Nepal | May 20, 2019

Privatization in Nepal: Government’s role

Rahul Shah

Privatization, as it has emerged in public discussion, is not one clear and absolute economic proposition. Rather it covers a wide range of activities, all of which imply a transfer of the provision of goods and services from public to private sector

For decades, governments around the world increased the scope and magnitude of their activities, taking on a variety of tasks that the private sector previously had performed.

In the United States, the federal government built highways and dams, conducted research, increased its regulatory authority across an expanding horizon of activities, and gave money to state and local governments to support functions ranging from education to road building.

In Western Europe and Latin America, governments nationalized companies, whole industries, banks, and health care systems, and in Eastern Europe, communist regimes strove to eliminate the private sector altogether.

According to privatization’s supporters, this shift from public to private management is so profound that it will produce panoply of significant improvements: boosting the efficiency and quality of remaining government activities, reducing taxes, and shrinking the size of government.

In the functions that are privatized, the argument is the profit-seeking behavior of new, private sector managers will undoubtedly lead to cost cutting and greater attention to customer satisfaction.

This newfound faith in privatization has spread to become the global economic phenomenon. Throughout the world, governments are turning over to private managers’ control of everything from electrical utilities to prisons, from railroads to education.

Developing countries have been quick to jump on the privatization bandwagon, sometimes as a matter of political and economic ideology, other times simply to raise revenue.

Argentina, for example, launched a major privatization program that included the sale of its telephone monopoly, national airline, and petrochemical company for more than $2.1 billion.

Mexico’s aggressive efforts to reduce the size and operating cost of the public sector have resulted in proceeds of $2.4 billion. Over the next decade, privatization is likely to be at the top of the economic agenda of the newly liberated countries in Eastern Europe, as well.

This growth of privatization has not, of course, gone uncontested in Nepal. Critics of widespread privatization contend that private ownership does not necessarily translate into improved efficiency.

More important, private sector managers may have no compunction about adopting profit-making strategies or corporate practices that make essential services unaffordable or unavailable to large segments of the population. A profit-seeking operation may not, for example, choose to provide health care to the indigent or extend education to poor or learning-disabled children.

Efforts to make such activities profitable would quite likely mean the reintroduction of government intervention.

The result may be less appealing than if the government had simply continued to provide the services in the first place. Overriding the privatization debate has been a disagreement over the proper role of government in Nepal’s economy.

Proponents view government as an unnecessary and costly drag on an otherwise efficient system; critics view government as a crucial player in a system in which efficiency can be only one of many goals.

There is other perspective that the issue is not simply whether ownership is private or public. Rather, the key question is under what conditions managers will be more likely to act in the public’s interest.

Refocusing the discussion to analyze the impact of privatization on managerial control moves the debate away from the ideological ground of private versus public to the more pragmatic ground of managerial behavior and accountability.

Viewed in that context, the pros and cons of privatization can be measured against the standards of good management—regardless of ownership.

What emerge are three conclusions: 1.Neither public nor private managers will always act in the best interests of their shareholders. 2. Profits and the public interest overlap best when the privatized service or asset is in a competitive market. 3. When these conditions are not met, continued governmental involvement will likely be necessary.

The simple transfer of ownership from public to private hands will not necessarily reduce the cost or enhance the quality of services.

Privatization, as it has emerged in public discussion, is not one clear and absolute economic proposition. Rather it covers a wide range of different activities, all of which imply a transfer of the provision of goods and services from the public to the private sector.

Unlike other industrialized countries where many of the utilities and basic industries are state-owned—and thus ripe targets for privatization—in the United States, the telecommunications, railroad, electrical power generation and transmission, gas distribution, oil, coal, and steel industries are entirely or almost entirely privately owned.

Privatization can simply reduce the size of government. Fewer government workers and fewer people supporting a larger role for government means less of a drain on the nation’s budget and overall economic efficiency.

In conclusion Government can make effective use of possible sector privatization to improve efficiency, increase competition, and reduce expenditures.

Shah is a consultant for Infrastructure and Energy Industry (Asia-Pacific)

A version of this article appears in print on December 22, 2016 of The Himalayan Times.

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