Privatization
Encyclopedia
Privatization is the incidence or process of transferring ownership of a business
, enterprise, agency or public service from the public sector
(the state or government) to the private sector
(businesses that operate for a private profit) or to private non-profit organization
s. The term is also used in a quite different sense, to mean government out-sourcing of services to private firms, e.g. functions like revenue collection, law enforcement, and prison management.
The term "privatization" also has been used to describe two unrelated transactions. The first is a buyout, by the majority owner, of all shares of a public corporation or holding company
's stock, privatizing a publicly traded stock, and often described as private equity
. The second is a demutualization
of a mutual organization
or cooperative
to form a joint stock company
.
Privatisation generally improves the output and efficiency of the organisations that are privatised.
coined the term in the 1930s in covering Nazi German economic policy.
The Oxford English Dictionary
notes usage dating from 1942 in Econ. Jrnl, 52, 398.
, when governments contracted out almost everything to the private sector. In the Roman Republic
private individuals and companies performed the majority of services including tax collection (tax farming
), army supplies (military contractors), religious sacrifices and construction. However, the Roman Empire
also created state-owned enterprises—for example, much of the grain was eventually produced on estates owned by the Emperor. Some scholars suggest that the cost of bureaucracy was one of the reasons for the fall of the Roman Empire.
Perhaps one of the first ideological movements towards privatization came during China
's golden age of the Han dynasty
. Taoism
came into prominence for the first time at a state level, and it advocated the laissez-faire
principle of Wu wei
(無為), literally meaning "do nothing". The rulers were counseled by the Taoist clergy that a strong ruler was virtually invisible.
During the Renaissance
, most of Europe was still by and large following the feudal economic model. By contrast, the Ming dynasty
in China
began once more to practice privatization, especially with regards to their manufacturing industries. This was a reversal of the earlier Song dynasty
policies, which had themselves overturned earlier policies in favor of more rigorous state control.
In Britain, the privatization of common lands is referred to as enclosure
(in Scotland as the Lowland Clearances
and the Highland Clearances
). Significant privatizations of this nature occurred from 1760 to 1820, coincident with the industrial revolution in that country.
In more recent times, Winston Churchill
's government privatized the British steel industry in the 1950s, and West Germany
's government embarked on large-scale privatization, including selling its majority stake in Volkswagen
to small investors in a public share offering in 1961. In the 1970s General Pinochet
implemented a significant privatization program in Chile
. However, it was in the 1980s under the leaderships of Margaret Thatcher
in the UK and Ronald Reagan
in the USA, that privatization gained worldwide momentum. In the UK this culminated in the 1993 privatization of British Rail under Thatcher's successor, John Major
; British Rail having been formed by prior nationalization of private rail companies.
Significant privatization of state owned enterprises in Eastern and Central Europe and the former Soviet Union was undertaken in the 1990s with assistance from the World Bank, the U.S. Agency for International Development, the German Treuhand
, and other governmental and nongovernmental organizations.
A major ongoing privatization, that of Japan Post, involves the Japanese post service and the largest bank in the world. This privatization, spearheaded by Junichiro Koizumi
, started in 2007 following generations of debate. The privatization process is expected to last until 2017.
Choice of sale method is influenced by the capital market
, political and firm-specific factors. SIPs are more likely to be used when capital markets are less developed and there is lower income inequality. Share issues can broaden and deepen domestic capital markets, boosting liquidity and (potentially) economic growth
, but if the capital markets are insufficiently developed it may be difficult to find enough buyers, and transaction costs (e.g. underpricing required) may be higher. For this reason, many governments elect for listings in the more developed and liquid markets, for example Euronext
, and the London
, New York
and Hong Kong
stock exchanges.
As a result of higher political and currency risk deterring foreign investors, asset sales occur more commonly in developing countries.
Voucher privatization has mainly occurred in the transition economies of Central and Eastern Europe, such as Russia
, Poland
, the Czech Republic
, and Slovakia
. Additionally, Privatization from below is/has been an important type of economic growth in transition economies.
A substantial benefit of share or asset-sale privatizations is that bidders compete to offer the highest price, creating income for the state in addition to tax revenues. Voucher privatizations, on the other hand, could be a genuine transfer of assets to the general population, creating a real sense of participation and inclusion. If the transfer of vouchers is permitted, a market in vouchers could be created, with companies offering to pay money for them.
, but through improved incentives to innovate and reduce costs also tend to raise the rate of economic growth
. The type of industries to which this generally applies include manufacturing
and retailing
. Although typically there are social costs associated with these efficiency gains,
many economists argue that these can be dealt with by appropriate government support through redistribution
and perhaps retraining
.
In sectors that are natural monopolies
or public services
(such as, say, passenger rail in the United States), the results of privatization are much more mixed, as a private monopoly
behaves much the same as a public one in liberal
economic theory. The government is actually seen as a more natural provider of public goods and services. However, the efficiency of an existing public sector operation can be put into question requiring changes to be made. Changes may include, inter alia
, the imposition of related reforms such as greater transparency and accountability of management, an improved cost-benefit analysis
, improved internal controls, regulatory systems
, and better financing, rather than privatization itself.
Regarding political corruption
, it is a controversial issue whether the size of the public sector per se results in corruption. The Nordic countries
have low corruption but large public sectors. However, these countries score high on the Ease of Doing Business Index
, due to good and often simple regulations, and for political rights and civil liberties, showing high government accountability
and transparency. One should also notice the successful, corruption-free privatizations and restructuring of government enterprises in the Nordic countries. For example, dismantling telecommunications monopolies has resulted in several new players entering the market and intense competition with price and service.
Also regarding corruption, the sales themselves give a large opportunity for grand corruption. Privatizations in Russia and Latin America were accompanied by large-scale corruption during the sale of the state-owned companies. Those with political connections unfairly gained large wealth, which has discredited privatization in these regions. While media have reported widely the grand corruption that accompanied the sales, studies have argued that in addition to increased operating efficiency, daily petty corruption is, or would be, larger without privatization, and that corruption is more prevalent in non-privatized sectors. Furthermore, there is evidence to suggest that extralegal and unofficial activities are more prevalent in countries that privatized less.
competition
. Over time this tends to lead to lower prices, improved quality, more choices, less corruption, less red tape, and/or quicker delivery. Many proponents do not argue that everything should be privatized. According to them, market failure
s and natural monopolies could be problematic. However, anarcho-capitalists prefer that every function of the state be privatized, including defense
and dispute resolution
.
The basic economic argument given for privatization states that governments have few incentives to ensure that the enterprises they own are well run. One problem is the lack of comparison in state monopolies. It is difficult to know if an enterprise is efficient or not without competitors to compare against. Another is that the central government administration, and the voters who elect them, have difficulty evaluating the efficiency of numerous and very different enterprises. A private owner, often specializing and gaining great knowledge about a certain industrial sector, can evaluate and then reward or punish the management in much fewer enterprises much more efficiently. Also, governments can raise money by taxation or simply printing money should revenues be insufficient, unlike a private owner.
If private and state-owned enterprises compete against each other, then the state owned may borrow money more cheaply from the debt markets than private enterprises, since the state owned enterprises are ultimately backed by the taxation and printing press power of the state, gaining an unfair advantage.
Privatizing a non-profitable state-owned company may force the company to raise prices in order to become profitable. However, this would remove the need for the state to provide tax money in order to cover the losses.
Proponents of privatization make the following arguments:
should remain primarily in the hands of government in order to ensure that everyone in society has access to them (such as law enforcement, basic health care
, and basic education
). Likewise, private goods and services
should remain in the hands of the private sector. There is a positive externality when the government provides public goods and services to society at large, such as defense
and disease control. As for natural monopolies, opponents of privatisation claim that they are subject to fair competition, and better administrated by the state.
Many privatization opponents also warn against the practice's inherent tendency toward corruption. As many areas which the government could provide are essentially profitless, the only way private companies could, to any degree, operate them would be through contracts or block payments. In these cases, the private firm's performance in a particular project would be removed from their performance, and embezzlement and dangerous cost-cutting measures might be taken to maximize profits.
