Privatization

Privatization, also spelt privatisation (in British English), has several meanings. Primarily, it is the process of transferring ownership of a business, enterprise, agency, public service, or public property from the public sector (a government) to the private sector, either to a business that operates for profit or to a nonprofit organization. It may also mean the government outsourcing of services or functions to private firms, for example, revenue collection, law enforcement, and prison management.[1]

Privatization may also describe ownership changes not involving the public/government sector. The first is the purchase of all outstanding shares of a publicly traded company by private investors. The shares are then no longer traded at a stock exchange, as the company became private through private equity. The second such type of privatization is the demutualization of a mutual organization or cooperative in order to form a joint-stock company.[2]

Forms of privatisation

There are five main methods of privatization:

  1. Share issue privatization: Shares sale on the stock market.
  2. Asset sale privatization: Asset divestiture to a strategic investor, usually by auction or through the Treuhand model.
  3. Voucher privatization: Distribution of vouchers, which represent part ownership of a corporation, to all citizens, usually for free or at a very low price.
  4. Privatization from below: Start of new private businesses in formerly socialist countries.
  5. Management buyout or employee buyout: 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 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, and the London, New York and Hong Kong stock exchanges.

Governments in developing countries and transition countries 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 in Central and Eastern Europe, such as Russia, Poland, the Czech Republic, and Slovakia. 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.[3]

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 [of former] 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.[3]

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[4][5] and are criticized as a "particularly noxious form of governmental debt".[4] In this interpretation, the upfront payment from the privatization sale corresponds to the principal amount 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.[4] 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",[4] due to legal restrictions on and political resistance to alternative sources of revenue, viz, raising taxes or issuing debt.

Etymology

The Economist magazine introduced the term "privatization" (or "privatisation") during the 1930s when it covered Nazi Germany's economic policy.[6][7]

History

Pre-20th century

The history of privatization dates from Ancient Greece, when governments contracted out almost everything to the private sector.[8] In the Roman Republic private individuals and companies performed the majority of services including tax collection (tax farming), army supplies (military contractors), religious sacrifices and construction. However, the Roman Empire also created state-owned enterprises—for example, much of the grain was eventually produced on estates owned by the Emperor. Some scholars suggest that the cost of bureaucracy was one of the reasons for the fall of the Roman Empire.[8]

Perhaps one of the first ideological movements towards privatization came during China's golden age of the Han Dynasty. Taoism came into prominence for the first time at a state level, and it advocated the laissez-faire principle of Wu wei (無為), literally meaning "do nothing".[9] The rulers were counseled by the Taoist clergy that a strong ruler was virtually invisible.

During the Renaissance, most of Europe was still by and large following the feudal economic model. By contrast, the Ming dynasty in China began once more to practice privatization, especially with regards to their manufacturing industries. This was a reversal of the earlier Song dynasty policies, which had themselves overturned earlier policies in favor of more rigorous state control.[10]

In Britain, the privatization of common lands is referred to as enclosure (in Scotland as the Lowland Clearances and the Highland Clearances). Significant privatizations of this nature occurred from 1760 to 1820, coincident with the industrial revolution in that country.

20th century onwards

Great Britain privatized its steel industry in the 1950s, and the West German government embarked on large-scale privatization, including sale of the majority stake in Volkswagen to small investors in public share offerings in 1961.[8] However, it was in the 1980s under Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States that privatization gained worldwide momentum. Notable privatization attempts in the UK included privatization of Britoil (1982), Amersham International PLC (1982), British Telecom (1984), Sealink ferries (1984), British Petroleum (gradually privatized between 1979 and 1987), British Aerospace (1985 to 1987), British Gas (1986), Rolls-Royce (1987), Rover Group (formerly British Leyland, 1988), British Steel Corporation (1988), and the regional water authorities (mostly in 1989). After 1979, council house tenants in the UK were given the right to buy their homes. One million purchased their residences by 1986.

