THE PROBLEM WITH SOES
Many SOEs have become problematic and inefficient. Can privatisation provide the solutions?
HISTORICALLY, the private sector has been unable or unwilling to affordably provide needed services. Hence meeting such needs could not be left to the market or private interests. Thus state-owned enterprises (SOEs) emerged, often under colonial rule, due to such “market failure” as the private sector could not meet the needs of colonial capitalist expansion.
Thus the establishment of government departments, statutory bodies or even governmentowned private companies were deemed essential for maintaining the status quo and to advance state and private, particularly powerful and influential commercial interests.
SOEs have also been established to advance national public policy priorities. Again, these emerged owing to market failures to those who believe that markets would serve the national interest or purpose.
However, neoliberal or libertarian economists do not recognise the existence of national or public interests, characterising all associated policies as mere subterfuges for advancing particular interests under such guises.
Regardless of their original rationale or intent, many SOEs have undoubtedly become problematic and often inefficient.
Yet privatisation is not, and has never been a universal panacea for the myriad problems faced by SOEs.
Undoubtedly, the track records of SOEs are very mixed and often vary by sector, activity and performance, with different governance and accountability arrangements. While many SOEs may have been quite inefficient, it is crucial to recognise the causes of and address such inefficiencies, rather than simply expect improvements from privatisation.
First, SOEs often suffer from unclear, or sometimes even contradictory objectives. Some SOEs may be expected to deliver services to the entire population or to reduce geographical imbalances.
Other SOEs may be expected to enhance growth, promote technological progress or generate jobs. Over-regulation may worsen such problems by imposing contradictory rules.
To be sure, unclear and contradictory objectives, e.g., to simultaneously maximise sales revenue, address disparities and generate employment — often mean ambiguous performance criteria, open to abuse.
Typically, SOE failure by one criterion (such as cost efficiency) could be excused by citing fulfilment of other objectives (such as employment generation). Importantly, such ambiguity of objectives is not due to public or state ownership per se.
Second, performance criteria for evaluating SOEs — and privatisation — are often ambiguous. SOE inefficiencies have often been justified by public policy objectives, such as employment generation, industrial or agricultural development, accelerating technological progress, regional development, affirmative action, or other considerations.
Ineffective monitoring, poor transparency and ambiguous accountability typically compromise SOE performance. Inadequate accountability requirements were a major problem as some public sectors grew rapidly, with policy objectives very loosely and broadly interpreted.
Third, coordination problems have often been exacerbated by inter-ministerial, inter-agency or inter-departmental rivalries. Some consequences included ineffective monitoring, inadequate accountability, or alternatively, over-regulation.
Moral hazard has also been a problem as many SOE managements expected sustained financial support from the government due to weak fiscal discipline or “soft budget constraints”. In IPS PIC many former state-socialist countries, such as the Soviet Union and Yugoslavia, SOEs continued to be financed regardless of performance.
Excessive regulation has not helped as it generally proves counter-productive and ultimately ineffective. The powers of SOEs are widely acknowledged to have been abused, but privatisation would simply transfer such powers to private hands.
Very often, inadequate managerial and technical skills and experience have weakened SOE performance, especially in developing countries, where the problem has sometimes been exacerbated by efforts to “nationalise” managerial personnel.
Often, SOE managements have lacked adequate or relevant skills, but have also been constrained from addressing them expeditiously. Privatisation, however, does not automatically overcome poor managerial capacities and capabilities.
Similarly, the privatisation of SOEs which are natural monopolies (such as public utilities) will not overcome inefficiencies due to the monopolistic or monopsonistic nature of the industry or market. The key remaining question is whether privatisation is an adequate or appropriate response to address SOE problems.
SOEs often enjoy monopolistic powers, which can be abused, and hence require appropriate checks and balances. In this regard, there are instances where privatisation may well be best. Two examples from Britain and Hungary may be helpful.
The most successful case of privatisation in the United Kingdom during the Thatcher period involved National Freight, through a successful Employee Stock Ownership Plan (ESOP). Thus, truck drivers and other staff coowned National Freight and developed personal stakes in ensuring its success.
In Hungary, the state became involved in running small stores. Many were poorly run due to over-centralised control. After privatisation, most were more successfully run by the new owners who were previously store managers.
Hence, there are circumstances when privatisation can result in desirable outcomes, but a few such examples do not mean that privatisation is the answer to all SOE problems.
Privatisation has never been a universal panacea. One has to understand the specific nature of a problem; sustainable solutions can only come from careful understanding of the specific problems to be addressed.
Regardless of their original rationale or intent, many state owned enterprises have undoubtedly become problematic and often inefficient. Yet, privatisation is not, and has never been a universal panacea for the myriad problems faced by SOEs.
The writer, a former economics professor, was United Nations assistant secretary-general for economic development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007