Privatization should never be about increasing revenues, but about productivity

The Economist’s most recent edition ponders how privatization of certain crown corporations could be used by governments that are starved for liquidities in the face of large public debts. The claim is that privatization would increase revenues and pay off parts of the public debt. I think that this is the wrong reason to enact a privatization.

The collection of additional revenues to pay off debts is merely a “bonus” of privatization. The point of privatization is to invite market discipline within the company in order to increase productivity as I argued three years ago with regards to privatizations in Greece (here). 

Let’s take the example of postal societies (a topic I am well versed in). In Canada, the privatization of Canada Post would be a long process in order to maximize the revenues from privatization. This is because financial markets cannot absorb huge IPOs of the value of Canada Post in one single shot without seeing the price of assets being diminished. Hence, revenues from privatization would be spread over numerous years and not generate large enough results to have a significant impact on debt servicing. However, Canada Post has a huge productivity differential with private sector equivalent and is stuck with important absenteeism problems. Other postal corporations (see my paper here at the Montreal Economic Institute) which were privatized saw important increases in labour productivity in the first few years which resulted, in the ten years following privatization, in price cuts across the economy. These increases in productivity liberated important quantities of ressources to other ends and increased the rate of economic growth. The point of privatization is to replicate what has happened with postal privatization: increase productivity and privatize risks. The extra revenues are merely desirable side benefits which can be used to reduce the public debt.

If you’re to jump on the privatization bandwagon like The Economist, do it for the right reasons … 

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