INTOSAI Privatisation Working Group PWG

1
INTOSAI Privatisation Working Group (PWG)

• Technical case study
• Series 1 Privatisation

2. Socio-economic and environmental effects of
privatisation
2
Table of Contents

• LIST OF ACRONYMS 3
• SUMMARY 4
• ISSUE 1 Assessing the Impacts of Privatisation
  
• 1.1 Establishing a framework 5
• 1.2 Evaluating objectives 6
• 1.3 Evaluating impact drivers 8
• 1.4 Measuring impacts 9
• ISSUE 2 Evaluating Economic Impacts
  2.1 Long term economic impacts 11
• 2.2 Business performance public vs.
  private ownership 13
• ISSUE 3 Evaluating Social Impacts
• 3.1 Impact on welfare 14
• 3.2 UK experience of employment levels
  following privatisation 15
• ISSUE 4 Evaluating Environmental Impacts
• 4.1 Environmental audit 18
• 4.2 Audit implications pollution and
  conservation 19

3
List of Acronyms
INTOSAI International Organisation of Supreme
Audit Institutions OECD Organisation for
Economic Co-operation and Development SAI Supreme
Audit Institution SSP Social Support
Packages EBRD European Bank for Reconstruction
and Development GDP Gross Domestic Product
4
Summary

• Privatisation often has an impact on the wider
  economy, society and the environment
• Short term/long term aims The state will
  typically have both short term and long term
  objectives in pursuing a privatisation. In the
  short term, a key objective could be the
  maximisation of sale proceeds. Over the long run,
  the state often intends that a privatisation, or
  set of privatisations, will help deliver wider
  benefits such as the development of a market
  economy and gains for society and the
  environment.
• Evaluating the impacts of privatisation can often
  be problematic
• Understanding the impacts Auditors should ensure
  that any assessment of the privatisation is wide
  ranging as long term impacts are often
  overlooked. Furthermore, the various aims of a
  privatisation may inherently lead to conflicting
  impacts (e.g. meeting a demanding timetable to
  bring in quick investment vs. thinking through
  the environmental consequences).
• Measuring impacts Auditors need to choose
  reliable and consistent methods and sources to
  measure long term realised/perceived impacts
• Is there any illustrative good practice on how
  best to evaluate these impacts?
• In the first instance, the SAI needs to ensure
  that they undertake a performance audit that
  assesses all the vendors objectives, both short
  and long term, and assess whether a defensible
  balance was struck between them (see INTOSAI
  Privatisation Audit Guideline 7).
• In terms of the technical aspects of evaluating
  socio-economic and environmental impacts, the SAI
  can look to the following good practice in
• Determining impact drivers.
• Measuring wider impacts through qualitative and
  quantitative measures.
• Evaluating the impacts of the privatisation by
  comparing these against relevant key indicators.
• Auditors must bear in mind that wider impacts may
  result from changes in the political, economic
  and social climate, rather than from a single
  privatisation or programme of privatisations.

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1. Assessing the Impacts of Privatisation

• 1.1 Establishing a framework for assessing the
  impacts of privatisation
• Getting the best from a privatisation is a
  balancing act
• It is always necessary to strike a balance
  between what the public sector may ideally want
  and keeping the deal attractive to the private
  sector.
• There is a need both to achieve the financial
  benefits of privatisation and to ensure that the
  interests of stakeholders such as customers and
  employees are given adequate regard. Without an
  appropriate balance, it is difficult to build a
  sustainable privatisation programme.
• For example, there was a case in Zimbabwe where
  an international contractor withdrew from
  negotiations for the privatisation of local water
  services because it became apparent that local
  residents would not be able to afford water at a
  price which brought the desired commercial return
  to the contractor.
• Delivering a coherent audit framework for
  assessing wider impacts
• The Governments proposals, the various
  privatisation agreements, and any sale and
  purchase contract may provide a list of the key
  objectives that the privatisation was intended to
  achieve. Such sources are likely to be a good
  starting point when understanding and considering
  the impacts of the privatisation.

