The other day my colleague Massimiliano Trovato and I had an op-ed in The Wall Street Journal Europe, on the forthcoming “privatization” of Poste Italiane, the Italian postal service. I’ve always thought that the old Milton Friedman mantra on tax cuts (“I am favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible”) applies to privatization too: I am in favor of privatizing anything under any circumstances and for any excuse, for any reason, whenever it’s possible.
Well, it ain’t so. For the very simple reason that sometimes government calls “privatization” something which is actually not privatization. The “privatization” of Poste Italiane is one of those cases.
Massimiliano and I write:
On Jan. 25, the Italian government announced that it is seeking to sell a 40% stake of Poste Italiane to institutional as well as retail investors, with a 5% stake to be set aside for the company’s own employees. As the public offering goes forward, the Italian treasury will remain a controlling shareholder. Rome has not spelled out any plans for further divestment at this time.
The partial flotation of Poste Italiane is expected to yield between €4 billion and €6 billion in revenues, to be used to curtail government debt. This is of course a commendable use of money, but the impact on Italy’s total debt stock, which currently stands at more than €2 trillion, would amount to a mere 0.5% reduction–that is, assuming the funds don’t get hijacked for more pressing needs in the process.
The government’s idea to set aside 5% of the stocks for postal workers is one of the most perverse features of this “privatization” plan and may create a conflict of interests: Shareholders aim to maximize profits, whereas workers understandably want to preserve the status quo. When a company is privatized, it typically undertakes a severe restructuring to enable it to navigate the private market. But workers acquiring 5% of Poste Italiane would necessarily become a powerful constituency, opposed to any further progress in liberalizing postal services in Italy.
For one thing, the Italian government is not “privatizing” Poste Italiane in a meaningful sense, as it shall keep control of the company. Poste Italiane enjoys a favorable regulatory regime (that we describe in the article) that should cease to be in place, if the postal sector is to be properly liberalized. Those investors that will join the Italian Treasury as shareholders are not very likely to be okay with a liberalization of the postal sector, as they are basically buying their share of a rent.
But I am also quite concerned about the notion of giving stocks to employees. The Italian postal service is heavily unionized, and this was the way in which their consensus to the “privatization” was secured. But, particularly in the case in which a lock-in clause is envisaged, I think this is a clear example of a policy which goes to the benefit of unions (that gain a place on the company’s board and could thus have an even stronger voice in its governance) but not to the benefit of individual workers. The political upshot is pretty clear to me: building a powerful constituency against any change in the regulatory regime of the postal sector. When a proper “privatization” happens, a company moves out of the government sphere to enter the private sector. Not only will this not happen with Poste Italiane, the government is making sure that this will be even more unlikely to happen in the future.
READER COMMENTS
Philip
Feb 8 2014 at 11:29am
The quoted text states that 5% is to be given to employees, but the blog post says that this 5% is to be given to the union. This is not the same thing. I would contend that making employees part owners would help to align their interests towards profitability (in a way that making the union an owner doesn’t because the union’s primary revenue stream would remain dues collections).
I would imagine that if the government proposed offering a 60% stake for sale (and thus a controlling interest), they would be able to get a much better price in this sale. On the plus side, the Italian Government is retaining the option to sell the controlling stake in the future and may yet see the benefit of this.
Vince
Feb 8 2014 at 12:44pm
@Philip, you are right in pointing out that
My understanding is that the authors implied that the Unions will most likely secure their members’ voting rights and on such basis claim one or more seats in the Board.
Also , I very much agree with you that
I have worked for over a decade in a large US company where over 25% of stock is owned by employees and retirees. But this is Italy, not the U.S.
Over here employee ownership of corporations is regarded as dispicable from the powerful (and usually left-wing) intellectualists as well as from the equally powerful Catholic hierarchies.
Moreover, when you state that
you seem to ignore a few important things about Italian Unions:
mobile
Feb 8 2014 at 1:06pm
See also: “deregulation” of the California electricity market from 1998-2001.
Roger McKinney
Feb 8 2014 at 10:47pm
The US has had similar episodes with “deregulation” in utilities in the US. The “deregulation” in many states has been nothing but reshuffling that protected old inefficient and polluting plants from the trash heap.
Alberto Mingardi
Feb 9 2014 at 11:27am
Concerning the point raised by Philip, I am sorry for not explaining myself well. Poste Italiane is a highly unionized company. One of the Unions is strongly sponsoring the “privatization”, and blessing the idea of having 5% of the shares given to workers. My sense is that this will be used to secure the Union’s stronghold on the board. Board members are nowadays nominated by the government – which will continue to be the controlling shareholder. The current President of Poste Italiane is the former secretary of a trade union of workers of the postal sector.
As far as alinging interests of workers and management through workers’ ownership of a company, I am not particularly enthusiastic in principle – but I think there is room for different kind of experiments, in a market economy.
However, what I see in the case of Poste is a move for strengthening a constituency against change.
On Vince’s many interesting points, I am not so sure that the Catholic hierarchy oppose co-ownership (CISL – the ‘Catholic’ trade union federation – is a big sponsor of it, not just in this case, and the few politicians who have tried to legislate it into practise come from the Catholic camp). But you are certainly right that the main objective of trade unions in Italy is consensus and media exposure: they are basically political actors on the national scene. I would also add to your points that pensioners account for more 50% of Unions’ membership in Italy (this comes from a 2003 study: I suppose the percentage increased even more by now).
Mark V Anderson
Feb 9 2014 at 4:38pm
Even true privatization is far from being a good thing in many cases. The power of the free market only occurs when competition occurs. Many privatizations seem to exclude this part.
1) mobile’s example of the California privatization is one example of a problem. In California, the distribution of electricity was privatized. The creation of electricity was still highly regulated. All the remaining regulations made it easy to control a great amount of market share (Enron in this case), and thus the result was perhaps even worse than when the government controlled the process.
2) Many countries privatizing businesses essentially give government firms away to well connected cronies, and make it difficult for competitors to come into the market. The resulting monopolies are often still controlled by the government, but in a less transparent manner than before.
3) The U.S. military became infamous for contracting out many of their functions to private contractors, including some of the military’s monopoly on police power. Contracting out government services may often result in savings and increased quality, but because the government is the sole customer, often the dysfunctionalities of the government transfer to the private parties.
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