Privatization The transfer of public functions and resources to the private sector –Involves transfer of operations, management, or ownership The entry of private entities into activities once reserved for government ownership and control Does not necessarily involve market liberalization---you can have a privately owned monopoly

Reasons for Public Ownership Governmental control of infrastructure for political, social, economic, and defense purposes Subsidization of other parts of the government Attainment of universal service goals Patronage issues

Reasons against public ownership Lack of access to capital markets Lack of financial and administrative autonomy Lack of management authority regarding staffing Lack of pricing and service flexibility Lack of political and planning independence

Reasons to Privatize Ability to raise cash Increasing operating efficiencies Spreading of corporate ownership through stock sales

Steps to Privatization Changes in legal provisions Corporatization Separation of telecom operation from postal and other functions Business organization of telecom operation Setting up of separate capitalization and also a system of accounts to measure performance Restructuring of entity to make it more efficient and profitable Defining the system of regulation

Various Privatization Methods State enterprise with greater autonomy than a department of the government State-owned company Mixed-ownership between state and private sector Mixed-ownership enterprise that is gradually sold to private interests

More privatization methods Agreement between public entity and foreign enterprise, with foreign enterprise having the management control Build-operate-transfer Build-transfer-operate Soft loans Management contracts Negotiated fixed price sale Stock offering (foreign or domestic market)

Challenges for new entities Lack of local knowledge Foreign ownership restrictions Incompatible equipment

Problem for Developing Nations Lack of domestic capital markets Concessions involved in attracting buyers too burdensome Loss of national autonomy Lack of investment in infrastructure by buyers Outflow of revenue dollars

Update on OECD countries Barriers to FDI –49% limit in Mexico; needs to be cleared by government in Australia; Japan, Norway and Switzerland have restrictions –“golden shares”—still in Portugal and Turkey Government ownerships of shares –Some still retain control of incumbent –Some only minority shares