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

DEBT, PRIVATIZATION & Commercialization of Essential Services

Grants and loans are offered to finance privatization projects

Privatization leads to onerous and illegitimate debts and liabilities

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)

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

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

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

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

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

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

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

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

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

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

Debts to finance privatization

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

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

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.

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)

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.

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

INTERNATIONAL FINANCIAL

INSTITUTIONSIMF, WB, ADB, EIB, ECAs

etc

Global Corporations

Northern Governments

Europe

WTOGATS

International Consulting Firms

Southern GovernmentsSouthern Private

Corporations & Elites

Commercial Banks &Financial Markets