Table 10.1 Privatization proceeds of single countries8
Friedrich Schneider
Privatization has been a key element of structural reforms in most European Union countries, including Austria, during the last decade. Governments undertaking privatization have pursued a variety of objectives: achieving gains in economic efficiency, given the extensive prevalence of poor economic performance of public enterprises in many countries and limited success with their reform; and improving the fiscal position, particularly in cases where governments have been unwilling or unable to continue to finance deficits in the public enterprise sector. In addition, budgetary-constrained governments, facing fiscal pressures have sometimes privatized mainly to finance fiscal deficit with the privatization proceeds.
The issues of privatization (and sometimes deregulation) have been reviewed in a large literature on the various aspects of privatization, and this literature has emphasized the potential efficiency gains.1 The goal of this paper is twofold: firstly, to provide some theoretical reasoning why privatization is useful and has occurred and secondly, to illustrate the extent of privatization in Austria. First, in section 2, the reasons why privatization is necessary are elaborated. Second, in part 3, the privatization proceeds for Austria and the one of the Vienna Airport are presented. Finally, in part 4, a short summary of these findings is given.
For at least the last century, economists have employed a positive economic theory to explore the implications of wealth maximization by private firms operating in private property contexts. Only since the late 1960s have empirical studies dealing with the behaviour of publicly operated firms been undertaken.2 Since then, a large number of studies of a variety of activities now exists and their main focus is the question of how public firms differ from their private equivalents.
Basically two methods are employed. The first, explored in section 2.1, is the property rights approach. It concentrates on the differences in the ease of captureability of economic surplus of a resource and the rights to direct an asset's use, alter its form or transfer its claims among existent and potential owners. In short, this approach explores the differences in incentives between public and private agencies caused by variation in the ability of owners to monitor management and the problems that emerge when the goals of "owners" and their agents, "managers" diverge.3 The second is "Public Choice approach" (elaborated in section 2.2) and concentrates on political coalitions and their effect on input usage and reward and/or product characteristics. The Public Choice approach also includes the theory of bureaucracy (see Niskanen, 1971, 1975).
The property rights approach points out one crucial difference between private and public firms, i.e. the practical difficulties in transferring ownership rights among individuals in the public sector and the relative ease of such transactions with private assets which includes, of course, the ability of owners (citizens) to monitor their agents' (elected officials' and bureaucrats') behaviour. By now, this approach pioneered by Armen Alchian is well known, but it is useful to recall his predictions: government managers will not organize the inputs under their direction in such a way as to maximize the wealth of the ultimate owners, the general citizenry. Alchian predicts, therefore, that public firms will be less efficient, their management will enjoy "quieter lives" and because of this the public will give them lower levels of discretion than their colleagues in private firms. To put it another way, the property rights approach is concerned with any type of cooperation in which ownership and management are separate. The emerging principal-agent problem may be prevalent in private enterprises as well, but to a much lesser extent. Numerous studies have been undertaken which have tested this proposition and the result that public enterprises are less efficient then private ones is confirmed in most of them.4
To sum up the results so far: the property rights approach seems to indicate that (1) private production is cheaper than production in publicly owned and managed firms and (2) given sufficient competition between public and private producers (and no discriminatory regulations and subsidies) the differences in unit cost turn out to be insignificant. From this, one may conclude that it is not so much the difference in the transferability of ownership but the lack of competition that leads to the often observed and less efficient production in public enterprises.
The public choice approach appears to provide a broader analysis than the property rights one. The public choice approach assumes that politicians, bureaucrats, managers of public enterprises are selfish utility maximizers subject to constraints.5 In this approach it is, for example, assumed that a politician acts selfishly in order to reach his ideological or personal goals under constraint not to lose the next election. Since, for a politician, to stay in power is a most important constraint (or sometimes the only goal), he will also use public utilities for his own selfish goals. One reason for this is evidently the lack of incentives for politicians and tax payers to exert effective control of public enterprises or efficient use of resources in the economy. This argument seems especially valid for the case of public utilities. Public utilities offer excellent opportunities to reach the selfish re-election goals of governments, like additional employment and the stabilization of purchasing power of certain regions.6 If such a "misuse" of public utilities or enterprises leads to full employment and higher income, at least for a certain time span, then it is easier for a government to win an election without such a "misuse" of public utilities. The cost of such a policy can be made invisible for several years (or even one or two legislative periods) as the deficit of the public enterprises can be hidden in the general budget deficit.
