Italian lessons on privatization

The winners and losers.

from Revolting Europe

Privatization has benefitted the very few, leading to massive job losses, delivering a bad deal for consumers and sowing the seeds of today’s financial and economic crisis, and yet the process goes on, says Marco Bersani. In an extract from his new book, Bersani surveys the case of Italy, home of one the world’s largest public asset sell off programmes.

Privatization in Italy has led to a massive retreat of the state from a direct role in industrial production and, more generally, the ‘public’ in service delivery. Privatization receipts covering the period 1985 – 2007 amounted to some 148 – 152 billion euros, placing Italy in second place, behind Japan, in the global ranking.

These figures appear to be large, but in reality, when compared with the subsequent stock market values of the privatized companies, state intervention in the economy effectively ended with a bargain sale.

Privatization in Italy has led to the total withdrawal of the state from the banking, insurance, telecommunications and tobacco, as well as a substantial reduction in investments, whether or not resullting in loss of state control, in the strategic sectors of energy (Eni and Enel) and defense (Finmeccanica).

The consequence has been that, the contribution to GDP of the companies owned by the central government has fallen from 18 percent in 1991 to 4.7 percent today. This is a structural transformation of the economy of enormous proportions.

Winners
"So who were the winners and losers out of this process?

"The financial advisory firms that accompanied the privatisation processes, in their multiple roles, as advisor, appraiser, dealer, distributor and consultants, raked in more than 2.2 billion euros. We are talking about the global financial elite, including Société Générale, Rothschild, Credit Suisse First Boston, JP Morgan, Merrill Lynch, Lehman Brothers.

"Second, the privatisation process put an end to the role of public finance. In Italy in the early 1990s,  public control of the banks was greater than any other European country: 74.5 percent compared to 61.2 percent in Germany and 36 percent in France. The ‘reform’ process drastically downsized public ownership of Italian banks to below the levels in Germany and France, which, while receiving less scrutiny, have however maintained a public presence in the banking system of 52 percent and 31 percent respectively.

Deregulation has also produced – as is obvious would happen in the jungle of the market – a strong concentration of ownership, which, through 566 acquisitions and mergers with a value equal to 50% of total assets, has drastically changed the Italian banking system, bringing the market share of the five largest banking groups from 34 percent to 54 percent.

If to this is added the 2003 partial privatisation of Cassa Depositi e Prestiti, which manages a "major share" of the savings of Italians held in the post office, the picture is quite clear: privatization led the reversal of any public function in the economic and financial spheres, with the results seen in today’s crisis, where the decisions about the country’s economy are conditioned completely by the dynamics of the international financial system.

One of the beneficial effects, repeatedly trumpeted by proponents of privatization, was on the public debt of the country;  the proceeds reduced the debt / GDP ratio in the period 1992-2004 to a degree that saved interest payments of about 38 billion euros.

Illusory gains
But it is an illusion, both from a quantitative and qualitative point of view, for any gain from the immediate revenues, in any case negligible when compared to the size of the public debt in the medium and long term, was outweighed by the loss of significant state revenue flows from the companies it used to own, as well as industrial structures that were the backbone of the economy and a public welfare system funded, in part, by those state-owned companies.

And if the stated goal was to implement a liberalization of economic activity by encouraging free competition, the most obvious result was the handing over to private monopolies of activities and services previously managed by the public, leading to their transformation from having a social function to being solely driven by profit.

This is because the primary objective of the privatization process was in fact to give a strong boost to financial markets. From 1992 to 2007, the domestic stock market capitalization grew seven-fold and the volume of trade increased by eighty-five times. Such huge gains are largely attributable to the listing of privatized enterprises, whose abundant supply fostered a massive redirection of funds from small savers traditionally investing in government bonds to the stock market.

Fueling the stock market
This process  far, from being the result of a free choice by the “consumer / saver,” was rather the result of a deliberate strategy, pursued by drastically reducing the attractiveness of government bonds and giving a final shot in the arm to the stock market through  taxation – the 1992-93 Amato government introduced a charge of 27 percent on interest from current accounts, compared to 12.5 percent applied to gains from investments in the stock market. This process was accompanied and supported by foreign investors, who bought both government bonds and shares of the newly privatized companies, quickly becoming key players in the financial system, and to become today the main cause of our current crisis.