Some would also point out that privatizing certain functions of government might hamper coordination, and charge firms with specialized and limited capabilities to perform functions which they are not suited for. In rebuilding a war torn nation's infrastructure, for example, a private firm would, in order to provide security, either have to hire security, which would be both necessarily limited and complicate their functions, or coordinate with government, which, due to a lack of command structure shared between firm and government, might be difficult. A government agency, on the other hand, would have the entire military of a nation to draw upon for security, whose chain of command is clearly defined. Opponents would say that this is a false assertion: numerous books refer to poor organization between government departments (for example the Hurricane Katrina incident).
Although private companies will provide a similar good or service alongside the government, opponents of privatization are careful about completely transferring the provision of public goods, services and assets into private hands for the following reasons:
, and are criticized as a "particularly noxious form of governmental debt". In this interpretation, the upfront payment from the privatization sale corresponds to the principal amount of the loan, while the proceeds from the underlying asset correspond to secured interest payments – the transaction can be considered substantively the same as a secured loan, though it is structured as a sale. This interpretation is particularly argued to apply to recent municipal transactions in the United States, particularly for fixed term, such as the 2008 sale of the proceeds from Chicago parking meters for 75 years. It is argued that this is motivated by "politicians' desires to borrow money surreptitiously", due to legal restrictions on and political resistance to alternative sources of revenue, viz, raising taxes or issuing debt.
may be considerably more efficient than an inefficient governmental bureaucracy
or NGO, however many implementations of privatization can - in practice - lead to the fire sale
of public assets, and/or to inefficient or corrupt - for profit management.
. The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage in off balance sheet transactions to make the company's profitability appear temporarily poorer, or simply promote and report severely conservative (e.g. pessimistic) estimates of future earnings. Such seemingly adverse earnings news will be likely to (at least temporarily) reduce sale price. (This is again due to information asymmetries since it is more common for top executives to do everything they can to window dress their earnings forecasts). There are typically very few legal risks to being 'too conservative' in one's accounting and earnings estimates.
When the entity gets taken private - at a dramatically lower price - the new private owner gains a windfall from the former top executive's actions to (surreptitiously) reduce the sales price. This can represent tens of billions of dollars (questionably) transferred from previous owners (the public) to the takeover artist. The former top executive is then rewarded with a golden handshake
for presiding over the fire sale
that can sometimes be in the tens or hundreds of millions of dollars for one or two years of work. (This is nevertheless an excellent bargain for the takeover artist, who will tend to benefit from developing a reputation
of being very generous to parting top executives).
When a publicly held asset, mutual
or non-profit organization
undergoes privatization, top executives often reap tremendous monetary benefits. The executives can facilitate the process by making the entity appear to be in financial crisis - this reduces the sale price (to the profit of the purchaser), and makes non-profits and governments more likely to sell.
Ironically, it can also contribute to a public perception that private entities are more efficiently run reinforcing the political will to sell of public assets. Again, due to asymmetric information, policy makers and the general public see a government owned firm that was a financial 'disaster' - miraculously turned around by the private sector (and typically resold) within a few years.
of state assets away from the public and into the accounts of their favored power brokers. Without privatization, corrupt officials would have to slowly harvest their corrupt earnings over time. As such, efficient privatization depends on their being a very low of current corruption among the current government officials since it allows for far more 'efficient' extraction of corrupt rents.
Of course, corrupt governments can also extract corrupt rents quite efficiently in other ways - particularly by borrowing extensively to engage in spending on overly favorable contracts with their backers (or on tax shelters, subsidies or other giveaways). Generations of subsequent taxpayers are then left with paying back the debt incurred for corrupt transfers made decades previously. Naturally, this may lead to the sale of public assets....
In the end, the public is left with a government that taxes them heavily, and gives them nothing in return. Debt repayment is enforced by international agreements and agencies such as the IMF.
Infrastructure and upkeep is sacrificed - leading to a further decay in the economic efficiency of the country over time.
, where many municipalities have contracted out their garbage collection or administration of parking fines to private companies. In addition, the British government has involved the private sector more in the workings of the National Health Service
principally through outsourcing the construction and operation of new hospitals to private companies. There are also moves to refer patients to private surgeries to ease the load on existing NHS human resources, and covering the cost of this.
, where the state often retains a "blocking stake" in private industries. In Germany, the state privatized Deutsche Telekom
in small tranches, and still retains about a third of the company. As of 2005, the state of North Rhine-Westphalia
is also planning to buy shares in the energy company E.ON
in what is claimed to be an attempt to control spiraling costs.
Whilst partial privatization could be an alternative, it is more often a stepping stone to full privatization. It can offer the business a smoother transition period during which it can gradually adjust to market competition. Some state-owned companies are so large that there is the risk of sucking liquidity from the rest of the market, even in the most liquid marketplaces: this may favor gradual privatization. The first tranche of a multi-step privatization would also in the first instance establish a valuation for the enterprise to mitigate complaints of under-pricing.
In some instances of partial privatization of contracted services, some portion(s) of the state-owned service are provided by private-sector contractors, but the government retains the capacity to self-operate at contract intervals, if it so chooses. An example of partial privatization would be some forms of school bus service contracting
, such as arrangements where equipment and other resources purchased with government capital funds and/o those already owned by a governmental entity are used by the contractor for a period of time in providing services, but ownership is retained by the governmental unit. This form of partial privatization eases concerns that once an operation is contracted, the government may be unable to obtain sufficient competitive bids, and be subjected to terms less desirable than the prior operation under state-ownership. Under that scenario, a reverse privatization would be more feasible for the government. (see section below)
. It was the nation's largest employer and one third of all Japanese government employees worked for Japan Post. Japan Post was often said to be the largest holder of personal savings in the world.
The Prime Minister Junichiro Koizumi
wanted to privatize it because it was thought to be an inefficient and a source for corruption. In September 2003, Koizumi's cabinet proposed splitting Japan Post into four separate companies: a bank, an insurance company, a postal service company, and a fourth company to handle the post offices as retail storefronts of the other three.
After the Upper House rejected privatization, Koizumi scheduled nationwide elections
for September 11, 2005. He declared the election to be a referendum on postal privatization. Koizumi subsequently won this election, gaining the necessary supermajority
and a mandate for reform, and in October 2005, the bill was passed to privatize Japan Post in 2007.
Nippon Telegraph and Telephone
's privatization in 1987 involved the largest share-offering in financial history at the time. 15 of the world's 20 largest public share offerings have been privatizations of telecoms.
The United Kingdom's largest public-share offerings were privatizations of British Telecom and British Gas
during the 1980s
under the Conservative
government of Margaret Thatcher
, when many state-run firms were sold off to the private sector. This attracted very mixed views from the public and parliament, and even a former Conservative prime minister, Harold Macmillan
, was critical of the policy; likening it to "selling the family silver".
The largest public-share offering in France was France Telecom
.
Egypt undertook widespread privatization under President Hosni Mubarak
. After his overthrow in the 2011 revolution
, the association of the newly private businesses with the crony capitalism
of the old regime along with the new look at long-festering labor
and police-state issues have led to calls for re-nationalization.
sectors such as water
and electricity
in many cases meet with strong resistance from opposition political parties and from civil society
groups, many of which regard them as natural monopolies
. Campaigns typically involve demonstrations and democratic political activities; sometimes the authorities attempt to suppress opposition using violence (e.g. Cochabamba protests of 2000 in Bolivia
and protests in Arequipa
, Peru, in June 2002). Opposition is often strongly supported by trade union
s. Opposition is usually strongest to water privatization
—as well as Cochabamba, recent examples include Haiti
, Ghana
and Uruguay
(2004). In the latter case a civil-society-initiated referendum
banning water privatization was passed in October 2004.
. Such a situation most often occurs when a privatization contractor fails financially and/or the governmental unit has failed to purchase satisfactory service at prices it regards as less than with state-ownership or self-operation of services. Another circumstance may occur when greater control than viable under privatization is determined to be in the governmental unit's best interest.
National-security concerns may be the source of reverse privatization actions when the most likely providers are non-domestic or international corporations or entities. For example, in 2001, in response to the September 11th attacks, the then-private airport security industry in the United States was nationalized and put under the authority of the Transportation Security Administration
.