As the public choice approach is more concerned with micro-economic aspects, De Alessi claims that public managers are growth not wealth orientated. He argues, and finds supporting evidence, that this leads to larger staffs and, higher capital labour ratios since excess capital makes managers and their subordinates' productivity appear higher to their monitoring agents, the legislature. Borcherding, et al (1977) argue that public employees effectively coalesce through their organizations and "capture" civil service commissions over time, altering rules in such a way that effective suppliers of competing labour to public firms become less wage elastic than a free market buyer would otherwise face. This public employee market power is enhanced, they claim, by the fact that public service employees contribute to the election of the ultimate "bosses", definitely not an option for a private sector union. In some sense then, public employees can alter the position of the derived demand schedule for their services by (a) "nudging" the final demand schedule for public services to the right and (b) specifying rules that lower both the elasticity of substitution between themselves and rival factors and the elasticity of supply of these close substitutes. Both (a) and (b) will tend to raise wages, but they may raise employment too, since, in effect, the budget and tie-in effects may offset the usual substitution effects one might derive out of the neoclassical models of labour demand in the presence of a simple monopoly. De Alessi (1974), in another paper, argues that given the relative loose monitoring of public enterprises by the political review authorities, a rational position for the latter given the gain-sharing results of assiduous monitoring, managers will indulge their taste for security rather more than in private firms. He finds evidence consistent with the riskavoiding hypothesis. Public managers' tenures are more secure, of a longer duration, and their fluctuations in real wages are lower than their private counterparts.
In conclusion, according to the public choice scholars, governmental agencies and firms have distinct biases leading to higher production costs, just as the property rights literature suggests, but also excessive outputs. The latter obtains because the staff of the bureaucracy can affect demand more readily under monopoly public ownership by the strength of its members' votes and/or lobbying efforts. The absence of a civil service and the constraint on strong unions under more competitive types of supply, public or private, are thought to reduce the ability of members of such bureaucracies to offer their services to the legislature on disadvantageous terms compared to potential competitors. On the other hand, the bureaucracy is not likely to have sole "capture" rights over the bureaus, but to share the ownership claims with other interests.
To sum up this part, the public choice approach not only recognizes the differences in behaviour between publicly owned and managed firms and private ones, owing to the limited transferability of ownership. It also considers the likely oversupply of public services owing to the lack of competition in their provision and production. This oversupply is then quite often used for the selfish re-election goals of politicians and can result in higher employment and higher wages in certain regions for a certain time.7
Summarising the two approaches, one clearly comes to the result that, as already noted in the introduction, there are various reasons to privatize public utilities or enterprises in order to stop the misuse of such policies. In the next section I investigate to what extent privatization has occurred in the European Union and in Austria.
Privatization and proceeds from privatization have been substantial all over the world. Since the beginning of the 1980s, numerous instances of privatization in market orientated industrial countries, but also in transition and developing countries, have been taken place.
A detailed picture of the privatization proceeds of single countries is given in table 10.1.
Comparing Germany with Great Britain, it is evident that the largest privatization proceeds were achieved at the beginning of the 1990s, with US$12.9 and US$21.8 billion in the years 1990 and 1991 in Great Britain. In the following years, in Great Britain the privatization proceeds were decreasing but still sizeable. By contrast, in Germany, it is evident that the privatization proceeds were greatest in 1996, with US$13.228 billions. This means that in this year 30 per cent of all privatization proceeds of the 15 European Union countries came from Germany. Apart from this year, the privatization proceeds are much smaller, compared with other larger European countries.
If one considers the small open economies the results are presented in table 10.2.
Table 10.2 shows that, in the beginning of the 1990s, the amount of privatization was quite moderate with the exception of Belgium. The Belgium government privatized extensively in the year 1993 and received proceeds of US$956 million, which are roughly 30 per cent of all privatization proceeds of the small open economies in Table 10.2. The second highest privatization proceeds in this year were received by the Netherlands with US$780 million. This was followed by Portugal, which had a quite ambitious privatization program over the years 1993-1998, with privatization proceeds over US$12 billions over those years. Many well known public utilities in Portugal were privatized, such as the power plant EDP, the highway system BRISA and cement factories ZINPOR. In Austria, the privatization proceeds have also been quite large. In the year 1997 in Austria the government privatized firms with proceeds of US$2.02 billion. In Austria the selling of 25 per cent share of the public telecommunications firm was the biggest sale, where proceeds of US$2.33 billion have been achieved.
The Austro-Keynesian era of stabilization policy lasted from the mid 1970s to the mid 1980s can be viewed as an attempt of "direct employment policy" in the public utilities and the public industrial sector, mainly in the heavy, machinery and chemical industry. The primary goal of this type of short-term policy in private goods markets was to stabilize employment and real income in the nationalized industry and, by way of interindustrial relations and the multiplier process, in the private sector as well.