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1. Assessing the Impacts of Privatisation (cont.)

• 1.2 Evaluating objectives
• Group objectives into appropriate sub-divisions,
  such as
• Economic to improve efficiency, ensure economic
  stability, promote cost effectiveness and
  generate economic growth.
• Financial to enhance cost recovery, promote
  capital investment and private investment in
  operations and maintenance.
• Political to achieve legitimacy, maintain power
  over allocation of resources, ensure a political
  mandate for private sector participation and
  improve voter base through improved municipal
  functions.
• Environmental to improve availability, quality
  and reliability of services, to expand service
  coverage in poor areas and to ensure
  environmental sustainability.
• Social to improve the well being of the poor,
  ensure affordability, improve health security and
  safety, empower the poor and promote choice,
  improve equality in service provision, target
  vulnerable groups and ensure gender equality,
  enhance opportunity for sustainable poverty
  reduction and ensure job and income security.
• Local Governance to create a better place for
  all to live and a sustainable, equitable,
  environmentally sound development.
• Institutional to improve skills, access new
  technologies, delegate management to skilled
  organisations and to institutionalise better
  management practices.

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1. Assessing the Impacts of Privatisation (cont.)

• 1.2 Evaluating objectives (cont.)
• Examples
• In transition economies, such as Eastern Europe
  and Central Asia, it is has become common
  practice to include Social Support Packages
  (SSPs) to help displaced workers rejoin the
  employment market as a key part of privatisation
  schemes. These schemes have three objectives
• Social to provide transitional income support
  payments while displaced workers find new
  employment and, for those who have difficulty
  doing this, to provide extended support including
  training to prevent these workers and their
  families slipping into unemployment.
• Economic to reduce excess labour costs so
  enterprises can be competitive and to facilitate
  the rapid return of workers to productive
  employment and thus reduce the duration of income
  support payments.
• Political SSPs build political support for
  restructuring by signalling to citizens,
  communities and labour representatives that those
  responsible for restructuring are attuned to the
  needs of affected workers and that they are ready
  and willing to assist those that need and want
  help.

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1. Assessing the Impacts of Privatisation (cont.)

• 1.3 Evaluating impact drivers
• This is not an exhaustive list, but an indication
  of some of the issues and activities that may
  take place during a privatisation project which
  have been reported to lead to wider economic,
  social and environmental impacts.
• Availability of public data Detrimental impacts
  may occur as a result of a lack of legislative or
  contractual control. The European Environment
  Agency has found, for example, that some
  privatisations have affected access to
  environmental information. Restricting public
  scrutiny of such information may make both policy
  and decision making and any evaluation of the
  privatisation much more difficult.
• Company Structure and Corporate Ethics Good
  practice would be to examine the appropriateness
  of the organisational structure and any impact
  this may have on the communication and
  enforcement of integrity and ethical values. This
  may avert consequences such as those which
  delayed the partial privatisation of British
  Nuclear Fuels. HM Nuclear Installations
  Inspectorate found that redundancies, outsourcing
  and an overly complicated management structure
  had created an atmosphere that contributed to the
  falsification of company data that might have had
  satefy implications.
• Funding conditions Funding in the public sector
  may have public good conditions attached intended
  to provide beneficial socio-economic and/or
  environmental impacts. For example, the EBRD
  often requires the organisations it funds to
  produce annual reports on environmental matters
  as well as on their compliance with environmental
  regulations.
• Externalities State enterprises may be required
  to pay attention to various public externalities
  (eg the provision of a national tarriff
  structure) which might be lost on privatisation
  unless steps are taken by contract or legislation
  to preserve them.
• Preservation of integrity The integrity of
  privatisation programmes must be maintained in
  order to guard against corruption which limits
  the realisation of socio-economic impacts. The
  awarding of concessions and contracts should be
  transparent and subject to scrutiny and audit.
  Attention must be paid to Human Rights throughout
  the privatisation process.

