Post on 12-Jan-2016
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Chapter 4: Chapter 4:
PrivatisationPrivatisation
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Privatisation and Privatisation and privatised firm privatised firm
Privatisation: Privatisation: • legal transfer of property rights from the state to legal transfer of property rights from the state to
private agents (individuals, legal entities…)private agents (individuals, legal entities…) Privatised firm: Privatised firm:
• a firm that used to be owned by the state (SOEs) a firm that used to be owned by the state (SOEs) and was partially or totally privatised through a and was partially or totally privatised through a privatisation scheme so that the combined privatisation scheme so that the combined private parts have majority or blocking decision private parts have majority or blocking decision powerpower– note that in some cases firms have been privatised but note that in some cases firms have been privatised but
state is still partial owner and sometimes majority state is still partial owner and sometimes majority owner while waiting for new private buyers - state is owner while waiting for new private buyers - state is passive ownerpassive owner
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Privatisation and Privatisation and privatised firmprivatised firm
In broader sense privatisation = In broader sense privatisation = destatisation of the economydestatisation of the economy• marketisation or commercialisation: SOEs marketisation or commercialisation: SOEs
managed according to market rules and managed according to market rules and facing competitionfacing competition
• new private firms = greenfield privatisationnew private firms = greenfield privatisation In broader sense privatised firm not In broader sense privatised firm not
necessarily full ownershipnecessarily full ownership• long term leasing provided have a transfer of long term leasing provided have a transfer of
property rights on earnings property rights on earnings
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Why is it important to Why is it important to privatise?privatise?
Objectives of Central Plan firms different from Objectives of Central Plan firms different from the objectives of the Market-oriented firms:the objectives of the Market-oriented firms:• The Plan defines production (location and integration), The Plan defines production (location and integration),
exchange, prices, quantities and qualityexchange, prices, quantities and quality• The Plan maximises The Plan maximises outputoutput and and employment,employment, not not
profitsprofits• The Plan does not minimise The Plan does not minimise costscosts or or losseslosses since the since the
government always bails out the loss-making firmsgovernment always bails out the loss-making firms• The Plan does not seek ways to improve the goods’ The Plan does not seek ways to improve the goods’
qualityquality since that would imply since that would imply extra coordination effort extra coordination effort and potential failureand potential failure due to a greater number of brands due to a greater number of brands for similar goods; frequent change of the goods for similar goods; frequent change of the goods themselves; variety of pricesthemselves; variety of prices
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Why is it important to Why is it important to privatise?privatise?
Resulted in the former socialist firms being:Resulted in the former socialist firms being:• large and overmannedlarge and overmanned• operating with the obsolete equipment operating with the obsolete equipment • producing low qualityproducing low quality• hidden slack (“less discipline”)hidden slack (“less discipline”)• low productivity or efficiencylow productivity or efficiency
General technical inefficiency - build-in General technical inefficiency - build-in efficiency: wrong incentives efficiency: wrong incentives need to need to privatise to correct them (together with privatise to correct them (together with liberalisisation)liberalisisation)• prices (in liberalised system) would reflect prices (in liberalised system) would reflect
demand and supply changes and scarcitydemand and supply changes and scarcity
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Why is it important to Why is it important to privatise?privatise?