Table 10.1 Privatization proceeds of single countries8
To achieve this political target, various steps were taken by the public management:
Table 10.2 Privatization proceeds in small open economies in the years 1993, 1995,1997 and 1998
With regard to the social and re-election problems arising from unemployment, the direct employment policy in public industrial firms was intended to smooth the inevitable adjustment process to the rising requirements of global competitiveness in the long run. Naturally, the type of stabilization policy pursued immediately caused substantial effects on the public industrial firms' productivity, thriftiness and profitability, thus reducing international competitiveness and augmenting deficits in the short run (Nowotny, 1982). Nonetheless, production and employment could not be maintained permanently at a high level, because the rationalization measures could not be postponed any longer. Since the rnid 1980s, the Austro-Keynesian stabilization policy has been increasingly criticized for its doubtful long-term efficacy. Finally, the troubling rise of the losses of the state-owned firms in the iron and steel, chemical, machinery and vehicle industry caused an about-turn in public opinion and economic policy. The amount of subsidies to public industrial firms covering the deficits and financing investment was limited to a fixed total in the the period until 1989. This change of policy emerged when the government realized that, due to the critique of the opposition, mass media and private entrepreneurs, as well as to the people's fear of tax increases, a majority of voters would not tolerate further subsidies to public industrial firms. Prior to this change of mind, politicians had formed coalitions with the management of the relatively big and locally concentrated public firms in order to secure the subsidies that rendered inefficiencies possible and served the local constituency. Moreover there have been powerful shop stewards who were simultaneously members of the legislating National Council and therefore succeeded in financing the expansionist enterprise policy out of the federal budget.
From the end of the 1980s there was a turnaround in the Austrian policy with respect to the public industrial sector and public utilities. Not only were there many privatizations in the 1990s, but also these enterprises were much less used for re-election purposes. This was partly due to the fact that, after joining the European Union and the deregulation of former monopolies into competitive markets, it was much less attractive to use the public utilities and industries for re-election purposes. In the 1990s, the privatization of Austrian state-owned industrial firms and state-owned utilities has yielded over US$6 billions over the period 1993-1998 (see Table 10.3). However, the privatization potential in Austria in the mid 1990s is still quite large. Taking the federal, the state and community levels and including all public utilities, there is a privatization potential of €45 billion of which the federal government owns 62 per cent, the city or state of Vienna 13 per cent, all other states (e.g. Upper and Lower Austria) 14 per cent and the communes (without Vienna) 11 per cent. The latest privatization proceeds of the federal government over the years 1999 to 2001 are presented in Table 10.3.
In 1999 9.4 per cent of the Austrian tobacco company was privatized, which yielded US$7.82 billion.
In 2000 100 per cent of the postal bank was privatized and the proceeds were US$1.115million. Also 24 per cent of the state owned Telecom utility was privatized with proceeds of US$878 million. In total in 2000, US$2.003 million of privatization proceeds were received. In 2001, a further 41.1 per cent of the Austrian tobacco state-owned utility was privatized, which brought privatization proceeds of US$670 million.
In total, over the years 1999-2001, US$2.823 billion privatization proceeds were received. This is quite sizeable and helped the Austrian government to reduce the federal debt.
Table 10.3 Privatization proceeds in Austria (Federal government) over 1999-20019
| Year | Proceeds (€ million) | Proceeds (US$ million) | |
|---|---|---|---|
| 1999 | Privatization of 9.4% of the Austrian Tabacco AG | 6,8 | 7.82 |
| 2000 | 100% PSK (Postal Bank) | 969.5 | 1114.93 |
| 24.4% Telecom | 763.8 | 878.37 | |
| 100% State Printing Office | 2.2 | 2.53 | |
| 1742.3 | 2003.65 | ||
| 2001 | 17.38% Airport Vienna AG | 54.1 | 62.22 |
| 41.1% Austrian Tobacco AG | 582.2 | 669.53 | |
| 100% Dorotheum | 55.6 | 63.94 | |
| 100% Strohal Rotary Printing | 21.1 | 24.27 | |
| 713.0 | 819.96 | ||
| Total 1999-2001 | 2,455.3 | 2,823.61 |
The first "wave" of privatization of the Vienna Airport spanned the years 1992 to 1995. Before 1992, the federal state owned 50 per cent of the airport and the city of Vienna and the province of Lower Austria each owned 25 per cent. The first wave of privatization transferred 27 per cent of the shares from public to private shareholders. Now the federal state owned "only" 36.5 per cent and the city of Vienna and the province of Lower Austria each owned 18.5 per cent. After the second wave of privatization in 1995 private share holders owned 48.86 per cent and the city of Vienna, the province of Lower Austria and the federal republic each owned 17.38 per cent. The last wave of privatization of Vienna Airport took place in March and April 2001. The 17.38 per cent of the federal republic which was owned by the Austrian Industrial Holding Agency (ÖIAG) was sold to the following institutions/investors:
In sum, the federal republic achieved net sale proceeds of US$163,882 million (€142,506million) and the average value of the "airport share" was US$45.3 (€39.4 Euro) in 2001.
