Alleviating motion sickness: transportation privatization trends in developing countries.

Author:Marber, Peter N.
Position:Privatization: Political and Economic Challenges

Privatization has a far greater impact on the lives and economies of developing country citizens than those in the G7.(1) It is a major restructuring tool for these emerging markets, and privatization of the transportation sector--including land, sea and air infrastructure and services--is vital: nascent economies cannot grow and prosper if they lack the ability to efficiently transport goods and people, both internally and externally. As the state divests itself of its control over industry, the products of privatized businesses, while more competitive than their antecedents and likely of better quality, must reach their markets, both at home and abroad, quickly and efficiently in order to maintain their newfound competitiveness.

The importance of transportation privatization in the developing world should not be underestimated. Recent estimates by the World Bank report that these emerging market economies are anticipating growth of approximately 6 percent per annum versus 2.5 percent in the G7 over the next decade. Rapidly developing economies need efficient means of moving workers from homes to factories and offices. Poorly maintained roads, ports, and rail systems undermine the competitiveness of manufacturing and distributing products. Moreover, renovating dilapidated or sub-standard airports (or building news ones) encourages business people from high-income economies, in their never-ending search for new markets and strategic investments, to travel to developing countries. Without a reliable and cost-effective transportation system, long-term business plans are impossible to implement.

Furthermore, the modes of transportation encouraged by the developing country during its growth spurt will ultimately shape its socio-economic destiny. Economies are largely the product of the dwelling, spending, and saving habits of their consumers which are, in turn, significantly influenced by available forms of transportation. Highly developed public rail systems, for example, might foster greater urbanization, while national highway projects encourage the use of automobiles and suburbanization. By extension, the preferred form of transportation will dictate the demand for the raw materials associated with it: reliance on railways may ultimately reduce the demand for steel, rubber and petroleum, while increasing the demand for other forms of manufactured goods, energy, and services associated with the construction and running of rail systems. The privatization of transportation infrastructure in the developing world, therefore, will not only impact product distribution logistics, but also demographic trends, leisure time availability, consumption patterns and sectoral growth. The future economic identities of these markets will be shaped by today's privatization decisions.(2)

The ongoing surge in transport and infrastructure privatization in developing countries also serves to remedy the increasing frustration on the part of the citizenry with the poor provision of infrastructure and transportation services by public and state-owned monopolies; to relieve widespread budget deficits and adapt to fiscal constraints which limit the amount of public funds that can be earmarked toward infrastructure development and maintenance and to apply new technology that has undermined previous rationales for monopoly ownership of transportation services and infrastructure.

While transportation privatization consistently yields similar benefits, by reviewing select experiences in various regions it is clear that countries are choosing the privatization path for different reasons and under different constraints, both political and financial. To a large extent, a country's geography and demographic patterns will dictate its transportation requirements, and its history of state ownership and incorporation in the global economy will affect the kind of financing to which it has access. In many cases, the need for large-scale privatization financing has led to the development of local capital markets, banking sectors and new and innovative financing techniques, highlighting the synergistic link between capital market development and economic growth in emerging markets. These developments themselves have contributed, and will continue to contribute, to a fundamental change in the character of the affected economies.(3)

In aggregate, infrastructure privatization accounted for US$32 billion or roughly 33 percent of all developing country privatizations between 1988 and 1993. Of this, transportation privatizations accounted for $6.75 billion in privatization activity (over 20 percent), the divestiture of national airlines representing the single largest category within the transportation sector, generating $5.35 billion in revenues for governments during this period.(4) [See Tables 1 and 2]

Table 1 Infrastructure Privatization in Developing Countries, 1988-1993 Total (in $US millions)

1988 1989 1990 1991 1992 1993 Total Airlines 367 473 1,926 269 1,478 845 5,351 Railroads 0 0 0 159 217 0 376 Road Transport 0 0 313 40 19 40 412 Ports 0 0 11 181 28 294 513 Telecom. 325 213 3,704 5,816 3,007 2,463 15,527 Energy 106 2,108 100 364 4,962 1,983 9,621 Water 0 0 1.8 0 175 50 227 TOTAL 798 2,792 6,055 6,828 9,878 5,674 32,027 Source: Foreign Investment Advisory Service (World Bank/IFC)

