Although privatization is an imprecise term with different meanings in different contexts, it broadly refers to loosening governmental control over public operations. The phenomenon gained prominence in the 1980s and 1990s, when governments in many advanced industrial nations reduced their stake in state-owned industries such as steel, aerospace, railroads, oil, postal services, telecommunications, electricity, gas, and water. Two decades later, the phenomenon diversified into many variants, such as outsourcing, subcontracting, "internal markets," and public-private partnerships; extends well beyond the industry sectors listed above; and is repeated in the transitional economies of the former Warsaw Pact.
CAUSES AND RATIONALE
In simple economic terms, a small number of goods and services has to be provided publicly. Their defining characteristic is that they cannot be priced and no one can therefore be excluded by price from the benefits they pro-vide—or indeed the disbenefits, since such goods and services may be associated with public ills such as atmospheric pollution and epidemic diseases. Some significant areas of state spending are unpriceable public goods in this sense, including national defense and law and order. Yet there are also policy-determined public goods, or publicly provided private goods, such as medical care, education, pensions, and transport, which could be priced but are not. Depending on the extent to which nations subscribe to the ideals of the Keynesian welfare state, policymakers may decide to provide these goods publicly as a means to bring about greater equality among citizens. On this view, it is deemed unjust if access to (and the quality of) public services such as health care or education depends on an individual’s level of income.
A further cause of the trend toward privatization was that public debt and borrowing requirements in many industrialized nations rose significantly as in the final decades of the twentieth century states found themselves having to foot the bill for burgeoning welfare provisions. Privatization was regarded as a means to cut debts by selling off state-owned assets and by transferring the responsibility for investment to private entities, the management skills and financial acumen of which were expected to create better value for the money for taxpayers.
However, while the newfound prosperity after World War II (1939-1945) led to a continuous expansion of welfare states around the world, this process came to a halt in the 1980s. This was due, first, to the up-and-coming economic paradigm of neoliberalism, which demanded that states relinquish their role in economic affairs so as to restore incentives for economic growth and efficiency. The underlying rationale was that the private sector is more efficient in providing these goods because of the disciplining effects of competition, which provides incentives to cut costs and produce goods that people want. Both productive and allocative efficiency were said to improve as a result. Furthermore, increasing processes of economic globalization put states in direct competition to each other for inward investment and provided a further rationale to cut taxes and "roll back" the state.
Finally, although the aforementioned factors triggered privatization predominantly in industrialized nations, governments in developing countries experienced an altogether different cause: the imposition of the principle of conditionality by institutions such as the International Monetary Fund (IMF) and the World Bank. According to the principle of conditionality, access to development aid was made conditional upon the borrower agreeing to meet specific requirements of economic liberalization, resulting in the coerced privatization (and subsequent sale to investors of mostly foreign origin) of many state-owned entities.
TYPES OF PRIVATIZATION
The term privatization can refer to (1) assets, as the sale or auctioning off of state property; (2) the organization, as the adaptation of organizational and legal constructs prevalent in the private sector, with the aim of creating autonomous entities unconstrained by political interference; (3) functions, as the abandonment of public functions in favor of market principles and actors; or a combination of the three.
The sale of assets raises problems for public policy if no real contestation from private entrepreneurs is forth-coming—for example, because the privatized entity retains its monopoly position and can therefore restrict output, raise prices, or extract excessive rents. Network utilities such as railways, water, gas, and electricity are particularly vulnerable to such scenarios, because the inherent natural monopoly means that consumers have no choice of network. As a countermeasure, policymakers tend to design complex governance schemes of regulation and deregulation aimed at preventing such exploitation.
The privatization of functions, in turn, is a policy lever that can be introduced at various junctures in the value chain, including the financing, production, provisioning, and operation stages. To use an example, a state may decide to provide publicly a good such as education or health care, but may choose to leave the financing, construction, or operation of schools or hospitals to the private sector, which then rents the finished project back to the government. The separation of production from provision has allowed many forms of such public-private partnerships (PPPs) to emerge, within which responsibilities, risks, and benefits are contractually shared between the public and private sector.
Critics of privatization argue that a private company will serve the needs of those who are most willing (and able) to pay, rather than the needs of the majority of citizens that public sector organizations would be obliged to satisfy. Furthermore, the anticipated efficiency gains, critics argue, have failed to materialize, particularly in sectors with a natural monopoly. Finally, in order to attract private investors in the first place, the sale price of many state-owned organizations awaiting privatization are claimed to have been lower than their actual value, thereby wasting taxpayers’ money invested in previous decades. PPPs, in turn, are controversial because the long-run cost of paying the private sector to run the schemes are said to exceed the cost the public sector would incur to build and run them itself. The test of time will tell the extent to which PPPs provide better value for citizens.