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1. Assessing the Impacts of Privatisation (cont.)

• 1.4 Measuring impacts
• Tests to monitor the performance of privatised
  enterprises
• Surveys for example consumers might be
  consulted regarding service levels and customer
  satisfaction
• Public Forums
• Complaints lines the provision of convenient
  consumer inquiry and complaint mechanisms
• Post project evaluations
• Targets comparisons against other countries
  results
• Compliance with international standards
• Benchmarking against indicators through the
  regular publication of key performance figures
• Use of consultants by the state
• Consultants can be used to help assess the
  benefits and liabilities of a privatisation
  program.
• SAIs could then inspect whether measures put in
  place following the consultation still exist -
  perhaps using the same consultants to perform a
  3-5 year health check if conditions warrant this
  and it was allowed for in the terms of the
  original privatisation.

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1. Assessing the Impacts of Privatisation (cont.)

• 1.4 Measuring impacts (cont.)
• Example
• Public perceptions of privatisation performance
• Figures 1 and 2 illustrate the perceptions of
  people in
• Argentina, Bolivia, Mexico and Sri Lanka towards
• privatisation.
• Public attitudes towards privatisation have
  worsened over time for these countries.
• Negative public attitudes may be attributed to
  long term impacts affecting wider issues.
• Auditors should seek to corroborate public
  perceptions through considering more quantitative
  assessments of the wider impacts of
  privatisation.
• If there is no correlation, further work maybe
  required to understand and explain the trend in
  public opinion.
• Such variances may be due to the public not being
  in a position to distinguish between impacts of
  privatisation and accompanying changes in the
  political, economic and social climate.

Fig. 1. Public attitudes to privatisation in
Argentina, Bolivia and Mexico
Fig. 2. Public attitudes on socio-economic issues
in Sri Lanka
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2. Evaluating Economic Impacts
2.1 Long term economic impacts Long term
economic impacts are often key drivers towards
privatisation for the state and therefore may be
the most straightforward impacts to evaluate.
Analytical procedures comparing privatisation
results/performance against key economic
indicators are often seen as a suitable tool for
evaluating economic impacts. Figure 3 shows a
selection of such indicators this list is
included as a guide and is not exhaustive.
Fig. 3. Various key indicators for areas of wider
economic impacts
Source National Audit Office analysis
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2. Evaluating Economic Impacts (cont.)

• 2.1 Long term economic impacts (cont.)
• Case Studies
• Competition Efficiency
• In a study examining 23 OECD countries it was
  discovered that prospective and actual
  competition both bring about productivity and
  quality improvements, and lower prices in telecom
  services. These positive impacts were not
  necessarily attributable to privatisation but may
  be associated with it.
• Economic Growth through Private Sector
  Development
• In Australia, the privatisation of infrastructure
  and government enterprises has stimulated
  business in regional and rural areas. Success
  stories include lower electricity charges, the
  retention and subsequent growth of passenger rail
  services whose future was in doubt under
  government control, and the upgrading and
  enhancement of airport facilities.
• Increased Investment Levels
• In transition economies privatisation acts as a
  signal to the markets of the extent and
  credibility of financial reform. Private
  operators have more ready access to capital
  funding the substantial investment following the
  privatisation of the Public Transport Corporation
  in Jordan led to the introduction of 165 new
  buses on the roads and an increase in passengers
  from 50,000 to 120,000 per day.
• Privatisation Proceeds
• In Bolivia, the new Mining Code stipulates that
  of all the taxes paid by mining or oil companies
  25 is allocated to municipalities for the
  support of local social and community development
  projects.

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2. Evaluating Economic Impacts (cont.)

