(Reprinted from HKCER Letters, Vol. 2, May 1990)
Thibaut de Saint Phalle
Privatization as a Solution
A very simple solution to the international debt crisis is simply to get rid of the state-owned businesses. In both Argentina and Brazil, for example, there are each 500 to 600 large companies belonging to the state. When they need money, they borrow with the guarantee of the government or directly from the government which then borrows the money from the World Bank or from private banking systems around the world. This is the biggest part of the problem, and I believe that if you privatize, you would probably be able to pay off at least a quarter of the current Brazilian debt.
A related problem is how to get flight capital to go back to the nation from which it came. Actually, you can put the two together: If you privatize the Mexican economy, and you do it in a way that will allow the buyers to have a chance of making money, you will find that the Mexican money will come home.
After World War II, the Western world granted loans to the newly independent countries both through the World Bank and on a government-to-government basis. However, largely due to Mrs. Thatcher and to President Reagan, the point of view around the world has changed 180 degrees in the past few years. People are beginning to realize that you need to rely on the private sector and individual initiatives to solve some of the problems in the developing countries.
Reasons for Privatization
Why do you privatize? In the first place, a private company is far more efficient. Secondly, it is the only way in which you can create an entity that can compete with entities in other countries. Thirdly, it gives you an opportunity to make management independent. The managers are not going to be responsible to an agency of the government which does not know anything about the business they are trying to run. Fourthly, once a company is privatized, economic decisions are not made for political reasons. For example, governments give financial support to the sunset industries for political reasons simply because they employ more people.
A further reason for privatization is that you can concentrate on the technologies of tomorrow, and generally such technologies do not employ people who are unionized and they do not employ a great number of people in general because they rely on capital and on machinery to solve the problems of competition.
Finally, in a state-owned corporation, the management is essentially responsible to no one. In private industry, you are responsible, and you have to be responsible either to your directors or to your stockholders or both.
Means of Privatizing
There are all sorts of ways of privatizing. One of the best and simplest ways is to create capital markets, so the capital markets can absorb the stock of these state-owned corporations when the stock is issued and sold to the public. It is very curious because all these developing countries say that they cannot privatize because they have no money. However, Egypt, for example, is perfectly capable of privatizing because so much of the Egyptian money is located outside Egypt. Privatization will attract this money home if there is a chance for profit. This has occurred in Turkey recently with privatization, and it is just as likely to happen in Argentina and Mexico.
Another way of privatizing, which we are beginning to look at in the United States, is by contract. The government builds, for example, the prisons and schools, but leases them out, or signs a contract with a private group to operate the prisons, airports, schools, railroads, or anything which requires an enormous capital investment.
Another way of doing it, in the housing business, is to convert what has been public housing with leases to the poor into long-term mortgages. This happened in Great Britain. Essentially, the people who are residing in those units are paying the same amount of money each month, but they are paying it on a mortgage instead of a lease, so they feel that they own the property. As owners, they take better care of it.
In the socialist countries, one way to privatize is through joint ventures. Here, because of the strange idea that the state owns the means of production, the state keeps the means of production while the foreign joint venturer agrees to run the company and share the profits.
Finally, you can use the tax system. In Quebec a few years ago, when the French Canadians decided that Quebec should not be a part of Canada any longer, all the Anglo-Saxon money in Quebec fled the province. The province ended up "provincializing" all of the bad businesses in Quebec. Then it said it could not keep this going because it could not raise any more money. It allowed anybody in Quebec who bought a stake in a "deprovincialized" company to deduct from his income taxes the cost of his investment in that company. It was a success, and everybody in Quebec became a capitalist over night.
Essentially, privatization is only limited by financial ingenuity. Think of the money that has gone into financing those leveraged buy-outs in the United States. If that money had gone into the privatization of public enterprises in different parts of the world, it would have played a very constructive and positive role.
Barriers to Privatization
Having said all this, there are difficulties and problems of privatization, particularly in the energy field. The public in different parts of the world considers that anything that is below ground belongs to the public and should be nationalized. Once the state has been given something, it is almost impossible to take it away again, particularly when it is thought by the public to be something that belongs to each and every one of us.
There is also the problem of simply substituting private monopolies for public monopolies through privatization. If you are creating private monopolies, then you have a problem of making sure that the public is somehow protected. This problem occurred with telecommunications.
Essentially, privatization is a political and not an economic problem. If it were an economic problem, it would have been long since done. It is a political problem because the public feels that somehow something is going to be taken away from the average human being who lives in that country. Secondly, you have got a terrible problem with the people who run these vast bureaucracies and public enterprises. Obviously, they do not want privatization and you have to explain to them that it is, in fact, better for them, that they will be able to share in the process and have a stake in the company. But it is very difficult for them to understand because most of them come out of the government in the first place, and therefore, they look to the government for the protection of their own jobs.
The other difficulty is, of course, with labor. In most countries, big labor feels that it is exercising a political right and not simply an economic right, and that it will lose its political clout if it can no longer negotiate with the government directly. This is the problem in Mexico, Argentina, Brazil, and France. Although unions are becoming depoliticized, there has to be some sort of system so that the man who works in the factory can have a stake in the business, just as the management can have a stake in the business. If you can explain that to the managers as well as the workers, you will be able to privatize. This is the essential thing to do in the kind of world in which we are living.
Mr. Thibaut de Saint Phalle is Chairman of Saint Phalle International Group in Washington, D.C. He was Co-Chairman of the International Privatization Council in the United States and Director of the U.S. Export-Import Bank.