The Privatization Payoff

By Jordan, Don D. | Chief Executive (U.S.), November-December 1993 | Go to article overview

The Privatization Payoff


Jordan, Don D., Chief Executive (U.S.)


A phenomenon is sweeping across the world stage that is unique in the annals of business. Its financial and geopolitical impact will be worldwide. Through it, technology will im,rove the economies of nations and the lives of ordinary citizens. And participating investors and politicians might alter the course of history.

This process is the large-scale privatization of government-owned industries. Virtually overnight, countries and their governments in every region of the world have repudiated socialistic, "managed" economies and have embraced private investment and free enterprise. As a result, the business and investment communities now are confronted with an unprecedented opportunity and challenge.

Among major industries being privatized are electric services, telecommunications, petroleum exploration and development, railways, steel production, and mining--each a critical part of the infrastructure needed to build or sustain economic success. I will focus on electric power production and distribution, one of Houston Industries' key businesses. But my comments, particularly those on risk analysis, are pertinent to any industrial privatiZation.

WHY PRIVATIZE?

Through pfivatization, poor countries are finding it possible to leapfrog decades ahead in building infrastructure required for development. Newly industrializing nations are using privatization as a means to speed the spread of prosperity among their citizens, bolstering lagging economies or adding momentum to those that are taking off. Even highly industrialized countries are getting into the act to enhance their positions in an increasingly competitive and ever-more-open world marketplace.

In many countries, state-owned enterprises such as elecuic utilities have been big money losers, requiring massive subsidies. Being exuemely capital-intensive, they often have burdened govemments with crushing debt. And, in many cases, the inability of governments to finance needed expansion has hampered industrialization. In India, for example, an official with the U.S. Agency for International Development estimateS that inadequate and unreliable electric supply costs industry 1.5 percent of GNP; in Pakistan the figure could be 1.8 percent. In other cases, frequent blackouts or brownouts have undermined political support and the credibility of the govemment.

For some nations, the sale of utiliry and other assetS also offers a way out of an international debt problem. By privatizing, th, govemment not only attracts investment and operating expertise, it raises hard currency that is used to reduce international debt. In turn, this may reduce pressures from the Intemational Monetary Fund, the World Bank, and private lenders, and facilitate loans needed for other purposes.

Finally, in an incresing number of nations, the decision is being made to let business handle what it does best, while the government focuses on areas such as defense, public health, and education, where it is the logical large-scale provider.

WANTED: CAPITAL TRANSFUSIONS

The scope of the investment needed is I staggering. There are at least 50 major nations in the process of privatizing, ranging from Argentina to Australia, Bangladesh to Brazil, Italy to India, Peru to pakistan, Turkey to Thailand, Mexico to Malaysia, and China to Colombia (see Exhibit I).(Exhibit I, omitted)

In the electric supply sector, the U.S. Agency for International Development estimates that power is increasing at an annual rate of 6.5 percent. In the U.S., the Edison Electric Institute forecasts a more modest annual rise of only 1.9 percent over the next decade.

According to AID, the electricity requirements of developing and indusuializing nations over the decade will amount to a whopping $100 billion a year, "...sums which are not now and are unlikely tobe ity available in the future from developing Asi nations' treasuries."

These figures only address known, new additions to the existing power supply. …

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