Objectives of Infrastructure Privatization

According to Vickers and Yarrow’s (1988: 157) classification, we can identify six major objectives of privatization. These are illustrated in Figure 3.1. As Suleiman and Waterbury (1990: 5) argue, “[i]n the advanced industrial countries, the policy of privatization has been guided much more by social and political considerations and has been legitimized by economic considerations”. Usually, more than one of these considerations stand behind each privatization objective. Consider, for instance, the goal of

‘improving industrial efficiency’. At first glance, it relates to pure economic considerations such as strengthening the infrastructure company against foreign competitors on an internationalized market. However, this privatization objective could also be related to political considerations: by improving the efficiency of a company, fewer state subsidies

will become necessary. This has a direct effect on the budget and thus on the performance of the government as perceived by the voters.

Figure 3.1 Reasons for Privatization

Among the various goals for privatization the reduction of the public sector borrowing requirement and the improvement of industrial efficiency have thus far probably been the most prominent ones. In official statements governments usually give primacy to the latter objective. Nevertheless, it is much harder to achieve. Efficiency considerations are based on the assumption that ownership possesses an effect on a firm’s economic performance.⁸⁰ The idea inherent in many privatization programmes was that under private ownership, efficiency, innovation and customer responsiveness are stimulated much better than under public ownership. Long-term efficiency and productivity gains in network

80 The idea is the following: public ownership creates ill-defined property rights which in turn weaken mechanisms of agent-control (the officials) by the principals (the public). In addition, complete contracts cannot be signed due to asymmetric information. As a consequence, public ownership should lead to shirking and the pursuing of private ends by the officials, which in general do not coincide with those of the public.

Private ownership, on the contrary, guarantees direct claims to profits and, thus, an incentive to maximize

infrastructures, in turn, are associated with indirect productivity effects in other economic sectors which rely on a functioning infrastructure. In this sense, efficient infrastructure services contribute to higher real income and tax revenues (Welfens 1999: 22).

However, the debate about the efficiency effects of ownership is often conducted in a highly dogmatic way and is thus misleading. What is often overlooked is the fact that public enterprises, i.e. in Austria, France, South Korea or Taiwan, have shown a remarkable performance (Rowthorn and Chang 1993). As several authors argue, the central issue as regards the efficient allocation of resources is not ownership per se but rather the political economy of state intervention and the competitive environment in which firms operate (Hodge 2000; Parker 1998; Ramamurti 1999). This argument plays an important role for the explanation of reform developments in the CEECs later in this study. As Rowthorn and Chang (1993: 63) conclude,

“in many ex-Communist countries the scope for rapid privatization, at least of large enterprises, is very limited. Where this is the case, there is simply no alternative, in the medium term, than to concentrate energies on improving the state sector”.

This statement points to the fact that the issue of regulatory reform is not so much about privatization but rather about functioning competition and improving regulatory policies. The absence of competition is not necessarily a reason for privatization since a private monopoly is as insulated from competitive forces as a public monopoly. This does not mean that ownership structure does not matter. However, it seems to be common sense that successful privatization needs to be accompanied by liberalization and reregulation initiatives in order to make the reform process complete. Only the combination of privatization with the latter two reform policies can ensure the emergence of a sustainable competitive environment.

The objective of improving the efficiency of public infrastructure companies mainly stems from pressures of international product and service markets. Efficiency reasons were not only rhetoric placebo from governments for voters but over time increasingly reflected the reality of a globalizing world economy. Today, economies of scale in the telecommunications sector, for instance, can no longer be achieved in narrow home

markets. In addition, large infrastructure providers feel the pressure to be present on foreign markets which offer new revenue possibilities. Finally, efficiency can be achieved through sharing rapidly mounting research and development costs (Pitelis and Clarke 1993: 6-7). The consequence of these challenges are cross-border mergers and acquisitions such as the takeovers of German Mannesmann by British Vodafone in 2000, British Orange by French France Télécom that same year, or American Voice Stream by German Deutsche Telekom in 2001, to name only the most prominent examples in the sector of telecommunications of recent years.

Privatization offers governments a possibility for fast and uncomplicated cash to consolidate their national budgets. Politically, the sale of public assets is a much easier way for reducing the public sector borrowing requirement than increasing taxes or cutting public expenditure. A good example for such a pragmatic approach is Germany whose privatization initiatives were at the beginning largely driven by fiscal considerations. The CDU/CSU/FDP government began privatization in the 1980s but never pushed it too ambitiously. Esser (1988: 69) concludes that privatization in Germany was merely symbolic according to the motto “we are privatizers too”. Surprisingly, data reveal that privatization is promoted by good rather than bad economic conditions. In Belgium and Ireland, for instance, the average budget deficit between 1980 and 1986 was 11 per cent and 12 per cent of GDP, respectively. Still, very few privatizations had been accomplished in this period (Meseguer 2003: 5-6).⁸¹

Reducing government involvement in the economy is clearly an ideological goal of privatization. While left-wing governments are said to accept active state intervention in the economy as a viable political strategy, their Conservative and Christian-Democratic counterparts usually take a more cautious position. According to the party difference model, privatizations are prone to occur less frequently and less intensely under left governments than under centre-right governments (Garrett 1998; Hibbs 1992). As for the privatization of public infrastructures, this hypothesis does indeed seem to hold some explanatory power. For example, the variance between the liberalization and privatization

81 As Brune and Garrett (2000) show, low inflation rates, low levels of short-term debt and high per capita income spur privatization.

practices in Great Britain and France can be conceptualized by applying the party difference thesis.

A further objective of privatization is widening share ownership to foster ‘popular capitalism’. It involves both shareholdings by the general public and employee share ownership. This is usually done through the sale of state shareholdings on the stock market or to the employees of the company. By transforming the ordinary citizen into a shareholder, privatizing governments aim at ‘coalition building‘ and the creation of long-term party loyalty. In addition, privatization through share flotation at the stock exchange makes a renationalization of the industry inconceivable. That widening share ownership has in the past indeed been a reason for privatization can be seen in the cases of reforms in the United Kingdom and in France. As former Prime Minister Jacques Chirac stated:

“privatization is the veritable nationalization of the economy” (as quoted in Suleiman 1990: 127).

From the original goal of widening share ownership stems another political consideration which has driven governments to pursue the goal of popular capitalism. The privatization processes fostered the belief especially among right governments that the rise of trade unions in the 1960s and 1970s was responsible for diminishing international competitiveness. The idea inherent in privatization was that the transformation of union members into shareholders leads to a decline of union power. Hence, by actively promoting privatization Conservative and Christian-Democratic politicians could weaken union power and deprive the left of one of its fundamental constituencies. Whereas in Japan privatization was made possible because of the declining power of the unions, in the United Kingdom and France the idea was that privatization leads to a decline of union influence (Suleiman and Waterbury 1990: 13).