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

Privatization, rents and rent-seeking 23later be given to someone else), but reallocation may not be as easily carriedout if outright privatization is the first step. As ex ante mistakes will invariablyoccur in the selection process, transparency is less important than thestate’s capacity to correct mistakes arising from political and informationconstraints.Successful privatization is also argued to depend on contract specificationto clearly allocate risks and establish accountability. The contract needs toaddress the problems arising from the divergent interests of the governmentand private sector, and an incentive-accountability structure is neededespecially when partners have separate interests (Rosenau 2000b). How risk isshared is directly related to the incentive structure of the contract (Heilmanand Johnson 1992).However, contract design is also constrained by imperfect information,namely the inability to specify all future contingencies, leading to incompletecontracts (where it is not possible to fully specify incentives and risks) andinevitable contract renegotiation. Ex post contract renegotiations are thereforelikely where the quality of information is poor at the start, and thepossibility of early renegotiation may in turn lead to unrealistically low bids(Dnes 1995, cited in Kessides 2004: 106). The high incidence of contractrenegotiation has been blamed on political interference, opportunisticbehaviour and flawed contract design (Guasch et al. 2003, cited in Kessides2004: 107). However, as it is neither possible (due to asymmetric informationand the inability to predict the future) nor desirable (in terms of the flexibilityto deal with the circumstances arising from future uncertainties) to designcomplete contracts, governments and firms agree to performance standardsthat can be modified to fit contingencies, with contracts often providingloopholes or relying on loose parameters of fulfilment (MacNeil 1978,cited in Weber 2002: 49). As such, contract renegotiation (and postcontractopportunism) almost always remains a reality (e.g. see Parker andKirkpatrick 2002).Furthermore, contract renegotiation appears to result in regulatory, asopposed to political, capture in developing countries (Kessides 2004).Evidence shows that contract renegotiation has been high in Latin America,especially in transport (where 50 per cent of contracts were renegotiated)and water (75 per cent renegotiations), with two out of every three of theserequested by the operator and leading to increased tariffs or reduced investment(Estache 2003). The ability of the state to enforce contracts thenbecomes more important than actual contract design as ‘(e)ven the best contracts– those that clearly specify terms of fulfilment and breach – must beenforceable in order to be effective in practice’ (Weber 2002: 48).This is especially important as contracts are not only limited by incompleteinformation but also by the limits of liability and enforcement. As there arebounds on the losses the contractor can be forced to bear (e.g. due tobankruptcy laws or political considerations), the contractor may renege onthe contract rather than deliver. Hence ‘with feasible penalties for failure that