Privatization

1. The transfer of ownership of property or businesses from a government to a privately owned entity.

2. The transition from a publicly traded and owned company to a company which is privately owned and no longer trades publicly on a stock exchange. When a publicly traded company becomes private, investors can no longer purchase a stake in that company.

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1. One of the main arguments for the privatization of publicly owned operations is the estimated increases in efficiency that can result from private ownership. The increased efficiency is thought to come from the greater importance private owners tend to place on profit maximization as compared to government, which tends to be less concerned about profits.

2. Most companies start as private companies funded by a small group of investors. As they grow in size, they will often access the equity market for financing or ownership transfer through the sale of shares. In some cases, the process is subsequently reversed when a group of investors or a private company purchases all of the shares in a public company, making the company private and, therefore, removing it from the stock market.

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Process of converting a publicly operated enterprise into a privately owned and operated entity. For example, many cities and states contract with private companies to run their prison facilities instead of managing them with municipal personnel. Many countries around the world have privatized formerly state-run enterprises such as banks, airlines, steel companies, utilities, phone systems, and large manufacturers. A wave of privatization swept through Russia and Eastern Europe after the fall of Communism in the 1990s, and through some Latin American countries such as Peru, as new, democratic governments were established. When a company is privatized, shares formerly owned by the government, as well as management control, are sold to the public. The theory behind privatization is that these enterprises run far more efficiently and offer better service to customers when owned by stockholders instead of the government.

Defined in the strictest of terms, privatization means the sale of public utilities to private concerns. But as Public Works magazine noted, "in the broader sense of the term …and the definition that applies to most contemporary discussions, privatization is the contract operation of a public utility or service by a private entity. It most often occurs in solid waste management, water/wastewater treatment, fleet maintenance, road/bridge building and maintenance, and municipal management." Small businesses that provide services in these and other areas (for-profit school academies, for instance) have been among the biggest winners in the growing national trend toward privatization. As Public Works commented, "opportunities abound for private concerns to offer to manage public services with a close eye on cost and efficiency."

Privatization efforts in America today are in large part a reaction to dissatisfaction with government performance and/or unhappiness with the level of taxation that is levied on individuals and businesses by municipal, state, and federal governments to pay for services. This trend has grassroots origins, with local governments in the forefront and state and federal levels of government trailing behind. The purpose of privatization is to take advantage of the perceived cost efficiencies of private firms. Indeed, proponents of the practice say that privatization results in better performance of needed services at lesser cost. "The government usually allows the firm to choose how it will satisfy the contract," wrote Simon Hakim and Edwin Blackstone in American City and County. "For example, a contract may specify trash removal services for the area residents a certain number of times per week. The firm is normally allowed to choose the methods it will use to perform the requirements of the contract, the trash trucks, used, and the number of workers on each trash truck. The profit motive will encourage the firm to produce the services efficiently at the least cost, a motive absent in government provision of services." Even after privatization, however, government monitoring is necessary in order to ensure that satisfactory services are provided to residents.

Growth of Privatization

"Privatization may be a popular buzzword today, but the concept has been around since the first municipality hired Joe and his wagon to pick up the trash instead of getting city employee Frank to do it," remarked Public Works. "The difference today is that privatization is encroaching into all areas of public administration. And governments are expecting public agencies to compete—dollar for dollar—with private operators or surrender management of services. For years, our country has supported the idea that a public workforce was the best provider of essential services. Public employees would reliably and efficiently protect the public safety and deliver water and power; maintain roads and bridges; collect refuse and treat sewage…. In return, public employees enjoyed a certain job stability and a wide range of desirable benefits." But proliferating responsibilities, fiscal belt-tightening, sometimes lackluster performance by workers, and—in the cases of larger cities, especially—festering problems with infrastructure led increasing numbers of city planners and public policy makers to look to privatization.

Today, several of the nation's largest cities, including New York, Indianapolis, Philadelphia, and Phoenix have contracted out a broad spectrum of services that were previously attended to exclusively by city employees. Indeed, New York City opened up bidding from private companies on 40 different municipal services in 1995alone. Smaller cities and towns have instituted outsourcing philosophies as well, and many service businesses, both large and small, have garnered significant new contracts as a result. American City and County reported that various analyses indicate that this trend will likely continue. "Cost pressures, both internal and external, are rated as the most important reasons that officials decided to privatize a service," stated a report on privatization conducted by a coalition of Illinois academic, business, and municipal groups. "The main obstacle is the lack of information or evidence of the benefits of privatization. Many officials also report they would like more information on certain aspects of privatization. It can be deduced that providing additional information on privatization to city officials will lead to increased acceptance."

