Privatization and development: Some Lessons from Experience François Bourguignon Sr. Vice President and Chief Economist The World Bank ABCDE, Bled, Slovenia May 17-18, 2007 1
Widespread dissatisfaction with privatization in Latin America N egative Views of Privatization in Latin America, 1998 and 2005 Peru N icaragua Mexico Chile 1998 2005 Brazil B o livia Argentina 0 20 40 60 80 100 % of respondents who disagree that privatization has been beneficial for the country Source: Latinobarómetro 2
Outline 1. Trends in Privatization in Developing Countries 2. The Simple Economics of Privatization 3. Empirical Evidence 4. Concluding Remarks 3
1. Trends in Privatization in Developing and Transition Countries 4
Privatization advanced rapidly in the 1990s Privatization Proceeds and Deals: Developing Countries, 1988-2005 70 600 Total Proceeds (US$ billion) 60 50 40 30 20 10 500 400 300 200 100 Total Number of Deals 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Total Proceeds: Developing countries Total Proceeds: Developing countries excluding Europe and Central Asia Total Number of Deals: Developing countries Total Number of Deals: Developing countries excluding Europe and Central Asia Source: World Bank Privatization Database and WDI 1998 1999 2000 2001 2002 2003 2004 2005 0 5
with Latin America leading the privatization wave and Europe and Central Asia taking over after 2000 Privatization Proceeds 1988-2005 (as % GDP) 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Mexico: 3.6% Nicaragua: 2.1% Venezuela: 4.4% Brazil: 4.1% El Salvador: 7.5% Guatemala: 6.3% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Latin America & Caribbean East Asia & Pacific Source: World Bank Privatization Database and WDI Europe & Central Asia 6
Cumulated Importance and Sectoral Composition of Privatization differ widely across regions Accumulated Proceeds by Sectors, 1988-2005 20.00 Total Proceeds as % of 2000 GDP 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 16 % 11% 5% 5% Mining/Other Manufacturing/Services Energy Financial Infrastructure 4% 4% 0.00 Europe & Central Asia Latin America & Caribbean Source: World Bank Privatization Database and WDI East Asia & Pacific Middle East & North Africa Sub-Saharan Africa South Asia 7
Extent of privatization must be measured against the size of the public sector Privatization Proceeds and the Role of State-Owned Enterprises (SOEs) Percentage 36 33 30 27 24 21 18 15 12 9 6 3 0 Argentina 1990 China 1997 Côte d'ivoire 1991 India 1993 Mexico 1995 Turkey 1997 Source: WDI 2000 Accumulated Proceeds 1988-2005 / GDP2000 SOEs Economic Activity (% of GDP) SOEs Investment (% of GDI) 8
2. The Simple Economics of Privatization 9
Efficiency and Equity Effects of Privatization: a simple stylized example Subsidized SOE Price 80 Quantity 85 Rationing 7 Employment 1062.5 Wage 10 Public Subsidy (incl. Fixed Costs 4825 1000) Consumer Cost 6800 Private Monopoly (Universal service, cap price, no subsidy) Price (set) 120 Quantity 88 Rationing 0 Employment 880 Wage 10 Public Subsidy 0 Consumer Cost 10560 (SOE quantity) 10200 Efficiency Gains (SOE as reference) Production 3 Employment -182.5 Distributional effects (in, SOE as reference) Taxpayers 4825 Consumers -3400 ("Access" +240) Employees -1825 Business owners 760 Total 360 10
3. Empirical Evidence 11
Conceptual and Methodological Issues Two criteria can be used to evaluate privatization: Efficiency Distributional Impact How to combine them? Empirical identification of the impact of privatization : Before and after Using a counterfactual (or a benchmark) 12
