When approaching a major decision relating to new laws or measures, leaders should give careful consideration to existing examples of efforts by other countries to solve the same underlying issues and their subsequent success or failure.
In the case of privatization of public entities, a wealth of knowledge has already been accumulated. Even in China, where one may not automatically assume that the government would privatize its various enterprises and functions, cases abound, the largest being China Unicom Ltd.
Japanese leaders should examine cases on the assumption that, as examples from many countries demonstrate, there really is no publicly owned “special purpose entity,” or SPE, that cannot be successfully privatized.
In this installment of my series of articles on reform, I will elaborate further on privatization abroad and the ramifications for Japan’s approximately 160 SPEs.
The increased level of privatization that I propose would not be truly trial and error in our case. In fact, Japan is not new to the idea of privatization.
As I pointed out in the first article in this series (April 2), Japan has performed since 1980 privatizations of several major Japanese government entities, such as NTT, Japan Airlines and the Japan National Railways, which combined are worth nearly $143 billion in value when added to other Japanese cases.
By contrast, in the same time period the U.K. and France lead the way in total privatization cases with 47 and 34, respectively, though their total values were about $60 million and $49 million.
The industries covered by these transactions include, in order of decreasing size: telecommunications, utilities (electricity/gas/water), banks and countless others. The names of many of the enterprises involved you will no doubt recognize: British Telecommunications, France Telecom, Thames Water, and many more.
The reason for the disparity in the value of privatizations emanates from the tremendous size of Japanese government entities. We should learn lessons from other countries. Serco Group plc, a private company that assists with many of these transformations, has compiled such a list, culled from their experiences and those of others.
1. All government services can be delivered by the private sector.
2. Political will is very important in successful privatizations and outsourcings.
3. Competition for delivering services produces great savings (and improved customer service).
4. It is important to establish an independent body to manage the process.
5. Involving the private sector early in the process will help ensure a successful outcome.
6. Notice to the market means that anything can be privatized or outsourced (It gives the sector time to prepare.)
7. Staff transfer issues must be dealt with thoroughly, early and sympathetically.
In light of these lessons and considering the success of many privatized companies, the post-privatization failure factor becomes less daunting.
Consider a hypothetical situation in which an SPE such as the Japanese Post Office goes private. What concerns would arise? Perhaps with the post office run as a truly capitalist private entity, people wishing to receive mail on the more distant islands of Japan would lose service due to lack of cost-effectiveness.
Alternatively, the charge for sending mail to or from them would increase dramatically.
Holland effectively dealt with these issues in the privatization of their national post office, now the KPN.
Along the lines of Lesson 2, they exercised their political will in establishing an Enabling Act, which set the minimum standards to be upheld. One such requirement is that a 500-gram package sent within Holland must arrive within one day of shipment, regardless of destination. In reality, high standards of service are antithetical to cost-effectiveness and reasonable pricing.
Nonetheless, while maintaining such standards by increasing tax revenues is not the answer, competition may be.
To rephrase, as stated by Ted Gaebler in the Australian Financial Review, Oct. 30, 1996, “This is not between the private and public sectors, but between competition and monopoly, and between good flexible management and bureaucratic, rule-governed management.”
In a sense, we should not be concerned with form over function. Considering the hypothetical post office case, customers made to wait excessively at the largest post office company would instead walk down the street to an adept competitor (Lesson 3).
While it may be argued that the private sector is not primarily concerned with the public good, watchful government agencies should help rein in abuses. If watchful government agencies don’t prove sufficient, maybe a private agency could be used to monitor the situation.
Consider the fact that in the U.K., Serco handles the early warning system for nuclear attack. It defies the imagination to think of any service that could be more urgent than providing a 4-minute window for detecting a missile attack and taking countermeasures.
The U.K. shows the ultimate commitment to Lesson 1. One group who may oppose privatization of SPEs is the employees of the SPE itself. Their fears would likely be the loss or instability of employment, lack of compensation or other previously non-existent risks. Serco has encountered similar apprehension, recalling Lesson 7.
These concerns should be addressed thoroughly, early and sympathetically as the French have done. The French demonstrate an excellent model for not only assuaging fears of decreased pay but for motivating former government employees through the use of corporate stock plans.
A French law passed Aug. 6, 1986, ensures that 10 percent of the shares of privatized companies will be reserved for employees of those groups. In addition, they gain entitlement to defer payment and receive a discount, say 5 percent, that rises to 20 percent if the shares are held for 2 years.
As a result, unlike a bureaucratic approach where the reward for insightful or substandard work could be the same paycheck and a tenure-based increase, the employee reaps the bounty of their efforts in financial form. This is a development they no doubt welcome.
France also shows us how to achieve privatization smoothly. The French government, more precisely the Ministry of Finance, formed a privatization committee for this purpose, adhering to Lesson 4.
With a small committee of seven members, the process was greatly accelerated. If input were gathered by individual politicians who had interests in each transaction proposed, the result would likely be significant delays, an improper offering price and deal-making for the benefit of constituencies unrelated to the transaction itself.
Of course, such a committee should represent a triumvirate of interests: those of the government, the company (or SPE) itself, and necessary experts from the legal, accounting and banking sectors.
To allow competitors the chance to prepare, notice should be given to them (see Lesson 6). This committee could best decide on what is proper notice, based on its background in the industry.
While I realize that the privatization process is not as simple as it seems, it is necessary for our country. The greater goal to be served lies in our struggle to bring about economic recovery, the most urgent of matters. I think that the countries that have tried privatization will agree that economic recovery does not necessarily come from increasing spending on public works, but in reducing government controls, as more cost-effective services are created along with a number of truly viable, globally competitive companies.
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