1

Chapter 4: Chapter 4:

PrivatisationPrivatisation

2

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

3

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

4

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

5

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

6

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

7

Central Plan vs MarketCentral Plan vs Market

B

TRA

TC

C

Output

TC

TR

profit-max BE Central Plan

8

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

9

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)

10

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

11

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)...

12

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

13

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

14

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

15

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

16

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

17

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

18

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

19

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)

20

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???

21

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

22

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

23

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

24

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

25

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

26

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)

27

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%

28

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

29

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

30

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)

33

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)

34

Classens and Djankov Classens and Djankov (1999)(1999)

35

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

36

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

37

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

38

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…)

39

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

40

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

41

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)