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Privatization: Successes and Failures resources

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FOREWORD xiii interests. For instance, America’s partial privatization of the army—the use of contractors—has not only been extraordinarily expensive, but in many ways it has also proven counterproductive. The contractors have fo- cused on minimizing costs, not on “winning the hearts and minds” of the Iraqis, an objective that was impossible to translate into fi nancial incen- tives. At the early stages of the Iraq war, when Iraqi unemployment hit 60%, it was important to create employment, but cost minimization by the contractors induced them to bring in workers from Nepal and the Philippines. Or consider the problems of managing airports. The private own ers’ profi ts are derived today largely from commissions on sales at airport stores. The longer individuals spend at the airport, the more the profi ts are increased. Randomness in security checks—making it necessary for individuals to arrive early to ensure that they catch their planes—is, to the own ers, a benefi t, even if to both passengers and the airlines it is a huge cost. Their incentives are not well aligned. Recent anxiety over sovereign funds (funds owned by foreign govern- ments) highlights the view even in liberal advanced industrial countries that own ership matters. These critics have explained why we should be worried about foreign own ers, but not about domestic own ers. For in- stance, the United States privatized the United States Enrichment Corpo- ration (USEC), which is responsible for enriching uranium. Low- enriched uranium is used in nuclear power plants, highly enriched uranium is used in atomic bombs, and the same plant can produce either. A private own- er’s incentive to sell the enriched uranium to the highest bidder is obvi- ously not in the national interest of limiting nuclear proliferation. It would clearly be a concern to sell USEC to Iran or a foreign government interested in obtaining highly enriched uranium. But should it not equally be a concern to sell it to a private domestic fi 12 rm? Not only are there many examples, like these, where private manage- ment has not worked well, but there are also many examples where public management has. I have already cited several (Korean steel, French electricity). There are others: Malaysia claims that its state- run oil com- pany is able to deliver to its citizens a larger fraction of the value of that country’s natural resource than any private company could or would have. The incentive of a private oil company is to minimize what it pays the country from which it takes the resource. There is a natural confl ict of interest: the objective of the country should be to maximize the amount the oil company pays. And unfortunately, it is diffi cult to design and

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