Variations in Privatization

The term privatization has been applied to three different methods of increasing the activity of the private sector in providing public services: 1) private sector choice, financing, and production of a service;2) public-sector choice and financing with private sector production of the service selected; 3) and deregulation of private firms providing services. In the first case, the entire responsibility for a service is transferred from the public sector to the private sector, and individual consumers select and purchase the amount of services they desire from private providers. For example, solid-waste collection is provided by private firms in some communities. The third form of privatization means that government reduces or eliminates the regulatory restrictions imposed on private firms providing specific services.

The second version of privatization refers to joint activity of the public and private sectors in providing services. In this case, consumers select and pay for the quantity and type of service desired through government, which then contracts with private firms to produce the desired amount and category of service. Although the government provides for the service, a private firm carries out the actual execution of it. The government determines the service level and pays the amount specified in the contract, but leaves decisions about production decisions to the private firm.

Advantages and Disadvantages of Privatization

The merits and drawbacks of privatization have been subjects of considerable debate among business-people, city leaders, and public employees alike. Indeed, each element of privatization—from its apparent cost-saving properties to its possible negative impact on minority workers—provokes strong reaction. About the only thing that everyone can agree on is that the trend has been enormously beneficial to owners of small- and mid-sized businesses. Following are some privatization issues that communities, public providers, and private providers all need to consider:

Costs and Productivity

Proponents of privatization argue that whereas government producers have no incentive to hold down production costs, private producers who contract with the government to provide the service have more at stake, thus encouraging them to perform at a higher level for lower cost. The lower the cost incurred by the firm in satisfying the contract, the greater profit it makes. On the other hand, the absence of competition and profit incentives in the public sector is not likely to result in cost minimization. Of course, small- and mid-sized companies also need to make sure that they do not sacrifice an acceptable profit margin in their zeal to secure a contract.

Although private firms may pay lower wages and fringe benefits than local governments, the major cause of the cost differences between the private and governmental sectors is employee productivity. Lower labor costs may arise either from lower wages (which means that the government was paying wages higher than necessary for a given skill) or from less labor input (which means that the government retaining more employees than necessary to fulfill need). Private firms have more flexibility than governmental units to use part-timers to meet peak periods of activity, to fire unsatisfactory workers, and to allocate workers across a variety of tasks. Moreover, critics of municipal governments argue that they are less likely to reward individual initiatives or punish aberrant behavior when compared with their private sector counterparts.

Finally, supporters of privatization argue that the trend has spurred improvements in performance by public service providers. "Evidence shows that public agencies should be allowed to bid on contracts along with private operators," wrote Blackstone and Hakim, "since this exposure to competition has led many public agencies to improve their service delivery and significantly reduce costs."

Service. Expected quality of service varies from community to community, depending on a wide range of factors such as historical service levels, local taxation, and possible changes in service requirements. Moreover, Public Works observed that good service is sometimes defined differently by citizens, public service providers, and private service providers. "Response time and public confidence need to be taken into account when judging the pros and cons of private/public," stated Public Works. "Stability may be a concern in the eyes of the public; a government agency cannot walk away at the end of a contract period."

Operating Philosophies. Proponents of privatization state that private firms may be more likely to experiment with different and creative approaches to service provision, whereas government tends to stick with the current approach since changes often create political difficulties for elected officials. In addition, private firms may use retained earnings to finance research or to purchase new capital equipment that lowers unit production costs. On the other hand, government may not be able or willing to allocate tax revenues to these purposes as easily, given the many competing demands on the government's budget.

Regulatory Realities. In some cases, local, state, and federal regulations may determine whether a service can even be handed over to a private provider. Moreover, "the ultimate responsibility (in the eyes of the public, if not the courts) rests with the public agency that assigns operating rights to a private concern," stated Public Works. "The local government will still be held responsible for the cost and quality of the service under contract."

Competition. Supporters of privatization often cite the competitive environment that is nourished by the practice as a key to its success. Private owners have a strong incentive to operate efficiently, they argue, while this incentive is lacking under public ownership. If private firms spend more money and employ more people to do the same amount of work, competition will lead to lower margins, lost customers, and decreased profits. The disciplining effect of competition does not occur in the public sector. Still, even advocates of privatization agree that private ownership produces the public benefits of lower costs and high quality only in the presence of a competitive environment. Privatization cannot be expected to produce these same benefits if competition is absent. Given this reality, analysts strongly encourage municipal governments to make sure that the bidding process is an ethical one.

