Privatization for Whom?

Mae A. Valdez

National College of Public Administration and Governance

University of the Philippines

2015
 I. Introduction

Public and private thought have become pervasive dualities – or, perhaps better said, polarities –
associated with the state in one direction, the individual in the other (Starr, 1988). Privatization
in its most basic sense is a transfer of ownership from the state to a group of individuals engaged
in business which has implicit and explicit socio-economic implications. The idea emerged from
the United Kingdom during the term of Margaret Thatcher which was founded on the
neoliberalist, “free-market” ideology as superior to government bureaucracy.

In the Philippines, privatization was implemented for political instead of economic reasons. The
administration of former president Corazon “Cory” Aquino decided to purge the bureaucracy
from the alleged corruption and cronyism of the previous Marcos regime by selling state-owned
enterprises (SOEs). Another political reason for adopting privatization in the country was the
pressure from international financing institutions that requires Structural Adjustment Programs
(SAPs) as conditions for loans, as in the case of the energy sector under the Energy Power
Industry Reform Act (EPIRA).

Today, privatization wears many faces. One of the modalities being widely implemented by the
current administration of Benigno Aquino III, Cory’s son, is the public-private partnership
(PPP). Though deemed to be a better version of the traditional, asset-divesture type, PPP raises
many questions among the public it aims to serve. This paper attempts to explain what
privatization is and how it fits into the Philippine public administrative system. It also aims to
identify best practices and the type of privatization that would suit the current system.

II. The Market and the State

Privatization is a policy movement and a process that show every sign of reconstituting major
institutional domains of contemporary society (Starr, 1988). In recent decades, many citizens
were becoming disillusioned about the interventionist role that governments play because it
failed to address the increasing wealth gap between the rich and poor. Citing the Indian academic
Deepak Lal, all states, especially those in the third-world nations, are inefficient and self-seeking
bureaucracies, creating more problems than they solve, and serving their own interest rather than
those they claim to assist. The expansion of government budgets by bureaucrats is thought to be
reinforced by the self-aggrandizement of politicians, and, especially by alliances between and
powerful elites (Mackintosh, 1992) which cause citizens to lose trust in their government. For
such reasons, academics proposed concepts that redefined the traditional public administration
from “inefficient” to one that would suit the demands of the times better as exemplified by the
New Public Management (NPM) and Reinventing Government movements which advanced
policies on privatization in varying degrees. Reinventing Government reasons that the state
should “steer” not ”row”, which means that its job is supposed to be more on policy-making and
regulating the economy rather than delivering public services.

Neoliberalist policies are based on economic theories such as the Theory of Public Choice stating
that people are primarily motivated by self-interest. This logic asserts that government
enterprises will be better managed if ownership will be transferred to the private sector because
tenured public servants are inefficient and self-serving. SOEs are also deemed to take monopoly
over public services, making it prone to unjust practices and poor quality of service. Since
competition is integral for a thriving economy, the state should create opportunities for private
players to enter the market. Another argument for private ownership is explained by the Property
Rights Theory which essentially suggests that people are motivated to create wealth if the state
would protect them from unlawful actions of others towards their property. The more individuals
stand to gain from tending their property, the better will it be tended… private ownership
concentrates rights and rewards; public ownership dilutes them (Starr, 1988). The main reason
for this is that people do not realize the value of resources that they acquire for free. The Tragedy
of the Commons captures the idea that public or common resources are easily degraded and
depleted because it is owned by everyone. Government regulation alone may not be a good
solution to protect and conserve the environment because it has many inadequacies and
loopholes which may lead to its utter destruction – as exhibited by the Climate Change
phenomenon.

“Free market” ideology may increase consumption and improve the economy in general, but it
may also result to the widening of the Wealth Gap because it drives people who have money to
purchase even the unnecessary at the expense of those who could not.

“Consumer wants can have bizarre, frivolous or even immoral

origins… as a society become increasingly affluent, wants are
increasingly created by the process by which they are
satisfied... increases in consumption, the counterpart of
increases in production, act by suggestion or emulation to
create wants. Expectation rises with attainment. Or producers
may proceed actively to create wants through advertising and
salesmanship.” (J.K. Galbraith)

If all people are self-serving individuals without concern for the common welfare, the more that
the state should act as a regulator, setting limits between the acceptable and the not acceptable to
promote a just and equitable society. The “steering” function of the government does not
necessarily have to replace its “rowing” function because consumption activities also depend on
public spending.

“An increase in the consumption of automobiles requires a

facilitating supply of streets, highways, traffic control and
parking space. The protective services of the police and the
highway patrols must also be available, as must those of the
hospitals. By failing to exploit the opportunity to expand public
production, we are missing opportunities for enjoyment which
otherwise we might have. (J.K. Galbraith)

Thus, the state should strike a social balance among all sectors of society. Rather than merely
“steer”, it should seek to harmonize economic activities.

