The decision to privatize six state-owned companies was made following the ratification of the 2017 state budget on November 10. Privatization is nothing new to Mongolia.
Since the democratic revolution in 1990, most major state-owned enterprises have been privatized. The remaining state-owned companies failed to make a profit or to even function properly. According to Finance Minister B.Choijilsuren, the govern- ment will be forced to privatize the remaining state-owned companies if operations do not improved, as a reported 70 percent of state-run companies have revenue deficits. Is mass privatization is the answer to the woes of state-owned enterprises?
It has been widely recognized around the world that a government owning too many companies can do more harm than good. International experience has generally shown that a government cannot handle many companies and still operate profitably. Privatization can bring improved efficiency to a business, as political interference can result in poor economic decisions. Governments tend to make decisions based on political pressure rather than sound business or economic sense. Since private businesses have an obligation to their shareholders, it is likely that privatization will provide incentive to cut costs and ambitions to work profitably. In certain cases, privatization can also increase competition, which is beneficial to the consumer. In the 1980s, major privatization efforts were initiated in the UK by Prime Minister Margaret Thatcher, and it bore positive results. For example, in 1986, one share of British Gas was valued at 135 pence, but in 2013, one share was valued at 11.09 GBP. Judging from the current situation of Mongolia’s economy, and given the government’s bad management of companies, it seems pretty cut and dry that privatization is the correct move.
Some readers might then wonder why there are any state-owned companies left at all. It is important to also take into account the vast number of disadvantages that come with privatization. The concept of privatization can seem good on paper, especially in Mongolia’s case. The government releases poorly managed companies to shareholders, who will in turn operate the company much more efficiently. However, it is wrong to apply this blanket statement to all state-owned companies.
It is hard to deny that most private businesses are run more effectively than public companies. But what we need to take into account is that there are certain sectors and companies that the government needs to be involved in. Recently, the decision to privatize six state-owned companies included Telecom Mongolia and Mongol Post. The telecommunications sector and the postal service are part of the integral infrastructure of any country. There is no denying that privatization of these two companies would probably increase efficiency and profits, yet selling these types of key companies could be detrimental to everyone involved, except for shareholders. The ones who have the most to lose are the consumers. It is very likely that the price of essential services will increase. The reality is that businesses look out for their shareholders, while the government prioritizes the interests of the general public.
The benefit of efficiency that comes with privatization can be a double-edged sword. Increasing efficiency usually involves the letting go of hundreds of workers. A business is not obligated to employ people it deems unnecessary for operations. This can result in an increase in the unemployment rate. While this won’t have a dramatic effect on companies based in UB, it will have a large impact on the employees of the soon-to-be-private Erdenet Bulgan Electricity Distribution Network.
In addition, it is very hard to hold private companies accountable, meaning that Erdenet Bulgan Electricity Distribution Network could, for example, jack up electricity prices and the government would have a hard time countering it. The threat of monopolies also persists, as a sole supplier of electricity (such as the Erdenet network) can make decisions about prices and services that ultimately only benefit the company and its shareholders.
As this trend of privatization looks like it will continue, there have been murmurs of the government selling many other integral companies, such as MIAT Mongolian Airlines. The notion of selling large infrastructural sectors to anyone willing to buy them can be dangerous. Privatizing companies that are not integral to the country, such as Orgil Hot Springs, can be beneficial. The main point is that there are certain sectors that are vital to a nation.Rapidly privatizing companies such as Mongol Post, without assessing the situation, can be negative, as privatization can be risky and very hard to reverse.
There have also been concerns that the companies that the government is planning to sell have been undervalued. This would negatively affect everyone involved except the buyers. The government would be letting go of future dividends, while selling valuable companies below market prices.
These observations are not intended to discourage and demonize the notion of privatization. We have seen the positive effects that privatization can have when done correctly. The question is whether Mongolia is at a point where it can be done correctly and openly.