Monitoring and Enforcement. Critics of privatization of government services contend that problems sometimes arise in various aspects of the process, including the bidding process, the precise specification of the contract, and the monitoring and enforcement of the contract. For example, some observers have raised concerns that potential suppliers may initially offer a price to the government that is less than actual production costs to induce the government to transfer the service to the private sector or to win the contract. Subsequently, the contractor would then demand a higher price after the government has dismantled its own production system. Such "low-balling" in the bidding process may be reduced if the local government requires relatively long-term contracts, or constructs contracts that give them flexibility in hiring and firing outside firms.

Public Personnel Management magazine also noted that governments need to take several important precautions before handing out a contract in order to avoid litigation and legal liability. These precautions include detailed performance specifications for service providers, guidelines for the evaluation of competitive bids, and labor relations strategies. For their part, private bidders need to make certain that these precautions are reasonable ones that will not unduly impact their ability to perform both profitably and professionally.

Commonly utilized methods of contract monitoring, meanwhile, include performance appraisals, tracking complaints, citizen satisfaction surveys, reports from contractors, field observations, and ongoing cost comparisons.

Employment. Privatization is understandably viewed as an alarming trend by public employee groups. In some cases, privatization results in layoffs of public sector employees, although governments often reassign them to other government jobs, place them with private contractors, or offer them early retirement programs. These possibilities have been particularly upsetting to public employee unions, which have been at the forefront of efforts to block privatization. Indeed, one of the principal objections to privatization is that it replaces positions that featured compensation that could be used to support a family with private sector spots that offer modest compensation. Indeed, critics such as the Journal of Commerce and Commercial's David Morris contend that private companies are only able to promise meaningful financial savings over public agencies because of the comparatively low salaries they pay their workers. Another charge leveled at privatization initiatives is that they too often have a disproportionate impact on minorities. "Governments often hire minorities in larger proportions than other workers," wrote Blackstone and Hakim. "Thus, if government size is reduced, relatively more minority workers are likely to lose their jobs." In recognition of these fears, some service contracts now require private contractors to hire affected public employees or give them hiring preference.

Demographic and Geographic Factors. Smaller municipalities may incur relatively high unit costs if they operate their own services as a result of not being able to achieve economies of scale. These localities may benefit from turning to a contractor that serves multiple communities. Privatization is also more acceptable in fast-growing communities. If services are being expanded to cover new residents, private contractors are less likely to displace existing public sector employees. Finally, contracting out varies with the number of services provided to residents. As the number of services increases, differences in the cost and effectiveness with which they are provided become more apparent. Therefore, municipalities providing diverse services may be more open to exploring private sector options than those localities where services are more limited.

Further Reading:

Blackstone, Edwin, and Simon Hakim. "Private Ayes: A Tale of Four Cities." American City and County. February 1997.

Elam, L.B. "Reinventing Government Privatization Style—Avoiding the Legal Pitfalls of Replacing Civil Servants with Contract Providers." Public Personnel Management. Spring 1997.

Kodrzycki, Yolanda. "Privatization of Local Government Services: Lessons for New England." New England Economic Review. May/June, 1994.

Layne, Judy. "An Overview of the Privatization Debate." Optimum. June 2000.

Lieberman, Ira W. "Privatization: The Theme of the 1990s—An Overview." Columbia Journal of World Business. Spring 1993.

Morris, David. "The Downside of Privatization." Journal of Commerce and Commercial. February 9, 1996.

"Private/Public Partnership: A Balancing Act." Public Works. September 1997.

Schine, Eric. "America's New Watchword: If It Moves, Privatize It." Business Week. December 12, 1994.

Schriener, Judy, Stephen H. Daniels, and William J. Angelo. "Gold in the Hills of Privatization." ENR.. October 24, 1994.

Sturdivant, John N. "Privatization: It Often Doesn't Work, Increases Costs and Lacks Accountability." Site Selection. April 1996.

The transfer of public assets to the private sector, by sale, or contracting out. After some hesitant and small-scale experiments by the Heath Government of 1970-4, UK privatization on a large scale was undertaken by the Thatcher Government after 1979 with the electricity, gas, and telecommunications industries being sold. The advantages of privatization from the government's perspective included: raising large sums of money to offset public borrowing; weakening the power of public sector trade unions; widening share ownership; giving the management of former nationalized industries normal commercial autonomy; and reducing the burden of decision-making imposed on government by public ownership. Critics of the British privatizations argued that they were undertaken so that maximizing competition was sacrificed in the interest of ensuring the greatest possible revenue from the sales and protecting the monopolistic positions of the existing enterprises. The perceived policy success of privatization in Britain led to its imitation in many other countries. In particular, organizations such as the World Bank encouraged developing countries to dispose of their loss-making state-owned industries. Privatization in the former Soviet Union has occurred more slowly than anticipated and has often involved acquisitions of enterprises by the managements on favourable terms.

