Privatization

Privatization is a process of transforming ownership of property from the
state or government into private hands. It is the opposite of
nationalization, in which privately-owned enterprises or resources are taken
over by local, regional, or national governments. Generally speaking,
nationalization was common during the postwar period (1950s – 1960s)
spurred on by social democratic or socialist governments. Privatization came
into vogue during the 1980s and 1990s, spearheaded in particular by the
administrations of Ronald Reagan and Margaret Thatcher as part of their
strongly neo-liberal policies. The term privatization is thought to have
been popularized by the British financial weekly The Economist during that era.

Privatization is frequently associated with industrial or service-oriented
enterprises, such as mining, manufacturing or power generation, but it can
also apply to any asset, such as land, roads, or even rights to water. In
recent years, government services such as health, sanitation, and education
have been particularly targetted for privatization in many countries.

Arguments for privatization

The basic argument given for privatization is that governments have few
incentives to ensure that the enterprises they own are well run. On the
other hand, private owners, it is said, do have such an incentive: they will
lose money if businesses are poorly run. The theory holds that, not only
will the business' customers see benefits, but as the privatized company
becomes more efficient, the whole economy will benefit. Ideally,
privatization propels the establishment of social, organizational and legal
infrastructures and institutions that are essential for an effective market
economy.

Advocates of privatization argue that governments run businesses poorly for
the following reasons:

   * They may only be interested in improving a company in cases when the
     performance of the company becomes politically sensitive.
   * Conversely, the government may put off improvements due to political
     sensitivity — even in cases of companies that are run well.
   * The company may become prone to corruption; company employees may be
     selected for political reasons rather than business ones.
   * The government may seek to run a company for social goals rather than
     business ones.
   * Privately-held companies can more easily raise capital in the financial
     markets than publically-owned ones.

In particular, the first and last reasons become important because money is
a scarce resource: if government-run companies are losing money, or if they
are not as profitable as possible, this money is unavailable to other, more
efficient firms. Thus, the efficient firms will have a harder time finding
capital, which makes it difficult for them to raise production and create
more employment.

Ideally, privatizations are organized as auctions where bidders compete to
offer the state the highest price, creating real value that can be used by
the state as investment capital.

The state can also allow foreigners to buy privatized enterprises, whereby
an outside investor invests the capital needed to upgrade and modernize the
firm, making it internationally competitive.

Arguments against privatization

In practical terms, there are many pitfalls to privatization. Privatization
has rarely worked out ideally because it is so intertwined with political
concerns, especially in post-communist economies or in developing nations
where corruption is endemic. Even in advanced market economies like Great
Britain, where privatization has been popular since the Thatcher era,
problems center on the fact that privatization programs are very politically
sensitive, raising many legitimate political debates. Who decides how to set
values on state enterprises? Does the state accept cash or for
government-provided coupons? Should the state allow the workers or managers
of the enterprise to gain control over their own workplace? Should the state
allow foreigners to buy privatized enterprises? Which levels of government
can privatize which assets? How much?

In the short-term, privatization can cause tremendous social upheaval, as
privatizations are nearly always accompanied by large layoffs. If a small
firm is privatized in a large economy, the effect may be negligible. If a
single large firm or many small firms are privatized at once, a whole
nation's economy may plunge into despair. For example, in the Soviet Union,
many state industries were often not even value adding, with cost of inputs
exceeding the cost of outputs. After privatization, sixteen percent of the
workforce became unemployed in both Eastern Germany and Poland. The social
consequences of this process have been horrendous, impoverishing millions,
but to little social benefit in many post-Communist countries. In the
process, Russia has gone from having one of the world's most equitable
distributions of wealth in the Soviet era to one of the least today. There
has been a dearth of large-scale investment to modernize Soviet industries
and businesses still trade with each other by means of barter.

Privatization in the absence of a market system may lead to assets being
held by a few very wealthy people, a so-called oligarchy, at the expense of
the general population and may discredit the process of economic reform.
This is notably the case in Russia, Mexico, and Brazil.

Moreover, where free-market economics are rapidly imposed, a country may not
have the bureaucratic tools necessary to regulate it. This has been a
pertinent problem in Russia and in many South American countries, although
some other Eastern European countries, such as Poland and the Czech
Republic, fared better in this respect, partly through the support of the
European Union. Paradoxically, while Britain has long had a market economy,
it also faced this issue after it privatized utilities in the Thatcher era;
Britain's utilities regulator was often criticized as being ineffective.

If the privatized company is a natural monopoly, or exists in a market which
is prone to serious market failures, consumers may be worse off if the
company is in private hands. This seems to have been the case with rail
privatization in the UK and New Zealand; in both countries, government
intervention has become necessary. In cases where privatization has been
successful, it is because genuine competition has arisen. A good example of
this is long-distance telecommunications in Europe, where the former
state-owned enterprises lost their monopolies, competitors entered the
market, and tariffs for international calls fell dramatically.

