privatization was issued in the middle of last year, "It is remarkable how long an idea can stay buried, then how quickly it can burst into bloom. Privatization is now so widely supported that it is easy to forget how new an idea it is."(*) Essentially a decade-old concept, privatization was initially an act of faith, a belief that private initiative could do better than state bureaucracy and public monopoly. The World Bank study provides a systematic assessment of the costs and benefits of privatization, and offers persuasive evidence that privatization can work effectively. Remarkably forthright, the authors begin by asking, "So, did divestiture make the world a better place, or not?" And then assert, "Our case studies answer this question with a resounding 'Yes.'"

The study examines 12 privatizations, three in each of four countries (Chile, Malaysia, Mexico, and the United Kingdom), including four airlines, three telecommunications companies, two electric utilities, a trucking company, a container port, and a state lottery. It assesses the net welfare change (or economic gain and loss) to the parties involved in privatization -- governments, domestic and foreign investors, customers, employees, and taxpayers -- comparing actual results with what would have happened under continued public ownership. In doing so, it provides insights into the behavioral and performance changes that took place in each organization, and a careful evaluation of the way that different market and institutional factors hindered or helped privatization success. Among the most interesting conclusions:

* Eleven of the 12 divestitures led to a net increase in wealth, with Mexico's airline, Mexicana, the only loser (because of mistimed plane acquisitions). This wealth increase was distributed unevenly to the parties concerned, but in a surprisingly acceptable way -- foreign and domestic investors gained; some governments lost, but only small amounts; employees as a group did not suffer in any case, and in some instances profited substantially; consumers lost in only three situations, as a result of much-needed price increases, but they were not affected in five cases and actually benefited in four. …

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