Will privatization work?

Egay Uy .

AS revealed by Cagayan de Oro Water District’s Engr. Bienvenido Batar, officials of the Metro Pacific Water Investments Corp. have signified their capability (or made an offer?) to run the distribution function of the water firm.  Metropac is not new to the business. It is running the management and operation of the west zone of Metro Manila’s Maynilad Water Services Inc..

But will privatization be beneficial to the end-users? Privatization involves selling state-owned assets to the private sector. This is what happened to the state-owned National Power Corp., the erstwhile sole generator of electricity until 2001 when the electric power industry was restructured through the Epira.

Accordilng to Tejvan Pettinger, a teacher of Economics to A-level students in a British college and a contributor of articles to the Economics Review, among other publications, there are potential benefits of privatization.

Privatization often results in improved efficiency. This is because private enterprise looks forward to making a profit hence the goal of cutting costs and becoming more efficient.

In the private sector, there is no or too little political interference. Those in government, according to Pettinger, make poor managers because they are motivated by political pressures rather than sound economic and business sense.  And this is manifested by the employment of what he calls “surplus workers” in government which results in increased inefficiency.

Those in government have a shorter-term view because they may think only in terms of the next election.  And any change in the leadership in government may also have adverse effects on the operation of governmentun companies.  Being so, they are likely more concerned about projects that give benefit before the election according to Pettinger.

Private firm managers also feel the pressure of shareholders hence they perform efficiently; otherwise the firm could be subject to a takeover by competitors.

Privatization often occurs alongside deregulation which allows more firms to enter the industry and increase the competitiveness of the market. Naturally, companies must improve their efficiency to gain a bigger market share.

However, privatization of natural monopolies such as water and electricity distribution may not necessarily result in increased competition.  Instead, it will expectedly increase efficiency in operations that redound to the benefit of the end users both as to costs (or rates, assuming the existence of strict regulation) and to service delivery efficiencies.

(Egay Uy is a lawyer and co-chair of the City Price Coordinating Council, chair of the Regulatory and Complaints Board, and chair of the Joint Inspection Team of Cagayan de Oro. He is a retired senior executive of Cepalco.)