— Wyn Grant

For more information on privatization, visit Britannica.com.

Privatization is the practice of delegating public duties to private firms. It is advocated as a means of shrinking the size of government, reducing deficits, and increasing efficiency in public services, although its success in these objectives is debated. Privatization takes several forms in the United States: the selling of firms that were once partly owned and regulated by government; the contracting out of public services to private companies for production; and the funding of vouchers for use in the private sector thus introducing competition between public and private agencies.

Historically the United States has maintained a distaste for federal government intervention in the economy, although the Constitution does grant Congress the power to regulate commerce. With the exception of the Progressive Era (1901–1921) and the New Deal (1933–1945), policy was guided by the principles of laissez-faire capitalism, articulated by economist Adam Smith in Wealth of Nations (1776).

After World War II, public agencies themselves began privatizing without legislative guidance. In 1955, the Bureau of the Budget officially discouraged federal agencies from producing any "product or service [which] can be procured from private enterprise through ordinary business channels." In the mid-1970s the Ford administration proposed legislation eliminating federal involvement in airline, trucking, banking, and gas industries, and one aspect of President Jimmy Carter's energy policy at the end of the decade was to end regulation of natural gas. But it was President Ronald Reagan who made the strongest postwar push for privatization on the federal level.

Reagan established the Private Sector Survey on Cost Control (of ten referred to as the Grace Commission) to "identify opportunities for increased efficiency and reduced costs in federal government operations." Congress supported the Commission's recommendations, and in the 1985 Deficit Reduction Act required "the President to report on progress in implementing [commission] recommendations." This led to the largest privatization in U.S. history, the sale of Conrail for $1.65 billion—and seventy-eight other recommendations for privatization.

Since the 1980s proposals to privatize Amtrak, the U.S. Postal Service, the prison system, health care, housing, welfare, Social Security, and education (among other programs), have been put forth, debated, and implemented in various forms. Allowing citizens to invest some of their social security funds in the stock market was hotly debated during the bull market of the 1990s, yet was generally unpopular with voters, while welfare-to-work programs tended to be supported by public opinion. By the turn of the twenty-first century, state and local governments were contracting services ranging from operation of public utilities to maintenance of public parks.

Perhaps the most intensely debated privatization proposals were in public education. School voucher programs, permitting parents to use public funds to send their children to private schools were implemented in Milwaukee, Wisconsin, and Cleveland, Ohio. In 1992, private firms began running public schools in cities across the county to mixed reviews, while efforts to privatize five of New York City's public schools were reject by parents in 2001.

Critics of privatization point out that the essential mandate of government is to work in the public interest, while that of private enterprise is to maximize profits; thus ideologically, public services are best handled by government. Others argue privatization disproportionately hurts minority populations because they tend to rely more heavily on employment in the public sector. When such jobs move to the private sector, workers of ten receive lower wages and fewer benefits.

Bibliography

Pack, Janet Rothenberg. "The Opportunities and Constraints of Privatization." In The Political Economy of Privatization and Deregulation. Edited by Elizabeth E. Bailey and Janet Rothenberg Pack. Brookfield, Vt.: Edward Elgar, 1995.

Smith, Preston H. "'Self-Help,' Black Conservatives and the Reemergence of Black Privatism." In Without Justice for All: the New Neo-Liberalism and Our Retreat from Racial Equality. Edited by Adolph Reed Jr. Boulder, Colo.: Westview Press, 1999.

Swann, Dennis. The Retreat of the State: Deregulation and Privitisation in the UK and US. Ann Arbor: University of Michigan Press, 1988.

Privatization may be pursued with different aims in mind. The political aim is to break away from the past and create a new class of capitalists as quickly as possible. The efficiency aim is to create a better management system for the enterprises, and to set up a market environment. If this aim is dominant, it requires complex institution-building and thus precludes rapid completion of the process. Privatization may have a financial aim: in this case the state-owned enterprises (SOEs) should be sold at their highest value so as to bring revenues to the state. Finally, an equity aim may involve returning property to those who had been deprived of it by the nationalization process (an aim pursued in some Central European countries), giving priority to employees for buying shares in their enterprises, or even giving away state assets to the citizens.

