Privatisation and the Poor: Measuring the Impact

Introduction: Measuring the Impact of Privatisation on the Poor

Since the early 1980s, many developing countries have pursued privatisation. Often, it was a requirement for obtaining critical aid. In some cases, governments simply could not continue subsidising State Owned Enterprises (SOE), nor could they finance necessary expansions. The question remains as to measuring the impact of privatisation on the poor households of a society.

Therefore, privatisation gained traction as a way to reduce subsidies, access private sector funds for expansion, and secure revenues from asset sales or, longer-term, increased tax receipts from formerly public enterprises. Savings and new revenue streams could be redirected to social spending, benefiting especially the poorest.

Nonetheless, privatisation can harm wider society, particularly the poorest, depending on its implementation. It may cause unemployment or worsen income distribution if marred by corruption—such as state assets being handed to a select few.

Importance of Examining Privatisation In Low-Income Households

It is vital to assess the effect of privatisation on the poorest in developing societies. Establishing effective regulatory environments promptly can boost the success of privatisation, both for fairness and firm performance afterwards.

This essay first explores theoretical arguments for and against privatisation. Next, three country cases are examined, focusing on regulatory impacts on privatisation’s outcomes. Recommendations and conclusions follow. The emphasis is on public utility and infrastructure enterprises.

Literature Review

The Role of International Lending Institutions

After the World Bank’s dissatisfaction with public sector enterprises, especially in Africa, international lenders insisted on privatisation as part of aid conditions. Privatisation was thought to anchor reforms and was hard to reverse (Bayliss, 2002).

Provision of utilities such as power, water, and telecommunications needs sizeable investment. Privatisation enables the private sector to shoulder much of this burden. It also boosts state revenues via taxation and asset sales and removes the state’s duty to fund utilities.

Economic Growth and Poverty Alleviation

Bayliss (2002) argues that private sector development is crucial for economic growth and poverty reduction. Yet, there is no assurance that privatisation actually fosters a thriving private sector. Nevertheless, privatisation may strongly impact poverty due to its frequent linkage to aid.

Historically, bodies like the World Bank and IMF did not focus on poverty impacts of privatisation. This oversight is significant given privatisation’s role in structural programmes for poor countries. By the early 21st century, however, there was a shift—World Bank moved to poverty reduction strategies, and the IMF introduced Poverty Reduction and Growth Facilities (Bayliss, 2002).

Continued Neo-liberal Focus

Despite these changes, Bayliss (2002) contends that these agencies remained driven by neo-liberal, market-focused policies. The new poverty-centric programmes echoed earlier structural adjustments, operating under the premise that efficiency reduces poverty.

Cook and Uchida (2001) challenge this logic, noting a lack of empirical evidence on privatisation’s true impact on poverty. Birdsall and Nellis (2003) also question the motive, asserting that efficiency is privatisation’s main goal; distribution and poverty concerns are secondary, meant mainly to smooth privatisation’s political acceptance.

Efficiency and Equity Trade-Off

Distributional effects of privatisation matter for different groups. These impacts are visible via service prices, access, and income changes.

Birdsall and Nellis (2003) frame the debate as an efficiency-equity trade-off. In theory, perfect competition only allows efficient redistribution through lump sum transfers, which do not distort incentives or prices. In practice, developing economies operate far from such efficiency. Thus, both efficiency and equity gains may be possible from privatisation.

The Need for Contextual Assessments

Privatisation’s distributional impact depends on conditions before, during, and after the sale, and on political and economic factors. Evidence shows that, provided post-privatisation regulation and competition are effective, it is possible to increase both efficiency and equity.

Yet, since privatisation is often an aid condition, the process can be rushed. Bidding is sometimes bypassed, and robust regulation is neglected in favour of speed. Too often, the deal is prioritised over safeguarding all stakeholders.

