Is Privatization The Solution?

Is Privatization The Solution?

There is a prevalent misconception of privatization. On one hand, the concept of privatization is diverse and hence complex, with no universal consensus on why and where it may be applied, what it exactly entails, how it is to be implemented and what are its actual historical outcomes. On the other hand, heavy doses of public relations cosmetics have been applied to camouflage it and increase its appeal, turning it into a single cure-all-pill, that can remedy all our ills and transform us into a modern and prosperous country. While, we dearly wish for such a rosy outcome, we doubt that this pill has the potency to deliver the desired results. We believe that negative risks of privatization in Kuwait and the GCC outweigh its theoretical positives. The camouflage has been based on two assumptions, both of which may not stand up to scrutiny. These two assumptions are: The State is inherently inefficient, and the Private Sector is inherently efficient and has outstanding abilities. Let us explore them briefly below:

The Inefficiency of the Sate Assumption:

The proponents of privatization assume that the State is a poor manager because:

1) It lacks people with management talent and abilities.
2) It is unable to control the quality of the products and services it delivers to the public.
3) It is non-profit by orientation, which diminishes its interest in cost control. Hence, its expenses are not only sky-high, but also encourage corruption.

However, the pro-privatization camp, intentionally or unintentionally, ignores, the following facts:

1) The State is very capable of hiring the best management talent to manage its work as well control its quality and costs. In fact, the public sector contains many top-notch executives in various fields and departments. They may not be visible because of their relative small number compared to that to the huge civil service cadre.
Historically, the breakneck speed and size of the development of Kuwait over the past half century, encouraged the government to employ an ever-growing number of citizens. The objective was to secure them jobs, income and a livelihood – productivity was not a priority then. This eventually led to the bloated civil service that we now complain is inefficient. In fact, the problem is social and political in nature, rather than managerial or economic. No doubt, better management planning and techniques may have mitigated its (then unforeseen) negative effects, but revenues were gushing in, and everybody was quenching their thirst. It is easy, to judge in retrospect, and to claim, after the fact, that the government should have been stricter in hiring and performance evaluation. But remember, this began in the 1950’s and 1960’, when the society was still in its infancy. Thereafter, it became a norm, and no one had the will or courage to stop the practice of hiring – And so continues today. Nevertheless, the fact remains. The State is very capable of hiring top managers – Despite the resistance of powerful interest groups and those benefiting from the status quo.

2) The State is very liquid, and has all the capital needed to fund projects the private sector gets cold feet about. The State’s mere presence, is a safeguard protecting such projects from the vagaries of the markets, which have tripped or pulled the rug from under many private sector projects, throwing them at the mercy of banks, financiers and creditors.

3) The State owns vast land holdings that can be utilized for any project imaginable.

4) The State can decide to monopolize projects it deems essential and critical for the welfare of society, the economy or national security.

5) The State can reclassify some of its projects from non-profit to for-profit. It can commercialize projects and operate them as such.

The Efficiency of the Private Sector Assumption:

The proponents of privatization assume that the private sector is capable of taking over many of the Government’s functions, manage them in a much better manner, as well as take the lead in entrepreneurship and economic development. They base this on the following:
1) The private sector has ample managerial and executive talent.
2) The principle of Profit and Loss ensure that the private sector delivers maximum product & service quality at minimum cost.
3) The private sector is the main driver of economic development as well as a protector of the Balance of Payments.

However, here too, they ignore, intentionally or otherwise, the following facts:

1) The private sector in Kuwait (and in most of the GCC) relies almost totally on Government spending. The State is by far largest source of the private sector’s revenue in the form of purchases of products and service via public tenders and direct buying. Also, the salaries and bonuses it pays its public employees, constitute a major part of consumers’ demand, which the private sector relies on to stay in business. Should the State stop its spending, or even reduce it, the private sector immediately stumbles, panics and inundates the government with appeals to save it from bankruptcy.

