By Gyasi Dapaa and Evans Koka
There has been an extensive, sometimes heated, debate on whether public companies should be privatized. The proponents of privatization argue that government is normally not an efficient executive and hence should be stripped off all duties which could otherwise be executed by private bodies. On the other hand, they argue that it would be beneficial if government does government things such as setting up and maintaining healthy institutions, defining property rights, and generally intervening only when needed. The critics of privatization are quick to point out that careless privatization could lead to another unappetizing market failure called market monopolies. So far the debate has been binary; the only choices being discussed are Privatize and Don't Privatize. This article attempts to join the debate by discussing the pros and cons of each choice and other better alternatives that mitigate the deficiencies of the current choices.
Why Government is wasteful
With little thought, one could see why government is very wasteful in her activities: The repercussions of any bad decision or activity of government is borne by everybody in the country. Economists call this phenomenon the public good problem. Many of us, if we try, could find one or more instances where we threw garbage on a public lawn even though we try hard not to litter our personal houses; In secondary schools, most students write on the walls of school buildings but rarely would these same people write on the walls of their bedrooms. In general, human beings are more willing to protect their personal interests but not well incentivized to protect the interest of a group. It's because of this that the president of a public company is less pressured (than the president of a private company) to achieve enviable goals and results like efficiency, solvency and viability. In the same vein, public employees feel less motivated to pursue high-growth practices (such as punctuality, honesty, hard work, etc) that are ingredients for success in any given company. With this disincentive to perform, public companies could only yield discouraging results as is experienced in most developing countries.
Another reason for the failure of most public firms is that many of the top executives are elected because of their political affiliation. Politically-motivated appointments are suboptimal because it doesn't guarantee that the most qualified person with the required set of skills and training would be appointed. This could explain a big portion of the inefficiencies that exist in most public companies. Another subtle way political appointments induce inefficiencies is by rendering the appointees short-sighted instead of long-sighted: Since these appointees know their appointments are as long as the next government, all their goals would be for the short-term. Hence, long-term goals like solvency and efficiency are of little meaning to them.
Why Privatization may not be the panacea
Like Publicly-run companies, privatization has its own problems especially within markets where the suppliers have so much power over price(such as those of the necessary goods like water and electricity). One common mistake of proponents of privatization is to use the success of private companies in western countries to extrapolate its potential success in Ghana. A useful fact to always remember is that Ghana is unique; Ghana differs from other western countries in many ways. First of all, the population of Ghana is relatively smaller, approximately 25 million. Such a small population size can only attract so many investors. This is because, after one or two companies have entered a particular market (especially one with high fixed cost of entry like water , electricity and airline), it becomes unprofitable for other potential investors to also enter and compete. Also Ghana, as a young African democracy, is yet to convince the rest of the world about the durability of her political stability and investor friendliness. As a result, hasty privatization could create monopolies that, like government, have little or no incentive to be efficient yet capable of charging whatever price they want to. The power and hence adverse effects of monopolies are even accentuated in markets for the indispensable commodities(such as water, and electricity) where customers are willing to pay whatever price the supplier asks for. In this regard, privatization without the assurance of competition, could yield worse results than publicly-run companies: An example are the currently rampant increases in tariffs even though the quality of water and electric services continue to be abysmal after the respective supply companies had been privatized.
The multi-billion dollar question is how could Ghana continue to enjoy these necessary consumer commodities at affordable prices. With the discussion above, it becomes clear that such a solution should be able to simultaneously resolve the inefficiencies of a public firm and the price-gouging behavior of the monopolist.
The Alternatives
As has been pointed out earlier, the inefficiency of the government is attributable to the public good problem. Hence, if the general public could learn how to hold the government accountable, it (the government) would be motivated to act like a private firm in a competitive market. Feeling accountable to the public provides a powerful check against corruption, negligence and indifference. In United states, most celebrities are conscious of their behavior because of fear of becoming unpopular with the public (Consider the backlash against perpetrators like Kobe Bryant and Tiger Woods). Unfortunately, in Ghana, politicians have been able to dissuade the electorates with election-time gifts to erase the electorates' memories of all the bad decisions they made during their term of office. Because of this, politicians in Ghana are less motivated to make valuable appointments that would enable the efficient running of most public companies. However, as the electorates become smarter (especially through education), politicians would feel more and more accountable and public inefficiencies would dwindle as a result. A strong impartial media could and should play a critical role in helping the public mass differentiate between bad and good policies or governance.
Public education seems like a long or medium term solution to government inefficiency; one needs at least nine years of academic education to be able to discern what a good public policy is. Hence, there is a need to look for other solutions that would ensure the solvency and smooth running of public companies in the interim. Unfortunately, most alternative solutions that have worked for other countries may not work in Ghana. One such solution is the public option. This is where a public company is set up, normally in a concentrated market(ie a market with few producers and hence little competition) to check against inefficiencies and price gouging behavior of firms with significant market powers. However, the public company, because of the aforementioned incentive problem, may not be able to compete with its private counterpart. Also, due to the relatively minute population size of Ghana coupled with the high entry costs associated with most publicly supplied commodities (such as electricity, water and airline), potential investors would be hesitant to share the market with any other competitor, especially if it's the government. Even in heavily populated countries, it's hard for a stock company with share holder expectations to compete with a public company whose main objective may be to recover its costs.
Another proposal that has received lots of traction and has deservedly been well- received by policy makers is what we(the authors) have called PBR - Privatize But Regulate. In this system, the price-gouging behavior of private monopolies is checked by an impartial regulatory board whose main responsibility is to protect the interests of consumers while ensuring the solvency of the company. A successful regulatory body therefore ensures that profit margins are high enough to sustain the company and low enough to protect consumer welfare. Unfortunately, most african regulators are not as knowledgeable as the representatives of the private companies. Hence, the private companies are able to push their agenda through even when there is a regulatory board. Many have asked whether the recent excessive tariff increases are justified. As the discussions may have shown, the decision to privatize is a hard one and should be carefully pondered over. There is nothing magical about privatization that renders it a universal solution to the failure of public companies in Ghana. One should therefore be cautious about extrapolating success of privatization in other countries to Ghana and African countries in general. Nevertheless, it should now be indubitable that the better solution is the one that controls the market power of suppliers (either by regulation or by promoting more competition) and discourages inefficiencies.
About The Authors
Gyasi K. Dapaa has a Master's degree in Economics, with specialization in Industrial Organization, Micro-economic Theory and Econometrics. Currently, he is working in one of the largest insurance companies in United States; he is involved in predictive modeling projects such as Rating Plan Developments , Customer Retention and Acquisition Modeling, etc. and also informs his organization about the economic optimality of strategic business decisions. Gyasi loves to think about the unique problems of Africa and hopes to reinvent insurance in Ghana and Africa. You could contact him at gkd5r@virginia.edu Evans Koka is a Civil Engineer with a BEng Honoured Degree, specialized in Rail infrastructures, with experiences in the construction and project management of road over rail bridges, building train stations and other enhancement works within the rail sector. He is an employer of Balfour Beatty, one the biggest civil engineering company in the world and certainly the biggest in the UK. Evans is a passionate Ghanaian who loves to think about Africa and the Diaspora.
