British English
British English (BrE, en-GB, or BE) is, according to Lexico, Oxford Dictionaries, "English language, English as used in Great Britain, as distinct from that used elsewhere". More narrowly, it can refer specifically to the English language in ...
) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for
deregulation
Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a ...
when a heavily regulated private company or industry becomes less regulated. Government functions and services may also be privatised (which may also be known as "franchising" or "out-sourcing"); in this case, private entities are tasked with the implementation of government programs or performance of government services that had previously been the purview of state-run agencies. Some examples include revenue collection,
law enforcement
Law enforcement is the activity of some members of government who act in an organized manner to enforce the law by discovering, deterring, rehabilitating, or punishing people who violate the rules and norms governing that society. The term en ...
,
water supply
Water supply is the provision of water by public utilities, commercial organisations, community endeavors or by individuals, usually via a system of pumps and pipes. Public water supply systems are crucial to properly functioning societies. Thes ...
, and prison management.
Another definition is that privatization is the sale of a
state-owned enterprise
A state-owned enterprise (SOE) is a Government, government entity which is established or nationalised by the ''national government'' or ''provincial government'' by an executive order or an act of legislation in order to earn Profit (econom ...
or
municipally owned corporation A municipally owned corporation is a corporation owned by a municipality. They are typically "organisations with independent corporate status, managed by an executive board appointed primarily by local government officials, and with majority public ...
to private investors; in this case shares may be traded in the public market for the first time, or for the first time since an enterprise's previous
nationalization
Nationalization (nationalisation in British English) is the process of transforming privately-owned assets into public assets by bringing them under the public ownership of a national government or state. Nationalization usually refers to pri ...
. This type of privatization can include the
demutualization
Demutualization is the process by which a customer-owned mutual organization (''mutual'') or co-operative changes legal form to a joint stock company. It is sometimes called stocking or privatization. As part of the demutualization process, member ...
of a
mutual organization
A mutual organization, or mutual society is an organization (which is often, but not always, a company or business) based on the principle of mutuality and governed by private law. Unlike a true cooperative, members usually do not contribute to ...
,
cooperative
A cooperative (also known as co-operative, co-op, or coop) is "an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically-control ...
joint-stock company
A joint-stock company is a business entity in which shares of the company's capital stock, stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their share (finance), shares (certificates ...
.
Separately, privatization can refer to the purchase of all
outstanding shares
Shares outstanding are all the shares of a corporation that have been authorized, issued and purchased by investors and are held by them. They are distinguished from treasury shares, which are shares held by the corporation itself, thus represent ...
private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a ty ...
investors, which is more often called "going private". Before and after this process the company is privately owned, but after the buyout its shares are withdrawn from being traded at a public
stock exchange
A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for th ...
.
Etymology
The term ‘''privatizing’'' first appeared in English, with quotation marks, in the ''
New York Times
''The New York Times'' (''the Times'', ''NYT'', or the Gray Lady) is a daily newspaper based in New York City with a worldwide readership reported in 2020 to comprise a declining 840,000 paid print subscribers, and a growing 6 million paid d ...
'', in April 1923, in a translation of a German speech referring to the potential for German state railroads to be bought by American companies. In German, the word '' Privatisierung'' has been used since at least the 19th-century. Ultimately, the word came to German through French from the Latin ''privatus''.
The term ''reprivatization'', again translated directly from German (''Reprivatisierung''), was used frequently in the mid-1930s as the ''
Economist
An economist is a professional and practitioner in the social sciences, social science discipline of economics.
The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this ...
'' reported on Nazi Germany's sale of nationalized banks back to public shareholders following the 1931 economic crisis.
The word became common in the late 1970s and early 1980s as part of Margaret Thatcher's economic policies. She was drawing on the work of the pro-privatization MP, David Howell, who was himself drawing on the Austrian-American management expert
Peter Drucker
Peter Ferdinand Drucker (; ; November 19, 1909 – November 11, 2005) was an Austrian-American management consultant, educator, and author, whose writings contributed to the philosophical and practical foundations of the modern business co ...
's 1969 book, ''The Age of Discontinuity''.
Definition
The word ''privatization'' may mean different things depending on the context in which it is used. It can mean moving something from the public sphere into the private sphere, but it may also be used to describe something that was always private, but heavily regulated, which becomes less regulated through a process of
deregulation
Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a ...
. The term may also be used descriptively for something that has always been private, but could be public in other jurisdictions.
There are also private entities that may perform public functions. These entities could also be described as privatized. Privatization may mean the government sells state-owned businesses to private interests, but it may also be discussed in the context of the privatization of services or government functions, where private entities are tasked with the implementation of government programs or the performance of government services. Gillian E. Metzger has written that: "Private entities
n the US
N, or n, is the fourteenth letter in the Latin alphabet, used in the modern English alphabet, the alphabets of other western European languages and others worldwide. Its name in English is ''en'' (pronounced ), plural ''ens''.
History
...
provide a vast array of social services for the government; administer core aspects of government programs; and perform tasks that appear quintessentially governmental, such as promulgating standards or regulating third-party activities." Metzger mentions an expansion of privatization that includes health and welfare programs, public education, and prisons.
History
Pre-20th century
The history of privatization dates from
Ancient Greece
Ancient Greece ( el, Ἑλλάς, Hellás) was a northeastern Mediterranean civilization, existing from the Greek Dark Ages of the 12th–9th centuries BC to the end of classical antiquity ( AD 600), that comprised a loose collection of cult ...
, when governments contracted out almost everything to the private sector.''International Handbook on Privatization'' by David Parker, David S. Saal In the
Roman Republic
The Roman Republic ( la, Res publica Romana ) was a form of government of Rome and the era of the classical Roman civilization when it was run through public representation of the Roman people. Beginning with the overthrow of the Roman Kin ...
private individuals and companies performed the majority of services including tax collection (
tax farming
Farming or tax-farming is a technique of financial management in which the management of a variable revenue stream is assigned by legal contract to a third party and the holder of the revenue stream receives fixed periodic rents from the contract ...
), army supplies ( military contractors), religious sacrifices and construction. However, the
Roman Empire
The Roman Empire ( la, Imperium Romanum ; grc-gre, Βασιλεία τῶν Ῥωμαίων, Basileía tôn Rhōmaíōn) was the post-Republican period of ancient Rome. As a polity, it included large territorial holdings around the Mediterr ...
also created state-owned enterprises—for example, much of the grain was eventually produced on estates owned by the Emperor. David Parker and David S. Saal suggest that the cost of bureaucracy was one of the reasons for the
fall of the Roman Empire
The fall of the Western Roman Empire (also called the fall of the Roman Empire or the fall of Rome) was the loss of central political control in the Western Roman Empire, a process in which the Empire failed to enforce its rule, and its vas ...
.
Perhaps one of the first ideological movements towards privatization came during
China
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
's golden age of the
Han Dynasty
The Han dynasty (, ; ) was an imperial dynasty of China (202 BC – 9 AD, 25–220 AD), established by Liu Bang (Emperor Gao) and ruled by the House of Liu. The dynasty was preceded by the short-lived Qin dynasty (221–207 BC) and a warr ...
.
