On September 23 last year–after the general elections, but before he was appointed as chairman of the Economic Development Advisory Board and as the head of a committee reviewing T&T state enterprises–Dr Terrence Farrell outlined his views on privatisation at a speech to Barbados Chamber of Commerce, which is excerpted below:
When economies get into trouble and governments need to retrench, the question of the privatisation of state enterprises and utilities tends to resurface, and the ears of the private sector prick up.
The labour movement is typically opposed to privatisation and I will discuss that briefly later on. I will, in this presentation, dissect the interests of government, the private sector and labour around the issue of privatisation and to assess whether and in what circumstances the policy makes sense and to focus a spotlight on the motivations and attitudes of the private sector in our region. By the end of my presentation I am sure I would have provoked everyone but, more importantly, I hope I would have provoked some thought as well.
The first issue relates to government behaviour when we ask: how come there are entities eligible for privatisation in the first place? Why weren't these businesses in the private sector all along? There have, of course, been instances where businesses in the private sector, were nationalised or expropriated, and were later re-privatised. I can think of no such instances in the Caribbean.
In other instances, a foreign business indicated its intention to leave and the government has bought the business in order to save the jobs which were supported. We have witnessed this in the sugar industry throughout the region and in petroleum exploration and refining in T&T.
Regulation vs ownership
The fundamental choice that governments have is between regulation and ownership. If it is possible to effectively regulate the activity in the public interest, there is arguably no need for the government to own the business.
The second consideration is the capital requirement. Initially, the generation and distribution of electricity or water may be too capital-intensive for private sector interests and it falls to the government to establish and grow these businesses. These businesses may, in the context of small island states, be natural monopolies.
Later on, as the capacity of the private sector grows, the businesses may be owned and operated by the private sector, but regulated by the government in the public interest. The public interest may involve not only the pricing of the services but also quality and service levels.
In the Caribbean, T&T has moved power generation into the private sector but electricity distribution remains in the public sector, as does water, ports, airports and bus and ferry transportation.
The third consideration is whether the industry or activity is strategic. This is a much-abused word which is more usually used as a justification for decisions and, when used, it is intended to suggest that no further inquiry or rationale is necessary. Regional governments have made such strategic investments.
In T&T, for example, the NGC and its subsidiary the National Energy Corporation have been established to ensure that developments in the critical natural gas and LNG industries evolved along a path that maximised the returns to the society.
I think that the airline industry in the region provides a good set of cases which illustrate the complexity of the problem. Governments took over the international routes of airlines with the cessation of the former colonial air transportation arrangements, but were unable to make commercial successes of BWIA in T&T, ALM in the Dutch Caribbean, or Air Jamaica.
The airline business is difficult enough at the best of times and, more so, in a region of archipelagic states with small populations and weak sea transportation links for passenger traffic.
When governments capriciously mandate state-owned airlines to fly routes which are unviable, it compounds the difficulties for airline managers. Governments also often do not have the financial capacity to make the investments in the airlines required to keep the equipment up-to-date and the service levels where customers would like them to be. It does not help the traveling public that airport facilities are often sub-standard.
On the face of it, the airline industry should be one that attracts private sector investment. But the attempts at privatisation of these airlines were also not successful. BWIA went private in the 1990s though the government retained a golden share and eventually retook control.
Air Jamaica was run for a period by the legendary Butch Stewart who could not translate his tremendous success as a hotelier into success at running an airline.
Intra-regional air transport has seen private ventures–Carib Express, RedJet, and several others–come and go while the government-owned LIAT carries on.
Regulatory and other capacities
Stiglitz, Mazzucato and others have sought in their writings to destroy (correctly in my view) the Washington Consensus which had argued for giving free rein to market forces, smaller government, and downplayed issues of inequality and income and wealth distribution. By contrast, these economists promote the idea of more active government involved not only in macroeconomic stabilisation, but also in addressing externalities, correcting serious inequality, and in promoting industrial and trade policies.
What they do not take into account are:
1. the capacity of governments to conceptualise and effectively manage these interventions and
2. the impact of politics on the formulation and implementation of these policies.
In respect of regulatory capacity, our central banks have been around for a long time and have acquired considerable experience in financial regulation.
Other areas of regulation–telecommunications, environment, utilities, occupational safety and health–are newer and there is less capacity for effective regulation. Areas such as industrial policy are even more problematic because they require an intimacy with business that public servants typically do not possess and cannot acquire by doing business degrees at a university. In the ethnically plural societies of T&T and Guyana, race and ethnicity play subtle and sometimes not so subtle roles in the implementation of policy.
The private sector: Parasitism
It is true to say the private sector is generally not viewed favourably by the general public or, for that matter, by government officials. One Trinidadian politician, Basdeo Panday, described the business community as a "parasitic oligarchy." The reasons for this disposition toward businesspeople are complex and rooted in our history and culture.
The plantocracy and the merchants were the employer class that exploited the labour of the rest of the population. That class was also phenotypically white or near-white, or in T&T Syrian-Lebanese, and latterly East Indian, in Guyana and Trinidad. They assumed leadership positions in business often without formal schooling beyond secondary level.
However, after adult suffrage and independence, the political directorate reflected the majority of the voting population. The public sector was the political and economic refuge of the Afro-West Indian.
