The Legal and Political Environment of Privatization

In many regions, progress at privatizing state petroleum companies has been uneven. Some countries' privatization efforts have faltered, in part due to lingering nationalistic views towards energy resources, particularly oil. On more than one occasion, progress at privatization has suffered severe setbacks. For example, billions of dollars of planned investment activity in Russia has for a long time been put on hold awaiting passage of a property rights law. A growing possibility that a Communist led government might regain power has been another factor causing foreign investors to be apprehensive about their investment commitments in Russia.

Further, the specter of re-nationalization has not been limited to the new democracies of Eastern Europe. In August of 1995, for instance, the newly-elected state government of Maharashtra, India, temporarily pulled out of a deal negotiated by the central government with Enron to build and operate a $3-billion electricity generating plant after Enron and its partners had already invested several hundred million dollars {see Endnote 8}. The newly-elected government alleged that the previous government had secretly negotiated the contract with Enron under terms that favored Enron and disadvantaged consumers {see Endnote 9}. Subsequently, in December of 1995, Maharashtra and Enron successfully reached a renegotiated agreement allowing the project to proceed.

Privatization almost always involves some changes in a nation's legal system. In several regions, legal reform has been an important key to the successful privatization of state-owned industries, especially with regard to the protection of property rights and the reliable enforcement of contracts. The equal treatment of foreign investors and domestic investors by the judicial system has also been important.