Such efforts culminated in 1993 when British Rail was privatized under Thatcher's successor, John Major. British Rail had been formed by prior nationalization of private rail companies. The privatization was controversial, and the its impact is still debated today, as doubling of passenger numbers and investment was balanced by an increase in rail subsidy.[11]

Privatization in Latin America flourished in the 1980s and 1990s as a result of a Western liberal economic policy. Companies providing public services such as water management, transportation, and telecommunication were rapidly sold off to the private sector. In the 1990s, privatization revenue from 18 Latin American countries totaled 6% of gross domestic product.[12] Private investment in infrastructure from 1990 and 2001 reached $360.5 billion, $150 billion more than in the next emerging economy.[12]

While economists generally give favorable evaluations of the impact of privatization in Latin America,[13] 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.[14]

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 U.S. Agency for International Development, the German Treuhand, and other governmental and nongovernmental organizations.

Ongoing privatization of Japan Post 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 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 and a mandate for reform, and in October 2005, the bill was passed to privatize Japan Post in 2007.[15]

Nippon Telegraph and Telephone's privatization in 1987 involved the largest share offering in financial history at the time.[16] 15 of the world's 20 largest public share offerings have been privatizations of telecoms.[16]

In 1988, the perestroika policy of Mikhail Gorbachev 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 countries followed suit after the Revolutions of 1989 introduced non-communist governments.

The United Kingdom's largest public share offerings were privatizations of British Telecom and British Gas during the 1980s under the Conservative government of Margaret Thatcher, 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 was critical of the policy, likening it to "selling the family silver".[17] 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.[18]

The largest public shares offering in France involved France Télécom.

Egypt undertook widespread privatization under Hosni Mubarak. After he was overthrown in the 2011 revolution, the public called for re-nationalization as the privatized firms were accused of practicing crony capitalism with the old regime.[19]

Results

Literature reviews[20][21] find that in competitive industries with well-informed consumers, privatization consistently improves efficiency. The more competitive the industry, the greater the improvement in output, profitability, and efficiency.[22] Such efficiency gains mean a one-off increase in GDP, but through improved incentives to innovate and reduce costs also tend to raise the rate of economic growth. Although typically there are many costs associated with these efficiency gains,[23] many economists argue that these can be dealt with by appropriate government support through redistribution and perhaps retraining. 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 and John Major 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.[24]

A study by the European Commission found that the UK rail network (which was privatized from 1994–97) was most improved out of all the 27 EU nations from 1997–2012. 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.[25]

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, studies have argued that in addition to increased operating efficiency, daily petty corruption is, or would be, larger without privatization, and that corruption is more prevalent in non-privatized sectors. Furthermore, there is evidence to suggest that extralegal and unofficial activities are more prevalent in countries that privatized less.[26]

A 2009 study published in The Lancet medical journal initially claimed to have 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 and in Eastern Europe during the 1990s,[27][28] although a further study revealed that there were errors in their method and "correlations reported in the original article are simply not robust."[29] Historian Walter Scheidel, a specialist in ancient history, posits that economic inequality and wealth concentration in the top percentile "had been made possible by the transfer of state assets to private owners."[30]

In Latin America, there is a discrepancy between the economic efficiency of privatization and the political/social ramifications that occur. On the one hand, economic indicators, including firm profitability, productivity, and growth, project positive microeconomic results.[12] On the other hand, however, these results have largely been met with a negative criticism and citizen coalitions. This neoliberal criticism highlights the ongoing conflict between varying visions of economic development. Karl Polanyi 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.

Privatization in Latin America has invariably experienced increasing push-back from the public. Some suggest that implementing a less efficient but more politically mindful approach could be more sustainable.[31]

In India, a survey by the National Commission for Protection of Child Rights (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.[32]

Opinion

Arguments for and against the controversial subject of privatization are presented here.