Case studies:
Development strategies:
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
, enterprise, agency or public service from the public sector
Public sector
The public sector, sometimes referred to as the state sector, is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal.Examples of public sector activity range...
(the state or government) to the private sector
Private sector
In economics, the private sector is that part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the state...
(businesses that operate for a private profit) or to private non-profit organization
Non-profit organization
Nonprofit organization is neither a legal nor technical definition but generally refers to an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends...
s. The term is also used in a quite different sense, to mean government out-sourcing of services to private firms, e.g. functions like revenue collection, law enforcement, and prison management.
The term "privatization" also has been used to describe two unrelated transactions. The first is a buyout, by the majority owner, of all shares of a public corporation or holding company
Holding company
A holding company is a company or firm that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself; rather, its purpose is to own shares of other companies. Holding companies allow the reduction of risk for the owners and can allow...
's stock, privatizing a publicly traded stock, and often described as private equity
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
. The second is a demutualization
Demutualization
Demutualization is the process by which a customer-owned mutual organization or co-operative changes legal form to a joint stock company. It is sometimes called stocking or privatization. As part of the demutualization process, members of a mutual usually receive a "windfall" payout, in the form...
of a mutual organization
Mutual organization
A mutual, mutual organization, or mutual society is an organization based on the principle of mutuality. Unlike a true cooperative, members usually do not contribute to the capital of the company by direct investment, but derive their right to profits and votes through their customer relationship...
or cooperative
Cooperative
A cooperative is a business organization owned and operated by a group of individuals for their mutual benefit...
to form a joint stock company
Joint stock company
A joint-stock company is a type of corporation or partnership involving two or more individuals that own shares of stock in the company...
.
Privatisation generally improves the output and efficiency of the organisations that are privatised.
Origin
Edwards states that The EconomistThe Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...
coined the term in the 1930s in covering Nazi German economic policy.
The Oxford English Dictionary
Oxford English Dictionary
The Oxford English Dictionary , published by the Oxford University Press, is the self-styled premier dictionary of the English language. Two fully bound print editions of the OED have been published under its current name, in 1928 and 1989. The first edition was published in twelve volumes , and...
notes usage dating from 1942 in Econ. Jrnl, 52, 398.
History
A long history of privatization dates from Ancient GreeceAncient Greece
Ancient Greece is a civilization belonging to a period of Greek history that lasted from the Archaic period of the 8th to 6th centuries BC to the end of antiquity. Immediately following this period was the beginning of the Early Middle Ages and the Byzantine era. Included in Ancient Greece is the...
, when governments contracted out almost everything to the private sector. In the Roman Republic
Roman Republic
The Roman Republic was the period of the ancient Roman civilization where the government operated as a republic. It began with the overthrow of the Roman monarchy, traditionally dated around 508 BC, and its replacement by a government headed by two consuls, elected annually by the citizens and...
private individuals and companies performed the majority of services including tax collection (tax farming
Tax farming
Farming is a technique of financial management, namely the process of commuting , by its assignment by legal contract to a third party, a future uncertain revenue stream into fixed and certain periodic rents, in consideration for which commutation a discount in value received is suffered...
), army supplies (military contractors), religious sacrifices and construction. However, the Roman Empire
Roman Empire
The Roman Empire was the post-Republican period of the ancient Roman civilization, characterised by an autocratic form of government and large territorial holdings in Europe and around the Mediterranean....
also created state-owned enterprises—for example, much of the grain was eventually produced on estates owned by the Emperor. Some scholars suggest that the cost of bureaucracy was one of the reasons for the fall of the Roman Empire.
Perhaps one of the first ideological movements towards privatization came during China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
's golden age of the Han dynasty
Han Dynasty
The Han Dynasty was the second imperial dynasty of China, preceded by the Qin Dynasty and succeeded by the Three Kingdoms . It was founded by the rebel leader Liu Bang, known posthumously as Emperor Gaozu of Han. It was briefly interrupted by the Xin Dynasty of the former regent Wang Mang...
. Taoism
Taoism
Taoism refers to a philosophical or religious tradition in which the basic concept is to establish harmony with the Tao , which is the mechanism of everything that exists...
came into prominence for the first time at a state level, and it advocated the laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
principle of Wu wei
Wu wei
Wu wei is an important concept of Taoism , that involves knowing when to act and when not to act. Another perspective to this is that "Wu Wei" means...
(無為), literally meaning "do nothing". The rulers were counseled by the Taoist clergy that a strong ruler was virtually invisible.
During the Renaissance
Renaissance
The Renaissance was a cultural movement that spanned roughly the 14th to the 17th century, beginning in Italy in the Late Middle Ages and later spreading to the rest of Europe. The term is also used more loosely to refer to the historical era, but since the changes of the Renaissance were not...
, most of Europe was still by and large following the feudal economic model. By contrast, the Ming dynasty
Ming Dynasty
The Ming Dynasty, also Empire of the Great Ming, was the ruling dynasty of China from 1368 to 1644, following the collapse of the Mongol-led Yuan Dynasty. The Ming, "one of the greatest eras of orderly government and social stability in human history", was the last dynasty in China ruled by ethnic...
in China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
began once more to practice privatization, especially with regards to their manufacturing industries. This was a reversal of the earlier Song dynasty
Song Dynasty
The Song Dynasty was a ruling dynasty in China between 960 and 1279; it succeeded the Five Dynasties and Ten Kingdoms Period, and was followed by the Yuan Dynasty. It was the first government in world history to issue banknotes or paper money, and the first Chinese government to establish a...
policies, which had themselves overturned earlier policies in favor of more rigorous state control.
In Britain, the privatization of common lands is referred to as enclosure
Enclosure
Enclosure or inclosure is the process which ends traditional rights such as mowing meadows for hay, or grazing livestock on common land. Once enclosed, these uses of the land become restricted to the owner, and it ceases to be common land. In England and Wales the term is also used for the...
(in Scotland as the Lowland Clearances
Lowland Clearances
The Lowland Clearances in Scotland were one of the results of the British Agricultural Revolution, which changed the traditional system of agriculture which had existed in Lowland Scotland in the seventeenth century...
and the Highland Clearances
Highland Clearances
The Highland Clearances were forced displacements of the population of the Scottish Highlands during the 18th and 19th centuries. They led to mass emigration to the sea coast, the Scottish Lowlands, and the North American colonies...
). Significant privatizations of this nature occurred from 1760 to 1820, coincident with the industrial revolution in that country.
In more recent times, Winston Churchill
Winston Churchill
Sir Winston Leonard Spencer-Churchill, was a predominantly Conservative British politician and statesman known for his leadership of the United Kingdom during the Second World War. He is widely regarded as one of the greatest wartime leaders of the century and served as Prime Minister twice...
's government privatized the British steel industry in the 1950s, and West Germany
West Germany
West Germany is the common English, but not official, name for the Federal Republic of Germany or FRG in the period between its creation in May 1949 to German reunification on 3 October 1990....
's government embarked on large-scale privatization, including selling its majority stake in Volkswagen
Volkswagen
Volkswagen is a German automobile manufacturer and is the original and biggest-selling marque of the Volkswagen Group, which now also owns the Audi, Bentley, Bugatti, Lamborghini, SEAT, and Škoda marques and the truck manufacturer Scania.Volkswagen means "people's car" in German, where it is...
to small investors in a public share offering in 1961. In the 1970s General Pinochet
Augusto Pinochet
Augusto José Ramón Pinochet Ugarte, more commonly known as Augusto Pinochet , was a Chilean army general and dictator who assumed power in a coup d'état on 11 September 1973...
implemented a significant privatization program in Chile
Chile
Chile ,officially the Republic of Chile , is a country in South America occupying a long, narrow coastal strip between the Andes mountains to the east and the Pacific Ocean to the west. It borders Peru to the north, Bolivia to the northeast, Argentina to the east, and the Drake Passage in the far...
. However, it was in the 1980s under the leaderships of Margaret Thatcher
Margaret Thatcher
Margaret Hilda Thatcher, Baroness Thatcher, was Prime Minister of the United Kingdom from 1979 to 1990...
in the UK and Ronald Reagan
Ronald Reagan
Ronald Wilson Reagan was the 40th President of the United States , the 33rd Governor of California and, prior to that, a radio, film and television actor....
in the USA, that privatization gained worldwide momentum. In the UK this culminated in the 1993 privatization of British Rail under Thatcher's successor, John Major
John Major
Sir John Major, is a British Conservative politician, who served as Prime Minister of the United Kingdom and Leader of the Conservative Party from 1990–1997...