• 2.2 Business performance public vs. private
  ownership
• Figure 4 sets out the results of some academic
  work aimed at showing whether, and by how much,
  privatisation programmes have actually improved
  the economic and financial performance of the
  divested firms. It examines some of the key
  performance indicators of newly privatised firms
  from a wide range of countries and spanning a
  broad spectrum of economic environments. It is
  based on the averaged results of a series of
  statistical analyses performed on the companies
  and broadly shows that the majority of firms
  improved their performance against the stated
  measures. SAIs may choose to replicate this work
  in their own countries.

Fig. 4. Average performance of privatised firms
Source Journal of Economic Literature
14
3. Evaluating Social Impacts

• 3.1 Impact on welfare
• A significant measure of the success or failure
  of privatisation programmes is the extent to
  which peoples Quality of Life
• has changed. But evaluating the impact of
  privatisation on the welfare of Society is a very
  difficult task, relying more on a
• qualitative analysis than quantitative. Again,
  analytical procedures using key indicators may
  provide a method of evaluating social impacts and
  also allow these to be measured over time. Figure
  5 shows a non-exhaustive list of such indicators.

Case Study Wider Social Impacts The
Privatisation of the water and sewerage in
Argentina impacted not only the service coverage,
but also the quality of life of the population.
Infant mortality, a direct, tangible welfare
indicator fell by 5 to 7 percent in areas that
privatised their water services. In some of the
poorest areas surveyed, the authors estimate that
the child mortality rate dropped 24 percent after
privatisation. Audit Implications Employment
levels Analytical Procedures conducted soon
after Privatisation will generally show falls in
employment levels due to restructuring. In the
long term however, employment levels may
stabilise and growth may see them increase beyond
historic levels. For example, employment in the
Peruvian telecommunications sector rose from
13,000 jobs in 1993 to 34,000 jobs in 1998 after
initial restructuring. Some detail on the
movement in employment levels of privatised
British industries is given on the following
pages and in Annex 1.
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3. Evaluating Social Impacts

• 3.2 UK experience of employment levels following
  privatisation
• The electricity generating companies, National
  Power and PowerGen, have both experienced a sharp
  fall in employment since privatisation in 1991
  (59 and 49 per cent respectively between 1990 and
  1994). By contrast, employment in the water
  companies has grown substantially (around 30) in
  the same period, having fallen steeply in the
  years before privatisation. In the main,
  employment growth in these companies is due to
  expansion and diversification into new areas
  nevertheless there appears to have been little
  reduction in employment levels in core
  activities, and as Saunders and Harris put it,
  for those in employment in 1989, privatisation
  has not posed any significant threat to jobs.
  Further details are given in Annex 1.
• One reason why employment levels in firms
  privatised during the 1980s did not show the
  steep fall feared by some is the regulatory
  regime established to oversee the activities of
  the privatised industries. The quality of
  service objectives enforced on these firms meant
  that freedom to reduce staffing levels was
  limited. At the same time regulatory regimes
  (governing the utilities) allowed for real price
  rises which muted pressures to reduce employment
  costs. Another contributory factor was the
  possibility of entry into new activities e.g.
  waste disposal in the case of water companies.
• Conversely, privatisation when accompanied by
  deregulation can also lead to enough new business
  generation that the overall level of employment
  in the sector rises even if employment in the
  former state-owned firm falls.
• A further important factor seems to be the degree
  of competition in the product market. Where
  competition is limited, pressures for greater
  profitability may well be secured through pricing
  changes rather than by changes to internal
  organisation.
• The assertion that deregulation and exposure to
  product market competition have a more powerful
  impact on firm behaviour than transfer of
  ownership is borne out here. Continuity in
  employment practice among the privatised
  utilities can be explained by the limited
  exposure to competition.
• Tables showing the movement in employment levels
  for some UK privatised industries are shown on
  the following pages.