Business was not automatically accorded high status in the post colonial dispensation; however, access to the corridors of political power was accorded high status. There was little movement between the public sector, with its lifelong, pensionable employment, and the private sector.
When T&T government had the resources, there was no need to treat with the local private sector at all. The political directorate was, at best, tolerant, at worst, downright hostile to the local private sector.
It did not help matters that the local private sector often could not bring itself to respect the political directorate or the public sector professionals. They aggressively pursued their own interests but, without political power or any hope of getting it, they had to lobby, corrupt public sector officials and adopt a posture of influence and pressure as the strategies for securing or promoting their interests.
Some of this has begun to change over the last couple of decades. Many private sector leaders are now well educated at university level. The private sector is now more reliant on professional skills–accounting, auditing, human resources management and industrial relations, engineering–in running their businesses and this has helped to bridge the gap between the professionals in the private and public sectors.
Afro and Indo West Indians began to take places on the boards of private sector companies. However, there still remains inadequate crossover between the two sectors, the social gaps have narrowed but still not closed significantly, and only very few businessmen enter active politics and take ministerial office.
Labour and state ownership
The labour movement loves state ownership. Governments will typically not resist the unionisation of workers in state enterprises and statutory bodies and may even agree to union representation on the boards of these entities. But, the real reason why unions love state ownership is that featherbedding becomes the norm and, in industries such as energy sector, this is accompanied by high wage levels and generous terms and conditions because the business is perceived as being able to pay. To illustrate, contrast the adjustments made by privately owned oil and gas companies since the collapse of energy prices to the publicly stated position of state-owned Petrotrin that jobs will not be affected!
Not surprisingly therefore, the labour movement tends to be opposed to privatisation of state enterprises, or private sector provision of public services under any and all circumstances. In T&T again, the incumbent trade union even opposed the recent IPO at First Citizens Bank, a state enterprise as a result of government intervention 20 years ago, and which by now ought to have been restored to private ownership with full recovery of the investment made by taxpayers.
Symbiosis: Forging a new relationship between public, private sectors
The tripartite process has been a longstanding mechanism as a forum for government- private sector-labour collaboration, although it has been restricted to industrial relations issues with government as the conciliator or mediator.
It has apparently worked fairly well here in Barbados, though it was abandoned in the more fractious political and industrial relations climate in T&T, with disputes channeled to the Industrial Court after conciliation fails. But, originally, the tripartite process was intended to extend to other areas of policy and collaboration between the three sectors, and arguably should be re-instituted on that basis, with the addition of a fourth sector–civil society organisations (NGOs)–which have become more significant in our societies in recent decades.
In recent years as the Washington Consensus has been undermined, economists have wrestled with the problem of the state's role in economic growth and development. It is in that process that PPPs–public private partnerships– came into vogue. From 2004-2012, investments in PPPs increased sixfold from US$ 22.7 billion to US$ 134.2 billion.
As we are wont to do in this region, we jumped on the PPP bandwagon without a serious appreciation of our political economy and, therefore, whether that approach was appropriate for us with or without modification.
In more recent years with actual experience of PPPs in several countries examined, it has been suggested that PPPs have not always worked well. Projects have been more expensive, accountability and transparency have been lacking and project selection has not always been optimal.
We need to take into account the political economy of the region, that is, the specific historical and cultural factors which influence the behaviours and decision-making of the actors in the public and private sectors and the trade union movement.
The aspiration involves:
1. mutual respect between the political directorate and the business elites;
2. collaboration in the formulation of economic policy beyond matters of industrial relations and taxation;
3. commitment to privatisation; and
4. incorporation and involvement of civil society organisations.
Conclusion
Mazzucato has written:
"The State cannot, and should not, bow down easily to interest groups who approach it to seek handouts, rents and unnecessary privileges like tax cuts. It should seek instead for those interest groups to work dynamically with it in its search for growth and technological change."
I agree fully.
Governments in developing economies are expected to play a larger role in the economy, including the promotion of entrepreneurship and innovation.
Politicians do not like to cede management control where they have invested in and own the business. State-owned enterprises provide a way of dispensing patronage by providing jobs for supporters of the ruling party, or feeding contracts to connected parties and supporters.
However, government capacity in our small, island economies is limited and constrains the extent and type of involvement they should entertain. Governments tend to over-reach their capabilities and state-owned enterprises are rarely sufficiently disciplined in the pursuit of their strategic missions.
Privatisation should not be contingent on the state of the economy and the constraints on government revenue, but should be an accepted exit strategy for state investments which would foster the expansion of the private sector and provide the government with the resources to pursue and develop other areas of activity which promote entrepreneurship and innovation.
I see no difficulty with governments de-risking certain activities and then allowing the private sector to enter by privatising the activity. The policy considerations here are undoubtedly complex. If the business is a monopoly, there must be sufficient regulatory capacity to secure the public interest. The valuation of the business when sold must also be sensible and fair to taxpayers who provided the capital and bore the initial risks.
It is critically important to build trust among the social partners: labour, business, NGOs and government. We need to accelerate (1) the movement of professionals between government and the private sector at the highest levels, including ministerial level; and (2) the establishment of forums for dialogue on policy issues (eg think tanks) which involve the partners.