; British Rail having been formed by prior nationalization of private rail companies.
Significant privatization of state owned enterprises in Eastern and Central Europe and the former Soviet Union was undertaken in the 1990s with assistance from the World Bank, the U.S. Agency for International Development, the German Treuhand
Treuhand
The Treuhandanstalt was the agency that privatized the East German enterprises, Volkseigener Betrieb , owned as public property. Created by the Volkskammer on June 17, 1990, it oversaw the restructuring and selling of about 8,500 firms with initially over 4 million employees...
, and other governmental and nongovernmental organizations.
A major ongoing privatization, that of Japan Post, involves the Japanese post service and the largest bank in the world. This privatization, spearheaded by Junichiro Koizumi
Junichiro Koizumi
is a Japanese politician who served as Prime Minister of Japan from 2001 to 2006. He retired from politics when his term in parliament ended.Widely seen as a maverick leader of the Liberal Democratic Party , he became known as an economic reformer, focusing on Japan's government debt and the...
, started in 2007 following generations of debate. The privatization process is expected to last until 2017.
Types
There are four main methods of privatization:- Share issue privatization (SIP) - selling shares on the stock marketStock marketA stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
- Asset sale privatization - selling an entire organization (or part of it) to a strategic investor, usually by auctionAuctionAn auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...
or by using the TreuhandTreuhandThe Treuhandanstalt was the agency that privatized the East German enterprises, Volkseigener Betrieb , owned as public property. Created by the Volkskammer on June 17, 1990, it oversaw the restructuring and selling of about 8,500 firms with initially over 4 million employees...
model - Voucher privatizationVoucher privatizationVoucher privatization is a privatization method where citizens are given or can inexpensively buy a book of vouchers that represent potential shares in any state-owned company...
- distributing shares of ownership to all citizens, usually for free or at a very low price. - Privatization from below - Start-up of new private businesses in formerly socialist countries.
Choice of sale method is influenced by the capital market
Capital market
A capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
, political and firm-specific factors. SIPs are more likely to be used when capital markets are less developed and there is lower income inequality. Share issues can broaden and deepen domestic capital markets, boosting liquidity and (potentially) economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
, but if the capital markets are insufficiently developed it may be difficult to find enough buyers, and transaction costs (e.g. underpricing required) may be higher. For this reason, many governments elect for listings in the more developed and liquid markets, for example Euronext
Euronext
Euronext N.V. is a pan-European stock exchange based in Amsterdam and with subsidiaries in Belgium, France, Netherlands, Portugal and the United Kingdom. In addition to equities and derivatives markets, the Euronext group provides clearing and information services...
, and the London
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
, New York
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
and Hong Kong
Hong Kong Stock Exchange
The Hong Kong Stock Exchange is a stock exchange located in Hong Kong. It is Asia's third largest stock exchange in terms of market capitalization behind the Tokyo Stock Exchange and the Shanghai Stock Exchange and fifth largest in the world...
stock exchanges.
As a result of higher political and currency risk deterring foreign investors, asset sales occur more commonly in developing countries.
Voucher privatization has mainly occurred in the transition economies of Central and Eastern Europe, such as Russia
Privatization in Russia
Russian privatization was the reform consisting in privatization of state-owned industrial assets that took place in Russia in the 1990s, during the presidency of Boris Yeltsin, immediately after the dissolution of the Soviet Union, where private ownership of enterprises had been illegal for a long...
, Poland
Poland
Poland , officially the Republic of Poland , is a country in Central Europe bordered by Germany to the west; the Czech Republic and Slovakia to the south; Ukraine, Belarus and Lithuania to the east; and the Baltic Sea and Kaliningrad Oblast, a Russian exclave, to the north...
, the Czech Republic
Czech Republic
The Czech Republic is a landlocked country in Central Europe. The country is bordered by Poland to the northeast, Slovakia to the east, Austria to the south, and Germany to the west and northwest....
, and Slovakia
Slovakia
The Slovak Republic is a landlocked state in Central Europe. It has a population of over five million and an area of about . Slovakia is bordered by the Czech Republic and Austria to the west, Poland to the north, Ukraine to the east and Hungary to the south...
. Additionally, Privatization from below is/has been an important type of economic growth in transition economies.
A substantial benefit of share or asset-sale privatizations is that bidders compete to offer the highest price, creating income for the state in addition to tax revenues. Voucher privatizations, on the other hand, could be a genuine transfer of assets to the general population, creating a real sense of participation and inclusion. If the transfer of vouchers is permitted, a market in vouchers could be created, with companies offering to pay money for them.
Results
Literature reviews find that in competitive industries with well-informed consumers, privatization consistently improves efficiency. The more competitive the industry, the greater the improvement in output, profitability, and efficiency. Such efficiency gains mean a one-off increase in GDPGross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
, but through improved incentives to innovate and reduce costs also tend to raise the rate of economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
. The type of industries to which this generally applies include manufacturing
Manufacturing
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
and retailing
Retailing
Retail consists of the sale of physical goods or merchandise from a fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser. Retailing may include subordinated services, such as delivery. Purchasers may be...
. Although typically there are social costs associated with these efficiency gains,
many economists argue that these can be dealt with by appropriate government support through redistribution
Redistribution (economics)
Redistribution of wealth is the transfer of income, wealth or property from some individuals to others caused by a social mechanism such as taxation, monetary policies, welfare, nationalization, charity, divorce or tort law. Most often it refers to progressive redistribution, from the rich to the...
and perhaps retraining
Retraining
Vocational rehabilitation or retraining is the process of learning a new skill or trade, often in response to a change in the economic environment. Generally it reflects changes in profession rather than an "upward" movement in the same field....
.
In sectors that are natural monopolies
Natural monopoly
A monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient for production to be concentrated in a single form...
or public services
Public services
Public services is a term usually used to mean services provided by government to its citizens, either directly or by financing private provision of services. The term is associated with a social consensus that certain services should be available to all, regardless of income...
(such as, say, passenger rail in the United States), the results of privatization are much more mixed, as a private monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
behaves much the same as a public one in liberal
Economic liberalism
Economic liberalism is the ideological belief in giving all people economic freedom, and as such granting people with more basis to control their own lives and make their own mistakes. It is an economic philosophy that supports and promotes individual liberty and choice in economic matters and...
economic theory. The government is actually seen as a more natural provider of public goods and services. However, the efficiency of an existing public sector operation can be put into question requiring changes to be made. Changes may include, inter alia
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, the imposition of related reforms such as greater transparency and accountability of management, an improved cost-benefit analysis
Cost-benefit analysis
Cost–benefit analysis , sometimes called benefit–cost analysis , is a systematic process for calculating and comparing benefits and costs of a project for two purposes: to determine if it is a sound investment , to see how it compares with alternate projects...
, improved internal controls, regulatory systems
Regulation
Regulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...
, and better financing, rather than privatization itself.
Regarding political corruption
Political corruption
Political corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...
, it is a controversial issue whether the size of the public sector per se results in corruption. The Nordic countries
Nordic countries
The Nordic countries make up a region in Northern Europe and the North Atlantic which consists of Denmark, Finland, Iceland, Norway and Sweden and their associated territories, the Faroe Islands, Greenland and Åland...
have low corruption but large public sectors. However, these countries score high on the Ease of Doing Business Index
Ease of Doing Business Index
The Ease of Doing Business Index is an index created by the World Bank. Higher rankings indicate better, usually simpler, regulations for businesses and stronger protections of property rights...
, due to good and often simple regulations, and for political rights and civil liberties, showing high government accountability
Accountability
Accountability is a concept in ethics and governance with several meanings. It is often used synonymously with such concepts as responsibility, answerability, blameworthiness, liability, and other terms associated with the expectation of account-giving...
and transparency. One should also notice the successful, corruption-free privatizations and restructuring of government enterprises in the Nordic countries. For example, dismantling telecommunications monopolies has resulted in several new players entering the market and intense competition with price and service.