Taoism
Taoism (, ) or Daoism () refers to either a school of Philosophy, philosophical thought (道家; ''daojia'') or to a religion (道教; ''daojiao''), both of which share ideas and concepts of China, Chinese origin and emphasize living in harmo ...
came into prominence for the first time at a state level, and it advocated the
laissez-faire
''Laissez-faire'' ( ; from french: laissez faire , ) is an economic system in which transactions between private groups of people are free from any form of economic interventionism (such as subsidies) deriving from special interest groups. ...
principle of
Wu wei
''Wu wei'' () is an ancient Chinese concept literally meaning "inexertion", "inaction", or "effortless action". ''Wu wei'' emerged in the Spring and Autumn period, and from Confucianism, to become an important concept in Chinese statecraft and Ta ...
(無為), literally meaning "do nothing". The rulers were counseled by the Taoist clergy that a strong ruler was virtually invisible.
During the
Renaissance
The Renaissance ( , ) , from , with the same meanings. is a period in European history marking the transition from the Middle Ages to modernity and covering the 15th and 16th centuries, characterized by an effort to revive and surpass ideas ...
, most of Europe was still by and large following the
feudal
Feudalism, also known as the feudal system, was the combination of the legal, economic, military, cultural and political customs that flourished in Middle Ages, medieval Europe between the 9th and 15th centuries. Broadly defined, it was a wa ...
economic model. By contrast, the
Ming dynasty
The Ming dynasty (), officially the Great Ming, was an Dynasties in Chinese history, imperial dynasty of China, ruling from 1368 to 1644 following the collapse of the Mongol Empire, Mongol-led Yuan dynasty. The Ming dynasty was the last ort ...
in
China
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
began once more to practice privatization, especially with regards to their manufacturing industries. This was a reversal of the earlier
Song dynasty
The Song dynasty (; ; 960–1279) was an imperial dynasty of China that began in 960 and lasted until 1279. The dynasty was founded by Emperor Taizu of Song following his usurpation of the throne of the Later Zhou. The Song conquered the rest ...
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 or Inclosure is a term, used in English landownership, that refers to the appropriation of "waste" or " common land" enclosing it and by doing so depriving commoners of their rights of access and privilege. Agreements to enclose land ...
(in Scotland as the
Lowland Clearances
The Lowland Clearances were one of the results of the Scottish Agricultural Revolution, which changed the traditional system of agriculture which had existed in Lowland Scotland in the seventeenth century. Thousands of cottars and tenant farmers ...
and the
Highland Clearances
The Highland Clearances ( gd, Fuadaichean nan Gàidheal , the "eviction of the Gaels") were the evictions of a significant number of tenants in the Scottish Highlands and Islands, mostly in two phases from 1750 to 1860.
The first phase resulte ...
). Significant privatizations of this nature occurred from 1760 to 1820, preceding the
industrial revolution
The Industrial Revolution was the transition to new manufacturing processes in Great Britain, continental Europe, and the United States, that occurred during the period from around 1760 to about 1820–1840. This transition included going f ...
in that country.
20th century onwards
The first mass privatization of state property occurred in
Nazi Germany
Nazi Germany (lit. "National Socialist State"), ' (lit. "Nazi State") for short; also ' (lit. "National Socialist Germany") (officially known as the German Reich from 1933 until 1943, and the Greater German Reich from 1943 to 1945) was ...
between 1933 and 1937: "It is a fact that the government of the National Socialist Party sold off public ownership in several state-owned firms in the middle of the 1930s. The firms belonged to a wide range of sectors: steel, mining, banking, local public utilities, shipyard, ship-lines, railways, etc. In addition to this, delivery of some public services produced by public administrations prior to the 1930s, especially social services and services related to work, was transferred to the private sector, mainly to several organizations within the Nazi Party."
Great Britain
Great Britain is an island in the North Atlantic Ocean off the northwest coast of continental Europe. With an area of , it is the largest of the British Isles, the largest European island and the ninth-largest island in the world. It is ...
privatized its
steel industry
Steel is an alloy made up of iron with added carbon to improve its strength and fracture resistance compared to other forms of iron. Many other elements may be present or added. Stainless steels that are corrosion- and oxidation-resistant ty ...
in the 1950s, and the
West German
West Germany is the colloquial term used to indicate the Federal Republic of Germany (FRG; german: Bundesrepublik Deutschland , BRD) between its formation on 23 May 1949 and the German reunification through the accession of East Germany on 3 O ...
government embarked on large-scale privatization, including sale of the
majority stake
A controlling interest is an ownership interest in a corporation with enough voting stock shares to prevail in any stockholders' motion. A majority of voting shares (over 50%) is always a controlling interest. When a party holds less than the major ...
in
Volkswagen
Volkswagen (),English: , . abbreviated as VW (), is a German Automotive industry, motor vehicle manufacturer headquartered in Wolfsburg, Lower Saxony, Germany. Founded in 1937 by the German Labour Front under the Nazi Party and revived into a ...
to small investors in public share offerings in 1961. However, it was in the 1980s under
Margaret Thatcher
Margaret Hilda Thatcher, Baroness Thatcher (; 13 October 19258 April 2013) was Prime Minister of the United Kingdom from 1979 to 1990 and Leader of the Conservative Party (UK), Leader of the Conservative Party from 1975 to 1990. S ...
in the United Kingdom and
Ronald Reagan
Ronald Wilson Reagan ( ; February 6, 1911June 5, 2004) was an American politician, actor, and union leader who served as the 40th president of the United States from 1981 to 1989. He also served as the 33rd governor of California from 1967 ...
in the United States that privatization gained worldwide momentum. Notable privatization attempts in the UK included privatization of
Britoil
Britoil plc was originally a privatised British oil company operating in the North Sea. It was once a constituent of the FTSE 100 Index. The company was acquired by BP in 1988, becoming a brand of it.Amersham International
Amersham plc was a manufacturer of radiopharmaceutical products, to be used in diagnostic and therapeutic nuclear medicine procedures. The company became GE Healthcare following a takeover in 2003, which was based at the original site in Amersh ...
(1982),
British Telecom
BT Group plc (trade name, trading as BT and formerly British Telecom) is a British Multinational corporation, multinational telecommunications holding company headquartered in London, England. It has operations in around 180 countries and is th ...
(1984),
Sealink
Sealink was a ferry company based in the United Kingdom from 1970 to 1984, operating services to France, Belgium, the Netherlands, Isle of Man, Channel Islands, Isle of Wight and Ireland.
Ports served by the company included: Dover, Folkesto ...
ferries (1984), British Petroleum (gradually privatized between 1979 and 1987),
British Aerospace
British Aerospace plc (BAe) was a British aircraft, munitions and defence-systems manufacturer. Its head office was at Warwick House in the Farnborough Aerospace Centre in Farnborough, Hampshire. Formed in 1977, in 1999 it purchased Marconi ...
(1985 to 1987),
British Gas
British Gas (trading as Scottish Gas in Scotland) is an energy and home services provider in the United Kingdom. It is the trading name of British Gas Services Limited and British Gas New Heating Limited, both subsidiaries of Centrica. Serving ...