2) There is no doubt that some excellent managerial talent exists in the private sector, especially that which has grown in the past couple of decades. However, their numbers are too small to carry the full load of the economy. As for the rest of the private sector, it remains classical in its management style, and continues to totally rely on expatriate management and labor. Recent history is full of examples confirming the private sector’s inability to deal with the many economic crises that have befallen the country. The private sector was not able to withstand a single internal or external crisis, and in each case, ran to the government for help to stave off its imminent collapse and bankruptcy.
From another aspect, there is a serious concern that the private sector’s infatuation with profits, can override its commitment to deliver quality goods and services. The huge number of dishonesty, fraud and deceit that are regularly reported in the press are a frightening indication of this – not to mention the cases that are not caught or reported. As for corruption, it is a two-sided affair. One side pays, and the other collects. The side that pays is the private sector, who may be forced to so, to ensure that its profitability levels are maintained.

3) One of the most important tenants of economic development is employment. This means the reduction of unemployment be it, visible or disguised. By reviewing the private sector performance over the past half century, it is obvious that it has been the main funnel for the rise in skilled and unskilled expatriate labor, at the expense of national labor.
As for the Balance of Payments, its historical surpluses are a direct result of oil exports, without which the Dinar exchange rate would have dropped to that of the weakest currencies. At the same time, the private sector’s net contribution to the balance of payments has always been negative.

What Does This Privatization “Pill” Mean?

If the privatization assumptions and facts described above are true, then why is there a rush to implement it? Especially without sufficiently studying its likely impact on Kuwait (and the other GCC countries)? In the government’s case, the reason may be to quickly wash its hands off the problem that it has inherited, and for which it has no vision or will to tackle and is hence, not confident in solving. But in the case of the private sector, the rush is a form of jockeying for priority positions to grab the choicest cuts of the State functions and projects. Especially as those projects will likely entail the granting of monopoly franchises, free or cheap land, specially designed laws and procedures, and guaranteed continuous demand for the products and services privatized at inflated prices with no competitors – And all this without paying its true cost, tangible and intangible. How can the private sector pass up such a golden opportunity?

What is the Alternative to Privatization?

Despite the World Bank’s insistence that privatization is the solution, and despite the economic theories that attach huge importance to privatization, it is not necessarily a cure-all. The World Bank has, for half a century, been forcing economic policies down the throats of third world countries. The end result for many of these countries has not been always positive, many ended drowning in debt and are now held captive, nay enslaved, by the developed countries, their banks and multinational corporations. As for the economic theories, when they speak of privatization, they primarily mean employment (as well as capital infusions, efficiency etc.). This means employing the national work force that existed in the public sector, as well as employing additional national labor. This is presently unrealistic in the GCC and would be very difficult to achieve.

Therefore, it is imperative to think outside the box, and seek totally new approaches. Classical methods may not work here. The following is a very brief exploration of some possible solutions:

1) Commercialize part of the Government. This can be done be identifying those functions that lend themselves to commercialization, segregate them into specially formed corporations, remove the surplus employees by transferring them to another government entity and let the new corporation operate commercially, but limit its profit targets (say 5% – 10%). There are many ways to control and monitor such an operation.

2) Reorganize the remaining government ministries and entities, appoint capable managers and remove the excess staff by transferring them as above. Then operate these entities according to clear and specific targets and KPI’s.

3) Undertake a massive retraining program to upgrade the skills of the excess government labor and then give them a choice of: work independently after receiving a lucrative severance bonus, work for the private sector or work for the government ministries and organizations if their skills are required.

4) Encourage Private Public Projects (PPP), with a greater concentration on medium sized projects generated by the private sector, after thorough study and assessment by the government. The history of the PPP projects of the 1960’s are a good example of what can be done. As for the Mega public projects, they undoubtedly remain useful, but they are way too big for the private sector to play a direct role in, other than that of a middleman or commission agent for multinational companies, who will always have their own agendas.

5) Pressure the private sector to hire national labor by stopping or drastically reducing work permits as well as transfers (exceptions may be allowed for rare specializations). Then, pressure unresponsive companies by blacklisting from government tenders and purchases (After granting them reasonable time to adjust). Such a decision must be applied unanimously on one specific date, otherwise it would be unfair, with some companies taking an unjustified competitive advantage over others.

6) Encourage local companies to export their products or services, and grant them appropriate rewards.

While the above summary ideas are subject to amendment and improvement, they remain better than jumping blind into the abyss of privatization. Especially as it is a one-way street, once taken, it cannot be reversed, and always results in higher consumer prices. We must be absolutely certain that the path we choose is the correct one, as the proposed cure-all-pill will need a road tanker of water to swallow, and even then, we are likely to choke on it.

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