Support

Studies show that private market factors can more efficiently deliver many goods or service than governments due to free market competition.[20][21][22] Over time this tends to lead to lower prices, improved quality, more choices, less corruption, less red tape, and/or quicker delivery. Many proponents do not argue that everything should be privatized. According to them, market failures and natural monopolies could be problematic. However, anarcho-capitalists prefer that every function of the state be privatized, including defense and dispute resolution.[33]

Proponents of privatization make the following arguments:

Opposition

Opponents of certain privatizations believe that certain 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, and basic education). There is a positive externality when the government provides society at large with public goods and services such as defense 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, opponents of privatization claim that they aren't subject to fair competition, and better administrated by the state.

Although private companies will provide a similar good or service alongside the government, opponents of privatization are careful about completely transferring the provision of public goods, services and assets into private hands for the following reasons:

Economic theory

In economic theory, privatization has been studied in the field of contract theory. 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, Shleifer, and Vishny (1997).[39] 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.[40]

See also

Notes

  1. ↑ Chowdhury, F. L. ‘’Corrupt Bureaucracy and Privatisation of Tax Enforcement’’, 2006: Pathak Samabesh, Dhaka.
  2. ↑ "Musselburgh Co-op in crisis as privatization bid fails.". Co-operative News. 2005-11-01. Retrieved 2008-05-21.
  3. 1 2 John Bennett, Saul Estrin, and Giovanni Urga (2007). "Methods of privatization and economic growth in transition economies" (PDF). Economies of Transition. 15: 661–683. doi:10.1111/j.1468-0351.2007.00300.x. Retrieved 18 June 2017.
  4. 1 2 3 4 Roin, Julie. "Privatization and the Sale of Tax Revenues". SSRN 1880033 Freely accessible, also published as "Privatization and the Sale of Tax Revenues" in Minnesota Law Review, Vol. 85, p. 1965, 2011, and U of Chicago Law & Economics, Olin Working Paper No. 560
  5. ↑ U. of C. professor argues privatization of public assets just like borrowing money, July 22, 2011, Chicago Tribune, Ameet Sachdev's Chicago Law, Ameet Sachdev
  6. ↑ Edwards, Ruth Dudley (1995). The Pursuit of Reason: The Economist 1843–1993. Harvard Business School Press. p. 946. ISBN 0-87584-608-4.
  7. ↑ Compare Bel, Germà (2006). "Retrospectives: The Coining of 'Privatisation' and Germany's National Socialist Party". Journal of Economic Perspectives. 20 (3): 187–94. doi:10.1257/jep.20.3.187.
  8. 1 2 3 International Handbook on Privatization by David Parker, David S. Saal
  9. ↑ Li & Zheng 2001, p. 241
  10. ↑ Bouye, Thomas M., Manslaughter, markets, and moral economy
  11. ↑ "Forget the nostalgia for British Rail – our trains are better than ever".
  12. 1 2 3 "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.
  13. ↑ "The Distributive Impact of Privatization in Latin America: Evidence from Four Countries" by David McKenzie, Dilip Mookherjee, Gonzalo Castañeda and Jaime Saavedra. Brookings Institution Press, 2008, p. 162.
  14. ↑ "Why is Sector Reform So Unpopular in Latin America?" by Mary Shirley. The Ronald Coase Institute Working Papers, 2004, p. 1.
  15. ↑ Takahara, "All eyes on Japan Post"Faiola, Anthony (2005-10-15). "Japan Approves Postal Privatization". Washington Post. The Washington Post Company. p. A10. Retrieved 2007-02-09.