Contrary to the repeatedly trumpeted aim the foment a mass culture of shareholding in Italy and to promote the model of the public (listed) company , the policies of privatization have instead resulted in high concentration of corporate power ownership – as has already happened in Britain – resulting primarily a centralization of control, even in the absence of a concentration of ownership: then as now, several industry groups – and increasingly financial groups – control listed companies without owning, even remotely, the majority of shares.

In the first ten listed groups, the controlled capital is nearly three times the capital actually  owned, and this is made possible by the so-called system of "Chinese boxes" the possession by a holding of 51 percent of a society, which in turn owns 51 percent of another, which owns 40 percent of another, which owns 30 percent of the final company, the one that really matters. To give just one example, with this system, Pirelli’s Marco Tronchetti Provera gained control of Olivetti – and through it, then Telecom Italia and Tim  – despite having bought only 29 percent of the shares of the company.

Within this model, beyond the tales on economic democracy, it clear what the role of small investors is: put money into a company while large shareholders control it, without having to own it.

Bad for jobs and consumers
The impact of privatization was pretty shocking in terms of employment and on the consequences for users. It lead to 225,000 job losses, of which 125,000 in the telecommunications sector, 25,000 in the steel industry, 24,000 in the mechanical sector, 22,000 in food and distribution, 14,000 in transportation and infrastructure.

At the same time, citizens have found themselves faced with a general deterioration in the quality of services and a steady rise in prices, particularly in banking, infrastructure (motorways) and utilities (water, electricity and gas), with rates significantly higher than those charged in other European countries.

In fact, privatisations have not done anything but allow the transfer of what was in public hands – therefore the property of citizens via the state – to a few private hands, often financial groups which couldn’t wait to get into monopoly sectors with high profitability in order to gain profits with zero risk.

Emblematic from this point of view the case of the highways: a real gift to the Benetton group, who got a guaranteed return with nil entrepreneurial risk, implementing minimum investments and profiting from tariffs that grew faster than inflation, while the taxpayer continued to bear the costs for the network in less wealthy and riskier areas (the Salerno – Reggio Calabria motorway and large inter-regional roads).

De-industrialization
From a strategic economic standpoint, privatization has also produced accelerated a process of de-industrialization started thirty years ago, by supplementing it with a specific process of denationalization.

With the slogan "private is good, public doesn’t work", just a few individuals got their hands on important strategic sectors such as banking and insurance, telecommunications, steel and food, and yet contrary to claims they were taking over state industries in trouble, 64.8 percent of privatized companies were actually in  banking, insurance and telecommunications, sectors that were financially lucrative under public management and control.

Ideological fundamentalism
But the data cannot compete with the ideological fundamentalism that has permeated Italy’s political and administrative culture.

And it was mainly the Left, which sought to make people forget the guilt that in the past it wanted to change the world and felt the need to be credited as reliable by financial markets, that turned privatisation into a reformist and modernising myth, and to offer at the mercy of financial executives activities, guaranteed by long term cash flows, that lent themselves perfectly to speculative transactions.

Despite the disastrous results in the economic, employment and social spheres, for several years there has been even an attempt to radicalize the policies of privatization, spreading it to socially important and sensitive areas like welfare, education, postal services, transport and local public services.

New privatization push
At the end of September 2011, the then Economy Minister Giulio Tremonti invited large Italian and international investors, the elite of the banking system and global banks, to partake in another mammoth process of disposal of public assets in the country, this time totally focused on state-owned real estate and municipal and local utilities.

This plan was resumed by the subsequent "technical government" led by prime minister Mario Monti, which has completed its term; the aim, of course, was to reduce public debt and promote growth of the country. The same strategy followed by the first violins of the orchestra, who continue to play while the Titanic heads relentlessly towards the iceberg.

This is a chapter from a new book by Marco Bersani called “CatasTroika” (just published by Edizioni Alegre and available on Amazon), which examines the impact of neo-liberal policies and privatisation over the last forty years, from Latin America to Great Britain, from Russia to Western Europe.

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