(1986),
Rolls-Royce
Rolls-Royce (always hyphenated) may refer to:
* Rolls-Royce Limited, a British manufacturer of cars and later aero engines, founded in 1906, now defunct
Automobiles
* Rolls-Royce Motor Cars, the current car manufacturing company incorporated in ...
(1987),
Rover Group
The Rover Group plc was the British vehicle manufacturing conglomerate known as "BL plc" until 1986 (formerly British Leyland), which had been a state-owned company since 1975. It initially included the Austin Rover Group car business (comprisi ...
(formerly
British Leyland
British Leyland was an automotive engineering and manufacturing conglomerate formed in the United Kingdom in 1968 as British Leyland Motor Corporation Ltd (BLMC), following the merger of Leyland Motors and British Motor Holdings. It was partl ...
, 1988),
British Steel Corporation
British may refer to:
Peoples, culture, and language
* British people, nationals or natives of the United Kingdom, British Overseas Territories, and Crown Dependencies.
** Britishness, the British identity and common culture
* British English, ...
(1988), and the regional water authorities (mostly in 1989). After 1979,
council house
A council house is a form of British public housing built by local authorities. A council estate is a building complex containing a number of council houses and other amenities like schools and shops. Construction took place mainly from 1919 ...
tenants in the UK were given the
right to buy
The Right to Buy scheme is a policy in the United Kingdom, with the exception of Scotland since 1 August 2016 and Wales from 26 January 2019, which gives secure tenants of councils and some housing associations the legal right to buy, at a large ...
their homes (at a heavily discounted rate). One million purchased their residences by 1986.
Such efforts culminated in 1993 when British Rail was privatized under Thatcher's successor,
John Major
Sir John Major (born 29 March 1943) is a British former politician who served as Prime Minister of the United Kingdom and Leader of the Conservative Party (UK), Leader of the Conservative Party from 1990 to 1997, and as Member of Parliament ...
.
British Rail
British Railways (BR), which from 1965 traded as British Rail, was a state-owned company that operated most of the overground rail transport in Great Britain from 1948 to 1997. It was formed from the nationalisation of the Big Four British rai ...
had been formed by prior
nationalization
Nationalization (nationalisation in British English) is the process of transforming privately-owned assets into public assets by bringing them under the public ownership of a national government or state. Nationalization usually refers to pri ...
of private rail companies. The privatization was controversial, and its impact is still debated today, as doubling of passenger numbers and investment was balanced by an increase in rail subsidy. This has been reverted by the same party in Britain in the early 2020s with the state-owned
Great British Railways
Great British Railways (GBR) is a planned state-owned public body that will oversee rail transport in Great Britain from 2024, with the exception of Transport for London, Merseytravel services, and light rail and trams elsewhere in England. I ...
.
The United Kingdom's largest public share offerings were privatizations of
British Telecom
BT Group plc (trade name, trading as BT and formerly British Telecom) is a British Multinational corporation, multinational telecommunications holding company headquartered in London, England. It has operations in around 180 countries and is th ...
and
British Gas
British Gas (trading as Scottish Gas in Scotland) is an energy and home services provider in the United Kingdom. It is the trading name of British Gas Services Limited and British Gas New Heating Limited, both subsidiaries of Centrica. Serving ...
during the 1980s under the
Conservative
Conservatism is a cultural, social, and political philosophy that seeks to promote and to preserve traditional institutions, practices, and values. The central tenets of conservatism may vary in relation to the culture and civilization i ...
government of
Margaret Thatcher
Margaret Hilda Thatcher, Baroness Thatcher (; 13 October 19258 April 2013) was Prime Minister of the United Kingdom from 1979 to 1990 and Leader of the Conservative Party (UK), Leader of the Conservative Party from 1975 to 1990. S ...
when many state-run firms were sold off to the private sector. The privatization received very mixed views from the public and the parliament. Even former Conservative prime minister
Harold Macmillan
Maurice Harold Macmillan, 1st Earl of Stockton, (10 February 1894 – 29 December 1986) was a British Conservative statesman and politician who was Prime Minister of the United Kingdom from 1957 to 1963. Caricatured as "Supermac", he ...
was critical of the policy, likening it to "selling the family silver". There were around 3 million shareholders in Britain when Thatcher took office in 1979, but the subsequent sale of state-run firms saw the number of shareholders double by 1985. By the time of her resignation in 1990, there were more than 10 million shareholders in Britain.
Privatization in Latin America was extensive in the 1980s and 1990s, as a result of a Western liberal economic policy. Companies providing public services such as
water management
Water resources are natural resources of water that are potentially useful for humans, for example as a source of drinking water supply or irrigation water. 97% of the water on the Earth is salt water and only three percent is fresh water; slightl ...
, transportation, and
telecommunication
Telecommunication is the transmission of information by various types of technologies over wire, radio, optical, or other electromagnetic systems. It has its origin in the desire of humans for communication over a distance greater than that fe ...
were rapidly sold off to the private sector. In the 1990s, privatization revenue from 18 Latin American countries totaled 6% of gross domestic product."Privatization in Latin America: The rapid rise, recent fall, and continuing puzzle of a contentious economic policy" by John Nellis, Rachel Menezes, Sarah Lucas. Center for Global Development Policy Brief, Jan 2004, p. 1. Private investment in infrastructure from 1990 and 2001 reached $360.5 billion, $150 billion more than in the next emerging economy.
While economists generally give favorable evaluations of the impact of privatization in Latin America, opinion polls and public protests across the countries suggest that a large segment of the public is dissatisfied with or have negative views of privatization in the region.
In the 1990s, the governments in Eastern and Central Europe engaged in extensive privatization of state-owned enterprises in Eastern and Central Europe and Russia, with assistance from the
World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
, the U.S. Agency for International Development, the German
Treuhand
The ("Trust agency"), colloquially referred to as , was an agency established by the government of the German Democratic Republic to reprivatise/privatise East German enterprises, Volkseigene Betriebe (VEBs), prior to German reunification. Cre ...
, and other governmental and
non-governmental organization
A non-governmental organization (NGO) or non-governmental organisation (see spelling differences) is an organization that generally is formed independent from government. They are typically nonprofit entities, and many of them are active in h ...
.
Ongoing privatization of
Japan Post
was a Japanese statutory corporation that existed from 2003 to 2007, offering postal and package delivery services, Retail banking, banking services, and life insurance. It's the nation's largest employer, with over 400,000 employees, and run ...
relates to that of the national postal service and one of the largest banks in the world. After years of debate, the privatization of Japan Post spearheaded by
Junichiro Koizumi
Junichiro Koizumi (; , ''Koizumi Jun'ichirō'' ; born 8 January 1942) is a former Japanese politician who was Prime Minister of Japan and President of the Liberal Democratic Party (LDP) from 2001 to 2006. He retired from politics in 2009. He is ...
finally started in 2007. The privatization process is expected to last until 2017. Japan Post was one of the nation's largest employers, as one-third of Japanese state employees worked for it. It was also said to be the largest holder of personal savings in the world. Criticisms against Japan Post were that it served as a channel of corruption and was inefficient. 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 and 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 the election, gaining the necessary
supermajority
A supermajority, supra-majority, qualified majority, or special majority is a requirement for a proposal to gain a specified level of support which is greater than the threshold of more than one-half used for a simple majority. Supermajority ru ...
and a mandate for reform, and in October 2005, the bill was passed to privatize Japan Post in 2007.
