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

Privatization, rents and rent-seeking 35candidate choice may not lead to failure if this can be remedied throughlearning rents and clearly specified incentives and penalties.Project viability and privatization designThe most important institutional condition is the capacity to determinewhether an enterprise or project is financially feasible and commerciallyviable. This requires:• identifying the problems to be solved in order to determine the aims andmost appropriate mode of privatization;• determining operating and capital costs and projected revenue;• ensuring that the deal can be properly financed, without creating anunrealistic debt burden which may affect operations and capital investment;• determining tariff conditions (level and structure, subsidy arrangements,collection performance, disconnection policy) and consumer preferences,affordability and willingness to pay (Stottmann 2000).The issue of project viability is separate from that of candidate selectionbecause the provision of certain public goods is often not commercially viableand has traditionally been subsidized as a result, usually for welfare reasons.This is the case for sewerage services and urban rail networks which usuallyrequire capital and operational subsidies, especially in developing countries,in order to keep tariffs affordable or politically acceptable. Similarly, airlinesand auto manufacture are extremely difficult sectors, characterized by regularfailures in the face of inherent industry problems. In these circumstances, weargue that even the most suitable candidate is unlikely to make a fundamentaldifference to the commercial viability of the privatization as ongoing statesubsidies will be needed, and success needs to be measured against second oreven third best outcomes. These examples are discussed in further detail inthe case study chapters. In addition, the state will usually have to make theseenterprises attractive enough for the private sector to participate, usually byproviding sufficient subsidies together with incentives and compulsionsfor improving management and efficiency. However, if the state could haveoperated the enterprise more efficiently in the first place, there would be noreason to privatize.The mode of privatization will depend on the level of information, regulationand monitoring, with regulatory capacity determining which privatizationoption is most appropriate. For example, it is possible to proceed withlimited information in the case of service and management contracts withfixed fees, while management contracts with performance incentives requiresufficient information to define incentives. Leases, BOT contracts and concessionsrequire good system information, and in the case of divestiture,very good system information is essential. A strong regulatory framework is