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

12 Privatization, rents and rent-seekingusually outweigh efficiency considerations (Krueger 1990; Vickers and Yarrow1991), and any economic intervention by the state is viewed as a potentiallycounter-productive policy response and an invitation to rent-seekingbehaviour. The greater the degree of regulation, the more private resourcesare absorbed by rent-seeking activities (Krueger 1974, 1990; Buchanan 1980).Because SOEs, through the allocation of rents, are seen as a vehicle toredistribute wealth or promote politically motivated redistributive arrangements(Jones and Mason 1982), privatization is desirable as it ‘effectivelydrives a wedge between politicians and managers’ by depoliticizing firms andmaking it too costly for politicians to subsidize them (Boycko et al. 1996:318). By placing some distance between the government and producer andsubstantially increasing the transaction costs of such interventions, privatizationis said to make more credible the promise not to use public fundsto subsidize losses (Sappington and Stiglitz 1987a; Stiglitz 1996). This alsohas beneficial effects by subjecting the firm to the discipline of the market.Privatization therefore limits government intervention by changing ‘theresidual rights of intervention’ and altering the incentives to intervene(Sappington and Stiglitz 1987a: 80).Financing capital investmentThe increasing cost of infrastructure development has required new financingsolutions, and privatization has been promoted as a way of mobilizingresources and investing them cost-effectively to meet the growing needs ofdeveloping countries while also overcoming existing inefficiencies. Privatizationis seen as suitable for high-cost, capital-intensive infrastructure projectswhere cost is the main concern and where there are limited externalities(Heilman and Johnson 1992; Rosenau 2000b) because private ownership issaid to provide more incentives or make it easier to implement cost-coveringtariffs, thus making the project more viable. The private sector is said to offerpotential efficiency gains (needed to turn around or restructure failing publicenterprises), new sources of funding (leveraged development) and projectrevenue enhancement (World Bank 1994; Hakim et al. 1996b; Payson andSteckler 1996). While governments may have access to cheaper credit, this isargued to be insufficient to outweigh inefficiencies arising from lax financialdiscipline, leading to cost overruns and delays in infrastructure construction(World Bank 1994). In this case, an efficient private operator who can reducecost and raise efficiency can theoretically raise money more cheaply as lendersface lower default rates.Privatization problemsThese well-known arguments for privatization are, however, problematicbecause the private sector is often unable or unwilling to finance capitalinvestment on its own, thereby necessitating state subsidies. Subsidies will