To privatize or not to privatize…that is the question.
Private sector participation in the provision of public utilities is not new. Private water services commenced in England during the 16th century and lasted for 300 years. Similarly, France had private water services during the mid 19th century when it was under the reign of Napoleon III. In the US, water services were largely private from the 18th century to the early 20th century.
Afterward, European and North American governments began taking over privately owned utility systems. It was believed that this would ensure service to all segments of society, for fire-fighting and to reduce the incidence of water-borne diseases.
However, because of the high capital intensive requirements of the utility industry, privatized systems have never really disappeared. In 2002, the number of people who received utility services from private companies throughout the world was 300 million.
Today, privatization manifests itself in different forms. These are:
- The transfer of responsibility for the operation delivery;
- The complete transfer of system ownership; and
- The sale of state-owned rights to private companies.
There are also many forms of state and private partnerships. For example, water services often solicit private investment in new facilities. Complete transfer of ownership takes place after the private investors have been repaid.
Arguments For and Against Privatization
Many economists and business professionals believe that state-ownership provides room for political interference in the management of utility companies. The argument is that state-ownership does not lend itself to independent decision-making. It is believed that this will benefit neither the company nor the public; only the individual stakeholders will benefit.
These same people are in favor of privatization. They argue that privatization lends itself to competition, greater customer service and that there is more focus on best practices and profit. Examples of the organizations in the Caribbean that have found success with privatization are Trinidad & Tobago Methanol Company and Trinidad Cement Ltd.
However, the opposite had occurred with the British West Indian Airways (BWIA). When BWIA was privatized, many airline workers were retrenched, thereby lending credibility to the argument against privatization.
Trade unions are one such group that views privatization in a negative light. Protest action is often seen when any move towards the privatization of any utility company occurs, even if it is only just being considered. Trade union leaders have stated that privatization is a means of reducing manpower required for production.
Apart from reduced job security, many have argued that public utilities should not be privatized if the interests of the poor are to be ensured. With privatization comes the risk of the poor being denied the basic necessities. Traditionally, government regulation has been applied when the service in question has “public good” characteristics. The state is usually a majority shareholder of (or totally owns) the utility companies.
The argument here is that utility companies should be managed on the basis of meeting the needs of society, not profit. This could very well be the reason why, traditionally, fully state-owned government run utility companies have not been described as successful. The definition and measures of success are different from those of private companies.
Case Study: Privatization of Water Treatment
The private utility companies tend to be less vulnerable to political manipulation. However, they also tend to be less responsive to public interests as illustrated in the following case.
The Organization for Economic Co-operation and Development (OECD) examined the repercussions of a privatization effort in England and Wales. Large investments in water system improvements were made without public input. This caused sharp increases in tariffs, which in turn fueled increased water debt and disconnections. There was widespread public anger towards the water companies. It is reported that these companies were continuing to earn substantial profits, even during dry periods, when water consumption was being rationed.
In this situation, the privatized market did not respond to public opinion. Therefore, re-organized and stronger government regulatory authorities were introduced. This helped to improve service delivery, stabilize prices and ensure some water quality protection.
Case Study: Privatization of Telecommunications
With the telecommunications industry in Trinidad & Tobago, however, the opposite occurred, giving credit to the argument that privatization of the market was beneficial to the public. For 30 years, the Telecommunications Services of T&T Ltd. (TSTT) was the sole telecom provider in the country. The state is the majority shareholder.
With the entrance of the Irish telecom provider, Digicel, TSTT responded by drastically reducing prices. The company is now freely giving away the same mobile phones that it once sold for over TT$1,000! In this situation, the competition and privatization turned out to be better for the public.
The privatization versus state-ownership debate does not have answers that are cut and dried. The ultimate solution may be found in one of the new private and public partnership models.
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