Privatisation and Poverty

Risks to the Poor

Bayliss (2002) warns that private investors pursue profit, which may limit extension of services to less lucrative, often poor, communities. Removal of subsidies—common under aid agreements—can hike prices, making services less affordable for those below the poverty threshhold.

For example, the installation of essential network infrastructure can be prohibitively expensive. As a result, people with low income may face long-term exclusion simply because they cannot pay for connection fees (Bayliss, 2002).

Impact on Access

Birdsall and Nellis (2003) take a more positive view, arguing that privatisation may quickly expand service access, mainly for the urban poor. This often occurs when sale contracts mandate service and network expansion. However, the rural poor frequently remain excluded.

Nonetheless, if access expansions are not accompanied by large price increases, privatisation benefits distribution. Problems arise if private owners increase tariffs sharply for cost recovery, or if regulation is poor. Such price increases hurt equity—as seen in Peru’s experience post-privatisation.

A serious welfare loss also results from crackdowns on illegal connections, often used by the poorest, illustrated in Argentina where most new legal electricity subscribers were previously using illegal connections (Delfino and Casarin, 2001).

Employment Consequences

Most evidence shows privatisation frequently causes staff reductions and higher unemployment, at least initially. Private owners usually operate with leaner workforces. Birdsall and Nellis (2003) describe a study of 308 privatised firms—over three-quarters shed staff after privatisation.

Typically, lower-skilled, lower-paid workers are most at risk. Even when higher-paid staff go, they usually find new jobs more easily. This can increase both poverty and inequality.

Still, some argue these job cuts are temporary. If privatisation and reform produce growth, new jobs and higher employment will emerge in the long run, ultimately aiding even the poorest.

Weak Social Safety Nets

Developing countries often lack comprehensive social safety nets. Common coping mechanisms, such as inflated public sector employment or tolerance of illegal connections, are discouraged by international agencies. Removal of these ‘safety valves’ through privatisation can hurt poorer citizens.

Fiscal Effects

In the short term, privatisation boosts government income via asset sales. Longer-term, significant gains come from new tax revenues and no longer needing to subsidise firms. Where public spending is progressive, these funds can be redirected to benefit low income households. For instance, they can do this by investing in health and education.

Regulation and Case Studies

The Critical Role of Regulation

Regulation is essential for privatisation success. Without robust oversight, private sector abuse becomes likely.

Bayliss (2002) argues that it is effective government regulation—and not privatisation itself—that drives private sector development. Birdsall and Nellis (2003) agree, noting that good regulation improves distributional outcomes in utilities and infrastructure.

Cook (1999) highlights that privatisation alone does not ensure competition. New entrants may struggle to match the scale of incumbents, keeping monopolies intact. Therefore, regulation is crucial in protecting consumers and promoting efficiency.

There are several regulatory options:

• Price caps: Limit the maximum price charged for services.
• Rates of return and profit caps: Restrict profits or return on investment to avoid gouging.

Case studies from Argentina, Mexico, Venezuela, Malaysia, and Chile show varying approaches—including rate-of-return caps and profit benchmarks.

Newbery (1994) suggests effective regulation must allow utilities to finance investment affordably and incentivise efficiency and innovation.

However, Cook (1999) stresses that building effective regulation is challenging in developing countries. In contrast, selling assets is relatively easier, as monopolies are already common.

Venezuela: Telecommunications

CANTV, Venezuela’s state-owned telecoms company, faltered under public ownership: limited expansion, declining service quality, and unsustainable costs. Privatisation via competitive bidding brought in a consortium who paid $1.885 billion for a 40% stake.

Ahead of the sale, tariffs tripled, likely to entice investors. Performance targets were fixed in the contract, and a new regulator, CONATEL, monitored progress.

Post-privatisation, expansion surged. Between 1992 and 1993, hundreds of thousands of new digital lines and customers were added, and service failures dropped drastically.

Chile: Electricity

Before privatisation, Chile’s power sector was a government monopoly, marred by losses and power cuts. Regulatory reforms were made before privatisation, creating the CNE regulatory body and separating the generation, transmission, and distribution companies.

