Privatization Promotes Collusion and Corruption

Privatization is expected by many to promote competition and eliminate corruption. In practice, the converse has been true as privatization beneficiaries have successfully colluded and engaged in new types of corruption to maximize their own gains.

By Jomo Kwame Sundaram
KUALA LUMPUR, Malaysia, Apr 23 2019 – At the risk of reiterating what should be obvious, the question of private or public ownership is distinct from the issue of competition or market forces. Despite the misleading claim that privatization promotes competition, it is competition policy, not privatization, that promotes competition.

Jomo Kwame Sundaram

Privatization the problem, not the solution
Instead, privatization has typically been accompanied by collusion, which undermines competitive pricing. Formal and, more commonly, informal collusion is rife. Informal collusion is more likely among those involved in public or transparent bidding to provide privatized or contracted-out services.

Transparent institutions and arrangements, such as public auctions and open, competitive bidding for contracts, have often been compromised by secret, informal collusion. Typically, those with political connections and insider information are better able to secure lucrative contracts and such other business opportunities.

Greater public transparency and accountability were expected to promote greater efficiency in achieving the public interest while limiting waste and borrowing. But contrary to such claims, privatization itself does not ensure transparency and accountability, or address corruption. As it is rarely implemented on an arm’s length basis, it may also contribute to other problems, including new types of corruption.

Hence, privatization does not enhance efficiency except to augment profits. The public sector can be more efficiently run, as in some economies. Hence, the challenge is to ensure that the public sector is better run. Greater public accountability and a more transparent public sector can help ensure greater efficiency in achieving the public and national interest while limiting public sector waste and borrowing.

Ascertain problems to determine solutions
Correlation does not imply causation. An enterprise may be better run after privatization due to managerial reforms, behavioural changes or organizational improvements. But if such improvements could have been achieved without privatization, then one cannot conclude that privatization is needed to bring about desired reforms.

It is important to consider the organizational and managerial reforms, including incentive changes, which might be desirable to achieve superior outcomes. One should not assume that privatization is the answer regardless of the question or the problem at hand.

After all, many SOEs were set up precisely because the private sector was believed to be unable or unwilling to provide certain services or goods. In many instances, the problems of an SOE are not due to ownership per se, but rather to the absence of explicit, feasible or achievable objectives, or the existence of too many, often contradictory goals.

In other cases, poor managerial and organizational systems, blocking flexibility, autonomy and needed reforms, as well as cultures supportive of them, may be the key problem. Such reforms may well achieve desired objectives and goals, or even do better, at lower cost, thus proving to be the superior option.

Many SOEs have undoubtedly proven to be problematic and inefficient. However, privatization has not proved to be the universal panacea for the myriad problems of the public sector it has been touted as. As such, the superior option cannot be presumed a priori, but should instead be the outcome of careful consideration of the nature and roots of an organization’s malaise.

SOE reform or government procurement often superior

SOE reform is often a superior option for a variety of reasons although there are no ‘one size fits all’ solutions regardless of circumstances. Problems need to be analysed in context and solutions cannot be assumed a priori.

It would be erroneous to presume that public ownership is always a problem. There may be other problems which are not going to go away without properly identifying and resolving them.

Desirable changes, resulting in improved performance and outcomes, may take place following the privatization of a particular SOE. But even this does not mean that privatization per se is responsible for these improvements unless state ownership itself has blocked needed changes, in which case there may well be compelling cases for privatization in such situations.

Another alternative, of course, is government or public procurement. Generally, public-private partnerships (PPPs) are much costlier than government procurement. With a competent government, government procurement is generally more efficient and much cheaper.

Yet, international trade and investment agreements are eroding the rights of governments to pursue government procurement. With a competent government and an incorruptible civil service, and competent accountable consultants doing good work, efficient government procurement has generally proved far more cost-effective than PPP alternatives.

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