Also regarding corruption, the sales themselves give a large opportunity for grand corruption. Privatizations in Russia and Latin America were accompanied by large-scale corruption during the sale of the state-owned companies. Those with political connections unfairly gained large wealth, which has discredited privatization in these regions. While media have reported widely the grand corruption that accompanied the sales, studies have argued that in addition to increased operating efficiency, daily petty corruption is, or would be, larger without privatization, and that corruption is more prevalent in non-privatized sectors. Furthermore, there is evidence to suggest that extralegal and unofficial activities are more prevalent in countries that privatized less.
Supporting
Studies show that private market factors can more efficiently deliver many goods or service than governments due to free marketFree market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
competition
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...
. Over time this tends to lead to lower prices, improved quality, more choices, less corruption, less red tape, and/or quicker delivery. Many proponents do not argue that everything should be privatized. According to them, market failure
Market failure
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...
s and natural monopolies could be problematic. However, anarcho-capitalists prefer that every function of the state be privatized, including defense
Private defense agency
A private defense agency is a conceptualized agency that provides personal protection and military defense services voluntarily through the free market. A PDA is not a private contractor of the state and is not subsidised in any way through taxation or immunities, nor does it rely on conscription...
and dispute resolution
Alternative dispute resolution
Alternative Dispute Resolution includes dispute resolution processes and techniques that act as a means for disagreeing parties to come to an agreement short of litigation. ADR basically is an alternative to a formal court hearing or litigation...
.
The basic economic argument given for privatization states that governments have few incentives to ensure that the enterprises they own are well run. One problem is the lack of comparison in state monopolies. It is difficult to know if an enterprise is efficient or not without competitors to compare against. Another is that the central government administration, and the voters who elect them, have difficulty evaluating the efficiency of numerous and very different enterprises. A private owner, often specializing and gaining great knowledge about a certain industrial sector, can evaluate and then reward or punish the management in much fewer enterprises much more efficiently. Also, governments can raise money by taxation or simply printing money should revenues be insufficient, unlike a private owner.
If private and state-owned enterprises compete against each other, then the state owned may borrow money more cheaply from the debt markets than private enterprises, since the state owned enterprises are ultimately backed by the taxation and printing press power of the state, gaining an unfair advantage.
Privatizing a non-profitable state-owned company may force the company to raise prices in order to become profitable. However, this would remove the need for the state to provide tax money in order to cover the losses.
Proponents of privatization make the following arguments:
- Performance. State-run industries tend to be bureaucratic. A political government may only be motivated to improve a function when its poor performance becomes politically sensitive, and such an improvement can be reversed easily by another regime.
- Increased efficiency. Private companies and firms have a greater incentive to produce more goods and servicesGoods and servicesIn economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility. It is often used when referring to a Goods and Services Tax....
for the sake of reaching a customer baseCustomer baseThe customer base is the group of customers and/or consumers that a business serves. In the most situations, a large part of this group is made up of repeat customers with a high ratio of purchase over time. These customers are the main source of consumer spending...
and hence increasing profits. A public organization would not be as productive due to the lack of financing allocated by the entire government's budget that must consider other areas of the economy. - Specialization. A private businessBusinessA business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
has the ability to focus all relevant human and financial resources onto specific functions. A state-owned firm does not have the necessary resources to specializeDepartmentalizationDepartmentalization refers to the process of grouping activities into departments.Division of labour creates specialists who need coordination. This coordination is facilitated by grouping specialists together in departments....
its goods and services as a result of the general products provided to the greatest number of people in the populationPopulationA population is all the organisms that both belong to the same group or species and live in the same geographical area. The area that is used to define a sexual population is such that inter-breeding is possible between any pair within the area and more probable than cross-breeding with individuals...
. - Improvements. Conversely, the government may put off improvements due to political sensitivity and special interests—even in cases of companies that are run well and better serve their customers' needs.
- Corruption. A state-monopolized function is prone to corruptionPolitical corruptionPolitical corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...
; decisions are made primarily for political reasons, personal gain of the decision-maker (i.e. "graft"), rather than economic ones. Corruption (or principal-agent issues) in a state-run corporation affects the ongoing asset stream and company performance, whereas any corruption that may occur during the privatization process is a one-time event and does not affect ongoing cash flow or performance of the company. - Accountability. Managers of privately owned companies are accountable to their owners/shareholders and to the consumer, and can only exist and thrive where needs are met. Managers of publicly owned companies are required to be more accountable to the broader community and to political "stakeholders". This can reduce their ability to directly and specifically serve the needs of their customers, and can bias investment decisions away from otherwise profitable areas.
- Civil-liberty concerns. A company controlled by the state may have access to information or assets which may be used against dissidents or any individuals who disagree with their policies.
- Goals. A political government tends to run an industry or company for political goals rather than economic ones.
- Capital. Privately held companies can sometimes more easily raise investment capital in the financial markets when such local markets exist and are suitably liquid. While interest rates for private companies are often higher than for government debt, this can serve as a useful constraint to promote efficient investments by private companies, instead of cross-subsidizing them with the overall credit-risk of the country. Investment decisions are then governed by market interest rates. State-owned industries have to compete with demands from other government departments and special interests. In either case, for smaller markets, political riskPolitical riskPolitical risk is a type of risk faced by investors, corporations, and governments. It is a risk that can be understood and managed with reasoned foresight and investment....
may add substantially to the cost of capital. - Security. Governments have had the tendency to "bail out" poorly run businesses, often due to the sensitivity of job losses, when economically, it may be better to let the business fold.
- Lack of market discipline. Poorly managed state companies are insulated from the same discipline as private companies, which could go bankrupt, have their management removed, or be taken over by competitors. Private companies are also able to take greater risks and then seek bankruptcy protection against creditors if those risks turn sour.
- Natural monopolies. The existence of natural monopolies does not mean that these sectors must be state owned. Governments can enact or are armed with anti-trust legislation and bodies to deal with anti-competitive behavior of all companies public or private.
- Concentration of wealth. Ownership of and profits from successful enterprises tend to be dispersed and diversified -particularly in voucher privatization. The availability of more investment vehicles stimulates capital markets and promotes liquidity and job creation.
- Political influence. Nationalized industries are prone to interference from politicians for political or populistPopulismPopulism can be defined as an ideology, political philosophy, or type of discourse. Generally, a common theme compares "the people" against "the elite", and urges social and political system changes. It can also be defined as a rhetorical style employed by members of various political or social...
reasons. Examples include making an industry buy supplies from local producers (when that may be more expensive than buying from abroad), forcing an industry to freeze its prices/fares to satisfy the electorate or control inflationInflationIn economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
, increasing its staffing to reduce unemploymentUnemploymentUnemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
, or moving its operations to marginal constituencies. - Profits. Corporations exist to generate profits for their shareholders. Private companies make a profit by enticing consumerConsumerConsumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...
s to buy their products in preference to their competitors' (or by increasing primary demand for their products, or by reducing costs). Private corporations typically profit more if they serve the needs of their clients well. Corporations of different sizes may target different market niches in order to focus on marginal groups and satisfy their demand. A company with good corporate governanceCorporate governanceCorporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
will therefore be incentivized to meet the needs of its customers efficiently. - Job gains. As the economy becomes more efficient, more profits are obtained and no government subsidies and less taxes are needed, there will be more private money available for investments and consumption and more profitable and better-paid jobs will be created than in the case of a more regulated economy.
Opposing
Opponents of certain privatizations believe that certain public goods and servicesPublic good
In economics, a public good is a good that is non-rival and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability means that no one can be effectively excluded from using the good...
should remain primarily in the hands of government in order to ensure that everyone in society has access to them (such as law enforcement, basic health care
Health care
Health care is the diagnosis, treatment, and prevention of disease, illness, injury, and other physical and mental impairments in humans. Health care is delivered by practitioners in medicine, chiropractic, dentistry, nursing, pharmacy, allied health, and other care providers...
, and basic education
Education
Education in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...
