Measuring the merits of privatization

TheStar.com – Opinion/Editorial Opinion
Published On Mon Jul 05 2010.  Matti Siemiatycki Assistant Professor, Department of Geography and Planning, University of Toronto

Calls to privatize public assets in Ontario are growing louder by the day. The province has recently floated the idea, backed by a $200,000 study, of merging its profitable liquor, electricity and gaming business into a single “super corporation” and selling off a 20 per cent stake to private investors.

At the municipal level, leading Toronto mayoral candidates and their advisers have mused about privatizing a range of public services, including garbage collection, hydro and parts or all of the city’s transit system. And large investors and pension funds are saving up in anticipation of a public-asset sell-off.

Clearly, privatization of public assets is a contentious and politically charged subject. For opponents, any outsourcing or privatization of public services is seen as leading to deteriorating service standards and working conditions. The disaster of Walkerton and the rapidly escalating tolls on Highway 407 are often pointed to as illustrations of the downsides of privatization.

Conversely, privatization promoters argue that asset sales can raise much needed funds for government, improve the efficiency of public service delivery, and reduce the potential for disruptive labour stoppages.

Within this context of polarization and contested claims, public discussions about asset privatization are often characterized by entrenched positions on all sides. But if a truly open discussion were to be had, how would we assess whether a specific privatization proposal was a good idea or not, especially considering that privatization has financial, public policy and social implications?

Here is a list of eight criteria that should be used when assessing the merits of privatizing a public asset.

  • The financial equation: If the capital raised from any asset sale is put toward paying down debt, does the reduction in interest payments outweigh the annual revenue generated from the asset? Alternatively, if the sale money is put toward public services, do these provide long-term benefits or simply a one-time boost?
  • Regulation: Will privatization be accompanied by deregulation of rates, service levels, safety standards or environmental standards? If so, how will the public be protected against dramatic rate hikes or depreciating service quality?
  • Source of efficiency gains: Are there sufficient opportunities within the business for innovation, or will costs be reduced primarily through lower wages and advantages of deregulation? If the latter, these cost savings represent an economic transfer from workers and users to the facility owners rather than a true efficiency gain, and are not a strong reason to support privatization.
  • Accounting for transaction costs: Privatization has considerable transaction costs for government related to deal structuring, competitive auctioning, monitoring, and the mediation of contract disputes. Have these been accounted for in calculating the benefits of asset privatization?
  • Sufficient competition: At the time of the auction, will there be multiple bidders to ensure that robust inter-firm competition enables the government to achieve the best deal possible. And when selling a public monopoly, will there be sufficient long-term competition in the industry to ensure that there is ongoing pressure to deliver efficient, high-quality services.
  • Public interest: Many public assets can be used as levers to affect public policy, for instance by keeping transit fares below market rates to provide access to low-income users, or subsidizing investments in renewable energy production. Can a public asset continue as a positive policy lever when under private ownership and guided more directly by the profit motive?
  • Community participation: Are there sufficient channels for input from citizens and service users to be integrated into decisions about critical public services when they are owned and operated by private companies?
  • Timing: Given that the global economy remains in a fragile state and credit is still difficult to obtain, is now the best sale time to achieve competition among bidders and maximize asset value?

As these criteria indicate, there are a set of conditions under which asset privatization may be an appropriate policy decision. However, whether any asset privatization being proposed by either the province or the Toronto mayoral candidates can meet these eight criteria remains to be seen.

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July 5, 2010

 

by Patrick Corrigan/Toronto Star

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