Nippon Telegraph and Telephone
, commonly known as NTT, is a Japanese telecommunications company headquartered in Tokyo, Japan. Ranked 55th in Fortune Global 500, ''Fortune'' Global 500, NTT is the fourth largest telecommunications company in the world in terms of revenue, as w ...
's privatization in 1987 involved the largest share offering in financial history at the time.The Financial Economics of Privatisation By William L. Megginson, pp. 205–206 15 of the world's 20 largest public share offerings have been privatizations of telecoms.
In 1988, the
perestroika
''Perestroika'' (; russian: links=no, перестройка, p=pʲɪrʲɪˈstrojkə, a=ru-perestroika.ogg) was a political movement for reform within the Communist Party of the Soviet Union (CPSU) during the late 1980s widely associated wit ...
policy of
Mikhail Gorbachev
Mikhail Sergeyevich Gorbachev (2 March 1931 – 30 August 2022) was a Soviet politician who served as the 8th and final leader of the Soviet Union from 1985 to dissolution of the Soviet Union, the country's dissolution in 1991. He served a ...
started allowing privatization of the centrally planned economy. Large privatization of the Soviet economy occurred over the next few years as the country dissolved. Other
Eastern Bloc
The Eastern Bloc, also known as the Communist Bloc and the Soviet Bloc, was the group of socialist states of Central and Eastern Europe, East Asia, Southeast Asia, Africa, and Latin America under the influence of the Soviet Union that existed du ...
countries followed suit after the
Revolutions of 1989
The Revolutions of 1989, also known as the Fall of Communism, was a revolutionary wave that resulted in the end of most communist states in the world. Sometimes this revolutionary wave is also called the Fall of Nations or the Autumn of Natio ...
introduced non-communist governments.
Freedom House's privatization index, 1998 and 2002
Freedom House
Freedom House is a non-profit, majority U.S. government funded organization in Washington, D.C., that conducts research and advocacy on democracy, political freedom, and human rights. Freedom House was founded in October 1941, and Wendell Wil ...
's privatization index rated transition countries from 1 (maximum progress) to 7 (no progress). The table below shows the privatization index for various Eastern European countries in 1998 and 2002:
The largest public shares offering in France involved
France Télécom
Orange S.A. (), formerly France Télécom S.A. (stylized as france telecom) is a French multinational corporation, multinational telecommunications corporation. It has 266 million customers worldwide and employs 89,000 people in France, and 5 ...
.
Egypt undertook widespread privatization under
Hosni Mubarak
Muhammad Hosni El Sayed Mubarak, (; 4 May 1928 – 25 February 2020) was an Egyptian politician and military officer who served as the fourth president of Egypt from 1981 to 2011.
Before he entered politics, Mubarak was a career officer in t ...
. Following his overthrow in the 2011 revolution, most of the public began to call for re-nationalization, citing allegations of the privatized firms practicing
crony capitalism
Crony capitalism, sometimes called cronyism, is an economic system in which businesses thrive not as a result of free enterprise, but rather as a return on money amassed through collusion between a business class and the political class. This is ...
stock market
A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...
.
#
Asset sale privatization
Privatization (also privatisation in British English) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when ...
: asset divestiture to a strategic investor, usually by
auction
An auction is usually a process of buying and selling goods or services by offering them up for bids, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder. Some exceptions to this definition ex ...
or through the
Treuhand
The ("Trust agency"), colloquially referred to as , was an agency established by the government of the German Democratic Republic to reprivatise/privatise East German enterprises, Volkseigene Betriebe (VEBs), prior to German reunification. Cre ...
model.
#
Voucher privatization
Voucher 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. Voucher privatization has mainly been used in the early to mid-1990s i ...
: distribution of vouchers, which represent part ownership of a corporation, to all citizens, usually for free or at a very low price.
# Privatization from below: start of new private businesses in formerly socialist countries.
#
Management buyout
A management buyout (MBO) is a form of acquisition in which a company's existing managers acquire a large part, or all, of the company, whether from a parent company or individual. Management-, and/or leveraged buyout became noted phenomena of 1 ...
: purchase of public shares by management of the company, sometimes by borrowing from external lenders
#
Employee buyout
Employee stock ownership, or employee share ownership, is where a company's employees own shares in that company (or in the parent company of a group of companies). US employees typically acquire shares through a share option plan. In the UK, Emp ...
: distribution of shares for free or at a very low price to workers or management of the organization.
The choice of sale method is influenced by the
capital market
A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers t ...
and the political and firm-specific factors. Privatization through the stock market is more likely to be the method used when there is an established capital market capable of absorbing the shares. A market with high liquidity can facilitate the privatization. If the capital markets are insufficiently developed, however, it would be difficult to find enough buyers. The shares may have to be underpriced, and the sales may not raise as much capital as would be justified by the fair value of the company being privatized. Many governments, therefore, elect for listings in more sophisticated markets, for example,
Euronext
Euronext N.V. (short for European New Exchange Technology) is a pan-European bourse that offers various trading and post-trade services.
Traded assets include regulated equities, exchange-traded funds (ETF), warrants and certificates, bonds, de ...
, and the
London
London is the capital and largest city of England and the United Kingdom, with a population of just under 9 million. It stands on the River Thames in south-east England at the head of a estuary down to the North Sea, and has been a majo ...
,
New York
New York most commonly refers to:
* New York City, the most populous city in the United States, located in the state of New York
* New York (state), a state in the northeastern United States
New York may also refer to:
Film and television
* '' ...
and
Hong Kong
Hong Kong ( (US) or (UK); , ), officially the Hong Kong Special Administrative Region of the People's Republic of China ( abbr. Hong Kong SAR or HKSAR), is a city and special administrative region of China on the eastern Pearl River Delt ...
stock exchanges.
Governments in
developing countries
A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...
and
transition countries
A transition economy or transitional economy is an economy which is changing from a centrally planned economy to a market economy.
Transition economies undergo a set of structural transformations intended to develop market-based institutions. T ...
more often resort to direct asset sales to a few investors, partly because those countries do not yet have a stock market with high capital.
Voucher privatization occurred mainly in the
transition economies
A transition economy or transitional economy is an economy which is changing from a centrally planned economy to a market economy.
Transition economies undergo a set of structural transformations intended to develop market-based institutions. T ...
in Central and Eastern Europe, such as
Russia
Russia (, , ), or the Russian Federation, is a List of transcontinental countries, transcontinental country spanning Eastern Europe and North Asia, Northern Asia. It is the List of countries and dependencies by area, largest country in the ...
,
Poland
Poland, officially the Republic of Poland, is a country in Central Europe. It is divided into 16 administrative provinces called voivodeships, covering an area of . Poland has a population of over 38 million and is the fifth-most populous ...
, the
Czech Republic
The Czech Republic, or simply Czechia, is a landlocked country in Central Europe. Historically known as Bohemia, it is bordered by Austria to the south, Germany to the west, Poland to the northeast, and Slovakia to the southeast. The ...
