Is it time for governments to launch a new wave of

privatisations?
Public indebtedness is at its highest peacetime levels in advanced
economies after the trauma of the global financial crisis. In Italy,
for instance, the public-debt burden is a dizzying 130% of GDP.
Emerging economies, meanwhile, have been slowing down after
years of impressive growth. Given the squeeze on public coffers,
is now the time to take a hard look at which assets could be put
on the blockas any household would do in the same situation?
A lot remains in public hands, even in countries where there have
already been several waves of privatisation. OECD countries have
state-owned enterprises worth $2 trillion, as well as a similar
amount of assets held by local and municipal governments. Even
more value is locked up in "non-financial" assets, such as land
and buildings.
Some argue on practical grounds that now is not the time to sell
because prices are not sufficiently buoyant. Others point out that
many past sell-offs, in Europe, Latin America and elsewhere,
were botched because the right regulatory frameworks were not
put in place first. Yet others insist that privatisation is almost
always a mistake, pushed by right-wing ideologues who
exaggerate the benefits and downplay the improvements that can
be generated by simply increasing the professionalism of
management in the public sector. On the other side, supporters
argue that privatisation is a useful tool for any government
seeking to bring its spending in line with revenues, and that it
generally improves overall economic efficiency by boosting
competition and by applying private-sector capital and skills to
hidebound assets. What do you think?

The proposer's opening

remarks
Feb 4th 2014 | Bernardo Bortolotti

Stars are realigning (again) for the start of a new big privatisation wave. The
key factors explaining state sell-offs are well-known: deteriorating public
finances; financial market conditions; and a large portfolio of state-owned
assets. Under present circumstances, governments of all stripes may decide to
put on the market large chunks of the national economy any time soon.
The financial crisis, with its lethal mix of credit crunch, decreased tax revenues,
huge economic stimulus programmes and bank bail-outs, led to a dramatic
increase in public debt for most advanced economies. Public debt as a
percentage of GDP in OECD countries, hovering around 70% during the 1990s,
rose to 113% in 2013, and it is projected to grow even more in the next year.
This trend is visible not only in countries chronically affected by debt problems,
such as Japan, Italy, Belgium and Greece, but also in countries where public
finances were well under control before the crisis, such as America, Britain and
France. A large-scale privatisation programme alleviates public finances
because cash revenues can be used to redeem public debt, and savings in
interest payments may give leeway to expansionary fiscal policy. Rising
interest-rate expectations reinforce the argument, along with the positive effect
on credit ratings of a sustained privatisation programme.
Market conditions are equally important because no government, like any other
asset owner, will sell shares in a depressed market. And again the compass
points in the same direction. Global stockmarkets are today at historical highs.
Last year American stocks posted the best annual return since 2007, and
valuations have gone ballistic for several listed assets in mature economies.
Given the current growth prospects, the outlook is still positive. Under current
market conditions, governments could thus take the opportunity to get good
prices for their listed stocks, and significant revenues in the primary markets in
case of initial public offerings (IPOs), given the high appetite for equity of
global investors. The recent highly oversubscribed IPO of Britain's Royal Mail
represents an interesting forerunner of this trend.
The boundaries of state ownership have moved considerably in the past few
decades, with the large privatisation waves of the late 1900s followed by the
more recent government bail-outs in advanced, crisis-hit economies, and
sovereign wealth fund investments in emerging countries. At any rate, residual
state ownership in listed and non-listed firms, real estate and infrastructure is
valued at around $9 trillion.

So governments have property left to sell and an interesting window of

opportunity to seize. However, they should remember the hard lessons learnt
from past privatisations.
First, divesting governments should always apply the basic financial rule for
privatisation: privatise only if the sale improves the net worth of the state. A
state-owned asset should be sold only if its expected return in private hands
exceeds the interest rates on public debt. The corollary of the rule is that
governments should auction the assets in competitive tenders to get the best
price in the market. Giveaway privatisation, sales to insiders like those
implemented in some transition economies (notably in Russia), or strongly
underpriced offerings in public markets violate the rule and should be avoided.
Getting high prices is an important objective to square public finances, but
turning a giant state company into a private monopoly in order to raise cash is
an economic disaster. Unfortunately, privatisation history is littered with
botched sales in network industries where efficiency considerations have been
neglected in favour of immediate financial relief. The usual method is a partial
sale of a badly regulated monopoly. Under this scheme, the divesting
government gets immediate revenues from the sale, and a future stream of
rent in the form of dividends from its residual stake in the company.
Monopolistic rents, extracted from captive consumers of public services, are
thus shared by the treasury and a happy few private shareholders. The
announced partial privatisation of Italy's Poste Italiane, a large state-owned
financial conglomerate and postal operator slated for sale as an integrated
monopoly, seems to fit perfectly in this scheme. Liberalise, regulate and then
privatise is the right timing.
The current crisis has raised questions about the role of the state in the
economy and disparaged the economic paradigm based on laissez-faire,
unfettered markets and unrestrained financial capitalism. In the 1980s and
1990s, privatisation was often shaped by right-wing ideology. This is not a time
to resurrect old ideologies, but rather a time to adopt a policy that can deliver
to citizens and taxpayers. The devil will be in the details of implementation, but
it is definitely worth a try.