Property rights and related incentives:Property rights and related incentives:• definition of whom is to obtain definition of whom is to obtain
revenue/earnings of firm, whom is to revenue/earnings of firm, whom is to control/use the inputs and the possibility of control/use the inputs and the possibility of selling or renting, liquidate selling or renting, liquidate incentive to do incentive to do more and better so you can earn moremore and better so you can earn more
Harder budget constraints if associated Harder budget constraints if associated with no state support or bail-out)= with no state support or bail-out)= higher risk of bankruptcy higher risk of bankruptcy incentive to do more and better and at incentive to do more and better and at
minimum wasteminimum waste
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Central Plan vs MarketCentral Plan vs Market
B
TRA
TC
C
Output
TC
TR
profit-max BE Central Plan
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Aims of privatisationAims of privatisation
An increase in managerial and general An increase in managerial and general enterprise efficiency enterprise efficiency • profit maximisation and cost minimisation profit maximisation and cost minimisation
A stimulus for restructuringA stimulus for restructuring• initial restructuring (reduce labour) and deep initial restructuring (reduce labour) and deep
restructuring (change technology, restructuring (change technology, management re-training, product innovation, management re-training, product innovation, etc)etc)
Privatisation and the entry of new private Privatisation and the entry of new private firms would lead to a large private sectorfirms would lead to a large private sector
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Aims of privatisationAims of privatisation
Raise state revenuesRaise state revenues If good results leads to political support If good results leads to political support
for reformsfor reforms For political/ideological reasons For political/ideological reasons
governments want to destatised governments want to destatised economy and create capitalist classeconomy and create capitalist class
To put to use the savings of the To put to use the savings of the population by direct sales of state population by direct sales of state assets (only Hungary)assets (only Hungary)
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Reform complementarityReform complementarity
LiberalisationLiberalisation But note that need also to have But note that need also to have
competition (domestic and international) competition (domestic and international) for allocative efficiencyfor allocative efficiency• lack of competition = danger of monopolies lack of competition = danger of monopolies
which is associated with lower bankruptcy which is associated with lower bankruptcy risk and x-inefficiencyrisk and x-inefficiency
Need to avoid SBCsNeed to avoid SBCs Environment:Environment:
• investment, institutionalinvestment, institutional
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StrategiesStrategies
Different governments followed different Different governments followed different strategiesstrategies• speed speed • modes of privatisingmodes of privatising
– traditional methods: direct sales of and/or auction of traditional methods: direct sales of and/or auction of company shares to interested individuals or firms company shares to interested individuals or firms
– non-traditional methods: give-away voucher or shares non-traditional methods: give-away voucher or shares schemes often called mass-privatisation schemesschemes often called mass-privatisation schemes
Due to constraints and considerations: Due to constraints and considerations: • ideological (Czech and Slovak Republics), political ideological (Czech and Slovak Republics), political
(Russia), informational, financial, administrative, (Russia), informational, financial, administrative, equity (Poland), restitution (Czech and Slovak equity (Poland), restitution (Czech and Slovak Republics)... Republics)...
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Small vs large-scale Small vs large-scale privatisationprivatisation
Greenfield privatisation: immediately Greenfield privatisation: immediately • from street sales to services (consulting, teaching…)from street sales to services (consulting, teaching…)
Small-scale privatisation = transfer of small Small-scale privatisation = transfer of small scale state assets (small firms) to private scale state assets (small firms) to private persons persons • through divestment: sales of assets, direct sales, through divestment: sales of assets, direct sales,
leasing, by auctions not open to foreignersleasing, by auctions not open to foreigners• through restitution in kind or cash or equivalent through restitution in kind or cash or equivalent