Table 2 Infrastructure Privatization in Developing Countries, 1988-1993 Total (by number of transactions)

1988 1989 1990 1991 1992 1993 Total Airlines 2 5 4 5 7 10 33 Railroads 0 0 0 2 5 1 8 Road Transport 0 0 9 5 3 10 27 Ports 0 0 2 6 9 19 36 Telecom. 5 4 12 16 8 21 66 Energy 1 3 3 8 30 45 90 Water 0 0 4 0 2 1 7 TOTAL 8 12 34 43 64 107 267 Source: Foreign Investment Advisory Service (World Bank/IFC)

As the figures show, transportation privatization represents a sizable proportion of private money being poured into infrastructure privatization in developing countries. One reason for this, as noted earlier, is that transportation privatization is a prerequisite for the development of many other sectors of the economy.

Moreover, while the initial amount of money raised from transport privatizations may seem trivial [see Table 1], the token prices paid for anitquated or poorly maintained assets do not reflect their true present value. First, it fails to include billions in annual savings from subsidies that governments no longer have to provide to state-owned transport facilities, many of which are debt-ridden and essentially bankrupt. Second, and more importantly, these figures exclude billions in future investment commitments new owners pledge to spend on upgrading the privatized facilities--often, the largest component of many privatization bids, as we will see later. Finally, one must remember that governments often receive additional annual fees from privatization concessions, some of which extend for decades. Indeed, the net present value from slashed subsidies and concession fees render the initial cash earned from transportation privatizations insignificant, which is why such figures are misleading.

Privatization of transportation infrastructure and services is, of course, not limited to developing countries. Many G7 countries, most notably the United Kingdom during the entire decade of the 1980s, and once again in recent years, have made significant headway in the privatization of the transportation sector. More recently, in the United States, many states have attempted similar privatization programs intending to improve transportation services through a decrease in government involvement. Each region--the economically developed countries of North America and Western Europe, Eastern Europe, the Former Soviet Union, Latin America and Asia--must be examined in light of its unique geographic, political, economic and historic context. What we will notice is that, in each region, transportation privatization has similar benefits, but different catalysts, which in turn impacts the different processes of privatization.

Case Studies in Transportation Privatization

The countries analyzed in this paper were selected both for the scope of their privatization efforts and for the contrast they provide in the rationales and methods of their privatization programs. In Latin America, Chile's privatization program was initially launched for ideological reasons, while in Argentina and Mexico the goal was primarily to raise revenue to address structural macroeconomic reforms, initially in the context of debt-restructuring. In Eastern Europe and the former Soviet Union (FSU), the Czech Republic is a small, land-locked country, while Russia, which spans 11-time zones with mountains, coastlines, and widely varied weather conditions, has very different transportation requirements. Also important is the fact that in the Czech Republic privatization was immediately embraced by politicians and the citizenry alike, while Russian economic reforms have been slower to gain widespread acceptance.

In Asia, Malaysia was an early privatizer, again primarily on ideological grounds, but growing spending requirements and the need for increasing amounts of private sectors financing fueled its expansion. China, like the countries of Eastern Europe and the former Soviet Union, has embarked on its privatization efforts as part of a rapid shift to a market-oriented economy, yet presents a unique case as this is being accomplished under the cloak of communism. Finally, an examination of transportation privatization experiences in the G7 countries of the United Kingdom and the United States offers some insight into the benefits of well-developed financial markets and sophisticated financing tools at the disposal of privatizers and, especially in the UK, illustrates the ideological grounding of many developing world privatization efforts.(5)

A country's choice of privatization path is partially dictated by the existence of well-developed domestic stock and bond markets. The United Kingdom and the United States both...

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