, and
Slovakia
Slovakia (; sk, Slovensko ), officially the Slovak Republic ( sk, Slovenská republika, links=no ), is a landlocked country in Central Europe. It is bordered by Poland to the north, Ukraine to the east, Hungary to the south, Austria to the s ...
. Additionally, privatization from below had made important contribution to economic growth in transition economies.
In one study assimilating some of the literature on "privatization" that occurred in Russian and Czech Republic transition economies, the authors identified three methods of privatization: "privatization by sale", "mass privatization", and "mixed privatization". Their calculations showed that "mass privatization" was the most effective method.
However, in economies "characterized by shortages" and maintained by the state bureaucracy, wealth was accumulated and concentrated by "gray/black market" operators. Privatizing industries by sale to these individuals did not mean a transition to "effective private sector owners
f former
F, or f, is the sixth letter in the Latin alphabet, used in the modern English alphabet, the alphabets of other western European languages and others worldwide. Its name in English is ''ef'' (pronounced ), and the plural is ''efs''.
His ...
state assets". Rather than mainly participating in a market economy, these individuals could prefer elevating their personal status or prefer accumulating political power. Instead, outside foreign investment led to the efficient conduct of former state assets in the private sector and market economy.
Through privatization by direct asset sale or the stock market, bidders compete to offer higher prices, generating more revenue for the state. Voucher privatization, on the other hand, could represent a genuine transfer of assets to the general population, creating a sense of participation and inclusion. A market could be created if the government permits transfer of vouchers among voucher holders.
Secured borrowing
Some privatization transactions can be interpreted as a form of a
secured loan
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral, an ...
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
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
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.
Results of privatization
Privatization had different outcomes around the world. Results of privatization may vary depending on the privatization model employed. According to Dr
Irwin Stelzer
Irwin M. Stelzer (born 22 May 1932) is an American economist
who is the U.S. economic and business columnist for ''The Sunday Times'' in the United Kingdom and was for ''The Courier-Mail'' in Australia. In the United States, he was a contributi ...
, "it is somewhere between difficult and impossible to separate the effects of privatisation from the effects of such things as trends in the economy".
According to research performed by the
World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
and William L. Megginson in the early 2000s, privatization in competitive industries with well-informed consumers, consistently improved efficiency. According to
APEC
The Asia-Pacific Economic Cooperation (APEC ) is an inter-governmental forum for 21 member economies in the Pacific Rim that promotes free trade throughout the Asia-Pacific region.
, the more competitive the industry, the greater the improvement in output, profitability, and efficiency. Such efficiency gains mean a one-off increase in
GDP
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
, but through improved incentives to innovate and reduce costs also tend to raise the rate of
economic growth
Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
.
More recent research and literature review performed by Professor Saul Estrin and Adeline Pelletier concluded that "the literature now reflects a more cautious and nuanced evaluation of privatization" and that "private ownership alone is no longer argued to automatically generate economic gains in developing economies". According to a 2008 study published in ''Annals of Public and Cooperative Economics'', liberalization and privatization has produced mixed results.
Although typically there are many costs associated with these efficiency gains,
many economists argue that these can be dealt with by appropriate government support through redistribution and perhaps
retraining
Retraining or refresher training is the process of learning a new or the same old skill or trade for the same group of personnel. Retraining is required to be provided on a regular basis to avoid personnel obsolescence due to technological change ...
. Yet, some empirical literature suggests that privatization could also have very modest effects on efficiency and quite regressive distributive impact. In the first attempt at a social welfare analysis of the British privatization program under the Conservative governments of
Margaret Thatcher
Margaret Hilda Thatcher, Baroness Thatcher (; 13 October 19258 April 2013) was Prime Minister of the United Kingdom from 1979 to 1990 and Leader of the Conservative Party (UK), Leader of the Conservative Party from 1975 to 1990. S ...
and
John Major
Sir John Major (born 29 March 1943) is a British former politician who served as Prime Minister of the United Kingdom and Leader of the Conservative Party (UK), Leader of the Conservative Party from 1990 to 1997, and as Member of Parliament ...
during the 1980s and 1990s, Massimo Florio points to the absence of any productivity shock resulting strictly from ownership change. Instead, the impact on the previously nationalized companies of the UK productivity leap under the Conservatives varied in different industries. In some cases, it occurred prior to privatization, and in other cases, it occurred upon privatization or several years afterward.
A 2012 study published by the
European Commission
The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body o ...
argues that privatisation in Europe had mixed effects on service quality and has achieved only minor productivity gains, driven mainly by lower labour input combined with other cost cutting strategies that led to a deterioration of employment and working conditions. Meanwhile, a different study by the Commission found that the UK rail network (which was privatized from 1994 to 1997) was most improved out of all the 27 EU nations from 1997 to 2012. The report examined a range of 14 different factors and the UK came top in four of the factors, second and third in another two and fourth in three, coming top overall. Nonetheless, the
impact of the privatisation of British Rail
The impact of the privatisation of British Rail has been the subject of much debate, with the stated benefits including improved customer service, and more investment; and stated drawbacks including higher fares, lower punctuality and increased r ...
has been the subject of much debate, with the stated benefits including improved customer service, and more investment; and stated drawbacks including higher fares, lower punctuality and increased rail subsidies.Have train fares gone up or down since British Rail? ,
BBC News
BBC News is an operational business division of the British Broadcasting Corporation (BBC) responsible for the gathering and broadcasting of news and current affairs in the UK and around the world. The department is the world's largest broadca ...
, 22 January 2013
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 widely reported the grand corruption that accompanied those sales, according to research released by the World Bank there has been increased operating efficiency, daily petty corruption is, or would be, larger without privatization, and that corruption is more prevalent in non-privatized sectors. Furthermore, according to the World Bank extralegal and unofficial activities are more prevalent in countries that privatized less. Other research suggests that privatization in Russia resulted in a dramatic rise in the level of economic inequality and a collapse in GDP and industrial output.
Russian President
Boris Yeltsin
Boris Nikolayevich Yeltsin ( rus, Борис Николаевич Ельцин, p=bɐˈrʲis nʲɪkɐˈla(j)ɪvʲɪtɕ ˈjelʲtsɨn, a=Ru-Boris Nikolayevich Yeltsin.ogg; 1 February 1931 – 23 April 2007) was a Soviet and Russian politician wh ...
's IMF-backed rapid privatization schemes saw half the Russian population fall into destitution in just several years as unemployment climbed to double digits by the early to mid 1990s. A 2009 study published in ''
The Lancet
''The Lancet'' is a weekly peer-reviewed general medical journal and one of the oldest of its kind. It is also the world's highest-impact academic journal. It was founded in England in 1823.
The journal publishes original research articles, ...