asset or privatisation vouchers asset or privatisation vouchers • trade, services, truck transport, construction, land trade, services, truck transport, construction, land
and housing and housing
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Small vs large-scale Small vs large-scale privatisationprivatisation
Large-scale privatisation: Large-scale privatisation: • slow: organisation needs timeslow: organisation needs time
– set up legal framework set up legal framework – set up institutions/agencies of privatisation and/or set up institutions/agencies of privatisation and/or
ministries (big enterprises), local government, and plan ministries (big enterprises), local government, and plan administrative process (no stock market)administrative process (no stock market)
– most governments did not want to be 100% involvedmost governments did not want to be 100% involved
– transform companies: evaluate and divide company in transform companies: evaluate and divide company in units with state as main stock/shareholderunits with state as main stock/shareholder
– find buyersfind buyers– monitor monitor – 18 months in Czechoslovakia and Russia the process of 18 months in Czechoslovakia and Russia the process of
giving away assets through vouchersgiving away assets through vouchers
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Privatisation methodsPrivatisation methods
Differ across countriesDiffer across countries
Though most countries tried:Though most countries tried:• 1. Sales to foreign capital (great 1. Sales to foreign capital (great
expectations foreign capital would be expectations foreign capital would be involved) and domestic capital = strategic involved) and domestic capital = strategic investorsinvestors
• 2. Mass privatisation to insiders or outsiders2. Mass privatisation to insiders or outsiders• 3. Sales3. Sales
Choice related to set of constraints plus Choice related to set of constraints plus difficulty in finding outsiders with difficulty in finding outsiders with respect to insidersrespect to insiders
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Obstacles faced by Obstacles faced by privatisationprivatisation
Foreign capitalForeign capital• Dilemma: want FDI - for technological know-how, Dilemma: want FDI - for technological know-how,
financial resources, management expertise and financial resources, management expertise and restructuring incentives - but protect national restructuring incentives - but protect national interestinterest
• Also FDI not able to achieve full privatisationAlso FDI not able to achieve full privatisation Domestic capitalDomestic capital
• relevant but domestic saving limited and most relevant but domestic saving limited and most spent on small - scale privatisationspent on small - scale privatisation
• took long time and few companiestook long time and few companies• potentially less innovativepotentially less innovative
Financial constraints Financial constraints state as passive owner state as passive owner
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Obstacles faced by Obstacles faced by privatisationprivatisation
Political constraintPolitical constraint: : • Privatisation is a difficult decision: e.g. potential Privatisation is a difficult decision: e.g. potential
increase in unemploymentincrease in unemployment• Idea: less depolitisation and destatisation and Idea: less depolitisation and destatisation and
increase in efficiency more important than way in increase in efficiency more important than way in which privatisation is conductedwhich privatisation is conducted
Politicians develop politically accepted Politicians develop politically accepted programmesprogrammes
• compromise to make privatisation reality, no other compromise to make privatisation reality, no other way possibleway possible– preferential treatment to insiders preferential treatment to insiders – hope that outsiders would slowly come inhope that outsiders would slowly come in
• Backlashes: parliament conflicts and party changesBacklashes: parliament conflicts and party changes
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Methods: Ia) mass Methods: Ia) mass privatisation = give away privatisation = give away schemes - Voucherschemes - Voucher
Voucher or coupon Voucher or coupon (Czechoslovakia, Bulgaria, (Czechoslovakia, Bulgaria, Russia, Lithuania, Slovenia)Russia, Lithuania, Slovenia)• piece of paper denominated in cash (e.g. Russia) piece of paper denominated in cash (e.g. Russia)
or in points (e.g. Czechoslovakia before partition)or in points (e.g. Czechoslovakia before partition)• small fee (Czechoslovakia and Bulgaria) or free small fee (Czechoslovakia and Bulgaria) or free
(Russia)(Russia)• tradable (e.g. Russia) but not in most countriestradable (e.g. Russia) but not in most countries• Each investor had to submit his vouchers as a bid Each investor had to submit his vouchers as a bid
