Privatization and the Globalization of Energy Markets
Chapter 1. Privatization: Motives and Methods
The Evolution of Privatization
Privatization as a Global Phenomenon
The Legal and Political Environment of Privatization
Build, Operate and Transfer Investments
The Evolution of Privatization
Energy privatization has been part and parcel of a recent world trend which has placed greater reliance on market forces and less dependence on government in the allocation of resources. Since the means by which different countries have privatized state-owned industries have varied considerably, we treat privatization in this report as any movement toward a market-driven economy--or any movement that diminishes public ownership and control and increases private ownership and control.
In part, privatization's roots stem from the recent decline of socialism as well as from the growing conviction that free enterprise advances the wealth of nations better than nationalized industries and planned economies. Both mixed-market and socialist (or formerly socialist) economies have engaged in various privatization efforts in recent years.
Privatization represents a reversal of the process of nationalization begun early in this century. In most Communist nations, a wave of nationalizations ensued shortly after Communist governments assumed power in the aftermaths of World War I (WWI) and World War II (WWII). In Western Europe, the nationalization process stretched over several decades but essentially took hold in the 1930's. At the time, European governments of divergent political viewpoints were largely in agreement over the benefits of a strong state role in their domestic economies. "Nationalization represented a cherished post-war European ideal to create large vigorous state-owned businesses that provided pools of public jobs and allowed European politicians to wield influence over their economies. A wide consensus of European politics after held that a strong, government-owned industrial sector was necessary for prosperity and middle-class stability " {see Endnote 1}. In the 1930's Spain, the Franco government nationalized the state petroleum resources, which later emerged as Repsol--Spain's state oil company. The Mussolini government in Italy did the same and formed what was to become ENI, Italy's state petroleum company. Energy resources were nationalized at about the same time elsewhere in Europe--although in other nations often by more freely-elected governments.
In other regions, nationalization often involved the expropriation of foreign-owned domestic petroleum properties. Russia was the first to nationalize its petroleum industry following the Bolshevik Revolution in 1918. In 1938, Mexico nationalized what was at the time an industry largely held by U.S., UK, and Dutch interests. Later waves of nationalizations (and expro- priations) followed in the post-war era in Latin America and the Middle East.
However, in the West, by the late 1970's, nationalized industries began to lose favor. Disenchantment with state ownership grew as government enterprises began to be perceived as bloated and inefficient. This view caught on with liberal and conservative parties throughout the world. Recently, the British labor party leader called for the abolishment of the labor party's constitution clause calling for the nationalization of industry--long one of the bedrocks of the British labor movement's constitution {see Endnote 2}. Other liberal parties have also embraced privatization. As a result of this historic change in attitude toward state-ownership, such companies as Repsol and ENI--along with a host of other formerly state-owned companies--are now being privatized.
In the East, the collapse of Communism precipitated later efforts to adopt market economies and privately-held industry. Even among still avowedly socialist regimes, such as China, a move to free market-based reforms and privatization has been evident for several years.
Among the developing countries, privatization has also been widespread. With the exception of Cuba, virtually all of Latin America has adopted some form of privatization. Chile--Latin America's pioneer at privatization--and, later, Argentina, Peru, and Colombia have undertaken the most ambitious privatization efforts. Among developing Asian nations, electric power privatization has been most prominent in countries such as Pakistan, the Phillippines, Malaysia, and Indonesia. The two most populous nations of Asia, China and India, have also embarked on various forms of energy privatization.
Privatization as a Global Phenomenon
Privatization has also been driven by the increasing globalization of the world economy. Several decades of rapid growth in international trade and investment have made competitiveness in international trade an essential factor in a nation's ability to create jobs, raise real wages, and generate wealth.
For many nations, privatization has become the only effective method of raising investment capital on favorable terms. High levels of past public sector borrowing have saddled many nations with large levels of debt. As a consequence, these nations have had little recourse but to sell state assets to reduce debt, generate revenue, and raise investment capital {see Endnote 3}.
Countries as different as the United Kingdom and Chile have led the way in privatization. Countries as different as Peru and Poland have followed. Between 1988 and 1993, roughly 2,700 state-owned enterprises in over 95 countries were transferred to private individuals, raising over $270 billion {see Endnote 4}. In Western Europe, the United Kingdom was at the forefront of privatization. Britain has raised $95 billion through the privatization of formerly state-owned enterprises {see Endnote 5}.
Various businesses have been privatized besides oil. Indeed, the largest privatization to date has been the sale of Japanese Telecom for $73 billion {see Endnote 6}. In the United Kingdom, public housing has been privatized and, in the United States, many municipal services, such as waste disposal, have been privatized.