Currently (1/2003) we have the situation that the Vienna Airport is 50 per cent owned by private shareholders, another 10 per cent by the employees of the airport the city of Vienna and the province of Lower Austria each own 20 per cent. Overall, Vienna Airport is now partly privatized, and the increasing number of airport privatizations that are taking place through the world demonstrate that growing acceptance of this process as a method of tackling some of the challenges many airports face nowadays.
However, airport ownership and control are always likely to be controversial: for many countries transferring airports, which are considered to be nationally important assets, to the private sector remains highly politically sensitive. This is the reason why the public still holds 50 per cent of the shares of Vienna Airport. This is so because the quasi monopolistic position of many airports will continue to be of concern to politicians and airport users. The fear is that priority will be given to private shareholders or investors and that the interests of the users and community might be neglected. This is in contrast to the situation for commercial airlines where competition can be quite intensive. Airports are likely to be a natural monopoly because competition is not so easy to create. In the case of Vienna, the nearest airports are in Bratislava, Prague and Budapest, but they all are some distance away and do not have the same level of facilities as Vienna Airport. For this reason it is an open question whether Vienna Airport will be totally privatized, and whether this step will be a success or not. So far, the three privatizing steps have been quite successful in terms of profitability and growth. Vienna Airport is a very profitable one and total passengers at Vienna Airport raised from roughly 5 million in 1990 to roughly 12 million in 2000. During the period from 1979-1999 revenues have grown by 9.5 per cent p.a. to US$460million (€400million). Since 1991, when new accounting procedures were adopted, profit before interest and tax increased from US$34.5 million (€30 million) in 1991 to US$97,8 million (€85 million) in 1999 - an annual average growth rate of 13.9 per cent.
Privatization has certainly been a key element of structural reform in the European Union countries, including Austria, and proceeds from privatization have been substantial in most of these countries. Gross receipts that can be transferred to the budget are affected by actions prior to sale, the sales process and the post-privatization regime. An evaluation of the potential uses of privatization receipts or proceeds should reflect the implications for government net worth and their macroeconomic impact. In so far as government net worth is concerned, proceeds from privatization do not often themselves indicate then the government is better off. Privatization has longer term implications in terms of revenues forgone and/or expenditures that will not be made in the future and government decisions on the use of proceeds should reflect these long ran effects. Government net worth will rise to the extent that private sector ownership leads to an increase in efficiency and the government shares in this gain. In the Vienna Airport case, the governments have been keen to obtain the revenues from partial privatization. They have, however, been wary of fully privatizing the airport given its market power, and the concern that it might use this market power to the detriment of users.
1 Surveys of the privatization literature is provided in Megginson and Netter (2001), Boes und Schneider (1996), Bartel und Schneider (1991) and a summary for the earlier discussion is given in Borcherding et al (1982).
2 Compare e.g. Borcherding, et al (1982) and Boes and Schneider (1996).
3 The first approach has been developed by Alchian (1961, 1965) and more recently Baron and Myerson (1982), Grossman and Hardt (1983) and MasColell et al (1995).
4 Compare the study by Boes and Schneider (1996), Schneider (1997, 2002), Schneider and Hofreither (1990). As these results are so well known, they are not reported here.
5Compare Schneider and Frey (1988), Bartel and Schneider (1991) and Pardo and Schneider (1996) and Schneider (2002).
6 For example for Austria, Upper Austria and Styria compare Schneider (2002) and Bartel and Schneider (1991).
7The Austrian type of Keynesian policy used the public enterprises and state-owned firms for such purposes quite successfully over the period 1971-1986. Compare section 3.2 and Schneider (2002).
8 (1) Gross receipt from privatizations.
(2) Up to 1997 no information about privatization proceeds were available.
(3) Debt sales in Great Britain were between 1990 and 1997 (fiscal year) GBP 5.347 million, GBP 7.924 million,GBP 8.189 million, GBP 5.453 million, GBP 6.429 million, GBP 2.439 million and GBP 4.500 million respective.