). Likewise, private goods and services
Private good
A private good is defined in economics as "an item that yields positive benefits to people” that is excludable, i.e. its owners can exercise private property rights, preventing those who have not paid for it from using the good or consuming its benefits; and rivalrous, i.e. consumption by one...
should remain in the hands of the private sector. There is a positive externality when the government provides public goods and services to society at large, such as defense
National security
National security is the requirement to maintain the survival of the state through the use of economic, diplomacy, power projection and political power. The concept developed mostly in the United States of America after World War II...
and disease control. As for natural monopolies, opponents of privatisation claim that they are subject to fair competition, and better administrated by the state.
Many privatization opponents also warn against the practice's inherent tendency toward corruption. As many areas which the government could provide are essentially profitless, the only way private companies could, to any degree, operate them would be through contracts or block payments. In these cases, the private firm's performance in a particular project would be removed from their performance, and embezzlement and dangerous cost-cutting measures might be taken to maximize profits.
Some would also point out that privatizing certain functions of government might hamper coordination, and charge firms with specialized and limited capabilities to perform functions which they are not suited for. In rebuilding a war torn nation's infrastructure, for example, a private firm would, in order to provide security, either have to hire security, which would be both necessarily limited and complicate their functions, or coordinate with government, which, due to a lack of command structure shared between firm and government, might be difficult. A government agency, on the other hand, would have the entire military of a nation to draw upon for security, whose chain of command is clearly defined. Opponents would say that this is a false assertion: numerous books refer to poor organization between government departments (for example the Hurricane Katrina incident).
Although private companies will provide a similar good or service alongside the government, opponents of privatization are careful about completely transferring the provision of public goods, services and assets into private hands for the following reasons:
- Performance. A democratically elected government is accountable to the people through a legislature, Congress or ParliamentParliamentA parliament is a legislature, especially in those countries whose system of government is based on the Westminster system modeled after that of the United Kingdom. The name is derived from the French , the action of parler : a parlement is a discussion. The term came to mean a meeting at which...
, and is motivated to safeguarding the assets of the nation. The profit motive may be subordinated to social objectives. - Improvements. the government is motivated to performance improvements as well run businesses contribute to the State's revenues.
- Corruption. Government ministers and civil servants are bound to uphold the highest ethical standards, and standards of probity are guaranteed through codes of conduct and declarations of interest. However, the selling process could lack transparency, allowing the purchaser and civil servants controlling the sale to gain personally.
- Accountability. The public does not have any control or oversight of private companies.
- Civil-liberty concerns. A democratically elected government is accountable to the people through a parliamentParliamentA parliament is a legislature, especially in those countries whose system of government is based on the Westminster system modeled after that of the United Kingdom. The name is derived from the French , the action of parler : a parlement is a discussion. The term came to mean a meeting at which...
, and can intervene when civil liberties are threatened. - Goals. The government may seek to use state companies as instruments to further social goals for the benefit of the nation as a whole.
- Capital. Governments can raise money in the financial markets most cheaply to re-lend to state-owned enterprises.
- Strategic and Sensitive areas. Governments have chosen to keep certain companies/industries under public control because of their strategic importance or sensitive nature.
- Cuts in essential services. If a government-owned company providing an essential service (such as the water supply) to all citizens is privatized, its new owner(s) could lead to the abandoning of the social obligation to those who are less able to pay, or to regions where this service is unprofitable.
- Natural monopolies. Privatization will not result in true competition if a natural monopolyNatural monopolyA monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient for production to be concentrated in a single form...
exists. - Concentration of wealth. Profits from successful enterprises end up in private, often foreign, hands instead of being available for the common good.
- Political influence. Governments may more easily exert pressure on state-owned firms to help implementing government policy.
- Downsizing. Private companies often face a conflict between profitability and service levels, and could over-react to short-term events. A state-owned company might have a longer-term view, and thus be less likely to cut back on maintenance or staff costs, training etc., to stem short term losses. Many private companies have downsized while making record profits.
- Profit. Private companies do not have any goal other than to maximize profits. A private company will serve the needs of those who are most willing (and able) to pay, as opposed to the needs of the majority, and are thus anti-democratic. The more necessary a goodNecessity goodIn economics a necessity good is a type of normal good. Like any other normal good, when income rises, demand increases. But the increase for a necessity good is less than proportional to the rise in income, so the proportion of expenditure on these goods falls as income rises. This observation...
is, the lower the price elasticity of demand, as people will attempt to buy it no matter the price. In the case of price elasticity of demand is zero (perfectly inelastic good), demand part of supply and demand theories does not work. - Privatization and Poverty. It is acknowledged by many studies that there are winners and losers with privatization. The number of losers —which may add up to the size and severity of poverty—can be unexpectedly large if the method and process of privatization and how it is implemented are seriously flawed (e.g. lack of transparency leading to state-owned assets being appropriated at minuscule amounts by those with political connections, absence of regulatory institutions leading to transfer of monopoly rents from public to private sector, improper design and inadequate control of the privatization process leading to asset strippingAsset strippingAsset stripping involves selling the assets of a business individually at a profit. The term is generally used in a pejorative sense as such activity is not considered productive to the economy. Asset stripping is considered to be a problem in economies such as Russia or China that are making a...
. - Job Loss. Due to the additional financial burden placed on privatized companies to succeed without any government help, unlike the public companies, jobs could be lost to keep more money in the company.
Equivalence to secured borrowing
Setting aside questions of efficiency and public versus private control of resources, some privatization transactions can be interpreted as a form of a secured loanSecured loan
A secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan...
, and are criticized as a "particularly noxious form of governmental debt". In this interpretation, the upfront payment from the privatization sale corresponds to the principal amount of the loan, while the proceeds from the underlying asset correspond to secured interest payments – the transaction can be considered substantively the same as a secured loan, though it is structured as a sale. This interpretation is particularly argued to apply to recent municipal transactions in the United States, particularly for fixed term, such as the 2008 sale of the proceeds from Chicago parking meters for 75 years. It is argued that this is motivated by "politicians' desires to borrow money surreptitiously", due to legal restrictions on and political resistance to alternative sources of revenue, viz, raising taxes or issuing debt.
Intermediate views
Others don't dispute that well-run for-profit entities with sound corporate governanceCorporate governance
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
may be considerably more efficient than an inefficient governmental bureaucracy
Bureaucracy
A bureaucracy is an organization of non-elected officials of a governmental or organization who implement the rules, laws, and functions of their institution, and are occasionally characterized by officialism and red tape.-Weberian bureaucracy:...
or NGO, however many implementations of privatization can - in practice - lead to the fire sale
Fire sale
A fire sale is the sale of goods at extremely discounted prices, typically when the seller faces bankruptcy or other impending distress. The term may originally have been based on the sale of goods at a heavy discount due to fire damage...
of public assets, and/or to inefficient or corrupt - for profit management.
Developed or minimally corrupt economies
A top executive can readily reduce the perceived value of an asset – due to information asymmetryInformation asymmetry
In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry, a kind of market failure...
. The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage in off balance sheet transactions to make the company's profitability appear temporarily poorer, or simply promote and report severely conservative (e.g. pessimistic) estimates of future earnings. Such seemingly adverse earnings news will be likely to (at least temporarily) reduce sale price. (This is again due to information asymmetries since it is more common for top executives to do everything they can to window dress their earnings forecasts). There are typically very few legal risks to being 'too conservative' in one's accounting and earnings estimates.
When the entity gets taken private - at a dramatically lower price - the new private owner gains a windfall from the former top executive's actions to (surreptitiously) reduce the sales price. This can represent tens of billions of dollars (questionably) transferred from previous owners (the public) to the takeover artist. The former top executive is then rewarded with a golden handshake
Golden handshake
A golden handshake is a clause in an executive employment contract that provides the executive with a significant severance package in the case that the executive loses his or her job through firing, restructuring, or even scheduled retirement...
for presiding over the fire sale
Fire sale
A fire sale is the sale of goods at extremely discounted prices, typically when the seller faces bankruptcy or other impending distress. The term may originally have been based on the sale of goods at a heavy discount due to fire damage...
that can sometimes be in the tens or hundreds of millions of dollars for one or two years of work. (This is nevertheless an excellent bargain for the takeover artist, who will tend to benefit from developing a reputation
Reputation
Reputation of a social entity is an opinion about that entity, typically a result of social evaluation on a set of criteria...
of being very generous to parting top executives).