Post-privatisation, larger customers negotiated rates with distributors, while prices for ordinary consumers remained regulated. Service quality and efficiency improved, and by 1989, nearly all urban—and most rural—households had electricity. These advances were credited mainly to regulatory reforms rather than privatisation itself.

Argentina: Water

Buenos Aires, once a leader in water coverage, saw a significant decline by 1980. Privatisation sought to reverse this trend. Before the sale, extensive new regulations were put in place over two years, costing $4 million.

The new private owners committed to lowering prices by 27% and investing substantially in expansion, far outspending their public predecessors. Service contracts included clear expansion targets. However, their restructuring efforts resulted in a 45% staff reduction.

Discussion: Common Themes in the Case Studies

Each case saw privatisation follow severe economic challenges affecting service access, quality, and government finances. All three countries carefully built regulatory frameworks before privatisation, ensuring oversight and fairness, as recommended by leading scholars.

Establishing these regimes came at a cost but proved worthwhile. All three also held competitive sales, maximising state returns.

Each country’s contracts included expansion targets, protecting poor communities’ access to services. Yet, issues remained—for example, rural exclusion in Chile.

Regarding prices, Venezuela raised tariffs just before privatisation—likely to attract bidders—while Argentina and Chile saw price reductions owing to efficiency gains and negotiations.

Weighing Costs and Benefits

Overall, these examples show that privatisation can achieve intended goals, especially where regulations ensure equity and competition. However, costs exist—such as job losses and the expense of regulation setup.

Whether these costs are offset depends on the long-term success of the now-private firms and on governments’ ability to support displaced workers as they seek new jobs.

Recommendations and Conclusion

There is no simple answer as to whether privatisation harms the poorest. Much depends on:

• Conditions before privatisation.
• How the process is managed.
• The political and economic context afterwards.

Key Recommendations

• Transparency: Asset transfers should be open and occur through competitive bidding to secure best value for the state.
• Proactive Regulation: Regulatory bodies must be created before privatisation to ensure fair pricing, good service, and competition. These regulators can also monitor tax compliance, increasing anti-poverty funding.
• Contractual Safeguards: Sale contracts should specify service expansion and price controls to ensure increased access and affordability for the poorest. These measures protect vulnerable groups and push private providers towards greater efficiency.
• Aligning Profits and Social Goals: Ensuring that private profit motives also drive business expansion can increase tax revenues, helping governments fund social programmes for low income households.

Robust and independent regulation, rather than privatisation itself, is key to developing the private sector and realising equitable benefits for all.

References

• Bayliss, K. (2002). Privatisation and poverty: The distributional impact of utility privatisation. St. Louis: Federal Reserve Bank of St Louis. Retrieved from https://manchester.idm.oclc.org/login?url=https://search.proquest.com/docview/1697510149?accountid=12253
• Birdsall & Nellis (2003). Winners and Losers: Assessing the Distributional Impact of Privatisation. World Development, 31(10), pp.1617–1633.
• Cook, P. (1999). Privatisation and Utility Regulation in Developing Countries: the Lessons So Far. Annals of Public and Cooperative Economics, 70(4), pp.549–587.
• Delfino, J. A., & Casarin, A. A. (2001). The reform of the utilities sector in Argentina. UN University WIDER Discussion Paper No. 2001/74, June.
• Megginson, W. L., & Netter, J. M. (2001). From state to market: a survey of empirical studies on Privatisation. Journal of Economic Literature, 39(2), 321– 389
• Neewbery, D. (1994). Regulatory Policies and Reforms in the Electricity
• Supply Industry’. DAE Working Paper No. 9421, Cambridge.
• Department of Applied Economics. University of Cambridge.
• World Bank, (1995) Bureaucrats in Business: The Economics and Politics of Government Ownership, Washington DC, World Bank and Oxford University Press.
• World Bank (2000) Can Africa Claim the 21st Century World Bank, Washington D.C.