John Nellis, co-editor of Reality Check: The Distributional Impact of Privatization, answers questions about the book and his work's implications for policymakers:
Q: Are there any generalizations that can be made about recent privatizations in developing countries? Do any interesting groupings emerge?
A: The most contentious privatizations are those in the utility sectors such as telecommunications, transport, energy and, especially, water. These are the areas in developing countries where it is more difficult to involve private providers, where the chances of something going wrong are higher, and where errors produce large, negative social consequences. The much more numerous privatizations of commercial, industrial and service firms in developing countries have not generated as much political debate; and they have been generally judged as beneficial, even in low-income, institutionally-weak countries.
In "Reality Check" we tried hard to reach conclusions based on data and reasoning, rather than on pre-conceived ideas. The big, well-documented conclusion that comes out of this approach is that the privatization of infrastructure - particularly evident in the best-studied Latin American cases - has NOT contributed to the continuing poverty and maldistribution of income. This is an important if modest defense of privatization. A stronger defense would be that privatization was closely associated with improved growth and reduced poverty and inequality. We did not find that, however.
Regarding regional differences and groupings, our findings are much more solid regarding Latin America than in the Asian or post-Communist transition cases examined. Partly, this is due to more and better quality information on the Latin cases. Still, we see more than enough in the transition country cases to make us think that privatization did contribute to the massive increases in inequality and poverty seen in that region since the demise of Communism.
Q: Is there enough evidence to judge the respective merits of moving quickly to privatize vs. a slower approach?
A: Yes, economically speaking, slower is better. The arguments for rapid privatization have been mainly political (e.g., if we Russian reformers do not sell off everything quickly the communists will return and defeat the transition); financial (if we do not find a private investor we will have to fund the railroad ourselves and there is no money in the budget for this); or some combination of the two (e.g., if we do not complete the privatization of X, then we will fail to comply with Bank or Fund conditions and a desperately needed injection of funds will be delayed at best, eliminated at worst). These arguments have often turned out to be spurious (though we must admit they rarely seem so at the time they are put forward!) Russia, for example, with a more cautious pace of sales and transfers, and earlier and greater attention to the creation of legal institutions, might have avoided some of the more egregious injustices in its early privatization program.
Our conclusion is that more time is generally available than is thought, and that the costs of speed outweigh the benefits.
Q: Can you highlight a few examples of developing countries that have managed privatization well? What did they seem to do right?
A: Chile has done a good job of privatization, particularly in infrastructure. In line with the conclusion above, the Chileans took their time. Years were spent on building regulatory bodies and subjecting the natural monopoly firms to regulatory supervision, well in advance of ownership change. Ultimately, they decided that private ownership was still required to tap private capital markets for network expansion. But by the time the new private operators came on board, the Chilean regulators were experienced and ready to deal with them.
Q: What do you think is new or important about this book?
A: We've already mentioned the important finding that privatization is, in Latin America at least, and probably in other non-transition regions, not the big social villain usually portrayed. The reason is that, in many countries, privatization has resulted in more poor people obtaining electricity and phone services, and to a lesser extent, water. The downside to getting connected to the network is that customers have to pay, and these costs can be high. A major finding of the book is that, in terms of distribution, the effects of increased access are more important than the effects of increased costs. That's a huge plus.
Q: What, if any, policy recommendations would you have for rich countries trying to help developing countries through the privatization process?
A: "Reality Check" focused much more on what is happening in the case countries as a result of privatization, rather than on how the countries' privatization policies were or were not influenced by donor countries. Nonetheless, the findings offer some guidance for rich countries wishing to assist the process and minimize the potential negative effects on distribution.
First, and most obviously, don't rush to sell the infrastructure firms. A corollary is take the time to enact and perfect regulation prior to sale. The stronger and more competent the regulatory system in place, the higher the likelihood that the social impact of an infrastructure privatization will be positive.
Second, some sectors are easier to privatize than others. For example, private operation of telecommunications' companies is much less problematic than in water, due mainly to the enormous differences in the technology of delivery systems in the two sectors. Private telecom companies are now the world norm; in water, in contrast, there have been a number of cancelled or disputed contracts with private providers. Electricity falls somewhere in the middle.