This well-written book tackles the relationship between privatisation (and privatisation failures) and specific country contexts. Using case studies of privatisation failures in Malaysia, the book argues that the political drivers behind privatisation must be considered alongside the constraints on the state's political capacity to manage post-privatisation challenges, such as regulation. The book contends that much of the international privatisation literature fails to recognise the importance of specific country contexts, for example the nature of social and community relationships, the balance of power in society, and the frameworks of governance in which decisions about privatisation and regulation take place.
Tan's analysis considers Malaysia's privatisation performance and the failure of four of Malaysia's largest privatisations: Indah Water Konsortium (the operator of the national sewerage system), Kuala Lumpur's Light Rail Transit, Malaysia Airlines (the national airline) and Proton (the national car company). The performance of these privatisation projects is measured against economic general indicators (efficiency, capital investment and financial performance) as well as indicators specific to each industry and in relation to official objectives.
The book makes two major claims. First, that privatisation in developing countries typically necessitates the continuation of state financial support for a variety of reasons. And second, successful privatisation will depend on the state's capacity, in particular its post-privatisation political capacity, to correct earlier failures and to manage the appropriate subsidy regimes. He therefore suggests that in order to make privatisation work, a state must have both political capacity (defined as the ability to deliver and enforce credible threats to act against underperformance) and institutional capacity (defined as project viability and privatisation design, regulatory and contract design, and selection).
The need to understand country-specific factors is central to Tan's argument, and Tan ensures the reader has the relevant Malaysia-specific understandings before he begins his detailed analysis. In Chapter 3, Tan shows how the emergence of a Malay middle class and the ‘“ethnic imperative” to create Malay entrepreneurs … led to public and private sector inefficiency, but also longer-term problems due to the lower efficiency of the Malay capitalists that the government sought to patronise’ (p. 39). Pushing further, Tan illustrates how ‘the emergence of the new Malay middle class … increased conflict over resource allocation and altered the balance of power’ (p. 40). This led to economically unviable privatisation decisions. He further argues that growing political tensions within the ruling elite resulted in more centralised and personalised patron-client relationships organised around Prime Minister Mahathir Mohamad and former Finance Minister Diam Zainuddin. These combined factors resulted in poor privatisation decisions and lack of capacity in the Malaysian government to implement regulatory policies to respond to, and manage earlier mistakes.
Tan presents some detailed data on the background, performance and problems associated with the four privatisation case studies. For example, in Chapter 6, Tan shows how Malaysia Airlines' average revex ratio (total operating revenue as a percentage of total operating expenditure) increased marginally from 100.1 before privatisation to 102.2 after privatisation. Tan then uses data from other airlines within the region, including Cathay Pacific and Thai Airways, to demonstrate the comparatively small return of this increase. Commendably, each case study includes numerous tables and other quantitative data, backed up with considered qualitative assessments. This shows the depth of research data presented in this analysis.
The analysis of Proton in Chapter 7 is particularly interesting. This chapter shows how personalised intervention by Prime Minister Mahathir enabled the privatisation of Proton despite uncertainties about the economic benefits of such a sale. Personalised intervention by Mahathir also created problems with Proton's post-privatisation management and general lack of government regulation.
A criticism of this book is the implicit assumption that the same set of pre-privatisation and post-privatisation factors leading to failures in Malaysia necessarily also occur in other developing countries. The historical legacy of British intervention, Malaysia's fiery ethnic tensions, and Mahathir's dominant political style are not factors found in all developing countries. Indeed, Tan's detailed focus on the country-specific (i.e. Malaysian) factors leaves a major question about the extent to which such factors would apply in other developing countries, as the book suggests.
Despite this criticism, the book presents a detailed and well-argued explanation of why privatisation in Malaysia failed. Moreover, and perhaps more importantly, the book also presents an alternative general model as to why privatisation sometimes fails. The new model shows that privatisation does not immediately lead to efficiency gains, particularly when the state continues to subsidise privatised companies, and also that the success of privatisation depends on country-specific institutional and political conditions which can inhibit the state's capacity to implement economically rational pre-privatisation and post-privatisation decisions.
