Understanding privatization Policy: Political Economy and Welfare Effects

UPP Project

Objectives

privatization is a landmark economic policy of the last two decades both in developed and developing nations. Yet some countries have pursued a consistent and sustained privatization policy as a part of wider reform packages, while in others ambitious programmes have been blocked on their way by adverse interest groups, so that privatization has been sporadic and small-scaled. Furthermore, some governments, have typically transferred the majority of capital of State-owned enterprises (SOE) to private investors, while in continental Europe the prevailing corporate governance model in privatised firms appears to be the separation of ownership and control, typified by government wielding power through pyramiding and statutory constraints especially in services of general interest (henceforth SGI). Finally, a cosmic “disconnect” is arising between the academic consensus and how privatization is perceived by the population, especially in transition economies and in the poorer regions of the world. In these circumstances, it is imperative to analyse the true record of privatization and understand the causes behind failures in order to improve the process in the future.

Against this background, the Project’s first objective is to study the political and institutional incentives and constraints affecting privatization. More particularly, the Project aims to develop:

- a sound theoretical foundation for the link between electoral rules (i.e. majoritarian vs. proportional systems), political orientation and privatization activity;

- two international databases assembled jointly by economists and political scientists on political and institutional variables;

- empirical tests of the theoretical results using the original databases described above;

- studies of the political economy of privatization and regulatory reform covering the evolution, the sectoral breakdown and the methods of privatization processes also in Euro-Mediterranean Partnership countries.

The Project’s second objective is to analyse the complex interactions between private and public ownership and control of firms, with special reference to regulated markets and SGI. More particularly, the Project aims to develop:

-  a theoretical framework to evaluate the trade-offs between private and public ownership and control of corporations, and identify (if any) the optimal government’s stake in models encompassing issues of regulatory governance;

- two datasets assembled jointly by economists and legal scholars with company ownership and performance variables and information on “golden share” provisions for OECD countries and for the Czech republic;

-  empirical analyses on the evolution of ownership and control structures of privatised firms assessing the long term effect of changes of ownership structure on firm value in OECD economies and in the Tzech Republic;

-  empirical analyses on the different patterns of ownership and control as compared with the level of divesting government (central, intermediate, local), with special reference to utilities and public services, and taking into account also legal and statutory constraints embodied in the so called “golden share provisions”.

The Project’s third objective is to evaluate the welfare effect of privatization policies on several stakeholders, such as:

-  consumers, analyzing empirically the impact of privatization, liberalisation and regulation of public utilities on individual and household welfare under different policy regimes, with special reference to SGI such as water supply, gas, electricity and telecommunications;

-  taxpayers, studying the role of privatization in stabilizing the current budget and in maintaining fiscal balance in the long-run both at the local and central level;

-  shareholders, evaluating the stock market performance of European listed privatised firms in order identify the risk and return characteristic of this particular investment;

-  employees, analyzing the long term effect of privatization on employment levels and wages in selected European countries.

The Project’s fourth objective is to draw from the research milestones and from the results of a comprehensive ad hoc survey a set of concrete policy recommendations in order to make privatization deliver the most desirable outcomes.

These recommendations will be strongly based on economic rationales taking into account the actual legislative and regulatory framework and the political and institutional constraints facing policymaking. They will be published in a policy report that will be presented at the final conference in Brussels.