Subtleties of privatisation
PRIVATISATION, in its essence, refers to the process by which ownership of a business, enterprise, agency, or public service is transferred from the government to private individuals or organisations. This shift is often motivated by the belief that the private sector operates more efficiently compared to the public sector, driven by the profit motive to innovate and cut costs.
Examples of privatisation can range from the sale of state-owned enterprises to private investors, the outsourcing of services such as waste collection or healthcare to private companies, or the granting of concessions for the operation of infrastructure like ports or airports. A notable instance of this is the privatisation of British Telecom in the UK during the 1980s, which transformed the telecommunications landscape by introducing competition and significantly improving service quality and innovation.
Similarly, in Fiji, the privatisation of the telecommunications sector stands as a testament to the profound benefits that such economic reforms can bring to a country. Thus began the formation of Amalgamated Telecom Holdings Ltd in 1998, with the sale of a major strategic stake to the Fiji National Provident Fund.
By transitioning the ownership and operation of telecommunications services from the public to the private sector, Fiji witnessed a remarkable improvement in both the quality of services and the cost to consumers. This strategic move not only spurred competition among service providers, leading to significant advancements in technology and customer service, but also dramatically reduced the cost of data, positioning Fiji as the third cheapest nation globally in terms of data prices. This transformation has had a far-reaching impact on the country’s digital landscape, making connectivity more accessible and affordable for its citizens and businesses alike.
Moreover, the capital generated from this privatisation has been judiciously recycled by the government, allowing for reinvestment in other critical sectors that require public funding and intervention.
This cycle of capital recycling has thus not only enhanced the telecommunications infrastructure but also facilitated broader socio-economic development by redirecting resources to more pressing areas of need within the nation.
In recent decades, the global economic landscape has witnessed a significant shift towards privatisation, with governments across the world selling or leasing public assets to private entities. This trend has not bypassed the Pacific, where historically, essential services such as telecommunications, healthcare, roads, electricity, and water were predominantly provided by the public sector.
Fiji, among other Pacific nations, has been at the forefront of adopting this global trend, beginning with telecommunications and progressively encompassing sectors like printing, healthcare, ports, and electricity. The rationale behind such moves is multifaceted, focusing on the need for governments to recycle capital, improve service efficiency, and foster innovation.
However, privatisation comes with its own set of challenges and criticisms, necessitating a nuanced discussion on its impacts and the emerging trend of PublicPrivate Partnerships (PPPs) as a mitigating strategy.
Capital recycling
The essence of privatisation lies in the concept of capital recycling, where governments divest from industries that have matured enough to attract private investment. This allows the public sector to redirect financial resources towards areas that are still out of the private sector’s reach due to commercial inviability. Historically, in regions like the Pacific, the government’s role was indispensable in initiating and supporting basic infrastructure and services. Yet, as these sectors become commercially viable, privatisation is seen as a means to foster more efficient management and innovation, driven by the private sector’s profit motive.
The Pacific, and Fiji in particular, provides a compelling case study of gradual privatisation across various sectors. The first significant move came with the privatisation of telecommunications, a sector once monopolised by the government but now benefiting from enhanced competition, technological advancements, and improved service delivery. Similar transformations have occurred in printing, healthcare, port management, and electricity, indicating a broader acceptance of privatisation as a tool for economic rejuvenation and modernisation.
Apart from the recycling of capital, which as we discussed earlier, can be used to reduce debt or invest in other public projects that are not attractive to private investors, privatisation offers other efficiencies:
Efficiency improvements: private companies often operate under stronger profit motives and competitive pressures, driving them to seek efficiencies and innovations that reduce costs and improve service quality.
Capital investment: privatisation can attract significant private capital to sectors that desperately need modernisation and expansion, without straining public finances.
Government revenue: selling public assets provides governments with immediate revenue.
Focus on core functions: by divesting from business operations, governments can focus more on their core functions, such as regulation, policy-making, and public welfare.
Market competition: introducing private players can break monopolies, fostering a competitive market environment that benefits consumers through lower prices and better services as seen in the examples of telecommunications earlier.
However, there is also the flip side of privatisations, as the same motivation and drive towards profitability that bring in efficiency, also creates problems:
Public interest at risk: essential services like water, electricity, and healthcare might be compromised in pursuit of profit, potentially leading to reduced access for lower-income populations.
Job losses: to cut costs and increase efficiency, private entities might reduce workforce, leading to job losses and negative social impacts.