for the company and shares were distributed for the company and shares were distributed proportionally or put them in an investment fundproportionally or put them in an investment fund
– e..g. 1000 shares / 40 vouchers e..g. 1000 shares / 40 vouchers 25 share each25 share each
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Methods: Ia) mass Methods: Ia) mass privatisation = give away privatisation = give away schemes - Voucherschemes - Voucher
Why in points and non tradable?Why in points and non tradable?• Vouchers are not currencies but mechanisms of Vouchers are not currencies but mechanisms of
privatisation. privatisation. – less impression of government giving away assets less impression of government giving away assets – avoid speculation and large discounts if trade only avoid speculation and large discounts if trade only
sharesshares– rich could take advantage of poor rich could take advantage of poor – large investors large investors blocs blocs– incentivises development financial marketsincentivises development financial markets
Problem with biding:Problem with biding:• small investors do not know how to value sharessmall investors do not know how to value shares• evaluating shares is difficult when accounting evaluating shares is difficult when accounting
books are flawed and no information availablebooks are flawed and no information available
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Methods: Ib) Mass Methods: Ib) Mass privatisation - Sharesprivatisation - Shares
Distribution of shares in investment funds that Distribution of shares in investment funds that have shares in companies to be privatised have shares in companies to be privatised • (e.g. Poland, Romania)(e.g. Poland, Romania)
Distribution of shares on subsidised credit Distribution of shares on subsidised credit • (e.g. Hungary) (e.g. Hungary)
Distribution of certificates of ownership/shares Distribution of certificates of ownership/shares to be traded by shares in enterprises or fundsto be traded by shares in enterprises or funds• (e.g. Slovenia)(e.g. Slovenia)
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Mass privatisationMass privatisation Advantages: Advantages:
• politically acceptable, politically acceptable, moral compensation moral compensation
• large fraction of assets is large fraction of assets is coveredcovered
• simple and fast (no simple and fast (no valuation)valuation)
• fair distributionfair distribution – small investors always small investors always
have shareshave shares– all investors pay same all investors pay same
price and large investors price and large investors do not get advantagesdo not get advantages
• no need for capital and no need for capital and restructuringrestructuring
Disadvantages:Disadvantages:• if too fast if too fast no good inventory no good inventory
possible possible • no revenue or negative no revenue or negative
budgetary impact budgetary impact • sophisticated investors sophisticated investors
(investment funds) tender (investment funds) tender more vouchers to influence more vouchers to influence the price the price
• private individuals difficulty in private individuals difficulty in bidingbiding
• employee ownership employee ownership – incumbent management left incumbent management left
in place in place restructuring???, restructuring???, fresh capita???fresh capita???
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Methods: Methods: II) Sales of State AssetsII) Sales of State Assets
Also called pAlso called piece-meal privatisationiece-meal privatisation• define value of firm and divide it in units and sell define value of firm and divide it in units and sell
thesethese Advantages:Advantages:
• revenue for the staterevenue for the state• restructuring prior to privatisation is possiblerestructuring prior to privatisation is possible• get rid of inefficient managementget rid of inefficient management
Obstacles:Obstacles:• limited cash (savings) in those economieslimited cash (savings) in those economies• but: foreigners (yet risks and limitations)but: foreigners (yet risks and limitations)• reflection of ability to payreflection of ability to pay
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Spontaneous privatisationSpontaneous privatisation
Workers and managers (insiders) Workers and managers (insiders) appropriate formerly state-owned appropriate formerly state-owned property property • (e.g Poland and Hungary)(e.g Poland and Hungary)• companies transformed into joint-stock and companies transformed into joint-stock and
managers split companies in parts and managers split companies in parts and transform some of them into limited liability transform some of them into limited liability firms securing their jobsfirms securing their jobs
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Insiders and outsiders: Insiders and outsiders: who are they?who are they?