If the privatization does not fully transfer property rights to the newly
private firm, there may be disincentives for the firm to make capital
investments. This was a particular problem in the case of the privatized
rail track-leasing company in the UK.

For example, in post-Communist Russia — by far the largest country to
experience a rapid privatization of nearly the entire economy —
economic decline over the past decade since the collapse of the USSR has
actually been far more severe and more protracted than the Great Depression
following 1929, and half as severe as the catastrophic depression caused by
the effects of World War I, the collapse of the Tsarist regime, the Civil
War, and the implementation of "War Communism" — in stark contrast to
the stated aims of the huge privatization process. GDP in post-communist
Russia has roughly halved and over half the population is impoverished in a
country where poverty had largely been eliminated. Many have argued that the
stategy of privatization in Russia differed from those seen in more
successful post-communist economies like Hungary and Poland, and combined
with capital market liberalization, and failure to establish institutional
infrastructure, have led to incentives for capital flight, contributing to
post-communist economic contraction in Russia.

Privatization can also have a ripple effect on local economies. State-owned
enterprises can be obliged to patronize national or local suppliers.
Privatized companies don't have that restriction, hence shift purchasing
elsewhere. Bolivia underwent a rigorous privatization program in the mid
1990s, with disasterous impact on the local economy.

Some privatizations have already been deemed failures. British Rail is one
such case. The track-owning company has been effectively repossessed by the
government, and many of the train-running companies are at risk of having
their concession removed for failing to provide adequate services. One of
them, Connex, actually had its franchise cut short in June 2003 by the
government for what the Strategic Rail Authority called "poor financial
management." However, in other cases, particularly in poor countries,
unsuccessful privatizations cannot be so easily undone. Governments don't
have the resources or the political will to do it, and there is strong
pressure exerted by international lending agencies to leave the situation as
it is.

Finally, it has been argued that Chinese economic reform has illustrated
that economic reform can take place in the absence of mass privatization.

The above arguments have centered on whether or not it is realistic to apply
privatization theory to the real world, but some reject the profit
incentive. Some opponents of privatization often argue that because the
driving motive of a private company is profit, not public service, the
public welfare may be sacrificed to the demands of profitability. There is
no definitive answer, but a strong argument can be made for leaving
essential services, such as water, electricity, health, primary education,
and so forth, in public hands.

Corporatization

New Zealand has experienced the privatization of its telecommunication
industry, its railway system and part of its electricity market. The process
of privatization was halted in 1999 when the New Zealand Labour Party won
the election. Although most of the electricity generation and the
electricity transmission system remain state owned, the government has
corporatized this sector as well as [[New Zealand Post]], the Airways
Corporation and other smaller [[state-owned enterprise]]s.

The effect of corporatization has been to convert the state departments into
public companies and interpose commercial boards of directors between the
shareholding ministers and the management of the enterprises. To some
extent, this model has enabled efficiencies to be gained without ownership
of strategic organizations being transferred. This has been the policy of
the People's Republic of China.

Partial list of privatizations

United Kingdom

   * British Telecom
   * British Steel
   * British Gas
   * British Airways
   * British Airports Authority
   * British Petroleum
   * British Rail
   * Cable and Wireless
   * Water industry
   * Electricity Industry
   * One million council-owned houses sold to their tenants

Germany

   * Deutsche Telekom

The Netherlands

   * PTT, the mail and telecom company
   * NS, the railways

Australia

   * Qantas
   * Commonwealth Bank of Australia
   * Telstra (49% privatised; remaining 51% to be privatised soon)
   * Commonwealth Serum Laboratories
   * Commonwealth Industrial Gases
   * Commonwealth Oil Refineries
   * Electricity and gas supplies in many States
   * State-owned betting agencies in most States
   * Many long-distance and urban passenger railway services
   * All freight railway services except Queensland Rail
   * Most State-owned banks
   * Government Printing Service (New South Wales)
   * Government Cleaning Service (New South Wales)
   * Government Insurance Office in New South Wales
   * All public transport in Melbourne
   * Sydney Airport

New Zealand

   * Contact Energy
   * Bank of New Zealand - subsequently had to be rescued by taxpayer
   * Air New Zealand - subsequently had to be rescued by taxpayer
   * Government Print
   * New Zealand Railways - Government has offered to repurchase the track

Notable anti-privatization protests

Bolivia

   * Cochabamba Riots of 2000

Peru

   * Arequipa, June 2002

Non-state, non-centralized alternatives to privatization

   * cooperatives
   * participatory economics

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