Privatization Essay

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Privatization is a transfer of management, ownership, and/or control of any aspect of an enterprise from the public (governmental) sector to the private (nongovernmental)  sector. The term (spelled privatization in the United Kingdom and most Commonwealth countries)  is very broad,  encompassing  a wide range  of activities and/or  assets and methods  of transferring those activities from public to private entities.

Privatization runs a gamut from large scale to small scale and from full public transfer to the private sector to more limited partial transfer. The purest  example of privatization is the outright sale of a governmental asset or operation to a private corporate entity. Infrastructure  assets such as roads and power-generating facilities are often  in this category, having in many cases been built, owned, and operated by the government, which then decides, perhaps many years later, to sell the asset to a private operator.  The asset may be directly sold, in which case the method of transfer is referred to as an asset sale; alternatively, the shares of an incorporated entity that holds the asset for the government  may be floated on public share markets, or those shares may be sold to selected private entities, in which case the method  of transfer is referred to as a trade sale.

An alternative method of public-to-private transfer is the concession or lease arrangement. For example, suppose  a government  decides  to transfer  a public commuter  rail to a private entity. As noted above, the government  could sell the rail line directly (an asset sale) or sell the shares of a governmental  corporate entity that  owns the rail line (a trade  sale). A third alternative is for the government  to retain ownership of the rail line but lease the line to a private entity for some period of time, after which the line reverts back to public ownership.  This arrangement would constitute  a lease or concession  agreement.  If the lease term is long enough (20 years or more; 75or 99-year leases are quite common  in the infrastructure field), the government has de facto (i.e., in fact), though not de jure (i.e., by law) transferred  ownership because of the long-term  control exercised over the asset by the private entity through  the lease. Leases and concession agreements  can have many different legal provisions, and through  these provisions, the degree of privatization can be modified. For example, shorter or more-limited  lease terms can allow the governmental owner to retain more management  control  over the privately managed asset.

Leasing is an example of a widely used method  of privatization known as contracting out. In contracting out, a service or activity (as opposed  to an asset) is paid for by the government but is provided, by means of  a  service  agreement,   through   a  private  entity. Almost  any  conceivable  example  of public  service has been provided in this way, though some, such as garbage collection  and  information  technology  services, are more widely contracted out by governments than others, such as police protection.  Outsourcing is another label often used to designate contracting  out, though  the former term is broader  in that it is used for both  public-to-private transfers  of responsibility as well as private-to-private transfers. If the service is outsourced to a provider in another country, then it is sometimes referred to as offshoring.

This continuum of privatization  has led to development of the term public-private partnership (PPP), which is often used synonymously. A broad definition of PPP refers to working arrangements based on a mutual commitment between a public sector organization with any organization  outside the public sector.  The common  theme  between  privatization  and a PPP is some sort of blending  of private and public institutions  and missions. However, privatization refers to some definite transfer of activity or authority from the public to the private sector, whereas a PPP can also include  joint public-private  efforts that  do not involve such a transfer.

Privatization can be completed in one step or completed through a series of intermediate steps. Corporatization,  in which a public operation  is first transferred to a new corporate  entity that is governmental but is typically run outside governmental budget and policy frameworks, is often a framework used for ultimate privatization. For example, when the Australian central government  decided to privatize a number of airports that it owned and operated, it first transferred ownership of and responsibility for those airports  to the  Federal  Airports  Corporation (FAC). The FAC operated these airports for a few years before putting them up for sale, mostly using trade sales. Even if corporatization  is a final outcome,  the final effect may be much  the same as privatizing if that  corporation operates  much  like a private company, even though technically a governmental  entity retains  ownership and control.

Privatization   has  become   widespread   throughout the world with, however, a wide variation across industry sectors and countries. One study of transfers of state-owned enterprises (SOEs) to private corporations from 1977 to 1999 counted  2,459 deals in 121 countries, worth approximately US$1.11 trillion. (An SOE is a governmental  corporation that is nominally operated as a company but that is typically majority owned  and  usually controlled  by a central  government.) Surveys of government managers in the United States have found large numbers of respondents, indicating  outsourcing  of a wide range  of programs  in areas as diverse as wastewater to health services.