Insiders (e.g. Insiders (e.g. Russia up to 70%)Russia up to 70%)• employees of employees of
privatised firmprivatised firm– workersworkers– managersmanagers
OutsidersOutsiders• foreign investors foreign investors
– most desiredmost desired– important in Hungary important in Hungary
mainly, followed by mainly, followed by Czech Republic and Czech Republic and Poland Poland
• domestic capitaldomestic capital– entities (financial - entities (financial -
investment or investment or privatisation funds - privatisation funds - and non-financial) and non-financial)
– individualsindividuals
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Outsider privatisationOutsider privatisation Fresh capital Fresh capital availability of funds to update availability of funds to update
obsolete equipmentobsolete equipment Technical know- how, management expertise Technical know- how, management expertise Workers remunerated according to their Workers remunerated according to their
performanceperformance High incentives for managers to do well High incentives for managers to do well Deep restructuringDeep restructuring Firms move closer to their production frontierFirms move closer to their production frontier But: unknown environment and technology But: unknown environment and technology
transfer takes time transfer takes time
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Insider privatisationInsider privatisation
Politically acceptablePolitically acceptable Know production well Know production well But: not trained in new/market management But: not trained in new/market management
and used to old routinesand used to old routines Lack of funds to buy new equipmentLack of funds to buy new equipment Layoffs of inefficient workers blocked by the Layoffs of inefficient workers blocked by the
insidersinsiders Initial (survival) restructuring onlyInitial (survival) restructuring only Low or negative profitability of the enterpriseLow or negative profitability of the enterprise
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Obstacles to deep Obstacles to deep restructuringrestructuring
1.1. Those whose Those whose jobs are at risk will jobs are at risk will opposeoppose restructuring restructuring
2. Restructuring is likely to require large 2. Restructuring is likely to require large capital expenditurescapital expenditures
3. Privatisation mode (e.g.insiders)3. Privatisation mode (e.g.insiders)
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The insiders’ reactionThe insiders’ reaction
““If the company in which you are If the company in which you are employed becomes privatised, what employed becomes privatised, what do you think the private owner will do you think the private owner will do? Choose 3 answers.”do? Choose 3 answers.”Fire all unneeded workers 76%
Squeeze the company for profit for a short time 44%
Employ competent workers in all positions 38%
Replace some of the executives in the company 29%
Buy new equipment and machines 23%
Limit the role of employees in decisions 21%
Limit the role of unions 19%
Increase wages 18%
Improve working conditions 8%
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Outcomes of mass Outcomes of mass privatisationprivatisation
Czech Republic: one of the very few successful casesCzech Republic: one of the very few successful cases
• Tighter pre-transition control of the firmsTighter pre-transition control of the firms• Privatisation started quickly and involved big reversal costsPrivatisation started quickly and involved big reversal costs
The Slovak RepublicThe Slovak Republic• Quick startQuick start• Fast suspension (1995)Fast suspension (1995)
The Russian FederationThe Russian Federation• Managers were given majority stakes in their firms to ensure their Managers were given majority stakes in their firms to ensure their
supportsupport• Mass insider privatisation resulted in little or no “deep” Mass insider privatisation resulted in little or no “deep”
restructuringrestructuring• Deep restructuring especially politically sensitive (town Deep restructuring especially politically sensitive (town
enterprises; social unrest)enterprises; social unrest) PolandPoland
• Complex institutions Complex institutions • Political backlash, hence indefinite postponement of privatisationPolitical backlash, hence indefinite postponement of privatisation
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Firm performance and Firm performance and ownershipownership
Firm performanceFirm performance• investment and technologyinvestment and technology• employment (growth rate)employment (growth rate)• sales revenues (growth rate) sales revenues (growth rate) • productivity (growth rate or levels)productivity (growth rate or levels)