When a publicly held asset, mutual
Mutual organization
A mutual, mutual organization, or mutual society is an organization based on the principle of mutuality. Unlike a true cooperative, members usually do not contribute to the capital of the company by direct investment, but derive their right to profits and votes through their customer relationship...
or non-profit organization
Non-profit organization
Nonprofit organization is neither a legal nor technical definition but generally refers to an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends...
undergoes privatization, top executives often reap tremendous monetary benefits. The executives can facilitate the process by making the entity appear to be in financial crisis - this reduces the sale price (to the profit of the purchaser), and makes non-profits and governments more likely to sell.
Ironically, it can also contribute to a public perception that private entities are more efficiently run reinforcing the political will to sell of public assets. Again, due to asymmetric information, policy makers and the general public see a government owned firm that was a financial 'disaster' - miraculously turned around by the private sector (and typically resold) within a few years.
Underdeveloped or highly corrupt economies
In a society with substantial corruption, privatization allows the government currently in power and its backers to siphon a large portion of the entire net present valueNet present value
In finance, the net present value or net present worth of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values of the individual cash flows of the same entity...
of state assets away from the public and into the accounts of their favored power brokers. Without privatization, corrupt officials would have to slowly harvest their corrupt earnings over time. As such, efficient privatization depends on their being a very low of current corruption among the current government officials since it allows for far more 'efficient' extraction of corrupt rents.
Of course, corrupt governments can also extract corrupt rents quite efficiently in other ways - particularly by borrowing extensively to engage in spending on overly favorable contracts with their backers (or on tax shelters, subsidies or other giveaways). Generations of subsequent taxpayers are then left with paying back the debt incurred for corrupt transfers made decades previously. Naturally, this may lead to the sale of public assets....
In the end, the public is left with a government that taxes them heavily, and gives them nothing in return. Debt repayment is enforced by international agreements and agencies such as the IMF.
Infrastructure and upkeep is sacrificed - leading to a further decay in the economic efficiency of the country over time.
Outsourcing or sub-contracting
National services may sub-contract or out-source functions to private enterprises. A notable example of this is in the United KingdomUnited Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, where many municipalities have contracted out their garbage collection or administration of parking fines to private companies. In addition, the British government has involved the private sector more in the workings of the National Health Service
National Health Service
The National Health Service is the shared name of three of the four publicly funded healthcare systems in the United Kingdom. They provide a comprehensive range of health services, the vast majority of which are free at the point of use to residents of the United Kingdom...
principally through outsourcing the construction and operation of new hospitals to private companies. There are also moves to refer patients to private surgeries to ease the load on existing NHS human resources, and covering the cost of this.
Partial ownership
An enterprise may be privatized, but with the state retaining a number of shares in the resultant company. This is a particularly notable phenomenon in FranceFrance
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, where the state often retains a "blocking stake" in private industries. In Germany, the state privatized Deutsche Telekom
Deutsche Telekom
Deutsche Telekom AG is a telecommunications company headquartered in Bonn, Germany. It is the largest telecommunications company in Europe....
in small tranches, and still retains about a third of the company. As of 2005, the state of North Rhine-Westphalia
North Rhine-Westphalia
North Rhine-Westphalia is the most populous state of Germany, with four of the country's ten largest cities. The state was formed in 1946 as a merger of the northern Rhineland and Westphalia, both formerly part of Prussia. Its capital is Düsseldorf. The state is currently run by a coalition of the...
is also planning to buy shares in the energy company E.ON
E.ON
E.ON AG, marketed with an interpunct as E•ON, is the holding company of the world's largest investor-owned energy service provider based in Düsseldorf, Germany. The name comes from the Greek word aeon which means eternity....
in what is claimed to be an attempt to control spiraling costs.
Whilst partial privatization could be an alternative, it is more often a stepping stone to full privatization. It can offer the business a smoother transition period during which it can gradually adjust to market competition. Some state-owned companies are so large that there is the risk of sucking liquidity from the rest of the market, even in the most liquid marketplaces: this may favor gradual privatization. The first tranche of a multi-step privatization would also in the first instance establish a valuation for the enterprise to mitigate complaints of under-pricing.
In some instances of partial privatization of contracted services, some portion(s) of the state-owned service are provided by private-sector contractors, but the government retains the capacity to self-operate at contract intervals, if it so chooses. An example of partial privatization would be some forms of school bus service contracting
School bus contractor
A school bus contractor is a private company or proprietorship that provides student transport services to a school district or non-public school. Of the 450,000 school buses operating in the United States, it is estimated that approximately 39% are operated by school bus contractors...
, such as arrangements where equipment and other resources purchased with government capital funds and/o those already owned by a governmental entity are used by the contractor for a period of time in providing services, but ownership is retained by the governmental unit. This form of partial privatization eases concerns that once an operation is contracted, the government may be unable to obtain sufficient competitive bids, and be subjected to terms less desirable than the prior operation under state-ownership. Under that scenario, a reverse privatization would be more feasible for the government. (see section below)
Notable examples
The largest privatization in history involved Japan PostJapan Post
was a government-owned corporation in Japan, that existed from 2003–2007, offering postal and package delivery services, banking services, and life insurance. It had over 400,000 employees and ran 24,700 post offices throughout Japan and was the nation's largest employer. One third of all Japanese...
. It was the nation's largest employer and one third of all Japanese government employees worked for Japan Post. Japan Post was often said to be the largest holder of personal savings in the world.
The Prime Minister Junichiro Koizumi
Junichiro Koizumi
is a Japanese politician who served as Prime Minister of Japan from 2001 to 2006. He retired from politics when his term in parliament ended.Widely seen as a maverick leader of the Liberal Democratic Party , he became known as an economic reformer, focusing on Japan's government debt and the...
wanted to privatize it because it was thought to be an inefficient and a source for corruption. In September 2003, Koizumi's cabinet proposed splitting Japan Post into four separate companies: a bank, an insurance company, a postal service company, and a fourth company to handle the post offices as retail storefronts of the other three.
After the Upper House rejected privatization, Koizumi scheduled nationwide elections
Japan general election, 2005
A general election in Japan was held on 11 September 2005 for all 480 seats of the House of Representatives of Japan, the lower house of the Diet of Japan, almost two years before the end of the term taken from the last election in 2003...
for September 11, 2005. He declared the election to be a referendum on postal privatization. Koizumi subsequently won this election, gaining the necessary supermajority
Supermajority
A supermajority or a qualified majority is a requirement for a proposal to gain a specified level or type of support which exceeds a simple majority . In some jurisdictions, for example, parliamentary procedure requires that any action that may alter the rights of the minority has a supermajority...
and a mandate for reform, and in October 2005, the bill was passed to privatize Japan Post in 2007.
Nippon Telegraph and Telephone
Nippon Telegraph and Telephone
, commonly known as NTT, is a Japanese telecommunications company headquartered in Tokyo, Japan. Ranked the 31st in Fortune Global 500, NTT is the largest telecommunications company in Asia, and the second-largest in the world in terms of revenue....
's privatization in 1987 involved the largest share-offering in financial history at the time. 15 of the world's 20 largest public share offerings have been privatizations of telecoms.
The United Kingdom's largest public-share offerings were privatizations of British Telecom and British Gas
British Gas plc
British Gas plc was formerly the monopoly gas supplier and is a private sector in the United Kingdom.- History :In the early 1900s the gas market in the United Kingdom was mainly run by county councils and small private firms...
during the 1980s
1980s
File:1980s decade montage.png|thumb|400px|From left, clockwise: The first Space Shuttle, Columbia, lifted off in 1981; American President Ronald Reagan and Soviet leader Mikhail Gorbachev eased tensions between the two superpowers, leading to the end of the Cold War; The Fall of the Berlin Wall in...
under the Conservative
Conservative Party (UK)
The Conservative Party, formally the Conservative and Unionist Party, is a centre-right political party in the United Kingdom that adheres to the philosophies of conservatism and British unionism. It is the largest political party in the UK, and is currently the largest single party in the House...
government of Margaret Thatcher
Margaret Thatcher
Margaret Hilda Thatcher, Baroness Thatcher, was Prime Minister of the United Kingdom from 1979 to 1990...