'' medical journal has found that as many as a million working men died as a result of economic shocks associated with mass privatization in the former
Soviet Union
The Soviet Union,. officially the Union of Soviet Socialist Republics. (USSR),. was a transcontinental country that spanned much of Eurasia from 1922 to 1991. A flagship communist state, it was nominally a federal union of fifteen national ...
and in
Eastern Europe
Eastern Europe is a subregion of the Europe, European continent. As a largely ambiguous term, it has a wide range of geopolitical, geographical, ethnic, cultural, and socio-economic connotations. The vast majority of the region is covered by Russ ...
during the 1990s, although a further study suggested that there were errors in their method and "correlations reported in the original article are simply not robust." A subsequent body of scholarship, while still controversial, demonstrates that rapid privatization schemes associated with
neoliberal
Neoliberalism (also neo-liberalism) is a term used to signify the late 20th century political reappearance of 19th-century ideas associated with free-market capitalism after it fell into decline following the Second World War. A prominent fa ...
economic reforms did result in poorer health outcomes in former Eastern Bloc countries during the transition to markets economies, with the
World Health Organization
The World Health Organization (WHO) is a specialized agency of the United Nations responsible for international public health. The WHO Constitution states its main objective as "the attainment by all peoples of the highest possible level of h ...
contributing to the debate by stating "IMF economic reform programs are associated with significantly worsened tuberculosis incidence, prevalence, and mortality rates in post-communist Eastern European and former Soviet countries." Historian
Walter Scheidel
Walter Scheidel (born 9 July 1966) is an Austrian historian who teaches ancient history at Stanford University, California. Scheidel's main research interests are ancient social and economic history, pre-modern historical demography, and comp ...
, a specialist in ancient history, posits that
economic inequality
There are wide varieties of economic inequality, most notably income inequality measured using the distribution of income (the amount of money people are paid) and wealth inequality measured using the distribution of wealth (the amount of we ...
and wealth concentration in the top percentile "had been made possible by the transfer of state assets to private owners."
In Latin America, on the one hand, according to John Nellis's research for
Center for Global Development
The Center for Global Development (CGD) is a nonprofit think tank based in Washington, D.C., and London that focuses on international development.
History
It was founded in November 2001 by former senior U.S. official Edward W. Scott, directo ...
, economic indicators, including firm profitability, productivity, and growth, project positive
microeconomic
Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
results. On the other hand, however, privatisation has been largely met with a negative criticism and citizen coalitions. This
neoliberal
Neoliberalism (also neo-liberalism) is a term used to signify the late 20th century political reappearance of 19th-century ideas associated with free-market capitalism after it fell into decline following the Second World War. A prominent fa ...
criticism highlights the ongoing conflict between varying visions of economic development.
Karl Polanyi
Karl Paul Polanyi (; hu, Polányi Károly ; 25 October 1886 – 23 April 1964),''Encyclopædia Britannica'' (Chicago: Encyclopædia Britannica Inc. 2003) vol 9. p. 554 was an Austro-Hungarian economic anthropologist and politician, best known ...
emphasizes the societal concerns of self-regulating markets through a concept known as a "double movement". In essence, whenever societies move towards increasingly unrestrained, free-market rule, a natural and inevitable societal correction emerges to undermine the contradictions of capitalism. This was the case in the
2000 Cochabamba protests
The Cochabamba Water War was a series of protests that took place in Cochabamba, Bolivia's fourth largest city, between December 1999 and April 2000 in response to the privatization of the city's municipal water supply company SEMAPA. The wave o ...
.
Privatization in Latin America has invariably experienced increasing push-back from the public.
Mary Shirley
Mary may refer to:
People
* Mary (name), a feminine given name (includes a list of people with the name)
Religious contexts
* New Testament people named Mary, overview article linking to many of those below
* Mary, mother of Jesus, also calle ...
from The Ronald Coase Institute suggests that implementing a less efficient but more politically mindful approach could be more sustainable.
In India, a survey by the
National Commission for Protection of Child Rights
The National Commission for Protection of Child Rights (NCPCR) is an Indian statutory body established by an Act of Parliament, the Commission for Protection of Child Rights (CPCR) Act, 2005. The Commission works under the aegis of Ministry of ...
(NCPCR) – Utilization of Free Medical Services by Children Belonging to the Economically Weaker Section (EWS) in Private Hospitals in New Delhi, 2011–12: A Rapid Appraisal – indicates under-utilization of the free beds available for EWS category in private hospitals in Delhi, though they were allotted land at subsidized rates.
In Australia a "People's Inquiry into Privatisation" (2016/17) found that the impact of privatisation on communities was negative. The report from the inquiry "Taking Back Control" made a range of recommendations to provide accountability and transparency in the process. The report highlighted privatisation in healthcare, aged care, child care, social services, government departments, electricity, prisons and vocational education featuring the voices of workers, community members and academics.
Some reports show that the results of privatization are experienced differently between men and women for numerous reasons: when
public service
A public service is any service intended to address specific needs pertaining to the aggregate members of a community. Public services are available to people within a government jurisdiction as provided directly through public sector agencies ...
s are privatized women are expected to take on the health and social care of
dependents
A dependant is a person who relies on another as a primary source of income. A common-law spouse who is financially supported by their partner may also be included in this definition. In some jurisdictions, supporting a dependant may enabl ...
, women have less access to privatized goods,
public sector
The public sector, also called the state sector, is the part of the economy composed of both public services and public enterprises. Public sectors include the public goods and governmental services such as the military, law enforcement, infra ...
employs a larger proportion of women than does the
private sector
The private sector is the part of the economy, sometimes referred to as the citizen sector, which is owned by private groups, usually as a means of establishment for profit or non profit, rather than being owned by the government.
Employment
The ...
, and the women in the public sector are more likely to be
unionized
A trade union (labor union in American English), often simply referred to as a union, is an organization of workers intent on "maintaining or improving the conditions of their employment", ch. I such as attaining better wages and benefits ( ...
than those in the private sector. In Chile, women are disproportionately affected by the privatization of the pension system because factors such as “women’s longer life expectancy, earlier retirement age, and lower rates of labor-force participation, lower salaries” affect their ability to accumulate funds for retirement which leads to lower pensions.
Low-income
Poverty is the state of having few material possessions or little
women face an even greater burden; Anjela Taneja, of
Oxfam
Oxfam is a British-founded confederation of 21 independent charitable organizations focusing on the alleviation of global poverty, founded in 1942 and led by Oxfam International.
History
Founded at 17 Broad Street, Oxford, as the Oxford Co ...
India says "The privatization of public services...implies limited or no access to essential services for women living in poverty, who are often the ones more in need of these services.”
The increase in privatization since the 1980s has been a factor in rising
income
Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...
and
wealth
Wealth is the abundance of Value (economics), valuable financial assets or property, physical possessions which can be converted into a form that can be used for financial transaction, transactions. This includes the core meaning as held in the ...
inequality in the United States.
Foreign privatization
Due to low levels of native capital accumulation in the former Central and Eastern Europe, the rapid privatization preferred by international institutions (
EBRD
The European Bank for Reconstruction and Development (EBRD) is an international financial institution founded in 1991. As a multilateral developmental investment bank, the EBRD uses investment as a tool to build market economies. Initially foc ...
World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Interna ...
) and other foreign banks was a ''de facto'' call for international bidding, reflecting the assumption that foreign investment would play a major role.