– sales per worker or value added per workersales per worker or value added per worker
• profitability (growth rate or levels)profitability (growth rate or levels)– account profits (bad measure)account profits (bad measure)– gross operating profit divided by net fixed gross operating profit divided by net fixed
assets plus inventoryassets plus inventory
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Performance of firms in Hungary and Poland, by Performance of firms in Hungary and Poland, by ownership type, 1993ownership type, 1993Source: EBRD (1995, ch. 8 , table 8-5)Source: EBRD (1995, ch. 8 , table 8-5)
OutsidersState InsidersDomestic Foreign
HungaryEmployees per firm 699 293 74 364% new technologies 13.9 16.7 23.1 42.9Investment-to-sales ratio (%) 0.6 0.2 * 1.1* 1.1*
PolandEmployees per firm 548 273 132 432% new technologies 51.6 75.0 71.4 87.5Investment-to-sales ratio (%) 1.2 2.8* 0.0* 5.8*
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Konings (1997) Konings (1997) employment employment growth rategrowth rate *: denotes significant at 5% critical level ** denotes significant at 10% *: denotes significant at 5% critical level ** denotes significant at 10% critical levelcritical level
(1) (2) (3) (4)Ln (employment) - -0.048 *
(0.009)-0.056 *(0.022)
-0.027 *(0.009)
Ln(age) - 0.017(0.015)
0.049 *(0.021)
0.030(0.024)
De novo 0.54 *(0.058)
0.17 *(0.059)
0.48 *(0.20)
0.74 *(0.26)
Privatized 0.052(0.059)
0.006(0.041)
0.061(0.18)
0.15(0.12)
Ln(empl)x de novo - - -0.012(0.028)
-0.043 *(0.019)
Ln(empl)xprivatized - - 0.24(0.025)
-0.001(0.010)
Ln(age)xde novo - - -0.16 *(0.09)
-0.25 *(0.16)
Ln(age)xprivatized - - -0.069 *(0.031)
-0.048 **(0.028)
Comp - - 0.018(0.033)
0.012(0.022)
Ciner - - -0.052(0.039)
-0.038 *(0.020)
Union - - 0.014(0.047)
0.033(0.029)
Number of obs 873 561 548 548Adjusted R² 0.31 0.30 0.33 0.32
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Table II The Ownership Effects
Revenue Employment Productivity Cost per unit of revenue
All
owners
Individual
categories
of owners
All
owners
Individual
categories
of owners
All
owners
Individual
categories
of owners
All
owners
Individual
categories
of owners
Privatisation Effects 7.26** 3.34*** 4.29 -3.05
Foreign Investorsa 12.17*** 8.40** 6.57 -3.69
Private domestic financial firmsa 18.54* -0.31 16.37** -6.77
Private domestic nonfinancial
firmsa
-2.92 0.71 0.71 4.46
Domestic Individualsa 7.57 -1.87 3.66 -8.41
State (in a privatised firm)a 9.85 -0.48 13.83 -6.71
Managersa 3.29 6.82*** -7.15 2.55
Workersa 1.61 4.14 -3.41 3.33
a: dummy variable set to 1 for the post-privatisation performance of privatised firms where the given type of owner is the largest shareholder, 0 otherwise.
Frydman et al. (1999)
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Table III Privatisation Effects Outsiders versus Insiders
Revenue Employment Productivity Cost per unit of
revenue Privatisation Effects
Outsidersa 9.70* 1.51 9.16** -4.36
Insidersa 0.68 7.72* -7.92 1.12
a: dummy variable set to 1 for the post-privatisation performance of privatised firms where the given type of owner is the largest shareholder, 0 otherwise.
Frydman et al. (1999)
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Classens and Djankov Classens and Djankov (1999)(1999)
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Outcomes of privatisation Outcomes of privatisation
Impact of privatisation on private sector share Impact of privatisation on private sector share of the economy is smallof the economy is small
Revenues resulting from privatisation rather Revenues resulting from privatisation rather small and wide variation and very high costssmall and wide variation and very high costs• costs to measure equity/asset value, privatisation costs to measure equity/asset value, privatisation
agencies. In Hungary = 28.5 % of revenues agencies. In Hungary = 28.5 % of revenues Effect on firm efficiency not clearcutEffect on firm efficiency not clearcut
• new new de novode novo private firms performed better but private firms performed better but privatised firms only in some context outperformed privatised firms only in some context outperformed SOEsSOEs
• only outsider privatisation led to increased only outsider privatisation led to increased performanceperformance
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Outcomes of privatisationOutcomes of privatisation
Outsider privatisation Outsider privatisation • increased revenue and productivity thus efficiency increased revenue and productivity thus efficiency • actually employment increased (foreign investors)!actually employment increased (foreign investors)!
