The United Nations Industrial Development Organization’s commissioned this study as part of its effort to assess the factors that have been key to the success or failure of privatizing state-owned enterprises. The study addressed macroeconomic and political conditions existing at the time of privatization, the objectives sought, conditions addressed, and the particular methods used to privatize CESMEC, a technical services enterprise in Chile.
Chile’s economic history during the past 25-30 years is a fascinating and complex story, of which enterprise privatization is an important aspect. Others have told portions of the story, but mainly from the “top down,” a point of view that mainly examined Chile’s macroeconomy and the effects of privatization as portrayed in terms of aggregated data for a large number of privatized enterprises. This effort for the United Nations was unique, in that it described privatization from the “bottom up,” namely from a point of view, and with particular focus, on one of Chile’s privatized enterprises.
The effort entailed extensive background research and interviews with key people in Chile who were instrumental in formulating the nation’s privatization policies and implementing the privatization effort, particularly CESMEC’s sale to private entrepreneurs. Key informants also included experts in analyzing Chile’s privatization program and those affected most by CESMEC’s privatization, including its employees of which many acquired shares of stock in the enterprise.
CESMEC’s privatization illustrated many of the important aspects of Chile’s privatization effort and of the elements necessary for success within the context of the nation’s economic environment at the time.
Not surprisingly, the study concluded that a successful privatization program requires healthy and stable macroeconomic conditions and a free market. Particularly important are monetary control, fiscal discipline, deregulation of prices, and opening of the economy to international trade and capital movement.
However, the study also concluded that people with entrepreneurial talent would emerge when sufficient financial incentives are offered, and that management would be most effective when it possesses a large enough portion of the enterprise’s equity to instill a balance of caution and aggressiveness together with the necessary management controls.
The study also concluded that governments should not allow entrepreneurs to finance enterprise privatizations with too much debt. While such leveraging will enable the government to obtain high prices for the enterprise, the high debt service requirements will also encourage high risk strategies that will increase the probability of enterprise bankruptcy when returns fall below the debt service costs. Indeed, while many of Chile’s privatized enterprises went bankrupt during the severe recession of the early 1980s, CESMEC’s survival provided important lessons.