Efficiency Outcomes 1983-91 Mexican Privatization of Non-Financial Firms Efficiency Performance in Competitive and Non Competitive Industries (change in the median before and after privatization) 6 5 4 All Industry Competitive Industry Non Competitive Industry Percentage 3 2 1 0-1 Sales per Employee Employment Sales Prices Source: La Porta and López de Silanes (1999) 13
Efficiency Outcomes: Relationship between privatization and type of ownership in Transition Economies 15 The Impact of Ownership on Performance : Czech Republic, Hungary, and Poland 1990-93 (Fixed effects for firms, SOE as reference) 10 Percentag 5 0-5 Revenue Employment Productivity -10-15 Firms Privatized,Owned by Outsiders Firms Privatized, Owned by Insiders Note: The fixed effects coefficients are estimated controlling by year and country. The coefficients for privatization owned by outsiders are statistically significant at 1 percent for revenue and productivity. Source: Frydman, Gray, Hessel, and Rapaczynski (1999) 14
Efficiency Outcomes: Water Utilities in Africa 70 Percentage of State and Private Water Utlities in Africa ranked by Relative Efficiency using Data Envelopment Analysis, 2000 60 50 40 State Private 30 20 10 0 100 % Rel. Efficiency 90-99 % Rel. Efficiency 80-89 % Rel. Ef f iciency 70-79 % Rel. Efficiency < 70 % Rel. Efficiency Source: Kirkpatrick, Parker, and Zhang (2006) 15
Distributional Impact: 1997 Privatization of Water Distribution in La Paz and El Alto (Bolivia) 160.0 Evolution of Water Prices in Bolivia Real Price Index 1994=100 140.0 Jan 2000 120.0 100.0 80.0 60.0 40.0 20.0 1994 Survey La Paz and El Alto Privatization 1999 Survey Cochabamba Privatization 0.0 1992 1993 1994 1995 1996 1997 1998 1999 La Paz/El Alto Cochabamba Source: Barja, McKenzie, and Urquiola (2005) 16
Welfare Changes (by decile) due to the 1997 Privatization 25 Welfare Changes from Water Privatization (as % of per capita 1994 household expenditure) 20 15 10 5 0 Households with access (both periods) Households who gain access All Households 1994 Poorest Decile Decile 5 Richest Decile Source: Barja, McKenzie, and Urquiola (2005) 17
Distributional Impact: The Water War Cochabamba (Bolivia), 1999 Welfare Changes from Water Privatization : Cochabamba (as % of per capita 1999 household expenditure) 0.1-0.1-0.3-0.5-0.7 Richest Decile -0.9-1.1-1.3-1.5 1999 Poorest Decile Decile 5 Source: Barja, McKenzie, and Urquiola (2005) 18
Distributional Impact: Argentina Child Mortality Rates Source: Galiani, Gertler, and Schargrodsky (2005) 19
4. Concluding Remarks Paucity of full evaluations in developing countries Efficiency gain of privatization seems warranted: productivity and output gain with (not always) employment loss. Uncertainty on distributional effects; opacity and the negative perception of privatizations. Little doubt on overall gain for 'competitive' privatizations. More to be done on ex-ante/ex-post impact evaluation, regulation, and losers' compensation in other cases 20
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1. Motivation 22
Privatization advanced rapidly in the 1990s Privatization Proceeds and Deals: Developing Countries, 1988-2005 Total Proceeds (US$ billion) 70 60 50 40 30 20 10 1993 Average Deal US$52 mil. 1997 US$179 ml. 2002 US$112 mil. 2005 US$295 mil. 600 500 400 300 200 100 Total Number of Deals 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Total Proceeds: Developing countries Total Proceeds: Developing countries excluding Europe and Central Asia Total Number of Deals: Developing countries Total Number of Deals: Developing countries excluding Europe and Central Asia Source: World Bank Privatization Database and WDI 1998 1999 2000 2001 2002 2003 2004 2005 0 23