Monopoly risks: if not properly regulated, privatisation can lead to the creation of private monopolies or oligopolies, which can exploit consumers by raising prices and reducing service quality.
Loss of public accountability: private companies are primarily accountable to their shareholders, not to the public, which can make it difficult for the government to ensure they serve the public interest.
Short-term focus: private companies might prioritise short-term gains over long-term investment and infrastructure development, potentially leading to underinvestment in critical areas.
The disadvantages of privatisation, while significant, can be mitigated through the interplay of free market forces and effective regulation, ensuring that the transition from public to private ownership maximises benefits while minimising negative impacts.
Free market forces
Competition: one of the primary mechanisms through which free market forces can address the disadvantages of privatisation is by encouraging competition. When multiple private entities compete for business in a previously monopolised sector, it leads to innovation, efficiency, and lower prices for consumers. Competition can prevent any single company from dominating the market, thus protecting consumers from exploitative practices.
Consumer choice: free market forces empower consumers with choices, allowing them to select services based on quality, price, and value. This consumer sovereignty forces private companies to continuously improve their offerings and customer service to retain or expand their market share.
Innovation and investment: the desire to outperform competitors can drive significant investment in new technologies and processes, leading to better services and infrastructure. This is particularly important in sectors like telecommunications, where rapid technological advancements can greatly benefit consumers.
Effective regulation ❏
Safeguarding public interest: regulatory bodies play a crucial role in ensuring that private companies operate in the public interest, especially in sectors providing essential services. Regulations can set standards for service quality, price caps, and minimum service coverage, ensuring that the basic needs of all citizens are met.
Preventing monopolies: through antitrust laws and regulatory oversight, governments can prevent the formation of monopolies or oligopolies that could exploit consumers. This involves careful monitoring of market dynamics and, if necessary, intervention to ensure market competitiveness.
Protecting workers: regulations can also safeguard employees affected by privatisation through policies that mandate fair treatment, protect against unjust dismissal, and, in some cases, require the new private owners to retain a certain number of employees.
Ensuring long-term investment: governments can use regulatory frameworks to mandate or incentivise long-term investments by private entities in infrastructure and service improvements, ensuring that short-term profit motives do not undermine longterm developmental goals.
Transparency and accountability: effective regulation requires private companies to maintain high levels of transparency and accountability, including regular reporting on their operations, financial health, and compliance with regulatory standards. This helps maintain public trust and ensures that privatisation benefits are realised.
By strategically leveraging free market forces and implementing robust regulatory frameworks, governments can mitigate the potential downsides of privatisation, ensuring that it leads to positive outcomes for the economy, society, and the general population. This balanced approach is crucial for harnessing the efficiency and innovation of the private sector while safeguarding public interests and social welfare.
The role of Public-Private Partnerships (PPPs)
Acknowledging the criticisms of privatisation, including concerns over monopoly formation, reduced access to essential services, and job losses, the Pacific nations are increasingly turning to PPPs as a balanced approach. PPPs allow for shared investments, risks, and rewards between the public and private sectors, ensuring that public interests are safeguarded while leveraging the efficiency and innovation of the private sector. This model has shown promise in mitigating some of the negative side effects of outright privatisation, offering a more collaborative approach to delivering public goods and services.
Conclusion
The nuanced journey of privatisation across the Pacific encapsulates a multifaceted dialogue involving the imperative of capital recycling, the pursuit of operational efficiency, and the critical need to protect public interests. In regions such as Fiji, the strategic adoption of PPPs illuminates a pathway towards harmonising the inherent advantages of privatisation with its associated challenges. This approach, augmented by the dynamic forces of the free market and the protective measures of effective regulation, underscores a concerted effort to mitigate the adverse effects of privatisation. The emphasis on careful regulation, meticulous strategic planning, and a steadfast commitment to the overarching objectives of sustainable development and equitable service access remains paramount. As these nations advance in their privatisation endeavours, the Pacific narrative offers insightful lessons on the complexities of privatisation, highlighting the criticality of adopting context-sensitive, well-calibrated economic reforms. This evolving landscape reaffirms the significance of a balanced approach, ensuring that the transition towards privatisation contributes positively to societal and economic wellbeing, aligning with long-term developmental visions.
■ ASHNIL PRASAD is a qualified CPA and licensed investment adviser with over 14 years of experience spread across mobile money, lending, transaction structuring, valuations, corporate finance, mergers and acquisition, share acquisition, corporate restructures, financial instrument pricing, feasibility studies and corporate governance. The views expressed in this article are his not necessarily the views of The Fiji Times.