(4) Inclusive convergeable bonds, INA, which could be transferred and shared among these utilities with the amount of US$2.055 million. in the year 1996 and indirect privatization proceeds of US$2.658 million. in the year 1996 and US$2.620 million. in the year 1997.
(5) In the year 1997 there have been no privatizations on the federal level.
(6) The cumulated amount for the years 1991-1993 is US$2.240 million.
(7) Source for the years 1990-1996 is the Worldbank and SBC Warburg; for the year 1997 the source is IFR Securities.
All other sources: National statistics, and OECD Financial Market Trends, No 72, (1999), Paris.
9 [US$1.15 ~ €1]
Alchian, A.A. (1961) Some Economics of Property Rights, Rand Corporation, Santa Monica.
Alchian, A,A. (1965) Some Economic of Property Rights, Il Politiquo 30/4, pp. 816-829.
Baron, B. and Myerson, F (1982) Principal Agents Theory, Econometrica 50, pp. 911-930.
Bartel Rainer and Friedrich Schneider (1991) The "mess" of public industrial production in Austria: A typical case of public sector inefficiency?, Public Choice Vol. 68/1, pp. 17-40.
Boes Dieter and Friedrich Schneider (1996) Private Public Partnership: Gemeinschaftsunternehmen zwischen privaten und der oeffentlichen Hand, Zeitsehrift fuer Unternehmens- und Gesellschaftsrecht, pp. 519-543.
Borcherding Thomas, Bush W.C. and R.M. Spann (1977) The Effects on Public Spending on the Divisibility of Public Outputs in Consumption, Bureaucratic Power and the Size of the Tax Sharing Group, in: T.E. Borcherding (editor), Budgets and Bureaucrats: The Sources of Government Growth, Durham, NC, Duke University Press, pp. 211-228.
Borcherding Thomas, Pommerehne Werner W. and Friedrich Schneider (1982) Comparing the Efficiency of Private and Public Production: The Evidence from 5 Countries, Zeitschrift fuer Nationaloekonomie/Journal of Economics 89 (Supplement 2), pp. 127-156.
De Alessi L. (1974) An Economic Analyses of Government Ownership and Regulation: The Theory and the Evidence from Electric Power Industry, Public Choice 19/1, pp. 1-42.
Grossman, F. and Hart, B. (1983) Principal Agents Theory: What is New, What is old, Econometrica 51, pp. 7-45.
MasColell, G., Winston, B, and Green, H. (1995) Microeconomic Theory, New York-Oxford, Oxford University Press.
Megginson, W.R. and Netter, J (2001) From state to market: a survey of empirical studies on privatization, Journal of Economic Literature, 39/3, pp. 321-389.
Niskanen W.A. (1971) Bureaucracy and Representative Government, Chicago and New York, Chicago University Press.
Niskanen W.A. (1975) Bureaucraths and Politicians, Journal of Law and Economics 18/4, pp. 617-643.
Nowotny Ewald (1982), Nationalist Industry as an Instrument of Stabilization Policy, Annalen der Gemeinwirtschaft 51/1, pp. 41-57.
Pardo José Casas and Friedrich Schneider (1996) Current Issues in Public Choice, Cheltenham, UK, Edward Elgar.
Schneider Friedrich (1997) Deregulierung und Privatisierung als Allheilmittel gegen ineffiziente Produktion von oeffentlichen Unternehmen?, in: Wieviel Staat, wie viel Privat?, Sammelband von der Arbeitsgemeinschaft der wissenschaftlichen Wirtschaftspolitik, Vienna, pp. 33-59,
Schneider Friedrich (2002) Privatisierungen und Deregulierungen in Oesterreich in den 90er Jahren: Einige Anmerkungen aus Sicht der neuen politischen Oekonomie, in: Hartmut Berg (editor), Deregulierung und Privatisierung: Gewolltes - Erreichtes - Versaeumtes?, Schriften des Vereins fuer Socialpolitik (Neue Folge, Band 287), pp. 89-120,
Schneider Friedrich and Markus F. Hofreither (1990) Privatisierung und Deregulierung in oeffentlichen Unternehmen in westeuropaeischen Laendern: Erste Erfahrungen und Analysen, Vienna: Manzsche Verlags- und Universitaetsbuchhandlung.
Schneider Friedrich and Bruno Frey (1988) Political Business Cycles: A Survey, in: Thomas Willet (editor), Influation and the Political Business Cycles, Durham, NC, pp. 239-275.
Sigmund Ulrich (1998) Die Treuhand 1990/1991: Spezialfall, Privatisierungsmonopol und Staatsversagen?, Universität Kiel: Institut fuer Weltwirtschaft, Kiel.
