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Privatization: Successes and Failures resources

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FOREWORD xv minimal investments. But because the incentives of the private fi rm are not aligned with those of government (or society), they work to circumvent these requirements, giving rise to legal disputes. In the case of the invest- ment requirements, for instance, the foreign fi rms may use “transfer” pric- ing schemes—the fi rm uses (which rm complies at the made- up prices the fi may even include charges for the time of the corporation’s headquarter management). In other cases, the private fi rm may claim that the govern- ment did not comply with implicit or explicit provisions of the concession requirement; for instance, in Bolivia, some of the oil and gas companies claimed that they could not make the necessary investments because of the civil unrest in the country. When there is actual or suspected bribery in the granting of a conces- sion or in a privatization (suspected because the terms are so unfavorable to the country that it is hard to believe that they are simply a matter of in- competence), successor governments may be under po liti cal pressure to rectify the agreement. In some cases, they may have fi rm legal grounds; for instance, the agreement may not have satisfi ed certain constitutional provisions.14 No contract is ever complete.15 Governments always have the power to impose regulations or undertake other actions that work to the disadvan- tage of the private fi rm. They may impose or enforce tougher environ- mental laws. If the government has a monopoly on electricity, it can fail to provide electricity on a regular basis, or it can demand higher prices. In short, there is always some leverage to force a renegotiation. More power- ful governments, like Rus sia’s, have used that power. In recent years, many countries have signed bilateral investment agree- ments that provide for arbitration of these state- investor disputes. But these investment agreements have themselves provided a further argu- ment against privatization. They are conducted by judicial pro cesses that fall far short of the judicial standards expected in modern democracies (e.g., proceedings, and even the rulings, may be secret; there is no appel- late pro cess and no clear system of determining pre ce dents).16 T H E P R I V A T I Z A T I O N P R O C E S S Even if it could be shown that private own ership is more effi cient than public own ership, it does not follow that privatization is desirable, for a simple reason: it is very diffi cult to do privatization well. Of obvious concern is the loss of revenue to the government in the pro cess of

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