Governments  choose to privatize for numerous  reasons, the major stated rationales being that the private sector operates more efficiently and cost-effectively than the public sector in many instances, that government  can achieve better overall outcomes  by focusing on its core  missions  and  core  competencies while giving peripheral  activities and programs outside its skill set to capable private operators, that privatization  allows access  to  private  capital  that would  otherwise  be  unavailable,  that  the  method shifts  risk  to  market-based   entities  better  able to handle  them,  and  that  greater  flexibility in operations is achieved.

Maintenance  of the public interest is a prime concern  with any privatization, and this constitutes one of the main counterarguments against its use. It is not a given that the public interest  will be maintained  when private  parties  with perhaps  countervailing interests  take over. A related issue is that of equity. Private operators  are generally return  driven and may be inclined to charge market  rates and/or cut costs to maximize returns.  This may be inequitable if service cuts or charges fall on groups deemed to be disadvantaged.

In general, economists  note that there is a difference between an actual gain in resources and a mere transfer  of resources  from one party to another  in which case government  budgets may see a gain but other  parties,  such  as labor  unions  or consumers, might see a loss. This is especially a problem where a natural  or  other  monopoly  exists (e.g., an  electrical  or telecommunications utility) and  in which price and quality is not  subject  to much  competition. Privatization can be said to enhance efficiency only if the gains are above and beyond any shifts of resources across different groups.

There is no a priori case for or against privatization  that  prevails, so the  matter  rests  on evidence and this is mixed. There are examples of very successful privatizations  that  have delivered  superior incomes  for both  public  and  private  sectors  (e.g., Japan Rail, mostly completed  by the  1960s), those that  did  poorly  on  both  counts  (e.g., the  initial privatization  of British Rail), and many much more ambiguous cases. Probably the most overall successful set of privatizations has been the transfer of SOEs to private enterprises.  Many privatized  SOEs were running  large losses, and being corporate  in organization, there seemed to be little economic reason to keep them  in public hands. Even here, however, there have been failures, even transfers  back to the public sector in a few cases.

In  general,  it is clear  that  privatizations,  being negotiated   arrangements  between   governmental and  nongovernmental  entities,  will be  successful only if the  agreements  are sound  and  well implemented  and,  in  some  cases, regulated  afterward. Some transfers,  such as an SOE, will be relatively straightforward  to sell to the  private  sector,  while others,  such  as  complex  public  services,  will be more difficult to arrange successfully. Privatizations certainly have wide applicability and do offer one of many alternatives for governments to use in providing services, but to work they need to be designed properly  and may not  always be the best available method of reform.


  1. Daniel Berkowitz and Jonathan Holland, “Does Privatization  Enhance  or  Deter  Small Enterprise Formation?” Economic Letters (v.74/1, 2001);
  2. Bernardo Bortolotti, Marcella Fantini, and Domenico Siniscalco, “Privatization Around  the  World:  Evidence From  Panel Data,” Journal of Public Economics (v.88, 2003);
  3. Ingrid  Hagen  and  Thea S. Halvorsen,  Global Privatization  and Its Impact  (Nova Science Publishers,  2009);
  4. Graeme  Hodge, Privatization: An International  Review of Performance (Westview Press, 2000);
  5. Sunita Kikeri and John Nellis, Privatization in Competitive Sectors: The Record to Date (World Bank, 2002);
  6. Ira W. Lieberman and Daniel J. Kopf, Privatization  in Transition  Economies: The Ongoing Story (Elsevier JAI, 2008);
  7. William Megginson,  The Financial Economics of Privatization  (Oxford University Press, 2005);
  8. Gérard Roland, Privatization:  Successes and  Failures (Columbia  University  Press, 2008);
  9. Andrei Shleifer, “State Versus Private Ownership,” Journal of Economic Perspectives (v.12/4, 1998);
  10. Vickers and G. Yarrow, “Economic Perspectives on Privatization,” Journal of Economic Perspectives (1991).

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