Why do governments need to borrow money from the IDB when a public enterprise is sold off to private buyers? The IDB loans pay for the menu of things necessary to make a sale appealing both to those that previously profited from public ownership and to new for-profit private operators. These include:
New information systems—Management information systems are costly, but they are the innovation that makes privatization viable in the first place. The adaptation and installation of electronic information systems allows corporate owners to meter service provision, bill effectively and collect efficiently on services like water and electricity that were previously public and often subsidized, either formally or informally. It is fairly common practice, for instance, for residents of the impoverished urban squatter settlements that ring most major cities to tap into utility lines for pirated water and electricity. With electronic tracking and billing, this informal subsidy to the poor from state-owned utilities comes to an end.
Worker layoffs—In services, a major element of operating costs is the wage bill, and it must be lowered to create the profit margin that motivates a corporation to bid. Many permanent public sector workers are employed under collective bargaining agreements negotiated through their unions or, where public sector unions are illegal, associations. Firing these workers can therefore be costly, and typically, a private owner does not want to deal with a unionized workforce. IDB privatization loans often include components that finance severance pay for those whose contracts require it. Frequently, however, the implementation of these loan procedures involve labor rights violations, as governments and the Bank try to minimize or restrict severance pay by pressuring individual workers to accept unilateral one-time pay-outs, rather than negotiating a collective agreement with the union.
Repair and renovation—As pre-existing austerity agreements with the IMF and the multilateral banks imposed increasing budget cuts during the past 15 years, many public enterprises and utilities became dilapidated and obsolete for lack of investment. They therefore require extensive renovations to make them profitable and attractive to private sector buyers. Many times the government will assume the debt for the renovation of a public system, just before selling or concessioning the assets.
Regulation—When privatization begins in a sector, little or no regulatory framework exists because the provision of the service has always been predominantly public. Labor laws must also be “reformed” to facilitate the firing of workers, limit benefits and restrict contract parameters for workers who were previously unionized. Technical assistance in writing new regulatory schemes, decentralizing administration and calculating operating costs and price structures make up an important cost of privatization that is financed externally. In order to secure the necessary parliamentary support for the legislation establishing the regulatory regime for the new private industry—whether in energy, education, water services or health care, or more generally in labor market restructuring—key congressmen may have to be paid off. (The most infamous case occurred in Argentina in 2000 when a political scandal developed surrounding a labor-reform bill that had passed the Senate as part of President Fernando de la Rúa’s plan to restructure Argentina’s economy. Eleven senators were implicated in vote-buying activities, and the vice president resigned to protest the government’s failure to investigate bribery charges.)
Finally, there is simply the cost of doing business. Before an enterprise or service can be privatized, those political and economic interests that profited from the public status quo must be compensated or they will not cooperate. This may take the form of alternative economic “opportunities,” the establishment of a poorly monitored discretionary fund or outright bribes.
ABOUT THE AUTHOR
Beatrice Edwards is a research analyst based in Washington, D.C. who monitors the multilateral development banks for Public Services International. http://www.world-psi.org