Although privatization efforts differ substantially from country to country, there is a strong comon economic rationale underlying the various decisions to privatize state energy resources. In general, nations have privatized state-owned energy industries to achieve one or more of several objectives. These objectives include: 1) raising revenue for the state; 2) raising investment capital for the industry or company being privatized; 3) reducing government's role in the economy; 4) promoting wider share ownership; 5) increasing efficiency; 6) introducing greater competition; and 7) exposing firms to market discipline {see Endnote 7}.
Privatization is closely connected with the development of the international energy company--a company whose focus is becoming both more global and more multi-purpose. Until recently, outside of the world's few major integrated oil companies, only a handful of energy companies were considered multinational. Currently, in addition to the scores of petroleum companies that can now be classified as multinational, the scope of many coal companies, petroleum pipeline companies, electric utilities, and power generation equipment and construction companies, has become increasingly global. Through consolidations, mergers, acquisitions, and strategic alliances, the world's energy companies have also become more integrated. Oil and gas companies have become electricity companies; domestic regional electric utilities have become multinational electricity companies; electricity distribution companies have become generation companies; and generation companies have become distribution and transmission companies.
The Legal and Political Environment of Privatization
In many regions, progress at privatizing state petroleum companies has been uneven. Some countries' privatization efforts have faltered, in part due to lingering nationalistic views towards energy resources, particularly oil. On more than one occasion, progress at privatization has suffered severe setbacks. For example, billions of dollars of planned investment activity in Russia has for a long time been put on hold awaiting passage of a property rights law. A growing possibility that a Communist led government might regain power has been another factor causing foreign investors to be apprehensive about their investment commitments in Russia.
Further, the specter of re-nationalization has not been limited to the new democracies of Eastern Europe. In August of 1995, for instance, the newly-elected state government of Maharashtra, India, temporarily pulled out of a deal negotiated by the central government with Enron to build and operate a $3-billion electricity generating plant after Enron and its partners had already invested several hundred million dollars {see Endnote 8}. The newly-elected government alleged that the previous government had secretly negotiated the contract with Enron under terms that favored Enron and disadvantaged consumers {see Endnote 9}. Subsequently, in December of 1995, Maharashtra and Enron successfully reached a renegotiated agreement allowing the project to proceed.
Privatization almost always involves some changes in a nation's legal system. In several regions, legal reform has been an important key to the successful privatization of state-owned industries, especially with regard to the protection of property rights and the reliable enforcement of contracts. The equal treatment of foreign investors and domestic investors by the judicial system has also been important.
Dimensions of Privatization
Privatization efforts are occurring in several different regions, nations, and industries. Although some clear patterns have emerged, there are many different forms and variations of privatization. One example of an aggressive attempt at privatization is when a government completely divests itself of all state-owned enterprises to the public and fully removes itself from the control and management of these enterprises. There are also several less substantial forms of privatizing. At the other extreme, a government may implement a deregulatory policy which allows an industry only a marginal amount of greater autonomy or may just contract out a service that was formerly performed by government workers, such as trash collection. Privatization can also be achieved without doing much of anything. If, for example, the private sector is growing while the public sector is shrinking, privatization is being achieved through attrition.
Recent efforts have also varied considerably in terms of the speed at which companies have been privatized. In some cases, recent privatizations have been sweeping--involving the transformation of state-owned petroleum monopolies into completely privatized companies, almost overnight. However, more typical is the case of gradual privatization. Even in the most far-reaching privatization efforts--such as in the United Kingdom--several years have gone by between the time government committed itself to privatizing industries and the full transfer of ownership to the public.
The role of the foreign investor has been an important factor in the privatization process. In some political jurisdictions, few, if any, restrictions have been placed on foreign investors. In the Australian state of Victoria, for instance, when five of the state's electric distribution companies were auctioned off, all were purchased, at least in part, by U.S. companies. Countries such as the United Kingdom and Argentina have also been at the forefront in allowing relatively nondiscriminatory treatment of foreign investors. In other cases, restrictions on foreign investment have been inhibiting. Several of the former Communist regimes, for example, along with China, have undertaken relatively moderate and often vacillating steps towards opening their energy sectors to foreign investment. In general, these countries have relied on joint ventures with state-controlled enterprises as an approved vehicle for foreign investment in their energy industries.
Governments have often undertaken a vast restructuring of energy industries prior to the transfer of ownership to the public. In Russia, for example, privatization has involved the creation of eleven vertically integrated petroleum companies, along with a large natural gas-producing company and a large transmission company. In other countries, a restructuring has ensued largely after the transfer of ownership from state to private hands. In the United Kingdom, a merger and acquisition frenzy ensued following the recent privatization of electricity generation, transmission and distribution industries, as well as in the natural gas transmission and distribution industries.
