The word “privatisation” has become very popular. Some people advance it as the final step toward a free market, others criticise and plan referendums against it. Yet, both positions are predicated on too narrow a view of privatisation.
Privatising Not Only Property But Functions
Privatisation is generally understood in Lithuania only as a kind of transaction by which state property is transferred to private hands. Yet, the concept of privatisation is much broader than that, for it is not only public property but also public functions that should be privatised. The forms of privatisation can also be diverse, starting from the sale of state assets and ending with the state renouncing certain functions and its interference in people’s private affairs. Even the bankruptcy of state structures losing in the competitive fight with the private sector can be viewed as privatisation.
The expanded concept of privatisation is important if only to ensure that privatisation is not viewed as a key only to additional government revenues. Privatisation is first and foremost a method of separating the economy from politics, demonopolising the market and freeing private initiative so it would be directed towards creating well-being rather than driven to procure it by engaging in shadow activity, circumventing artificial barriers and fighting bureaucracy. To that end, it is essential that there are owners whose interests are, not to carry out directives in the name of the state, but to earn profits, fulfilling the needs of the market, thus the people. It is even more important to reject protectionism and wide-ranging privileges so that profits of some people would not be generated at the cost of their consumers, competitors, and tax payers.
Privatisation Is More Than a Change of Owners
As long as privatisation is only about transferring the ownership of shares from the state to the private sector, the existing state regulations, monopoly rights and protectionism being left unaddressed, it will fail to bring about desired changes. Experience shows that a private monopoly is no better than a state one; in fact, in most cases it is even worse. Therefore, it is essential to ensure that during the privatisation process the new owners do not make backstage agreements with the state, agreements intended to endorse their preferential status. Only the enforcement of competition and free market principles can ensure that private ownership will mean a better life for people-higher incomes, stable prices and higher quality consumption. Only then can we be sure that the well-being of all people will not be sacrificed for selected interest groups, abstract ideals or political games.
In order to achieve progressive changes, privatisation should also extend to the areas that today are “beyond the limits of the market,” such as pension provision, education, social safety, and community services. It is the quality and expense of these services that consumers complain about. It is these services that are the greatest source of inflation, that retain old working methods and provide an open invitation to bribery. Furthermore, experience shows that consistent privatisation brings about better quality and lower prices, or at least their slower rise as compared with public sector services.
While denationalisation of state property is received favourably by society, privatisation of social functions is often viewed with distrust. And that private entities can perform, for example, the functions of tax collection appears to be simply inconceivable for most people.
A Suitable Mechanism Is a Key to Successful Privatisation
The transfer of state property to private hands (which is the prevailing notion of privatisation in Lithuania) is an essential element of privatisation. The government is now proclaiming really large dimensions of the privatisation programme, but we can already predict that it will encounter serious problems. Once the decision to denationalise state property has been made, it is no less important to determine how it will be conducted. However, there is little talk about the privatisation mechanism and the process is being organised on an ad hoc basis.
The forms of privatisation set forth in the law, such as direct negotiations or tenders, lack clear-cut criteria that would allow to select objectively a new owner of the privatised property. Bidders are driven to make all kinds of promises, for the winner is selected based on fine words rather than on the prices offered. Unfortunately, the promises made fail to be translated into reality. Social guarantees-an example of such popular promises-turn out mere window dressings, and assets are sold at ridiculously low prices. Lithuania should learn from the experience of many other countries where wide-ranging powers granted to privatisation executives to foster the “flexibility” of the process turned it into a hearth of corruption.
In Lithuania the assignment of tasks among privatisation authorities is complex and unclear, as is the system of privatisation authorities itself. Decisions concerning the privatisation programme are made by a bunch of institutions, including the parliament, the government, the Privatisation Commission, the Privatisation Agency, the administrators of privatised entities, and municipal privatisation commissions. This long list was recently supplemented with the Ministry of European Affairs. It should be noted that this is only one example of a jumbled mishmash of privatisation rules and regulations. A system like this, for obvious reasons, can be neither simple nor effective.
Privatising the Privatisation Process
It is natural that a state carrying out large-scale privatisation is somewhat inhibited by lack of experience. Under such circumstances it has two alternatives. One of them consists of reliance on the market and its established mechanisms of price determination. It means reliance on professional experience of financial brokerage firms, banks and other private institutions driven by the most effective, profit motive. The other alternative is to create a maladroit government agency simulating the market, an agency that would sell the property scheduled for privatisation by trial and error. So far, unfortunately, preference has been given to the latter.
It would be unfair to say that, in carrying out the privatisation programme, the state uses none of the services offered by the private sector. Yet, this is done at random and according to unnamed, vague criteria. For example, the criteria used in selecting the winner in the tender for drawing the privatisation programme for “Lithuanian Telecommunications” were somewhat elucidated only after the tender had been awarded. In such circumstances one can rely only on the insight and goodwill of government executives. There are no guarantees though that the process of privatisation will not turn into a process of “pirotisation”.
It is alarming that privatisation in Lithuania is being conducted only to the “tune” of the state. In case of a normal purchase-sale, both the seller and the buyer can initiate the deal. In our case, however, it is limited to the seller, i.e. the state. Even if there are potential investors interested in acquiring certain property, there is no legal way that they can initiate its privatisation. They are forced to wait until the decision “matures politically.”
A good example of the chaotic nature of the privatisation rules is the law on the privatisation of the State Commercial and Agriculture Banks, passed in haste by the parliament. It states that the banks can be privatised only by banks or other financial institutions and that all the proceeds must be used to restructure the banks themselves. Yes, this is privatisation, but clearly not as a sale, but as an exceptional gift.
An Artificial Concept of “Strategic Object”
In addition to the weaknesses in the privatisation mechanism embedded in the legislation, the widespread concept of “strategic objects” can do a lot of harm, too. It is clear that “strategic object” is an artificial concept, for anything can be regarded as one. If we hold “strategic” anything that is essential for meeting human needs, wouldn’t food or shelter be first to cross your mind? Not accidentally, for a long time every regional centre had a not-to-be-privatised “strategic” drugstore. Regardless of what any of us consider “strategic”, market principles are universal and equally valid everywhere.
With the existing defects in the privatisation mechanism, there is a danger that there will be another wave of “piratisation” by which people’s wealth will be distributed in an arbitrary manner. Paradoxically, the arbitrariness displayed by state officials does not necessarily defy the law. The laws give them broad powers and leave much room for subjective decisions, inviting corruption and “piratisation.”
Avoiding the Hard Way
In summary, it does not necessarily follow that the transfer of state-owned property to private hands proclaims the pursuit of free market principles. It is as important to privatise government functions, such as community services, social security, and education. Further, privatisation of state property will not bring desired results if the policy of deregulation and of reducing bureaucracy and removing state support is not implemented concurrently.
The success of privatisation will to a great extent depend on the suitability of its mechanism, which at the present moment contains the following shortcomings: (i) the forms of privatisation leave too much room for arbitrary decisions; (ii) there are no rules about how to involve private institutions in the privatisation process; (iii) the assignment of responsibilities among privatisation authorities is complex and unclear; and (iv) unjustified exceptions are made in the privatisation of individual objects.