III. The Nature of Privatization

Privatization may be in the form of asset divesture, concessions, franchises, long-term lease and
outsourcing. Deregulation is also a form of privatization because it is a “withdrawal of
involvement” which has implications on the distribution of welfare.

In the Philippines, privatization came to mean “the divestment, disposition and liquidation of
non-relevant and non-performing assets and corporations” during the late Marcos and early
(Cory) Aquino periods (Mendoza, 2007). The Asset Privatization Trust was created to manage
all the privatization programs of the government in Cory Aquino’s term. During the Ramos
administration, however, EO 289 provided other modes of privatization such as joint venture,
Built-Operate-Transfer (BOT) schemes, management contracts, lease-purchase and
securitization. The BOT concept further evolved to what is now known as public-private-
partnerships (PPP).

The PPP concept was already around in the 1990s upon the passage of Republic Act No. 6957 or
the BOT Law which has two project schemes: the build-operate-and-transfer (BOT) and build
and- transfer (BT). In 1993, Republic Act No. 7718 amended R.A 6957 and introduced new
types of private sector infrastructure or development projects: build-own-and-operate (BOO);
build-lease-and-transfer (BLT); build-transfer-and-operate (BTO); contract-add-and-operate
(CAO); develop-operate-and-transfer (DOT); rehabilitate-own-and-transfer (ROT; and
rehabilitate-own-and-operate (ROO). During this time, these projects were handled by an
attached agency of the Department of Trade and Industry (DTI). President Aquino issued two
Executive Orders on PPP: the EO No. 8 which created the PPP Center and EO No. 136 which
amended some sections of the BOT Law. EO 136 also created the PPP Governing Board
composed of secretaries of the different government agencies. The revised BOT law presented
the following PPP modalities: Build-Operate-and-Transfer (BOT); Build-and-Transfer (BT);
Build-Own-and-Operate (BOO) Build-Lease-and-Transfer (BLT); Build-Transfer-and-Operate
(BTO); Contract-Add-and-Operate (CAO); Develop-Operate-and-Transfer (DOT); Rehabilitate-
Operate-and-Transfer (ROT); and Rehabilitate-Own-and-Operate (ROO).

IV. Privatization as Structural Adjustment Policy

Structural Adjustment Programs (SAPs) are conditions imposed by financing institutions such as
the International Monetary Fund (IMF), World Bank (WB) and Asian Development Bank (ADB)
for giving loans to developing countries in Latin America, Africa and Southeast Asia.

In the 1950s, the United Nations believed that a steady state economic growth is attainable if
capital is continuously poured into the economy. Domar’s “steady growth” formula was used to
compute the required capital or foreign aid that developing countries needed in order to increase
their GNP. Foreign aid was also used by the US to ward off communism during Kennedy’s
term, proving the central role of politics in the bureaucracy, especially when international
finance is involved. The formula failed to deliver desired results and the World Bank’s
alternative solution was to prescribe neoliberalist policies – deregulation, market liberalization
and privatization – that would ultimately advance globalization.

SAPs are criticized because of its one-sidedness and its failure to achieve development goals in
the third world countries. These programs catalyzing globalization are prescriptive and it fails to
consider the social, political, cultural and environmental context of nation and its institutions. By
imposing policies encouraging nations to liberalize trade, SAPs are deemed to promote a culture
of dependency between the rich and poor nations which leaves the latter on the losing end.

“In March 2003, the IMF itself admitted in a paper

that globalization may actually increase the risk of financial crisis
in the developing world. “Globalization has heightened these risks
since cross-country financial linkages amplify the effects of
various shocks and transmit them more quickly across national
borders” the IMF notes and adds that, “The evidence presented in
this paper suggests that financial integration should be approached
cautiously, with good institutions and macroeconomic frameworks
viewed as important.”
(A. Shah, 2013)

V. Privatization Case Studies across the Globe

The sale of British Telecom shares in the1980s pioneered the trend of privatization across the
globe. In a Harvard Business Review article, John Moore, who served as Thatcher’s Social
Security Secretary, boasted that by 1979, the borrowings and losses of state-owned industries in
the UK were running at about £3 billion a year. But from 1989 to 1990, companies privatized by
the Thatcher government fattened the government purse by some £2 billion. He also noted that
the conflict between the commercial and political objectives in the financial dealings of
nationalized industries restricts access to capital. However, despite the wonders it did to the
economy by “taking capitalism to the people” some privatizations were deemed to be
undervalued. In 2013, Royal Mail was sold at £ 3.3 billion, but the real value was estimated to be
£ 10 billion.

