This post was published first time on 2.09.2011.
One of the major obstacles for Romanian government to achieve better fiscal discipline are the arrears. Most of them are debts that state-owned companies owe to suppliers and to the governments. The solution agreed with IMF was to change the current management with “private” management. A great publicity stunt if you ask me. Even more it can turn out to be the scam of the century.
This is the first question mark. This means that we admit that current management has political ties. If that is true choosing independent managers, technocrats, should at least solve the problem of political affiliation.
But will this be enough to solve the problem of arrears?
As I said arrears are debts of state owned companies to suppliers mostly and obviously show up as a debt of the Romanian state towards the private sector. At the very core it shows that those companies have higher costs than revenues thus no profit which makes them run up debts. And here comes another implicit assumption behind the motivation to change current management. It is assumed that corruption plays a big role in those costs being really high. There is no clear evidence here but the general feeling is that something is going on.
The main conclusion from all of these points would be that our own resources are poorly managed by the current managers. They are wasted and some are transferred though corruption in the pockets of friends of those managers.
So what is the “private” management supposed to do? Here I want to stop and mention that even today the management is private. In most companies although there are political ties the people chosen have been working in the industry for years as employees. Or turning it upside down how can a manager employed to run a state owned company can be a private manger? She/he will be employed by the Romanian government to run a state-owned company. Not too many private forces at work here. I do not believe that if his employer the Romanian government say jump the “private” manager will not jump.
Nevertheless, assume everything goes as planned and Romanian government has chosen the best managers money can buy. Now their task is to turn around those companies and make them profitable (employ our resources efficiently). As we assume that they are independent maybe the corruption part will be eliminated. What about the rest?
The main cost in a state-owned company is labor force. The communist regime had a policy of mandatory full employment and ended up with too many people employed in each company. To increase efficiency fast those new managers will have to start firing people immediately. Will they be able to do it? I doubt it. In the end people mean votes and votes are always important, no matter the level of development in the economy.
One other problem faced by those managers is that areas in which these companies activate have prices controlled by the government. In my view as long as this situation remains it will be almost impossible for those companies to become profitable. After all production costs for those industries should be similar over time with production costs in other countries. With prices in Romania much smaller profit margins will be either close to zero or non-existent.
Personally I do not believe in half-solutions. If you already have identified the problem, inefficient allocation of resources in the state sector, the solution is easy. The only “entity” that will allocate those resources efficiently is the market. All the other options are just a detour and will end up costing us more money. That’s why a much better and simpler solution for this problem is the PRIVATISATION of those companies.
For those blinded by the marriage between private management and state owned companies should have a look at this book : The halo effect.
I leave you with few questions?
1) To whom will the managers be accountable?
2) How do you make the managers “owners” of the business of assets that are state owned?
3) What is the incentive of a manager running a company in a monopolistic market to cut costs?
4) How do we know they were successful?
5) How many years do they have until they need to show profit?
6) What if they fail?
7) Is there a guarantee that because we are dealing with state assets new managers will not become corrupt?
8) Will they manage to run a business in ROMANIA?
9) Will they stand political pressure from their employer the Romanian Government?