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The private sector’s role


DR TERRENCE FARRELL

The private sector’s role

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WHEN YOU HAVE BEEN AROUND LONG ENOUGH, what went around sometimes comes back around.

In recent years economists such as Nobel Laureate Joe Stiglitz, Thomas Piketty, Mariana Mazzucato and many others have raised anew the questions such as the significance of gross domestic product as an appropriate measure of welfare, income and wealth inequality, and the role of the state in the economy.

None of these questions is new and those very issues were at the fore of debate and discussion when I was a graduate student at the University of Toronto in the 1970s. The fact that they arise again and again is a reflection of the complexity of the issues, not the oft-quoted canard that economists and other social scientists are not useful!

When economies get into trouble and governments need to retrench, the question of the privatisation of state enterprises and utilities tends to resurface, and the ears of the private sector prick up.

The labour movement is typically opposed to privatisation. I would like to dissect the interests of government, the private sector and labour around the issue of privatisation and to assess whether and in what circumstances the policy makes sense and to focus a spotlight on the motivations and attitudes of the private sector in our region.

The first issue relates to government behaviour when we ask: how come there are entities eligible for privatisation in the first place? Why weren’t these businesses in the private sector all along?

There have, of course, been instances where businesses were in the private sector, were nationalised or expropriated, and were later re-privatised. I can think of no such instances in the Caribbean.

In other instances, a foreign business indicated its intention to leave and the government has bought the business in order to save the jobs which were supported. We have witnessed this in the sugar industry throughout the region and in petroleum exploration and refining in Trinidad and Tobago.

The fundamental choice that governments have is between regulation and ownership. If it is possible to effectively regulate the activity in the public interest, there is arguably no need for the government to own the business.

The second consideration is the capital requirement. Initially, the generation and distribution of electricity or water may be too capital-intensive for private sector interests and it falls to the government to establish and grow these businesses. These businesses may, in the context of small island states, be “natural monopolies”.

Later on, as the capacity of the private sector grows, the businesses may be owned and operated by the private sector, but regulated by the government in the public interest.

The public interest may involve not only the pricing of the services but also quality and service levels.

In the Caribbean, Trinidad and Tobago has moved power generation into the private sector but electricity distribution remains in the public sector, as does water, ports, airports, and bus and ferry transportation.

The third consideration is whether the industry or activity is “strategic”. This is a much abused word which is more usually used as a justification for decisions and when used, it is intended to suggest that no further enquiry or rationale is necessary. Regional governments have made such strategic investments.

In Trinidad and Tobago, for example, the National Gas Company and its subsidiary the National Energy Corporation have been established to ensure that developments in the critical natural gas and LNG industries evolved along a path that maximised the returns to the society.

I think that the airline industry in the region provides a good set of cases which illustrate the complexity of the problem. Governments took over the international routes of airlines with the cessation of the former colonial air transportation arrangements, but were unable to make commercial successes of BWIA in Trinidad and Tobago, ALM in the Dutch Caribbean, or Air Jamaica.

The airline business is difficult enough at the best of times and more so in the region of archipelagic states with small populations and weak sea transportation links for passenger traffic.

When governments capriciously mandate state-owned airlines to fly routes which are unviable, it compounds the difficulties for airline managers. Governments also often do not have the financial capacity to make the investments in the airlines required to keep the equipment up to date and the service levels where customers would like them to be. It does not help the travelling public that airport facilities are often substandard.

Parenthetically, it is interesting to note that Caribbean governments have more often than not resorted to foreign managers for their airlines.

We have not invested consistently in capacity building in an area of business which is considered sufficiently strategic to warrant investment of millions of taxpayers’ dollars.

Dr Terrence Farrell made these remarks as the main speaker at last week’s Barbados Chamber of Commerce and Industry luncheon at Hilton Barbados Resort. Farrell is a former deputy governor of the Central Bank of Trinidad and Tobago and also served in several senior private sector posts. Part II will be published next week. 

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