Is privatising power a real turn-off?

Third, the rapid growth of a new private enterprise sector rather than privatising SOEs best achieves economic reform.

Fourth, if a large state owned and control sector exists, it is essential to encourage movement of assets out of SOEs before they are privatised. This can be done through a program of fiscal constraints, and liberalisation of barriers to entry, price controls, and trade. It is the sequencing order which matters, and Dabrowski et al (2001, p.318) conclude that fast privatisation of SOEs will not produce output gains unless a completely new private sector is created.

Constructing a scale of reducing state involvement in the ownership and control of the means of production, we could put in the first stage of evolution away from a state controlled economy to full market driven one, public private partnerships (PPPs). Private finance initiatives (PFIs) could be considered as a half way house in the middle. The final stage of evolution would be privatisations.

The reason for starting with PPPs is that they have been described as a “third-way economics” (Montanheiro, 2002). This is because if the degree of government ownership rather than control is taken as a criterion, PPPs are a halfway house between full state ownership and control, and loosening the reins through PFIs and privatisations. There is yet to be an economy where there has been zero state involvement, so an economy characterised by large-scale privatisations can be taken as the far end of the spectrum.

PPPs have been defined as, collaboration between public and private parties to realise for both a surplus value (Braekeleer and Sprundel, 2002). Collaboration can take the form of a concession, joint venture corporation, or trust, set up specifically for a concrete and well-defined project with a clear public sector character. It creates surplus value in terms of better price to quality ratios, either socially or financially.

PFI projects were first trialed in the UK in the early 1990s, with a total value of US$1.65 billion undertaken in the period 1992-8 (Montanheiro, 2001). Arguments for PFIs devolve around efficiency, value for money, better relationships with users/consumers, greater service accountability but at times appear a way of reducing government deficits.

One advantage is the expertise, which the private sector, whether foreign or domestic, can contribute and which the public sector may lack.

Another advantage is the ability to access the capital markets with a captive customer - the government.

Disadvantages are the need to ensure the total contract delivers benefits for the taxpayer and the investor, without costly time and transaction delays. Although a disadvantage may be a mark down in country risk borrowing lines, or reduced support from an international agency, the same cost can apply to PPP projects.

PFI projects can be taken to mean, “build, operate, and transfer” (BOT) whereby the private sector invests in a project, which they maintain and operate. The government can lease essential infrastructure to the private investors, or guarantee a certain usage and revenue in return for the transfer of risk.

If ownership of all assets, not just the assets provided by the private sector, passes out of government hands to the private investors, then effectively the utility, service, industry has been privatised. This is called “build, own, operate” or BOO; or “build, operate, own and transfer”, or BOOT, whereby the private sector totally supplants the government in the provision of services and infrastructure. This is to be distinguished from asset sales, as the private sector adds value by building and operating with BOT, BOO or BOOT structures.

Private finance initiatives, where the ownership remains in public hands but the private sector takes the risk, is attractive in advanced nations as opposed to emerging nations. This is because a high sovereign credit rating may be required in the case of a take or pay guarantees, which may be part of PFI structures, or to dispel fears of nationalisation of the operation of the asset.