Insider privatisationInsider privatisation• increased employmentincreased employment
No evidence on cost or employment reductionNo evidence on cost or employment reduction Type of privatisation (insiders vs outsiders) Type of privatisation (insiders vs outsiders)
• no impact on choice of defensive (cost reduction) no impact on choice of defensive (cost reduction) vs strategic restructuring (revenue increase) but vs strategic restructuring (revenue increase) but on the effectiveness of the latteron the effectiveness of the latter
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Outcomes of privatisationOutcomes of privatisation Some evidence that ownership concentration Some evidence that ownership concentration
leads to higher profitability and productivity in leads to higher profitability and productivity in Czech Republic Czech Republic • Voucher scheme was a way to go from individual to Voucher scheme was a way to go from individual to
more concentrated structure more concentrated structure In Russia little move from insiders to outsidersIn Russia little move from insiders to outsiders
• weak financial markets, solidarity among workers weak financial markets, solidarity among workers and desire to keep controland desire to keep control
• difficult for outsiders and are these good?difficult for outsiders and are these good?• But actually some variationBut actually some variation
Outsider concentration also important in Outsider concentration also important in Russia Russia
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How fast should How fast should privatisation take place ? privatisation take place ? Big bang vs gradualismBig bang vs gradualism
Big Bang: Speed of privatisation is main Big Bang: Speed of privatisation is main objectiveobjective• Why ? Private property is needed for incentive Why ? Private property is needed for incentive
reasons reasons – Absence of clarified property rightsAbsence of clarified property rights– Getting the state out of the economyGetting the state out of the economy
– state should correct market failure onlystate should correct market failure only
• Privatisation faces political constraints:Privatisation faces political constraints:– redistribution effects of privatisationredistribution effects of privatisation– blocking of programmes (which impacted on choice of more blocking of programmes (which impacted on choice of more
politically acceptable programme)politically acceptable programme)– backlash or reversalbacklash or reversal– restructuring after privatisation? Uncertaintyrestructuring after privatisation? Uncertainty– financial constraints(financial markets are developing…) financial constraints(financial markets are developing…)
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How fast should privatisation How fast should privatisation take place ? Big bang vs take place ? Big bang vs gradualismgradualism
Because of these constraints Because of these constraints Gradualism Gradualism• Firms are identified for privatisation and those who Firms are identified for privatisation and those who
get an interested buyer are soldget an interested buyer are sold– this buyer is interest in financing and restructuring the firmthis buyer is interest in financing and restructuring the firm– they use financial markets contributing to sound financial they use financial markets contributing to sound financial
systemsystem
• SOEs gradual restructuring towards privatisation. SOEs gradual restructuring towards privatisation. – Can harden the budget constraints of SOEsCan harden the budget constraints of SOEs– financed by state budget so do not impact on financial financed by state budget so do not impact on financial
systemsystem– only bail-out those that not possible to close downonly bail-out those that not possible to close down
• The best firms are privatised firstThe best firms are privatised first
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How fast should privatisation How fast should privatisation take place ? Big bang vs take place ? Big bang vs gradualismgradualism
AdvantagesAdvantages• reduces cost of experimentingreduces cost of experimenting
– if successful the programme the electorate will support if successful the programme the electorate will support further reformfurther reform
– if unsuccessful the cost of reversal is smallif unsuccessful the cost of reversal is small
• increases likelihood of success as best firms are increases likelihood of success as best firms are privatised first and of restructuringprivatised first and of restructuring– less likely that employment decreases and more likely less likely that employment decreases and more likely
restructuring takes placerestructuring takes place– if these are successful then popular supportif these are successful then popular support
• allows the development of better financial sectorallows the development of better financial sector Disadvantages: few firms are privatisedDisadvantages: few firms are privatised
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State intervention State intervention
To correct market failuresTo correct market failures• public goodspublic goods• externalitiesexternalities• incomplete contractsincomplete contracts• monopoliesmonopolies
Through provision or funding or Through provision or funding or regulation (if not enough regulation (if not enough competition)competition)