In Russia, privatization began in January 1992, together with the implementation of the stabilization program, and assumed the form of liberalization of small-scale trade (street vending). This "small privatization" was conducted at a quick pace in the services sector, which consisted of trade, catering, services to households, construction, individual transportation activities, and housing. It was often marred by racketeering and crime. The small-scale state enterprises (which had already been transferred to the local authorities in 1991) were sold to citizens, local entrepreneurs, and/or employees, basically through auctions. At the same time, as prices and individual activities were liberalized, it became immediately possible to create new, small-scale businesses, especially in fields where human capital was the main requirement, such as consulting, engineering, private teaching, and computer services. Actually, such activities were already privately conducted in the Soviet era within the shadow economy.

The main challenge lay in the privatization of the big SOEs, or large-scale privatization. The Russian government was clearly privileging the political objective, and hence opted for a quick mass privatization scheme. It also favored equity considerations, so that the people would benefit from the divestment of the state. In June 1992, the mass privatization program was adopted, and in October the voucher system was launched. All Russian citizens received 10,000 rubles' worth of privatization vouchers (equivalent then to 50 U.S. dollars), immediately redeemable in cash, or exchangeable against shares in the enterprises selected for privatization that had been transformed into joint stock companies. These enterprises were sold at direct public auctions. The staff (employees and management) could opt for three variants, of which the most popular was the allocation of 51 percent of the shares to the employees at a discounted price. Seventy percent of the enterprises were thus privatized by the end of June 1994; past this deadline the vouchers were no longer valid. The second wave of large-scale privatization proceeded much more slowly and was far from complete in 2002. It had to be based upon sales to foreigners or domestic buyers. It was slowed by several factors: the Russian financial crisis of 1998, which led to a collapse of the banking sector; the scandals linked with the outcomes of the first wave, when several notorious deals evidenced the dominant role of insiders who managed to acquire large assets with very little cash; and, finally, the enormous stakes of the second wave, which involved privatization of the energy sector (oil, gas, and electricity) and the telecommunications sector.

Who owned the Russian enterprises? The most prominent owners were the oligarchs, who controlled the largest firms of the energy and raw materials sector, but who became less powerful after Boris Yeltsin's resignation in 1999. More generally, the former nomenklatura of the Soviet system, along with a small number of newcomers, took advantage of a privatization process lacking transparency and clear legal rules. Restructuring of enterprises and improving of corporate governance did not proceed along with the change in ownership. Privatization was close to completion in Russia as of 2002, when 75 percent of the GDP was created by the private sector. However, the private sector had yet to function according to the rules of a transparent market.

Bibliography

Boycko, Maxim; Shlejfer, Andrei; and Vishny, Robert. (1995). Privatizing Russia. Cambridge, MA: MIT Press.

European Bank for Reconstruction and Development (EBRD). (1999). Transition Report 1999: Ten Years of Transition. London: EBRD.

Hedlund, Stefan. (2001). "Property Without Rights: Dimensions of Russian Privatisation." Europe-Asia Studies 53(2):213 - 237.

—MARIE LAVIGNE

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Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector (government) to the private sector (business). In a broader sense, privatization refers to transfer of any government function to the private sector including governmental functions like revenue collection and law enforcement.^[1]

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. The second is a demutualization of a mutual organization or cooperative to form a joint stock company.^[2]

Contents 1 Origin of the term 2 History 3 Types of privatisation 4 Arguments for and against privatisation 4.1 Pro-privatisation 4.2 Anti-privatization 5 Outcomes 6 Alternatives to total privatisation 6.1 Public Utility 6.2 Non-Profit 6.3 Municipalization 6.4 Outsourcing or Sub-contracting 6.5 Partial ownership 7 Notable privatisations 8 Negative responses to privatisation 9 Reverse privatisation 10 See also 11 References 11.1 Unindexed 12 External links

Origin of the term

It has been claimed that the term was first used in the 1930s by The Economist in covering Nazi German economic policy.^[3][4]

History

There is a long history of privatization dating from Ancient Greece when the government contracted out almost everything to the private sector^[5]. In the Roman Republic private individuals and companies performed the majority of services including tax collection, army supplies, 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 ^[5].

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 privatisation, including selling its majority stake in Volkswagen to small investors in a public share offering in 1961 ^[5]. However, it was in the 1980's under the leaderships of Margaret Thatcher in the UK and Ronald Reagan in the USA, that privatization gained its real momentum in the modern era.