Privatization was not only carried out by nations that have commercial-industrial economies, but
also by those with a communist/socialist orientation. In the 1980s China started to open its
economy, followed by Russia in the 1990s. China’s embracing of a “confined privatization”
where privatized firms were still heavily influenced by the ruling Party, happened gradually;
while Russia’s transition from a centrally planned economy to an open economy occurred
abruptly and harshly that it was described as a “shock treatment”. China’s “state capitalism”
implemented a “Grasp the Big, Let Go of the Small” strategy that allowed the sale of small SOEs
but retained that large ones. Productivity of former SOEs were reported to have increased
because of this. Russia’s voucher privatization failed to deliver desired economic results as the
public who were given vouchers signifying ownership of SOEs were either too poor or had a
poor understanding of the nature of the program that led them to sell it. Some individuals took
advantage of this transition through “economic arbitrage” activities that made instant billionaires
who did not invest their earnings back to the Russian economy. Oligarchs also emerged in Russia
as few individuals took control over its vast industrial resources.

VI. Privatization in the Philippines

The Philippines have been widely implementing privatization for more than two decades. One of
the major privatization policies, the Energy Power Industry Reform Act (EPIRA), was
implemented under the administration of former president Gloria Macapagal Arroyo. EPIRA
aimed to make the energy sector more efficient by dismantling monopolies but it only did so in
the aspect of power generation.

“It (EPIRA) broke up the industry into four distinct

subsectors: transmission and distribution, both of which
have the character of public utilities and are natural
monopolies; and generation and supply, which are to be
open to competition, being “only affected with public
interest”. The first two are subject to regulation, while
the latter two have been deregulated.” (Mendoza, 2003)
EPIRA allowed the sale of the National Power Corporation; however, power distribution was
still in the hands of monopolistic firms such as MERALCO which continue to insinuate
electricity hikes. Furthermore, power distribution firms are allowed to venture into power
generation. In fact, a huge percentage of the electricity being generated comes from their “sister
companies”, and mainly owned by those with the surnames Lopez and Aboitiz.

Recently, the public health sector is often being scrutinized because of aggressive privatization
through PPP projects such as the case of Philippine Orthopedic Center (POC). The winning
bidder, Megawide Corp., will build and operate a “modernized” POC, then, transfer it back to
DOH at the end of the concession period. POC’s case is a type of Design-Operate-and-Transfer
(DOT) partnership. Once finished, it will become “the most modern orthopedic hospital in
Southeast Asia”, according to former Health Secretary Ona. The Manila Bulletin reports that
objections were raised on the provision that under the winning bid, the “modernized” POC is
allowed to allocate only 70 beds for indigent (non-paying) patients and 420 for sponsored
patients (with Philhealth [national health insurance program]) – compared to the current 562
beds or 85 percent capacity for indigent patients. The management will also have an option not
to accommodate non-paying patients if the 70 beds are already occupied.

"Modernization and efficiency have been touted as benefits from privatization, but the
proponents of such a program fail to mention the severe impacts on poor patients, which public
hospitals mostly cater to. Presently, health care privatization schemes, such as subcontracting of
hospital laboratory services, are already being implemented in the current administration. The
entry of these private businesses has made health care even more inaccessible and unaffordable
to the majority. What more when a whole hospital will be privatized, " said director Council for
Health and Development’s Dr. Eleanor Jara in an interview. Council for Health and
Development (CHD) is a non-profit organization that advocates against hospital privatizations.
In a more recent news, Megawide decided to terminate its contract because of a long delay in the
implementation of the project. POC’s management said the reason for the delay are hurdles in
land use, opposition from the employees and other internal issues.

VII. Conclusions

It is widely believed that privatization improves the quality of goods and services that are
previously provided by the state. Some cases also prove that the productivity of former state-
owned enterprises increased when privatized, as exemplified by such firms in China. States also
earn revenue through privatization which may be used to pay off its debts, like what happened in
the Philippines during the post-Marcos regime. Privatization has its own advantages but it cannot
be generalized for all because it differs on a case to case basis.

The labor sector takes the first hit in privatization as private firms are more inclined to outsource
employees for “efficiency purposes”. The profit-orientedness of the private sector also tends to
be detrimental for the poor and marginalized members of society who rely heavily on
government welfare provisions. Taking the example of the privatization of public hospitals, there
is no clear mechanism that those in need will be accommodated. Privatization activities also
make a good venue for corruption as such sale to the private sector may be undervalued, with
opportunities for connivance among rent-seeking, crooked individuals belonging both in the
public and the private sectors.

There will be instances when privatization may prove to be the best way, but the process should
be transparent and democratic. The Philippines’ experience with privatization has its pros and
cons. The tangle created by EPIRA may be pointed to several factors as cited by Cariño. One is
the that EPIRA, being a condition for loans from international financing institutions, was a
model from developed countries that was transferred to the country without considerations on
peculiarities of the Philippine context. Other reasons are the lack of political will from leaders
and the familial connections of industry and government leaders.

Government should be careful in making decisions for the "long-run" because some perceived
benefits may prove to be the opposite. Policy-makers should learn from past mistakes and should
put citizen welfare first before economic growth. Government exists to ensure distributive justice
for the citizenry and it should be responsive to the most basic needs of the most marginalized
sector, and at the same time, it should act like a conductor that harmonizes all sectors of society.
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