, when many state-run firms were sold off to the private sector. This attracted very mixed views from the public and parliament, and even a former Conservative prime minister, Harold Macmillan
Harold Macmillan
Maurice Harold Macmillan, 1st Earl of Stockton, OM, PC was Conservative Prime Minister of the United Kingdom from 10 January 1957 to 18 October 1963....
, was critical of the policy; likening it to "selling the family silver".
The largest public-share offering in France was France Telecom
France Télécom
France Telecom S.A. is the main telecommunications company in France, the third-largest in Europe and one of the largest in the world. It currently employs about 180,000 people and has 192.7 million customers worldwide . In 2010 the group had revenue of €45.5 billion...
.
Egypt undertook widespread privatization under President Hosni Mubarak
Hosni Mubarak
Muhammad Hosni Sayyid Mubarak is a former Egyptian politician and military commander. He served as the fourth President of Egypt from 1981 to 2011....
. After his overthrow in the 2011 revolution
2011 Egyptian revolution
The 2011 Egyptian revolution took place following a popular uprising that began on Tuesday, 25 January 2011 and is still continuing as of November 2011. The uprising was mainly a campaign of non-violent civil resistance, which featured a series of demonstrations, marches, acts of civil...
, the association of the newly private businesses with the crony capitalism
Crony capitalism
Crony capitalism is a term describing a capitalist economy in which success in business depends on close relationships between business people and government officials...
of the old regime along with the new look at long-festering labor
Employment
Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...
and police-state issues have led to calls for re-nationalization.
Negative responses
Privatization proposals in key public servicePublic services
Public services is a term usually used to mean services provided by government to its citizens, either directly or by financing private provision of services. The term is associated with a social consensus that certain services should be available to all, regardless of income...
sectors such as water
Water
Water is a chemical substance with the chemical formula H2O. A water molecule contains one oxygen and two hydrogen atoms connected by covalent bonds. Water is a liquid at ambient conditions, but it often co-exists on Earth with its solid state, ice, and gaseous state . Water also exists in a...
and electricity
Electricity
Electricity is a general term encompassing a variety of phenomena resulting from the presence and flow of electric charge. These include many easily recognizable phenomena, such as lightning, static electricity, and the flow of electrical current in an electrical wire...
in many cases meet with strong resistance from opposition political parties and from civil society
Civil society
Civil society is composed of the totality of many voluntary social relationships, civic and social organizations, and institutions that form the basis of a functioning society, as distinct from the force-backed structures of a state , the commercial institutions of the market, and private criminal...
groups, many of which regard them as natural monopolies
Natural monopoly
A monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient for production to be concentrated in a single form...
. Campaigns typically involve demonstrations and democratic political activities; sometimes the authorities attempt to suppress opposition using violence (e.g. Cochabamba protests of 2000 in Bolivia
Bolivia
Bolivia officially known as Plurinational State of Bolivia , is a landlocked country in central South America. It is the poorest country in South America...
and protests in Arequipa
Arequipa
Arequipa is the capital city of the Arequipa Region in southern Peru. With a population of 836,859 it is the second most populous city of the country...
, Peru, in June 2002). Opposition is often strongly supported by trade union
Trade union
A trade union, trades union or labor union is an organization of workers that have banded together to achieve common goals such as better working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labour contracts with...
s. Opposition is usually strongest to water privatization
Water privatization
Water privatization is a short-hand for private sector participation in the provision of water services and sanitation, although sometimes it refers to privatization and sale of water resources themselves . As water services are seen as such a key public service, water privatization is often...
—as well as Cochabamba, recent examples include Haiti
Haiti
Haiti , officially the Republic of Haiti , is a Caribbean country. It occupies the western, smaller portion of the island of Hispaniola, in the Greater Antillean archipelago, which it shares with the Dominican Republic. Ayiti was the indigenous Taíno or Amerindian name for the island...
, Ghana
Ghana
Ghana , officially the Republic of Ghana, is a country located in West Africa. It is bordered by Côte d'Ivoire to the west, Burkina Faso to the north, Togo to the east, and the Gulf of Guinea to the south...
and Uruguay
Uruguay
Uruguay ,officially the Oriental Republic of Uruguay,sometimes the Eastern Republic of Uruguay; ) is a country in the southeastern part of South America. It is home to some 3.5 million people, of whom 1.8 million live in the capital Montevideo and its metropolitan area...
(2004). In the latter case a civil-society-initiated referendum
Referendum
A referendum is a direct vote in which an entire electorate is asked to either accept or reject a particular proposal. This may result in the adoption of a new constitution, a constitutional amendment, a law, the recall of an elected official or simply a specific government policy. It is a form of...
banning water privatization was passed in October 2004.
Reversion
A reversion from contracted ownership of an enterprise or services to governmental ownership and/or provision is called reverse privatization or nationalizationNationalization
Nationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...
. Such a situation most often occurs when a privatization contractor fails financially and/or the governmental unit has failed to purchase satisfactory service at prices it regards as less than with state-ownership or self-operation of services. Another circumstance may occur when greater control than viable under privatization is determined to be in the governmental unit's best interest.
National-security concerns may be the source of reverse privatization actions when the most likely providers are non-domestic or international corporations or entities. For example, in 2001, in response to the September 11th attacks, the then-private airport security industry in the United States was nationalized and put under the authority of the Transportation Security Administration
Transportation Security Administration
The Transportation Security Administration is an agency of the U.S. Department of Homeland Security that exercises authority over the safety and security of the traveling public in the United States....
.
See also
- CorporatizationCorporatizationCorporatization refers to the transformation of state assets or agencies into state-owned corporations in order to introduce corporate management techniques to their administration...
- DeregulationDeregulationDeregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.Deregulation is the removal or...
- MarketizationMarketizationMarketization is the process that enables the state-owned enterprises to act like market-oriented firms. This is achieved through reduction of state subsidies, deregulation, organizational restructuring , decentralization and in some cases privatization...
- Public ownership
- SecuritizationSecuritizationSecuritization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...
- Too Big to FailToo Big to FailToo Big to Fail is a television drama film in the United States broadcast on HBO on May 23, 2011. It is based on the non-fiction book Too Big to Fail by Andrew Ross Sorkin. The TV film was directed by Curtis Hanson...
- Welfare stateWelfare stateA welfare state is a "concept of government in which the state plays a key role in the protection and promotion of the economic and social well-being of its citizens. It is based on the principles of equality of opportunity, equitable distribution of wealth, and public responsibility for those...
Case studies:
- Privatization in RussiaPrivatization in RussiaRussian privatization was the reform consisting in privatization of state-owned industrial assets that took place in Russia in the 1990s, during the presidency of Boris Yeltsin, immediately after the dissolution of the Soviet Union, where private ownership of enterprises had been illegal for a long...
- Privatization of British RailPrivatisation of British RailThe privatisation of British Rail was set in motion when the Conservative government enacted, on 19 January 1993, the British Coal and British Rail Act 1993 . This enabled the relevant Secretary of State to issue directions to the relevant Board...
- Privatization of public toiletsPrivatization of public toiletsPrivatization of public toilets is an ongoing process in the United States and other countries. Police have sometimes supported their privatization, claiming that public toilets are "crime scenes" that attract illegal activity. A criticism of toilet privatization is that it results in the denial...
Development strategies:
- Private sector developmentPrivate sector developmentPrivate Sector Development is a strategy for promoting economic growth and reducing poverty in developing countries by building private enterprises, membership organizations representing them, and competitive markets that are stronger and more inclusive....
- Special Economic ZoneSpecial Economic ZoneA Special Economic Zone is a geographical region that has economic and other laws that are more free-market-oriented than a country's typical or national laws...
- Urban Enterprise ZoneUrban Enterprise ZoneIn the United States, Urban Enterprise Zones , also known as Enterprise Zones, are intended to encourage development in blighted neighborhoods through tax and regulatory relief to entrepreneurs and investors who launch businesses in the area. UEZs are areas where companies can locate free of...
External links
- In the Public Interest is a Resource Center on privatization and responsible contracting.
- Reports of the Public Services International Research Unit at the University of Greenwich Research database with many articles on the effects of privatization
- Privatization Blog is a resource dedicated to recent developments in privatization.