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HOW TO PRIVATIZE

So far we have seen what governments do when they so–call "privatize" and why this process does not work. Now we are going to look at the correct way of doing it, although it is our duty to make sure you aware that in the end even this process is futile.

Lots of pain for very little gain

The main purpose of privatizing should be to correct government distortions introduced in the free market. Privatization should not be done because the government is running out of money (this is their default state), nor should it be done because a given political theory so demands or because there is an underlying political principle that should be observed.

Privatization should be done because it returns markets to a free state, which is the best state to generate the highest standards of living for all.

However, and there is inevitably a however, any change to the current market structure will be painful; actually very painful. Government enterprises have been distorting markets for decades. People and private companies have evolved solutions to survive and thrive with those distortions. Once they are gone, neither these people nor these companies are likely to survive without major changes. Some won't make it even with those changes.

We won't lie to you, dear reader. Privatization done properly (and even in–properly) is not for the faint of heart. A lot of people will suffer, this is unavoidable. There will be a lot of pain for very little gain…in the beginning.

Privatization is like treating cancer with chemotherapy. It consists in injecting poison directly into market veins with the expectation that the poison will act predominantly on market distortions while having little effect on free market initiatives. The operating word here being expectation.

In reality, privatizations have the same effect as chemotherapy: they sicken the patient far more than the cancer itself… until the cancer is gone and then the patient recovers.

In economic terms, people and private enterprises conduct economic calculations and make economic and market plans based on market distortions. A company may set–up a manufacturing division in a place where electricity is cheap. A family may move into a green neighborhood because water is plenty. However, after privatization, things change dramatically. Electricity prices reach free market values due to loss of subsidies making manufacturing prohibitively expensive. Water prices jump to free market levels due to a drought and the entire neighborhood dries out.

Let's not be kidding ourselves. Any way you may look at, privatization is always painful. What needs to be reminded of during this period is not that privatization is to be blamed, but the government for creating and maintaining market distortions for so long. Politicians have the nasty habit of blaming the remedy for the discomfort caused by the disease!

How privatization should be conducted

We will proceed to analyze how to deal with the four elements that government enterprises exhibit. We will do so keeping in mind that the goal is to revert these enterprises back to their original free market state.

Monopoly

The following question needs to be answered. Would a free market have created a monopoly similar to the one the government developed? In other words, is a natural monopoly the free market answer to the problem? If the answer is yes, then the privatization should proceed with the enterprise as–is without break–ups. If the answer is not, then the monopoly should be broken–up. Although this is a theoretical question, we can find suitable answers in the past before governmental interventions. There is no reason to believe that past market conditions (i.e. near free–market conditions) would generate a vastly different answer tan current near free–market conditions. This keeps guesses at a minimum. For example, if we look at roads we know that originally roads belonged to private companies. We also know more or less how many of these companies existed per geographic area. We can extrapolate quite effectively from the past into the present.

Usually the answer is no natural monopoly. This means that in most cases the artificial government monopoly must be broken–up. But how do we proceed to do this? We again look at the past and mimic it. We make use of the best entrepreneurs we can find and let them figure it out but with one caveat: these new mini–monopolies won't be sold to them or single owners. These entrepreneurs will have little to no incentive to cheat since they won't be able to profit personally.

Infrastructure

The same concepts apply to infrastructure issues. We would look into the past for private solutions. We would also look into the present for standardization initiatives. For example, let's say that we want to privatize a large water company. How do we determine which portion of the water infrastructure should each mini–monopoly hold? The basic premise is by territory. In any given territory each mini–monopoly will also own the water pipes underneath. But then the question shifts as to how will all those mini–monopolies share the same piping system? The answer lies in the way cellular phones contract with each other to provide roaming features to clients from other companies. One company lets the other use its cellular network… for a price and a reciprocal privilege. Again. We place the best entrepreneurs in a room and let them figure it out.

Irrational rules

This one is simple. A privatization contract stipulates that once a mini–monopoly is passed on to private hands, all laws, rules and regulations controlling the previous government monopoly are extinguished. Every new company is free to create any rational rule it deems most appropriate.

Operating at a loss

Theoretically speaking, privatization should proceed by shifting ownership of these new mini–monopolies as–they–are. If they are not profitable, let the free market figure it out. Realistically however, we need to be sensitive to people's needs. Much that we would like to, there is certain amount of punishment that people cannot endure. For example, it would be unconscionable to simply break–up a water company and let one or several mini–monopolies fail and left thousands of people without running water.

One thing is to allow for the free market to clean–up the mess and quite another is to foster misery and chaos. If a given government monopoly is critical for the population and it is operating at a severe loss or with severe debts, its financial status must be sanitized to a large degree before privatization. Private mini–monopolies must be given a fair chance in the free market. Since the government created the problem in the first place, it is only suitable that the government provides help. Now, in general terms, we opposed any type of interventions and subsidies, but let's face it; any privatization will be a very messy affair. A minimum dose of pragmatism may be called upon, strictly as a one–time event and only where necessary.

Introducing the new owners

One question that we did not answer so far is to whom should the government shift the ownership of these new mini–monopolies? The answer: you, us and any other citizen with a meaningful claim to it.

It is quite simple, really. If a mini–monopoly encompasses a neighborhood, then all the neighbors receive shares in the proportion they used the services of the government monopoly over a period of time that would make sense.

We become the new owners of former government property. This property has now been privatized. It has been returned to its rightful owners. We all paid for it and it is only fair that we get it. This process is not farfetched. It has been tried in many countries (although at a smaller scale) and it works remarkably well. It goes by many names, but the classic one is co–operative (or co–op for short). There is nothing new under the sun. It is not the size of the privatization that matters, but to whom and under which conditions it is privatized to.

Consequences of free–market style privatization for owners

Let's analyze the consequences of free–market style privatization decisions.

Monopolies: as their break–up generates free market–like mini–monopolies, their chances of survival are maximized. Furthermore, as their owners are their users, they will be exceedingly attentive stewards of profits, losses, risks and environmental conditions.

Infrastructure: the same is true for infrastructure concerns. Every mini–monopoly receives a share of the infrastructure that makes sense according to free–markets. Furthermore, they receive pre–arranged sharing deals with other companies for their consideration. This again maximizes their free market survival and minimizes customer's disruptions.

Irrational rules: as no rules are imposed, every mini–monopoly is free to set–up any rules it deems appropriate. This means that the level of service and free market survival now fully depends of its owners, which are also its customers. The chances that these people would enact irrational rules when confronted with sobering accounting numbers is nil.

Operating at a loss: as the owners are the customers, they will have an exceedingly clear understanding that operating at a loss is simply not an option. For example, no property owner would accept to run out of drinking water because the water company went broke. The owners will make absolutely sure that said mini–monopolies operate in the black, whatever the cost.

In summary, by following free market–inspired privatization rules, we obtain companies that are well prepared to survive in a free market. These companies are based on sound market infrastructure principles; they follow rational rules and operate at a profit. This all means that these companies are self–sustainable and hence able to serve their customers for a very long time indeed.

Consequences of free–market style privatization for customers

There is very little difference between what customers would see from what owners would see because they are one and the same. Their interests will be mostly aligned, although they will not homogeneous. They can never be since every one of us is different from any other one. As such, all their financial and economic decisions will be different. For example, some owners would prefer better services for higher prices and some would prefer more basic services for lower prices. It is then up to the free market (i.e. shareholders) to decide.

Note: please see the Glossary if you are unfamiliar with certain words.

Continue to Privatization Follies Part 4

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