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3. Evaluating Social Impacts
Source National Audit Office analysis
17
3. Evaluating Social Impacts
Source National Audit Office analysis
18
4. Evaluating Environmental Impacts
4.1 Environmental audit Environmental concerns
are now growing in priority across the
privatisation process from initial government
proposals to post project reviews and
environmental audits. Reliable independent
evidence, such as incident reports and key
environment indicators, will facilitate the
measurement of direct and indirect impacts.
Figure 6 shows a non-exhaustive list of such
indicators.
Fig. 6 Examples of Environmental Audits
An environmental audit is commonly used to obtain
accurate, comprehensive and meaningful
information on the environmental impact of a
company from which management decisions can be
based. Figure 6 gives some of the types of audit
often used within companies.
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4. Evaluating Environmental Impacts (cont.)

• 4.2 Audit Implications Pollution Conservation
• Private suppliers of water may not have economic
  incentives to address long-term (chronic) health
  problems that are associated with low levels of
  some pollutants. It is important therefore that
  legislation or regulations enforce appropriate
  environmental quality criteria and maintain
  health and safety requirements. In addition,
  water suppliers may understate or misrepresent to
  customers the size and potential impacts of
  problems that do occur.
• Public Interest reporting requirements should
  be maintained after privatisation and be subject
  to audit.

Fig. 6. Various key indicators for areas of wider
environmental impacts
Source National Audit Office analysis
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Annex 1 employment case examples

• British Gas
• For the gas market, privatisation occurred some
  time before effective competition was introduced.
  The UK government saw privatisation as an
  essential component in the route towards the
  provision of liberalised energy markets, mainly
  because it was considered that a privatised
  industry would provide efficiency incentives.
• At privatisation in 1986, the company, now
  British Gas plc, was restructured into 12
  integrated regions. During the early stages of
  privatisation the company shed jobs at the rate
  of about 5 per year. i.e. about 3-5,000 job
  losses per year. By 1994, British Gas employed
  about 75,000 staff.
• in 1995, British Gas implemented a demerger that
  separated transportation from trading. UK
  transportation of gas was taken over by Transco,
  and gas supply by Centrica.
• As a supplier operating in a fully competitive
  market, Centrica now competes against a range of
  other gas suppliers. Many of these are other
  utilities, especially electricity companies, also
  a number of other organisations without direct
  experience of the gas industry, instead with
  skills of serving a large customer base, such as
  supermarkets.
• Today, Centrica employees are working in a highly
  competitive environment, and the commercial aims
  of the company are paramount. The company has
  changed the roles of many of its staff to meet
  the demands of working in a competitive
  environment, and in addition it has acquired a
  number of businesses outside of the gas industry
  to complement its main business.
• Call handling In Centrica, about 12,000 staff
  provide call handling services. These include
  not only those directly within the gas industry,
  but also those in the associated company
  businesses of financial services (Goldfish credit
  card), vehicle breakdown services (Automobile
  Association) etc.
• Information Technology There has been a large
  expansion in the companys IT activities.
  Centrica employs about 1,700 staff in IT, and it
  is one of the most effective energy traders in
  the country. It also brings in some contractors,
  but most of these relate to legacy systems
  inherited from pre-Centrica.
• Electricity Sales Centrica now also sells
  electricity to about 3 million customers.

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Annex 1 employment case examples

• PowerGen
• Privatised in 1991, employment in PowerGen fell
  from over 9,000 in 1990 to 3,700 in 1995, as
  productivity more than doubled. However, it was
  not just the numbers of employees but their
  activities that changed dramatically.
• In 1990, the company employed around 7,250 staff
  in power stations, with the rest based at head
  office. By 2000, only 1,150 worked in UK
  production, in seven generating sites, down from
  15 major fossil-fuel stations plus some small
  hydro plants in 1994.
• However, total employment rose to 7,678 after
  PowerGen acquired East Midlands Electricity, the
  third largest regional electricity company in
  1998. The diversification of the business
  continued with the acquisition of the US company
  LGE Energy Corporation at the end of 2000, and
  the development of interest in the marketing of
  gas and telephone services in the UK. UK
  operations is now divisionalised into electricity
  generation combined heat and power electricity
  distribution and energy trading and retail.

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