The Privatization challenge

Global leaders share their experience in Beijing.

Privatization is not a panacea and needs to be complemented by the right tax structure, a transparent and honest regulatory framework and emphasis on the greater good, global leaders advised today at a BusinessWeek conference in Beijing.

Speakers ranging from former Philippines President Fidel Ramos, former New Zealand Prime Minister Jenny Shipley and India's former Minister for Disinvestment, Dr Arun Shourie concluded that while the privatization process was undoubtedly improving the dynamism of an economy, certain challenges should not be ignored.

Professor Yang Ruilong of Fudan University said that the key question facing privatization in China was the division of the benefits. "In Russia, you certainly had a huge privatization, but who actually benefited? It's not clear if society at large benefited," he pointed out.

New Zealand's Shipley said that when her government privatized hydro-electric power plants, the consumers saw immediate benefits in the falling cost of energy.

She added that a floating exchange rate, the end of industrial and agricultural subsidies, reducing the size of the state sector and a flexible labour market were also important mechanisms to encourage a privatization process, which generated wealth in an equitable manner.

Shipley said that during her time as Prime Minister the government introduced private sector concepts early on into the state sector to enable them to carry out a more successful and thorough privatization. These measures included valuing the entities and providing them with proper balance sheets; and appointing CEOs in the same as a private company. She said that utilizing such intermediate techniques could enable the government to calibrate the speed of its privatization process and avoid social disruption.

"The privatization process turned New Zealand from a sluggish, inward-looking economy into something much more vigorous," she argued.

She added that infrastructure projects in China and the agricultural sector in India had both played an important role in providing employment to members of the population with skills not suitable to a modern economy.

Shourie, who pointed out that the Indian economy had grown almost 7% for the past 12 years, said that although due process had to respected, speed was important during the privatization process.

"Every day we clung to a state-owned asset, its value went down with regard to other private companies, which were making huge gains in the area," he said.

Shourie commented that the Indian government had contemplated shifting assets to a holding company structure, as China has done with the State Administration and Supervision of State Assets Committee (SASAC), mainly to circumvent bureaucratic opposition to privatization. Ultimately, however, the idea was abandoned.

Shourie said it was absolutely vital for every step of the bidding process to be regularized.

"The loser in the bidding process will invariably cry foul," he said. "That's why it's so important for the government to be able to prove that the law was respected."

During Shourie's time as Minister of Disinvestment, there were 26 appeals against privatization cases, but all of them were held up by the top Indian court.

Shourie also said it was important that genuine privatization through the sale of strategic stakes to the private sector be encouraged, as partial sell offs of state assets via IPOs do not provide sufficient momentum for change.

A milder alternative would be to keep the state-owned entities, but to open the sector up to the private sector.

This would generate benefits while minimizing the social fall out, he said.

He said that a good way for ensuring support for privatizations was to ring fence the funds raised by the sell off and make sure they were spent on projects which had obvious benefits for the community at large, such as universities or social welfare.

Shourie claimed that in certain sectors, production had gone up by 250% while wages were up 30%, all within eight to ten months.

Under Chinese regulations, 10% of any state-owned equity sold abroad reverts to the government's social security fund.

He pointed that in a democratic country like India, the process of privatization could progress much faster than closed societies because there were more mechanisms, such as a free press, for alleviating abuses.

Jean Christophe-Iseux Iseux, director of China Studies at the Regulatory Policy Institute at the University of Oxford, pointed out that China's regulatory environment was unique.

"Asset sell offs are being supervised by SASAC, which essentially represents of the Chinese communist party. So we are seeing the Western mechanism of a board of directors being used to ensure the integrity of assets belonging to a communist party," he said.

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