Contrasting cases in Eastern Europe: Romania and East Germany
In post-
reunification
A political union is a type of political entity which is composed of, or created from, smaller polities, or the process which achieves this. These smaller polities are usually called federated states and federal territories in a federal governm ...
East Germany, by the end of June 1992, the ''
Treuhandanstalt
The ("Trust agency"), colloquially referred to as , was an agency established by the government of the German Democratic Republic to reprivatise/privatise East German enterprises, Volkseigene Betriebe (VEBs), prior to German reunification. Cre ...
'' had privatized 8,175 companies, with 5,950 left on hand (4,340 remaining to be sold and the remainder to be liquidated). June 1992 was also when the last East German on the board of the ''Treuhand'' left. By the end of 1994, ''Treuhand'' had sold almost everything, having only 65 firms left to privatize as of December 1994. More than 80% of the privatized businesses were bought by foreigners (chiefly West Germans - 75%).
Romania's first privatization took place on 3 August 1992. There was "very little" privatization during 1992: only 22 state-owned enterprises were privatized. The pace picked up throughout the following year, with more than 260 companies privatized. Four of the 22 enterprises privatized in 1992 were sold to foreign investors. In 1993, 265 companies were privatized, followed by 604 in 1994. Two companies were sold to foreign investors during this period, one each in 1993 and 1994. At the start of 1999, 4,330 companies were left to be privatized, with 5,476 having been sold during 1993-1998. At the end of 1998, only 2.4% of privatized companies had foreign participation.
Opinion
Arguments for and against the controversial subject of privatization are presented here.
Support
Proponents of privatization argue that, over time, this can lead to lower prices, improved quality, more choices, less corruption, less
red tape
Red tape is an idiom referring to regulations or conformity to formal rules or standards which are claimed to be excessive, rigid or redundant, or to bureaucracy claimed to hinder or prevent action or decision-making. It is usually applied to g ...
, and/or quicker delivery. Many proponents do not argue that everything should be privatized. According to them,
market failure
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indiv ...
s and
natural monopolies
A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming adv ...
could be problematic. However,
anarcho-capitalists
Anarcho-capitalism (or, colloquially, ancap) is an anti-statist, libertarian, and anti-political philosophy and economic theory that seeks to abolish centralized states in favor of stateless societies with systems of private property enfor ...
prefer that every function of the state be privatized, including
defense
Defense or defence may refer to:
Tactical, martial, and political acts or groups
* Defense (military), forces primarily intended for warfare
* Civil defense, the organizing of civilians to deal with emergencies or enemy attacks
* Defense industr ...
and dispute resolution."Review of Kosanke's Instead of Politics – Don Stacy" Libertarian Papers Vol. 3, ART. NO. 3 (2011)
Proponents of privatization make the following arguments:
* Performance: state-run industries tend to be
bureaucratic
The term bureaucracy () refers to a body of non-elected governing officials as well as to an administrative policy-making group. Historically, a bureaucracy was a government administration managed by departments staffed with non-elected offi ...
. A political government may only be motivated to improve a function when its poor performance becomes politically sensitive.
* Increased efficiency: private companies and firms have a greater incentive to produce goods and services more efficiently to increase profits.
* Specialization: a private
business
Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for pr ...
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 specialize its goods and services as a result of the general products provided to the greatest number of people in the
population
Population typically refers to the number of people in a single area, whether it be a city or town, region, country, continent, or the world. Governments typically quantify the size of the resident population within their jurisdiction using a ...
.
* 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
corruption
Corruption is a form of dishonesty or a criminal offense which is undertaken by a person or an organization which is entrusted in a position of authority, in order to acquire illicit benefits or abuse power for one's personal gain. Corruption m ...
; 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
Politics (from , ) is the set of activities that are associated with making decisions in groups, or other forms of power relations among individuals, such as the distribution of resources or status. The branch of social science that studies ...
goals rather than
economic
An economy is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...
ones.
* Capital: a 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
Political risk is a type of risk faced by investors, corporations, and governments that political decisions, events, or conditions will significantly affect the profitability of a business actor or the expected value of a given economic action. Po ...
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
A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming adv ...
does not mean that these sectors must be state owned. Governments can enact or are armed with
anti-trust legislation
Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust l ...
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
A politician is a person active in party politics, or a person holding or seeking an elected office in government. Politicians propose, support, reject and create laws that govern the land and by an extension of its people. Broadly speaking, a ...
for
political
Politics (from , ) is the set of activities that are associated with making decisions in groups, or other forms of power relations among individuals, such as the distribution of resources or status. The branch of social science that studies ...
or
populist
Populism refers to a range of political stances that emphasize the idea of "the people" and often juxtapose this group against " the elite". It is frequently associated with anti-establishment and anti-political sentiment. The term developed ...
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
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
, increasing its staffing to reduce
unemployment
Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for Work (human activity), w ...
, or moving its operations to marginal constituencies.
* Profits: corporations exist to generate profits for their shareholders. Private companies make a profit by enticing
consumer
A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. T ...
s to buy their products in preference to their competitors' (or by increasing
primary demand
Primary or primaries may refer to:
Arts, entertainment, and media Music Groups and labels
* Primary (band), from Australia
* Primary (musician), hip hop musician and record producer from South Korea
* Primary Music, Israeli record label
Works
* ...
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
Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions th ...
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.
Opposition
Opponents of privatization in general—or of certain privatizations in particular—believe that public goods and services 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 or healthcare is the improvement of health via the prevention, diagnosis, treatment, amelioration or cure of disease, illness, injury, and other physical and mental impairments in people. Health care is delivered by health profe ...
, and basic
education
Education is a purposeful activity directed at achieving certain aims, such as transmitting knowledge or fostering skills and character traits. These aims may include the development of understanding, rationality, kindness, and honesty. Va ...
). There is a
positive externality
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
when the government provides society at large with public goods and services such as
defense
Defense or defence may refer to:
Tactical, martial, and political acts or groups
* Defense (military), forces primarily intended for warfare
* Civil defense, the organizing of civilians to deal with emergencies or enemy attacks
* Defense industr ...
and disease control. Some national constitutions in effect define their governments' "core businesses" as being the provision of such things as justice, tranquility, defense, and general welfare. These governments' direct provision of security, stability, and safety, is intended to be done for the common good (in the public interest) with a long-term (for posterity) perspective. As for
natural monopolies
A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming adv ...
, opponents of privatization claim that they aren't subject to fair competition, and better administrated by the state.
Although private companies may provide a similar good or service alongside the government, opponents of privatization are critical 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
Parliament
In modern politics, and history, a parliament is a legislative body of government. Generally, a modern parliament has three functions: Representation (politics), representing the Election#Suffrage, electorate, making laws, and overseeing ...
, 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 has less control and oversight of private companies although these remain answerable to various stakeholders, including shareholders, clients, suppliers, regulators, employees and collaborators.
* Civil-liberty concerns: a democratically elected government is accountable to the people through a
parliament
In modern politics, and history, a parliament is a legislative body of government. Generally, a modern parliament has three functions: Representation (politics), representing the Election#Suffrage, electorate, making laws, and overseeing ...
, 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, although this preferential access to capital markets risks undermining financial discipline because of the assurance of a bailout from the government.
* 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 monopoly
A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming adv ...
exists.