Types of privatisation

There are three main methods of privatisation:

• Share issue privatisation (SIP) - selling shares on the stock market
• Asset sale privatisation - selling the entire firms or part of it to a strategic investor, usually by auction or using Treuhand model
• Voucher privatisation - shares of ownership are distributed to all citizens, usually for free or at a very low price.

Share issue privatisation is the most common type of privatisation.

Share issue 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. Euronext, and the London, New York and Hong Kong Stock Exchanges are popular because they are highly developed and sophisticated.

As a result of higher political and currency risk deterring foreign investors, asset sales are more common in developing countries.

Voucher privatisation has mainly been used in the transition economies of Central and Eastern Europe, such as Russia, Poland, the Czech Republic, and Slovakia.

A very substantial benefit to share or asset sale privatisations is that bidders compete to offer the state the highest price, creating revenues for the state to redistribute in addition to new tax revenue. Voucher privatisations, on the other hand, would be a genuine return of the assets into the hands of the general population, and create a real sense of participation and inclusion. Vouchers, like all other private property, could then be sold on if preferred by what companies are offering.

Arguments for and against privatisation

Pro-privatisation

Proponents of privatisation believe that private market factors can more efficiently deliver many goods or service than government due to free market competition. In general, it is argued that over time this will lead to lower prices, improved quality, more choices, less corruption, less red tape, and quicker delivery. Many proponents do not argue that everything should be privatised. According to them, market failures and natural monopolies could be problematic. However, some Austrian school economists and anarcho-capitalists would prefer that everything be privatised, including the state itself.

The basic economic argument given for privatisation is 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 there are both private and state owned enterprises competing 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.

Privatising a non-profitable company which was state-owned 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.

• 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 services for the sake of reaching a customer base and hence increasing profits. A state-owned firm 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.
• Specialisation A private business 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 specialise its goods and services as a result of the general products provided to the greatest number of people in the population.
• 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 monopolized function is prone to corruption; 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) during the privatisation process - however - can result in significant underpricing of the asset. This allows for more immediate and efficient corrupt transfer of value - not just from ongoing cash flow, but from the entire lifetime of the asset stream. Often such transfers are difficult to reverse.

• 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 risk 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 privatisation. 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 populist 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 inflation, increasing its staffing to reduce unemployment, or moving its operations to marginal constituencies.
• Profits. Corporations exist to generate profits for their shareholders. Private companies make a profit by enticing consumers 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 governance will therefore be incentivized to meet the needs of its customers efficiently.

Anti-privatization

Opponents of privatisation dispute the claims concerning the alleged lack of incentive for governments to ensure that the enterprises they own are well run, on the basis of the idea that governments are proxy owners answerable to the people. It is argued that a government which runs nationalized enterprises poorly will lose public support and votes, while a government which runs those enterprises well will gain public support and votes. Thus, democratic governments do have an incentive to maximize efficiency in nationalized companies, due to the pressure of future elections.

Opponents of certain privatisations believe certain parts of the social terrain should remain closed to market forces in order to protect them from the unpredictability and ruthlessness of the market (such as private prisons, basic health care, and basic education). Another view is that some of the utilities which government provides benefit society at large and are indirect and difficult to measure or unable to produce a profit, such as defense. Still another is that natural monopolies are by definition not subject to competition and better administrated by the state.

The controlling ethical issue in the anti-privatisation perspective is the need for responsible stewardship of social support missions. Market interactions are all guided by self-interest, and successful actors in a healthy market must be committed to charging the maximum price that the market will bear. Privatisation opponents believe that this model is not compatible with government missions for social support, whose primary aim is delivering affordability and quality of service to society.

Many privatisation 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.

Furthermore, large corporations can pay public relations professionals to convince decision-makers that privitazation is a sensible idea, whether or not this is actually the case. Corporations typically have far more resources for expert testimony, advertisements, conferences and other propaganda efforts than anti-privatisation advocates. Of course, this fact has no bearing on the merits of privatisation itself.

Some would also point out that privatising 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).

