Ensuring environmental management of privatization

Privatization can have an impact on the environment in a number of ways: for example, by creating industrial and market structures which attract foreign investment and technology, including environmentally sound technology; by creating competitive market structures which provide incentives for innovation and efficiency, including incentives to improve production processes and to produce products which are environmentally friendly, and which allow market-based instruments of environmental regulation to operate efficiently; and by forcing infrastructure services to align the prices of their outputs to their real costs and thus to cut out wasteful consumption and pollution due to underpricing.

The primary objective of privatization which is broadly shared by governments is to promote competition and economic efficiency. Competition is in fact central to the success of privatization. One of the major lessons learned from privatization experiences is that, while ownership often matters, competition matters even more. This is true of public utilities, where pro-competition regulation is an important aspect of utility regulation, as it is true of competitive markets. Thus, where privatization contributes to competition and economic efficiency - and there is some evidence from the country presentations submitted to the Ad Hoc Working Group and other studies that privatization programmes in a number of countries have achieved efficiency gains in terms of increased competition and lower consumer prices It can also contribute to eco-efficiency. Broadly speaking, eco-efficiency means production and consumption structures which minimize resource use and pollution per unit of output. In a technical sense, it means ecological or "full-cost pricing", [ie] pricing of economic transactions or goods in a way which reflects or "internalizes" environmental externalities.

In practice, whether privatization promotes eco-efficiency, for example by reducing pollution, can only be verified by reference to the evidence. There is, however, a "circumstantial case", as the World Bank puts it, that privatization is beneficial for the environment. To put it simply, public enterprises tend to pollute more because they use old technology, they often receive protection and they can more easily avoid compliance with pollution controls or get exemptions from pollution regulations. However, private enterprises can also increase pollution, because they may be more inclined to undertake polluting activities where profits are important, to bribe regulators or to hide information from them. In the final analysis, whether ownership matters depends on the manner in which competition and environmental regulation and pressure operate on public or private ownership.

In theory, privatization, by improving industrial and market structures and attracting foreign investment and capital, which is one of the major reasons for privatization, can attract modern technology, including environmentally friendly technology. One example is water treatment technology for the privatization or expansion of water supplies. However, it can also bring in foreign capital to participate in projects, for example mining or large-scale irrigation, which can lead to environmental damage unless such activities are properly managed environmentally.

Further, where privatization succeeds in creating competitive market structures, the environment itself can become -an instrument of competition. This is happening in a number of developed countries, but developing countries too can get into the act, for example by developing environmentally so un d natural resource-based industries. In developed countries, there is evidence that companies in competitive markets, with an eye to increased environmental consciousness on the part of consumers and under pressure of environmental lobbies and regulations, are themselves looking for ways to improve their "green" image through environmental reporting and through the development of environmentally sound products in terms of improved energy efficiency or of reduced pollution in order to stay ahead of their competitors or to maintain market shares. Examples include electricity-driven cars, phosphate-free detergents and mercury-free batteries. Some companies in developed countries have also been able develop new export markets, for example for the environmentally friendly water treatment technology referred to earlier.

Competitive markets are also necessary if market-based instruments for environmental regulation are to work. Such instruments, because they rely on market forces and the competitive drive, may be more efficient than command and control mechanisms which are usually seen as an imposition. By reducing subsidies and introducing environmental taxation, they also have a number of fiscal advantages. One such market-based mechanism is a system of tradable emission permits. In this regard, reference may be made to the market-based programme to clean up urban air pollution, which was introduced recently in Southern California. Under the programme, known as the Regional Clean Air Incentives Market (RECLAIM), industrial enterprises in four Los Angeles area counties are allocated an annual pollution limit and then granted the freedom to choose the cheapest way to achieve it. Companies that succeed in cutting their emission levels in relation to their limits can sell the excess credits for whatever price they can fetch, thus giving them an incentive to reduce pollution.

Privatization, by forcing a privatized electricity company, for example, to charge consumers the real costs of production, can also help to reduce wasteful consumption and pollution due to underpricing. The latter may be due to historical reasons or to the fact that no conscious effort has been made to calculate the real economic costs until it is decided to privatize or to invest in new capacity because of supply shortages, as has occurred in some developing countries. The costs of inadequate supply, when translated into macroeconomic constraints to growth, may be much higher than the costs of generation and supply. If subsidies are to be provided, for example for particular social groups such as rural populations, that can be done in an explicit and transparent manner on the basis of the real costs.

In the commodity sector of developing countries, privatization and its benefits are closely related to the need to provide incentives for the economic agents involved to use the resources and to provide their goods and services in a sustainable way. The issue is of relevance both in agriculture, where the resources are renewable, and in the mining sector, where the resources are non-renewable. In many instances, the issue is closely related to property rights which do not exist or are not well defined, thus creating large externalities. In that situation, the market pricing mechanism does not reflect the environmental value of natural resources for the society as a whole. For example, there are cases where the absence of land titles has created a situation of open access goods and, thus, the farmers and other economic agents operate only in the context of their private costs and of their profit objectives, in disregard of conservation and other environmental objectives. In these cases, securing the land titles, in combination with other policy instruments, can improve significantly the way the resources are used.