  16. 1 2 The Financial Economics of Privatisation By William L. Megginson, pp. 205–06
  17. ↑ Archived June 23, 2012, at the Wayback Machine.
  18. ↑ "Thatcher years in graphics". BBC News. 2005-11-18.
  19. ↑ Amos, Deborah, "In Egypt, Revolution Moves Into The Factories", NPR, April 20, 2011. Retrieved 2011-04-20.
  20. 1 2 "Privatisation in Competitive Sectors: The Record to Date, World Bank Policy Research Working Paper No. 2860". John Nellis and Sunita Kikeri. World Bank. June 2002. SSRN 636224 Freely accessible.
  21. 1 2 "From State To Market: A Survey Of Empirical Studies On Privatisation" (PDF). William L. Megginson and Jeffry M. Netter. Journal of Economic Literature. June 2001.
  22. 1 2 "Privatising State-owned Enterprises" (PDF). 2010-02-22. p. 9. Retrieved 2011-07-11.
  23. ↑ "Winners and Losers: Assessing the Distributional Impact of Privatisation, CGD Working Paper No 6" (PDF). Nancy Birdsall & John Nellis. Center for Global Development. March 9, 2006.
  24. ↑ FLORIO Massimo – “The Great Divestiture: Evaluating the Welfare Impact of the British Privatizations, 1979–1997” (MIT Press, 2004). Book review by William L. Megginson, Journal of Economic Literature, Vol. XLIV (March 2006) p. 172.
  25. ↑ "European rail study report".
  26. ↑ Privatisation in Competitive Sectors: The Record to Date. Sunita Kikeri and John Nellis. World Bank Policy Research Working Paper 2860, June 2002. Privatisation and Corruption. David Martimort and Stéphane Straub.
  27. ↑ "Death surge linked with mass privatisation". University of Oxford. 2009. Archived from the original on 2014-07-02. Retrieved 2015-06-28.
  28. ↑ Privatisation 'raised death rate'. BBC, 15 January 2009. Retrieved 29 June 2014.
  29. ↑ "Did mass privatisation really increase post-communist mortality?". The Lancet. 375: 372. doi:10.1016/S0140-6736(10)60159-6.
  30. ↑ Scheidel, Walter (2017). The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century. Princeton University Press. p. 222. ISBN 978-0691165028.
  31. ↑ "Why is Sector Reform So Unpopular in Latin America?" by Mary Shirley. The Ronald Coase Institute Working Paper, 2004, p. 1.
  32. ↑ Perappadan, Bindu shajan (August 17, 2013). "Private hospitals shun destitute children". The Hindu. Retrieved 21 August 2013.
  33. ↑ "Review of Kosanke's Instead of Politics – Don Stacy" Libertarian Papers VOL. 3, ART. NO. 3 (2011)
  34. ↑ Central Europe's Mass-Production Privatization, Heritage Lecture #352
  35. ↑ Dagdeviren (2006). "Revisiting privatisation in the context of poverty alleviation". Journal of International Development. 18: 469–88. doi:10.1002/jid.1244.
  36. ↑ David Moberg (6 June 2014). Privatizing Government Services Doesn’t Only Hurt Public Workers. In These Times. Retrieved 28 June 2014.
  37. ↑ Race to the Bottom: How Outsourcing Public Services Rewards Corporations and Punishes the Middle Class. In the Public Interest, 3 June 2014. Retrieved 7 June 2014.
  38. ↑ Joshua Holland (17 July 2014). How a Bogus, Industry-Funded Study Helped Spur a Privatization Disaster in Michigan. Moyers & Company. Retrieved 20 July 2014.
  39. ↑ Hart, Oliver; Shleifer, Andrei; Vishny, Robert W. (1997). "The Proper Scope of Government: Theory and an Application to Prisons". The Quarterly Journal of Economics. 112 (4): 1127–1161. ISSN 0033-5533. doi:10.1162/003355300555448.
  40. ↑ Hoppe, Eva I.; Schmitz, Patrick W. (2010). "Public versus private ownership: Quantity contracts and the allocation of investment tasks". Journal of Public Economics. 94 (3–4): 258–68. doi:10.1016/j.jpubeco.2009.11.009.

References

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