privatization paradigm

The privatization paradigm 

Few words evoke as much passion amongst citizens and their governments as 'privatization'. Often, even the slightest rumor of the privatization of government services is enough to set off Facebook petitions and letter writing campaigns lamenting the government's 'abandonment' of policy objectives. But for governments around the world, privatization is a valuable and essential approach to managing budgets and - far from turning their backs on serving citizens - is a viable way to maintain and improve service levels.

Both camps have a valid point however. Consumer/user protection must be a central tenet in any government approach to privatization; it cannot simply be driven by short-term financial gains. This will require governments to think carefully about how they might use regulation to ensure that policy and financial objectives continue to be met post-privatization. But all too often, governments telescope these regulations to focus on meeting certain financial outcomes and fail to embed levers that will allow them to ensure (and adjust) long-term alignment to policy.

The capital imperative

But governments are facing their own challenges. The recent financial crisis and ongoing debt concerns have put budgetary pressure on almost every jurisdiction, creating a keener appetite for privatization as a means of rebalancing capital. A growing number of governments are even starting to approach their capital allotments in much the same way that asset managers do; using the monetization of one asset to refocus capital onto a different project within the portfolio.

Take, for example, airports in the developed world. From a purely financial perspective, most have the potential to be run as a viable stand alone business. In these cases, governments may well consider privatizing the facility and reinvesting the proceeds into another capital-intensive infrastructure project - say high speed rail - that further meets their policy objectives. And while some consumers (often unduly) fret about the potential for airport privatization to lead to price increases and sub-standard service, governments can respond to these concerns by creating appropriate regulations that protect the public interest.

Unique structures for unique situations

But privatization is by no means a 'one size fits all' solution to government fiscal imbalances. In fact, each government business entity must be carefully analyzed to identify its potential as a stand-alone business and, if applicable, tailor the solution for each situation. This is particularly true for infrastructure; privatization approaches to water are not automatically transferable to power, and approaches taken in Europe will not necessarily translate into Africa or the Middle East.

What is clear is that governments will need to do their homework when approaching privatization: they must consider how the change in ownership will impact their ability to ensure public policy and protect the public interests; they must examine the financial imperatives that underpin the action; and they must create regulations that address all of those issues while protecting the commercial viability of the business.

If governments can accomplish all of that, then privatization may quickly prove itself to be a valuable tool that not only frees up much needed government capital, but also enshrines public policy objectives and protects the interests of citizens.

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