Furthermore, opponents of privatisation argue that it is undesirable to transfer state-owned assets into private hands for the following reasons:

• Performance. A democratically elected government is accountable to the people through a legislature, Congress or Parliament, 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 parliament, 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.
• Lack of market discipline. Governments have chosen to keep certain companies/industries under public ownership 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 privatised, 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. Privatisation will not result in true competition if a natural monopoly 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 good 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 unelastic good), demand part of supply and demand theories does not work.
• Privatisation and Poverty. It is acknowledged by many studies that there are winners and losers with privatisation. 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 privatisation 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 privatisation process leading to asset stripping.^[6]

Outcomes

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Literature reviews ^[7][8] find that in competitive industries with well-informed consumers, privatisation consistently improves efficiency. Such efficiency gains mean a one-off increase in GDP, 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^[9], 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, the results of privatisation are much more mixed, as a private monopoly behaves much the same as a public one in liberal economic theory. In general, if the performance of an existing public sector operation is sufficiently bad, privatisation (or threat thereof) has been known to improve matters. Changes may include, inter alia, the imposition of related reforms such as greater transparency and accountability of management, improved internal controls, regulatory systems, and better financing, rather than privatisation 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 privatisations and restructuring of government enterprises in the Nordic countries. For example, dismantling telecommunications monopolies have 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. Privatisations 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 privatisation 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 privatisation, and that corruption is more prevalent in non-privatised sectors. Furthermore, there is evidence to suggest that extralegal and unofficial activities are more prevalent in countries that privatised less.^[10]

Alternatives to total privatisation

Public Utility

The enterprise can remain as a public utility.

Non-Profit

The enterprise could be managed by a private non-profit organization.

Municipalization

Transferring control to municipal government

Outsourcing or Sub-contracting

It is possible that national services may sub-contract or out-source functions to private enterprises. A notable example of this is in the United Kingdom, 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.

See also: private finance initiative

Partial ownership

An enterprise may be privatised, with a number of shares in the company being retained by the state. This is a particularly notable phenomenon in France, where the state often retains a "blocking stake" in private industries. In Germany, the state privatised 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 privatisation could be an alternative, it is more often a stepping stone to full privatisation. 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, and thus must be sold off bit by bit. The first tranche of a multi-step privatisation would also in the first instance establish a valuation for the enterprise to mitigate complaints of under-pricing.

In some instances of partial privatisation of contracted services, provision of some portion(s) of the state-owned service are provided by private-sector contactors, but the government retains the capacity to self-operate at contract intervals, if it so chooses. An example of partial privatisation 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 privatisation 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 privatisation would be more feasible for the government. (see section below)

See also: Public-private partnership

Notable privatisations

See also: List of privatisations

The largest privatisation in history was Japan Post. 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 privatise 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 privatisation was rejected by upper house, Koizumi scheduled nationwide elections to be held on September 11, 2005. He declared the election to be a referendum on postal privatisation. Koizumi subsequently won this election, gaining the necessary supermajority and a mandate for reform, and in October 2005, the bill was passed to privatise Japan Post in 2007.^[11]

Nippon Telegraph and Telephone's privatisation in 1987 was the largest share offering in financial history at the time.^[12] 15 of the world's 20 largest public share offerings have been privatisations of telecoms.^[12]

The United Kingdom's largest public share offerings were privatisations of British Telecom and British Gas. The largest public share offering in France was France Telecom. Privatisation in Europe has led to genuine competition: the former state-owned enterprises lost their monopolies due to legislation and technological change, competitors entered the market, and prices for broadband access and telephone calls fell dramatically.^{[citation needed]}

Negative responses to privatisation

Privatisation proposals in key public service sectors such as water and electricity are in many cases strongly resisted by opposition political parties and civil society groups. 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 unions. Opposition is usually strongest to water privatisation — as well as Cochabamba, recent examples include Haiti, Ghana and Uruguay (2004). In the latter case a civil-society-initiated referendum banning water privatisation was passed in October 2004.

Reverse privatisation

A reversion from contracted ownership of an enterprise and/or services to governmental ownership and/or provision is called reverse privatisation or nationalization. Such a situation most often occurs when a privatisation contractor fails financially and/or the governmental unit has been unable to purchase satisfactory service at prices it regards as less than state-ownership or self-operation of services. Another circumstance may occur when greater control than viable under privatisation is determined to be in the governmental unit's best interest.

National security concerns may be the source of reverse privatisation 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^{[citation needed]} and put under the authority of the Transportation Security Administration.

When a state-owned enterprise or service has been nationalized or privatised, and then is reverted to state-ownership or service provision, the process of reverse privatisation may be called denationalization.