It should be noted that the privatization of an industry does not mean that governments relinquish their authority to regulate these industries. In many cases, the politically sensitive issue of what allowances could be made to electric utilities being privatized in their freedom to adjust residential electricity rates has placed constraints on the privatization process.
Methods of Privatization
National governments have pursued various methods of privatization--the motivations for which are as various as the methods themselves. The following are a number of the more common means of achieving greater private control over energy resources.
Direct Sale of Entire Company to Public
In some instances, countries have chosen to transfer ownership of industries or companies swiftly and completely. Argentina, the United Kingdom, Chile, and New Zealand have generally undertaken some of the most ambitious of privatization efforts by auctioning off companies directly to the public--thereby letting the market determine the value of these companies through the bidding process. In some cases, (for example, see the discussion on the privatization of British Energy) the auctioning off of a company has revealed an enormous divergence between newly-discovered market value and the previous book value of the company as recognized by the government.
Partial Sale of Company to Public
Most privatizations have been gradual. For example, in the case of British Petroleum, partial government ownership dates back to 1914. In 1977, the government reduced its ownership share from 66 percent to 51 percent, to 46 percent in 1979, to 31 percent in 1983, to under 2 percent in 1987, and to zero in 1995. Also, governments have often sold shares of a state-owned firm while still retaining a portion of the company (a "golden share"), thereby maintaining a limited degree of control over the company. This practice has been widespread, both in OECD and non-OECD countries {see Endnote 10}.
Sale of a State-Owned Company to Another Company or Consortiums
Often governments have chosen to sell state-owned utilities directly to companies--either foreign or domestic.
For example, when Bolivia privatized the state electricity monopoly, Ende, it was broken into three electricity generation companies and directly sold off to foreign primarily U.S. utility companies.
Deregulation
Another form of privatization involves deregulation. Deregulation has been the most prevalent form of energy privatization in the United States, most recently in natural gas transportation and electric power generation and transportation. Electric power generation, transmission, and distribution has long been held up as a model for the "natural monopoly." However, as the notion of a what constitutes a natural monopoly has evolved, so has the justification for maintaining government-controlled utilities.
Removal of Subsidies
The removal of a subsidy can also be viewed as a form of privatization. The removal of subsidies for European coal operations, for example, precipitated the constriction of Europe's coal mining industry and encouraged a large shift in coal investment from European mines to mines in the United States, Australia, and Latin America.
Voucher Schemes
Another aspect of privatization concerns how public ownership is achieved. In many formerly Communist countries, voucher schemes have been adopted whereby ownership of an industry is simply transferred to the general public with no cash exchanged. A lack of developed equity markets may have encouraged voucher schemes. After the initial distribution of vouchers, individuals have been allowed to buy or sell these vouchers, thereby encouraging the creation of stock exchanges. In some instances, the transfer of ownership has been implemented with labor and management being allotted favored shares.
Investment Vehicles
Privatization has opened enormous opportunities for foreign investors. In overseas energy projects, companies which in the past had generally avoided equity commitments have now begun to take financial stakes in projects. Some of the world's major construction companies and electrical generation equipment companies have taken equity stakes (in lieu of payment for services) in power generation projects brought on by privatization, albeit these stakes, have generally amounted to a small share of the total capital commitment. Some commonly used means of taking direct stakes in newly-privatized foreign energy projects follow.
Independent Power Producers
Independent power producers are playing an important and growing role in providing for the world's future power generation needs. Independent power producers are generally producers of electricity that are separate from franchised electric utilities. In several cases, U.S. utilities have formed independent power-producing subsidiaries as a vehicle of entry into non-utility electricity generation investments, both in the United States and overseas. Other industries, such as oil companies and natural gas transmission companies, have also set up independent power-producing subsidiaries. Among U.S. companies, independent power producers have been among the most active in seeking overseas energy project investments.
Build, Operate and Transfer Investments
One innovative financing method growing in popularity involves the building of a power plant by a foreign investor, operating it for a prescribed period of time, and then transferring it to the host company. This has been a popular means of encouraging foreign investment in power projects in underdeveloped and developing nations.
Joint Ventures
In several former Communist countries, along with a handful of Latin American countries, most foreign investment commitments have been restricted to a joint venture with a domestic company. In some cases, such as in Russia, the government has also allowed foreign companies to purchase a limited stake in domestic petroleum companies.
This report is online: http://www.fedstats.gov
Globalization and Workers' Rights | |
HOME | International Labour Office |
Posts
No comments:
Post a Comment