DEBT, PRIVATIZATION

1
DEBT, PRIVATIZATION Commercialization of
Essential Services

• These are intimately linked
• Debt creates the need and justification for
  privatization and other policies which lead to
  commercialization of essential services
• Debt is used as leverage for pushing
  privatization and related policies

2
DEBT, PRIVATIZATION Commercialization of
Essential Services

• Grants and loans are offered to finance
  privatization projects
• Privatization leads to onerous and illegitimate
  debts and liabilities

3
Debt - Creating the need for privatization
commercialization of Essential Services

• Public Debt servicing big burden on
  government revenues and spending for most South
  countries
• High percentage of government revenues goes to
  service debts (interest and principal)

4
Creating the need for privatization and
commercialization of essential services

• This leads to
• Restrictions on expenditures, leaving little
  money for basic services and investments in
  public utilities
• More borrowings not only by national
  governments but also by public agencies, state
  enterprises and government corporations including
  those involved in provision of services and
  utilities

5
Creating the need for privatization and
commercialization of essential services

• Consequently, service institutions and public
  utilities are
• Inadequate and poorly maintained
• Debt-ridden and burdened with debt service
• Operating with deficits

6
Creating the need for privatization
commercialization

• Response and solutions
• PRIVATIZATION
• More revenues for cash-strapped governments
• Cut losses and liquidate non performing assets
• Private sector has the capital is more
  efficient - will redound to greater benefits for
  the poor so privatization has become part of
  poverty reduction programs

7
Creating the need for privatization
commercialization

• 2 TYPES OF PRIVATIZATION SCHEMES
• ASSETS, RESOURCES and INFRATRUCTURES are sold to
  private corporations
• MANAGEMENT and CONCESSIONAIRE ARRANGEMENTS -
  long term contracts for running the service
  companies and enterprises

8
Creating the need for privatization and
commercialization of essential services

• REVENUE GENERATION and FULL COST RECOVERY as main
  policy framework leading to COMMERCIALIZATON
• Streamlining of services and abolishing "low
  priority" or "non essential" programs
• Lower Subsidies for remaining programs
• Freeze on wages of public servants in the service
  agencies

9
Creating the need for privatization and
commercialization of essential services

• Imposition of high user fees, counter-parting by
  beneficiaries, and other related policies
• ex. deposits required before medical attention
  is given, all medicines supplies are charged,
  high consultation fees etc

10
Debt as leverage to impose / promote privatization

• Part of conditionalities and prescriptions in
  exchange for
• new loans
• debt relief / debt cancellation
• good credit ratings and economic performance
  evaluations

11
Debt as leverage to impose / promote privatization

• Promoted implicitly explicitly in
• fiscal and public expenditure management reforms
• market reforms
• sectoral reforms (water sector, power sector etc)
• poverty reduction programs

12
Leverage to impose / promote privatization

• Some of the countries in the Asia region where
  the WB has been active in pushing (and financing)
  privatization projects through policy
  prescriptions and loan conditionalities
• India
• Indonesia
• Philippines
• Nepal
• Pakistan
• Srilanka
• Vietnam

13
Debts to finance privatization

• World Bank Asian Development Bank (ADB)
  finances (through loans)
• Pre-privatization projects -- designed to create
  the environment and meeting the requirements for
  private investments in services and utilities
  ex infrastructure improvements and financial,
  managerial and technical upgrading
• Privatization process feasibility studies,
  evaluation and bidding processes, preparation and
  design of contracts, setting up of regulatory
  mechanisms, etc

14
Debts to finance privatization

• International Finance Corporation (IFC) of the
  WB engages in equity lending and investments to
  private corporations involved in privatization

15

• Other roles the World Bank, ADB and other
  international financial institutions play in the
  privatization process
• Providing insurance for the private sector
  against commercial and political risk- MIGA -
  Multilateral Investment Guarantee Agency
• Arbitration of disputes between investors and
  states
• ICSID - International Court for Settlement of
  Investment Dispute

16
Debts to finance privatization

• Export Credit Agencies -- provide direct
  financing (through loans) as well as guarantees
  to private corporations, (mostly big
  multinational companies) in what are considered
  high-risk ventures and investments, many of which
  are privatization projects especially in the
  water and power sector.

17
Privatization leads to Bigger Debts

• Ways through the public debt burden is
  exacerbated because of privatization
• New borrowings to liquidate debts of state
  enterprises to be privatized
• New borrowings to cover loss or delay of
  anticipated revenues from privatization
• Government guarantees for private sector loans
  (contingent liabilities)

18
Privatization - guarantees to private profits
illegitimate and onerous debts

• PUBLIC GUARANTEES and ASSUMPTION OF PRIVATE LOANS
  and LIABILITIES
• Many private corporations involved in
  privatization projects borrow part of their
  equity investments from commercial banks and
  other creditors. These creditors require various
  forms of government guarantees to these loans.
  When profits are not generated as expected,
  governments end up paying for the debts and
  liabilities of private corporations.

19
Privatization and onerous debts liabilities

• ONEROUS and GROSSLY UNFAIR CONTRACTS with PRIVATE
  SECTOR
• Some privatization projects involve BOT and BTO
  contracts between the government and the private
  sector which contain onerous and grossly unfair
  unjust provisions which guarantee profits for
  private corporations and lead to illegitimate
  public debts and liabilities
• Example -- In contracts with Independent Power
  Producers (private) take or pay provisions
  foreign exchange guarantees, fuel cost guarantees

20
INTERNATIONAL FINANCIAL INSTITUTIONS IMF, WB,
ADB, EIB, ECAs etc
WTO GATS
Northern Governments Europe
International Consulting Firms
Commercial Banks Financial Markets
Global Corporations
Southern Governments
Southern Private Corporations Elites