Turning private has its pitfalls

PUBLISHED : Tuesday, 12 July, 2011, 12:00am
UPDATED : Tuesday, 12 July, 2011, 12:00am

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Harold Macmillan, one of the most interesting British prime ministers, was quoted accusing Margaret Thatcher of 'selling the family silver' when she embarked on large-scale privatisation of the country's state-owned industries. (His actual quote was more nuanced*.)

Today, other European governments, the European Central Bank and the International Monetary Fund are ganging up to demand that Greece sell its government-owned industries to raise Euro50 billion (HK$550.83 billion) by 2015 to help pay down its massive debts and get the economy back on an even keel.

Conventional wisdom, except in China with its plethora of state-owned enterprises, has become that private enterprise always does things best and that the state should get out of business. Business knows best how to run things efficiently and to make money, while governments tend to tie up enterprise in bureaucratic red tape, or so the pro-privatisation supporters claim, whereas socialists argue that the market and profit motive do not protect the poor or the security of the state.

Dr Manmohan Singh, when he was India's finance minister with barely enough foreign exchange reserves for two weeks of imports, was reluctant to privatise profitable state-owned companies. He told me: 'If they are profitable, why shouldn't the profits go to the people?'

Similarly, the 1945 Labour government in Britain believed the 'commanding heights of the economy', including energy, coal, railways and transport, and iron and steel, should be under government control, which would prevent rich owners from exploiting monopoly profits.

The British experience was that new forms of monopoly, inefficiency and exploitation replaced the old under government control: red tape and union power meant services were inefficient or expensive or both; managers' freedom to run their industries was curbed by political intervention; and crippling strikes were threatened if managers tried to trim staff or benefits or governments intervened.

Thatcher's privatisations were as much about bringing the unions to heel as about selling the family silver to raise funds or making the industries more efficient. Successive governments have accepted the benefits of shedding the burden of business. A 2003 study by the Organisation for Economic Co-operation and Development, the club of the rich industrialised nations, found 'privatisation brings about a significant increase in the profitability, real output and efficiency of privatised companies'.

For India and Greece, there is always the burden of history.

The Indian government, for example, owned a bread-making factory among a host of other loss-making industries, and its 'permit raj' spaghetti of regulations strangled entrepreneurship. One leading minister justified a years-long wait for a telephone line by claiming a phone was a privilege, not a right.

New Delhi was also saddled with a bloated airline, whose ancillary activities included fielding cricket and hockey teams, and whose losses were boosted by graft and political interference. To its credit, India opened up what is now a fast-growing cellphone market. It also has several profitable private airlines, one of which has the five coveted stars of Skytrax, in company with only six other five-star airlines that include Cathay Pacific Airways and Singapore Airlines.

But its government airline has seen its market share drop from monopoly to 13.2 per cent, staff have been demonstrating to be paid their wages and vendors have been waiting months for payment. It recently sent an SOS message to the prime minister, Singh, for emergency cash or it would have to stop flying.

Greece has committed itself in its austerity plan to what The Wall Street Journal calls 'a giant yard sale' of an assortment of companies, including a casino, a horse-racing concession, a nickel miner and smelter, a munitions maker, hundreds of kilometres of roads, old venues for the Olympic Games and hectares of land, including breathtaking parts of the fabulous coastline, as well as conventional firms such as banks, utilities suppliers, the post office and harbours.

Greece epitomises state-run inefficiency. The Acropolis used to close for the day at lunchtime. Even after a so-called reforming government insisted on opening in afternoons, staff numbers were swollen by security guards. It is a worry whether what amounts to a fire sale of companies can bring in short-term cash and long-term structural reform of corporate Greece.

Britain's experience is relevant. Some former state-owned companies are now in foreign hands, which seems not to bother the government. A tendency to monopoly has also emerged as the more efficient companies buy up the less efficient.

More worrying is the entry of private equity and buyout specialists, as in health care, the area that governments think can be more efficiently run by entrepreneurs. Southern Cross, Britain's biggest operator of elderly care homes, with 750 homes and 31,000 residents, plunged to the brink of bankruptcy last month. Top executives had pocketed GBP35 million (HK$437.03 million) by selling their shares at 550 pence at the top of the market. Its shares closed last week at 6.25 pence. It told the London Stock Exchange yesterday that it was to be broken up and the shares delisted.

Key sectors must be properly regulated. Proper regulation was clearly lacking in the finance world and continues to be lacking in Japan with collusion between the nuclear industry and bureaucrats.

Monopoly should also be kept in check, something Hong Kong should look at, in areas from land supply and construction to supermarkets.

The most difficult area is what may be called the 'native spirits' of the people: whether Greeks will accept they can't be out to lunch forever, or whether mainland Chinese will question their state-owned enterprises or Hong Kong question the virtues of duopoly and oligopoly.

*Macmillan's quote was: 'First of all the Georgian silver goes. And then all that nice furniture that used to be in the salon. Then the Canalettos go.'

$68.8b

The cumulative debt, in Hong Kong dollars, state-owned Air India is saddled with

- The carrier has 40,000 employees