with Latin America leading the privatization wave and Europe and Central Asia taking over after 2000 Privatization Proceeds 1988-2005 (as % GDP) 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 BANMEX Deal: 1% of Mexico 1991 GDP Telesp Deal: 0.6% of Brazil 1998 GDP 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Latin America & Caribbean East Asia & Pacific Source: World Bank Privatization Database and WDI Europe & Central Asia 24
Efficiency and Equity Effects of Privatization: a simple stylized example Subsidized State-Owned Enterprise (SOE) Price (set) 80 Wage 10 Quantity 85 Q demand 92 E (employees) 1062.5 Subsidy (incl. Fixed Costs) 4825 Consumer Cost 6800 25
Summary Results: SOE vis-à-vis Private and Optimally Regulated Monopolies Private Monopoly (cap price, no subsidy) Efficiency Gains (SOE as reference) Optimally Regulated Monopoly Efficiency Gains (SOE as reference) q 3 E -182.5 q 5 E -162.5 Change of Income (in, SOE as reference) Distribution of Income (in, SOE as reference) Taxpayers 4825 Consumers -3400 Employees -1825 Business 760 Total 360 Taxpayers 3825 Consumers -1700 Employees -1625 Business 0 Total 500 26
1983-91 Mexican Privatization of Non-Financial Firms Defining the counterfactual Industry Adjusted and Non Adjusted Changes in Efficiency (change in the median before and after privatization) 1.4 1.2 1 Percentage 0.8 0.6 0.4 0.2 0 Sales per Employee Sales Prices Change in the Median Change in the Median (Industry Adjusted) Source: La Porta and López de Silanes (1999) 27
Efficiency and Equity Effects of Privatization: Optimal Regulation or Competitive Unbundling Subsidized SOE Price 80 Quantity 85 Rationing 7 Employment 1062.5 Wage 10 Public Subsidy (incl. Fixed Costs 4825 1000) Consumer Cost 6800 Optimally Regulated Monopoly (or competitive unbundling) Price (set) 100 Quantity 90 Rationing 0 Employment 900 Wage 10 Public Subsidy (Fixed cost) 1000 Consumer Cost 9000 (SOE quantity) 8500 Efficiency Gains (SOE as reference) Production 5 Employment -162.5 Distributional effects (in, SOE as reference) Taxpayers 3825 Consumers -1700 ("Access" +400) Employees -1625 Business owners 0 Total 500 28
Efficiency and Equity Effects of Privatization: a simple stylized example Subsidized SOE Price 80 Quantity 85 Rationing 7 Employment 1062.5 Wage 10 Public Subsidy (incl. Fixed Costs 4825 1000) Consumer Cost 6800 Private Monopoly (Universal service, cap price, no subsidy) Price 120 Quantity 88 Rationing 0 Employment 880 Wage 10 Public Subsidy 0 Consumer Cost 10560 (SOE quantity) 10200 Efficiency Gains (SOE as reference) Production 3 Employment -182.5 Distributional effects (in, SOE as reference) Taxpayers 4825 Consumers -3400 ("Access" +240) Employees -1825 Business owners 760 Total 360 29
The Importance of Privatization in Developing Countries Privatization Proceeds in Developing Countries, 1988-2005 70 60 50 US$ billio 40 30 20 10 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: World Bank Privatization Database 30
SOE vis-à-vis Optimally Regulated Monopoly (or "unbundling" with full competition) Subsidized SOE Price (set) 80 Wage 10 Quantity 85 Q demand 92 E (employees) 1062.5 Subsidy (incl. Fixed Costs) 4825 Consumer Cost 6800 Optimally Regulated Monopoly or competitive privatization Price 100 Wage 10 Quantity 90 Q demand 90 E (employees) 900 Subsidy (Fixed Costs) 1000 Consumer Cost 9000 SOE quantity 8500 Efficiency Gains (SOE as reference) Q 5 E -162.5 Change of Income (in, SOE as reference) Taxpayers 3825 Consumers -1700 Employees -1625 Business 0 Total 500 31