The opposition's opening

remarks
Feb 4th 2014 | Elliott Sclar

Is it time for governments to launch a new wave of privatisations?

While privatisation might make sense in some instances, a massive sell-off of
public assets is not one of them. Privatisation is fundamentally a variation on a
simple technical outsourcing question: should government make or buy
products or services such as computer hardware or painting contracting that
are readily available in the marketplace? However, once the discussion moves
from the straightforward to such uniquely governmental functions as
communications monitoring and security-clearance certification, more
philosophically complex questions arise pertaining to the proper role of
government in the life of society. Over the past three decades, privatisation
proponents have deployed the outsourcing for efficiency argument in the
service of varying policy ends: reining in the incomes of public employees,
putting state-owned enterprises into the private sector and, most recently,
solving state fiscal crises by selling public assets.
Repurposing privatisation to resolve public-sector budgetary constraints is the
issue I address here. The policy prescription calls for reducing public debt via
the sale or lease (ie, privatisation) of publicly owned assets. The justification is
made by analogy. Private firms facing debt crises are expected to sell assets to
avert bankruptcy. The same should hold true for governments. Firms are not
governments. Firms easily arise and as easily liquidate. Governments can do
neither easily, if at all. Governments have abiding social obligations to deliver
important public goods and governance. Asset dispositions to meet current
budget gaps must be weighed against the future costs of enduring
responsibilities.
Privatisation always involves establishing a relationship between government,
the agent of society's collective interests, and a private entity motivated by
self-interest. The critical issue in evaluating this deployment of outsourcing is
appreciating the time-sensitive motivations of the parties involved.
A major proportion of saleable public value is locked into the infrastructure that
is critical to animating vibrant urban societies. The prices private investors
willingly pay for control over such assets reflect their estimates of the revenue
streams they expect from tolls, fees and other charges. The freer the hand the
public sector extends to private investors in operating the asset, the more the
latter will offer. Is government seeking maximum sale value at the cost of
something more enduring?
There is no readily obvious alignment between the long-term public needs of a
vibrant urban society and the shorter-term private needs for investment return
and protection of capital. This motivational misalignment is at the core of all
the instances of failure in public-asset sales and leases. Failures are more
common than is popularly understood.
Consider Chicago's experience with its 2008 75-year lease of its street-parking
meters for $1.157 billion. Almost everyone regards that sale as a poor bargain.
Chicago now reportedly has the highest parking rates of any city in America,

never a good economic omen in an auto-dependent country. The consensus is

that the city badly mishandled the leasing process. Chicago's inspector general
put the value of the deal at just over $2 billion. For privatisation advocates, the
lesson is that Chicago officials failed to negotiate well. Incidentally, that is the
standard advocate response to all such failures regardless of specifics.
Accumulated evidence of serial failure never proves to be an intellectually
powerful enough reason to reconsider the rationale. It is dismissed as just so
many poorly executed anomalies.
But that framing of the contract debate misses the larger lesson here. Chicago,
in leasing its parking meters effectively, relinquished critical control of its most
vital public good, its streets. Leasing its street space, regardless of price,
breaches an important public fiduciary responsibility. The worst aspect of this
privatisation is that Chicago must guarantee revenue from its street space to a
private investment partnership for the equivalent of three generations. The city
cannot take parking space away for transit, cycle lanes or other purposes.
Given new technologies such as self-driving vehicles and smartphoneaccessible demand-responsive taxis, it is unlikely that we will still need much, if
any, on-street parking towards the end of this century. But Chicago will still be
reimbursing a private investment partnership with real taxpayer dollars for the
imaginary lost revenue of what will in effect be phantom parking spaces.
We will not resolve the larger philosophical questions here about the proper
scope of government. But let's agree that when governments engage in any
public-asset privatisation, for whatever reason, it is vital that public aims
remain paramount. These aims should not be compromised for the sake of
private-sector profit-making or rent-seeking, as is now the case in Chicago.
The core problem remains one of mission misalignment between the parties.
Because this difference is so fundamental, the contractual terms become
critical. All public-asset lease and sale contracts must do three things: explicitly
protect public options in the face of changing conditions; specify exactly how
transparency will be maintained; and make explicit provision for ongoing
oversight and accountability. These provisions will, of course, diminish the
attractiveness of such sales and leases to the private sector and raise publicsector contract enforcement costs. This lesson was recently driven home when
Chicago, stung by its misadventure in parking-meter sales, sought to impose
more contract accountability in the sale of its municipal airport. Once the new
terms of engagement became known, the number of interested bidders rapidly
fell from 16 to one. With no competition there was no sale. And that is the
point. More upfront revenue means higher future social costs. No free lunches
here.