See also

• Nationalization - the reverse process

• Cooperative
• Deregulation
• Gated community
• Megaproject
• Megaprojects and risk
• Public ownership
• Reprivatisation
• Securitization
• Welfare state
• Marketization
• Special Economic Zone
• Urban Enterprise Zone
• National security privatisation
• Private sector development
• Privatisation of British Rail
• Privatisation in Russia
• Voucher privatisation

References

1. ^ Chowdhury, F. L. ‘’Corrupt Bureaucracy and Privatisation of Tax Enforcement’’, 2006: Pathak Samabesh, Dhaka.
2. ^ "Musselburgh Co-op in crisis as privatisation bid fails.yeah of corse". Co-operative News. 2005-11-01. http://www.thenews.coop/index.php?content=story&id=835. Retrieved on 2008-05-21. 
3. ^ Edwards, Ruth Dudley (1995). The Pursuit of Reason: The Economist 1843-1993. Harvard Business School Press. pp. 946. ISBN 0-87584-608-4. 
4. ^ Bel, Germà (2006). "Retrospectives: The Coining of “Privatisation” and Germany's National Socialist Party". Journal of Economic Perspectives 20 (3): 187–194. doi:10.1257/jep.20.3.187. 
5. ^ ^{a b c} International Handbook on Privatization by David Parker, David S. Saal
6. ^ Dagdeviren (2006) "Revisiting privatisation in the context of poverty alleviation" Journal of International Development, Vol. 18, 469–488
7. ^ "Privatisation in Competitive Sectors: The Record to Date, World Bank Policy Research Working Paper No. 2860". John Nellis and Sunita Kikeri (World Bank). June 2002. http://ssrn.com/abstract=636224. 
8. ^ "From State To Market: A Survey Of Empirical Studies On Privatisation" (PDF). William L. Megginson and Jeffry M. Netter (Journal of Economic Literature). June 2001. http://faculty-staff.ou.edu/M/William.L.Megginson-1/prvsvpapJLE.pdf. 
9. ^ "Winners and Losers: Assessing the Distributional Impact of Privatisation, CGD Working Paper No 6" (PDF). Nancy Birdsall & John Nellis (Center for Global Development). March 9, 2006. http://www.cgdev.org/docs/cgd_wp006.pdf. 
10. ^ Privatisation in Competitive Sectors: The Record to Date. Sunita Kikeri and John Nellis. World Bank Policy Research Working Paper 2860, June 2002. [1] Privatisation and Corruption. David Martimort and Stéphane Straub. [2]
11. ^ Takahara, "All eyes on Japan Post"Faiola, Anthony (2005-10-15). "Japan Approves Postal Privatisation". Washington Post (The Washington Post Company): p. A10. http://www.washingtonpost.com/wp-dyn/content/article/2005/10/14/AR2005101402163.html. Retrieved on 2007-02-09. 
12. ^ ^{a b} The Financial Economics of Privatisation By William L. Megginson, p. 205 - 206

Unindexed

• Kosar, Kevin R. (2006), "Privatisation and the Federal Government: An Introduction", Report from the Congressional Research Service
• Bel, Germà (2006), "The coining of `privatisation´and Germany's National Socialist Party", Journal of Economic Perspectives 20(3), 187-194
• Clarke, Thomas (ed.) (1994) "International Privatisation: Strategies and Practices" Berlin and New York: Walter de Gruyter, ISBN 3-11-013569-8
• Clarke, Thomas and Pitelis, Christos (eds.) (1995) "The Political Economy of Privatisation" London and New York: Routledge, ISBN 0-415-12705-X
• Nico Perrone (2002), Economia pubblica rimossa, Milan, Giuffrè ISBN 88-14-10088-8
• Mayer, Florian (2006) Vom Niedergang des unternehmerisch tätigen Staates: Privatisierungspolitik in Großbritannien, Frankreich, Italien und Deutschland, VS Verlag, Wiesbaden, ISBN 3-531-14918-0
• Juliet D’Souza, William L. Megginson (1999), "The Financial and Operating Performance of Privatised Firms during the 1990s", Journal of Finance August 1999
• von Hayek, Friedrich, (1960) The Constitution of Liberty
• Smith, Adam (1994) The Wealth of Nations
• Stiglitz, Joseph Globalization and its Discontents
• David T. Beito, Peter Gordon, and Alexander Tabarrok (editors); foreword by Paul Johnson (2002). The voluntary city: choice, community, and civil society. Ann Arbor: University of Michigan Press/The Independent Institute. ISBN 0-472-08837-8. 
• von Weizsäcker, Ernst, Oran Young, and Matthias Finger (editors): Limits to Privatisation. Earthscan, London 2005 ISBN 1-84407-177-4
• Jeb Sprague, 2007. Haiti: Workers Protest Privatizatin Layoffs. Inter Press Service.

External links

Look up privatization in Wiktionary, the free dictionary.

• Reports of the Public Services International Research Unit at the University of Greenwich Research database with many articles on the effects of privatisation
• A Primer on Public-Private Partnerships

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