PRIVATIZATION Privatization in Malaysia, Regulation, rent-seeking and policy failure

2 Privatization, rents andrent-seekingPrivatization is argued to provide better incentives and monitoring throughthe clear designation of property rights, while also reducing damaging stateinterventions. Improved efficiency as a result is then seen to encourage theprivate owner or operator to undertake much-needed capital investment.However, privatization does not necessarily lead to the clear designation ofproperty rights, reduce state intervention or enhance the private financingof capital investment. This is because the private sector is often unable or unwillingon its own to meet the high cost of capital investment associated withtypical privatizations (e.g. sewerage and water services). This is especiallyso in developing countries where there is in addition a shortage of entrepreneurialcapacity. Furthermore, the ability of the private sector to meetcapital investment targets will in part also depend on projected revenuesbased on cost-covering tariffs. However, cost-covering tariffs are usuallypolitically unfeasible for many critical services. High capital costs and theinability of tariffs to cover high operational costs will then require statesubsidies which in turn dilute incentives associated with private ownershipunless they are combined with additional and credible incentives andsanctions.In addition, governments in developing countries will often be attemptingto create domestic capitalists due to a shortage of entrepreneurial capacitybut also because of political pressure from groups contesting for resources.This will require additional subsidies for learning (also known as ‘rents forlearning’) in order to develop entrepreneurial capacity, and in the long term,promote efficiency and technological ‘catching up’. The processes involvedhere have elements similar to the process of (primitive) capital accumulationin early capitalism (e.g. see Marx 1979) in addition to the regulatory issuesraised in the privatization of public sector enterprises in advanced countries.As such, privatization will often be closely tied in with state motivations andthe political forces behind this. Here, the mainstream literature on privatizationsuffers from several shortcomings when attempting to explain the failureof privatization in developing countries because it tends to largely ignore thepolitical context and hence political motivations which often drive privatization.These can affect both the character of privatization (what is privatized,