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Monday, June 29, 2009

The Nationalisation to Privatisation quagmire!

With high premium on free markets and the virtue of privatisation, more countries are finding themselves controling private organisations than one would want to believe. Venezuela comes to mind. Belarus and in the Ukraine- both having severe economic challenges for differing reasons- have nationalised industries. The Saudi government as well as the other state owned oil companies in the United Emirates are also examples of nationalised industry that apparently will remain nationalised for quite some time.

This is not endemic to Eastern Europe, Latin America, The Middle East or other emerging or developing regions and countries. For example, the recent exercises in the U.S. and the U.K., leaves some gleeful in the notion that the great purveyors of private enterprise, have fallen victim to the trappings of easy pickings from the private market.

Currently, Citigroup and, more publicised, General Motors (GM), took U.S. Federal funding to stay afloat. GM is currently 60% owned by the U.S. government. In the U.K., Northern Rock, a mortgage lender, has been under public control since 2007 as well as the Royal Bank of Scotland (RBS), being partly controlled by the U.K. government, both due to their exposure to subprime debt. In fact, nationalisation fever has gotten so out of hand in the U.K., until they nationalised an entire country, The Turks and Caicos Islands, for all intents and purposes. I digress!

France, in contrast, has partial and predominantly state run corporations. The most observable of these are its transportation company, Regie Autonome des Transports Parisiens (RATP), the partially state owned France Telecom, where the state has 27% ownership and, in addition, the 85% share owned state energy company, Électricité de France (EDF).

The questions of why said companies- particularly with U.S. and the U.K.- were nationalised in the first place, is of little importance. But the issue that they will have to be privatised in the medium to near future is.

This presents the problem for the newly acquired public companies; how should government privatise, again?

This isn’t easy. For example, if GM were to be privatised too early, there is a chance that the U.S. may end up losing GM all together, because the company simply isn’t ready to compete against other car companies on its own; especially now after filing for bankruptcy.

In the U.K, re-distributing the government shares in Northern Rock would violate a tremendous property rights standing of the former majority share holders in Northern Rock, if it were not to be handed back to them, first and foremost.

To go even further, there may be a case where prolonged nationalisation can lead to a “French-style” government ownership of industry economy, with no exit plan, with the profitability of these enterprises in future dispute.

The best and most relevant examples of state owned to privatisation, to nationalisation to again privatisation, can be seen in Latin America during the late 1940’s to the 1990’s, especially in the latter years where there were sweeping changes in attitudes with regard to the virtue of private enterprise opposed to government monopoly.

A fantastic comparative study is within the telecommunications sectors' of Argentina and Chile. While these are by no means the only sectors' that were privatised in either country, the comparison bear fruit to the issue of the process.

Chile, on average, had a more successful privatisation experience, particularly with their telecommunications (Compania de Telefonos de Chile- CTC) liberalisation.

The process was marked by a very strong desire to not only privatise, but to also re-distribute resources to a greater share of the population- through various stock packages to employee's (labour capitalism), to further stock packages to indigenous investors and then to competitive bidding- through what ever capital market structure Chile had. The experience of the investor did not matter as much, over the actual sale through competition did.

More importantly, Chile focused on the actual regulations that promoted competitiveness, before concentrating on securing the profitability of CTC. In addition, the actual cost of running the organization, proved more valuable to the future profit of CTC than its price adjustments during.

With the latter, this is, primarily, due to the lower rates CTC had as a result of lowering them prior to private investment, which ended up with the buyer having the option to raise rates and at the same time presenting the consumer, with the opportunity to take advantage of lower rates, which resulted in less outrage from consumers upon privatisation, who would, possibly, be outraged with higher rates if the rate ceiling was left at the status quo during privatisation- this, coupled with the concept of labour capitalism, softened public outrage.

Argentina, on the other hand, had a much different privatisation process. While the Argentinean government ended up appropriating the consumer surpluses due to the privatisation, the end result was not optimal.

Similar to CTC, Empressa Nacional de Telecomunicaciones (ENTEL), was first private, then nationalised and then privatised again. However, the impact from the round of privatisation that occurred in the years1989 to 1991 made the process problematic, due to the emergency of their debt crisis in the 1990's and their consistently unstable macro-economic condition, which did result with the Argentinean economy crashing as an effect of their debt crisis in 1999-2002.

The privatisation of ENTEL did alleviate, temporarily, the national debt in Argentina through its actual sale and the government’s insistence on external debt papers. However, the sale was overshadowed by the more important need to regulate the industry pre-privatisation, in order to solve the issue of, now, private monopoly.

In comparison to CTC in Chile, Argentina did not use the capital markets to drive the sale. The bidding was closed to particular investors who fit certain criteria for running a telecommunications company. This limited the amount of bidding activity in the purchase of ENTEL and, subsequently, kept the actual sale price for ENTEL relatively low as compared to the pre-sale price. Also, laws enacted before the privatisation of CTC as different from ENTEL, made constant reimbursable contributions to the services under regulation and more importantly, allowed for domestic and foreign competition, as well as set rate ceilings to discourage private monopoly concentration.

To this date, there are six main providers in Chile, providing service to over 16 million inhabitants. While there are only two, from the privatisation and break up of the original ENTEL into two parts- Telecom Argentina covering the north and Telefónica de Argentina covering the south- providing service to well over 40 million inhabitants, albeit Argentina has several niche service providers.

Whatever the issues are currently for all that fit this crisis, the re-sale of entities after state intervention, to whom and for what purpose, presents a considerable challenge as it does with Northern Rock. In addition, the issue with regard to new regulations for the current financial system, should factor into the re-privatisation of Northern Rock and RBS, for the purpose of them being more efficiently ran companies, operating within a stable environment, where, at least from this aspect, systemic risk, or the fear of risk, doesn't envelope the sector.

On the other hand, direct and indirect industry partners in the supply and value chains would suffer greatly from the consistent attempt by the US government to be a player in the car manufacturing business. Prolonging state management can- in the long term by crowding out private investment- damage and penalise competitors, like Ford Motors, who had their challenges in the recent past and have pre-crisis, adjusted their business model to become profitable today.

It also shouldn’t be a question of whether or not the U.S. will be forced to sell nationalised companies, to pay off debt (over 82% of current GDP) where they clearly have the institutional ability to monetise that debt.

The issue of crawling back out of debt, particularly in the U.S., is an issue all to itself. The issue of re-privatisation, without question, is clearly with its own set of unique issues and challenges.
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