* Concentration of wealth: profits from successful enterprises end up in private hands instead of being available for public use.
* Political influence: governments may more easily exert pressure on state-owned firms to help implement government policy.
* Profit: private companies do not have any goal other than to maximize profits.
* 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 stripping
Asset stripping is a term used to refer to the practice of selling off a company's assets in order to improve returns for equity investors. In many cases where the term is used, a financial investor, referred to as a 'corporate raider', takes cont ...
).
* 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.
* Reduced wages and benefits: a 2014 report by In the Public Interest, a resource center on privatization, argues that "outsourcing public services sets off a downward spiral in which reduced worker wages and benefits can hurt the local economy and overall stability of middle and working class communities."
* Inferior quality products: private, for-profit companies might cut corners on providing quality goods and services in order to maximize profit.
Economic theory
In economic theory, privatization has been studied in the field of
contract theory
From a legal point of view, a contract is an institutional arrangement for the way in which resources flow, which defines the various relationships between the parties to a transaction or limits the rights and obligations of the parties.
From an ...
. When contracts are complete, institutions such as (private or public) property are difficult to explain, since every desired incentive structure can be achieved with sufficiently complex contractual arrangements, regardless of the institutional structure. All that matters is who are the decision makers and what is their available information. In contrast, when contracts are incomplete, institutions matter. A leading application of the incomplete contract paradigm in the context of privatization is the model by
Hart
Hart often refers to:
* Hart (deer)
Hart may also refer to:
Organizations
* Hart Racing Engines, a former Formula One engine manufacturer
* Hart Skis, US ski manufacturer
* Hart Stores, a Canadian chain of department stores
* Hart's Reptile Wo ...
, Shleifer, and Vishny (1997). In their model, a manager can make investments to increase quality (but they may also increase costs) and investments to decrease costs (but they may also reduce quality). It turns out that it depends on the particular situation whether private ownership or public ownership is desirable. The Hart-Shleifer-Vishny model has been further developed in various directions, e.g. to allow for mixed public-private ownership and endogenous assignments of the investment tasks.
Privatization of private companies
Privatization can also refer to the purchase of all
outstanding shares
Shares outstanding are all the shares of a corporation that have been authorized, issued and purchased by investors and are held by them. They are distinguished from treasury shares, which are shares held by the corporation itself, thus represent ...
private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a ty ...
investors, which is more often called "going private". The buyout withdraws the company's shares from being traded at a public
stock exchange
A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for th ...
. Depending on the involvement of internal and external investors, it may occur through a
leveraged buyout
A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money (leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loan ...
or a
management buyout
A management buyout (MBO) is a form of acquisition in which a company's existing managers acquire a large part, or all, of the company, whether from a parent company or individual. Management-, and/or leveraged buyout became noted phenomena of 1 ...
,
tender offer
In corporate finance, a tender offer is a type of public takeover bid. The tender offer is a public, open offer or invitation (usually announced in a newspaper advertisement) by a prospective acquirer to all stockholders of a publicly traded corpo ...
, or
hostile takeover
In business, a takeover is the purchase of one company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to ...
.
See also
*
Commodification
Within a capitalist economic system, commodification is the transformation of things such as goods, services, ideas, nature, personal information, people or animals into objects of trade or commodities.For animals"United Nations Commodity Trad ...
*
Corporatization
Corporatization is the process of transforming and restructuring state assets, government agencies, public organizations, or municipal organizations into corporations. It involves the adoption and application of business management practices and ...
*
Deregulation
Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a ...
Kibbutz
A kibbutz ( he, קִבּוּץ / , lit. "gathering, clustering"; plural: kibbutzim / ) is an intentional community in Israel that was traditionally based on agriculture. The first kibbutz, established in 1909, was Degania. Today, farming h ...
*
List of nationalizations by country
This is a list of industries, services, products, or companies that have been nationalized at various times, grouped by country.
List
Argentina
* 1946 Central Bank of Argentina
* 1946 Natural gas services (later privatized in 1992)
* 1947 T ...
*
List of privatizations by country
This list of privatizations provides links to notable and/or major privatizations.
..
Privatisation by country
Argentina
* Aerolíneas Argentinas (1990) – former national carrier; renationalized in 2009.
* Agua y Energía Eléctrica ...
*
Marketization
Marketisation or marketization is a restructuring process that enables state enterprises to operate as market-oriented firms by changing the legal environment in which they operate.
This is achieved through reduction of state subsidies, organizati ...
*
Nationalization
Nationalization (nationalisation in British English) is the process of transforming privately-owned assets into public assets by bringing them under the public ownership of a national government or state. Nationalization usually refers to pri ...
*
Private prison
A private prison, or for-profit prison, is a place where people are imprisoned by a third party that is contracted by a government agency. Private prison companies typically enter into contractual agreements with governments that commit pr ...
*
Private sector development
Private sector development (PSD) is a term in the international development industry to refer to a range of strategies for promoting economic growth and reducing poverty in developing countries by building private enterprises. This could be throug ...
*
Privately owned public space
Privately owned public space (POPS), or alternatively, privately owned public open spaces (POPOS), are terms used to describe a type of public space that, although privately owned, is legally required to be open to the public under a city's zoni ...
*
*
*
*
*
*
*
; Unindexed
*
*
* Clarke, Thomas (ed.) (1994) "International Privatisation: Strategies and Practices" Berlin and New York: Walter de Gruyter,
* Clarke, Thomas and Pitelis, Christos (eds.) (1995) "The Political Economy of Privatisation" London and New York: Routledge,
*
* von Hayek, Friedrich, (1960) ''
The Constitution of Liberty
''The Constitution of Liberty'' is the magnum opus of Austrian economist and 1974 Nobel Memorial Prize in Economic Sciences recipient Friedrich A. Hayek. First published in 1960 by the University of Chicago Press, the book is considered Hayek’s ...
''
* Kosar, Kevin R. (2006) "Privatisation and the Federal Government: An Introduction" ''Report from the Congressional Research Service''
* Mayer, Florian (2006) ''Vom Niedergang des unternehmerisch tätigen Staates: Privatisierungspolitik in Großbritannien, Frankreich, Italien und Deutschland'', VS Verlag, Wiesbaden,
* Megginson and Netter, From state to market: A survey of empirical studies on privatization,
Journal of Economic Literature
The ''Journal of Economic Literature'' is a peer-reviewed academic journal, published by the American Economic Association, that surveys the academic literature in economics. It was established in 1963 as the ''Journal of Economic Abstracts'',
39(2), June 2001, 321–389.
*
*
*
Nico Perrone
Nico Perrone (born April 27, 1935) is an Italian essayist, historian and journalist. He firstly discovered papers on the plot for killing Enrico Mattei, the Italian state tycoon for oil in the 1950s.
He is the author of twenty books, and some fi ...
The Wealth of Nations
''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the ''magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in 1 ...
Globalization and Its Discontents
''Globalization and Its Discontents'' is a book published in 2002 by the 2001 Nobel laureate Joseph E. Stiglitz. The title is a reference to Freud's Civilization and Its Discontents.
The book draws on Stiglitz's personal experience as chairman ...