Privatisation Definition

Definition

Privatisation is the process of selling a firm owned and controlled by the government to investors in the private sector of the economy. It means that a government-owned business, property, or operation is now owned by a private, non-government party. Generally, the governments do the transfer of ownership of particular operations, facilities, or business processes to a private, separate, or for-profit company by creating public limited companies. The shares of the newly created public limited companies are sold to the private investors through the stock exchange. As a result of privatisation, the public sector of the economy reduces in size while the private sector grows.

Examples

In Europe, the list of the privatised firms is extensive. For example, in the UK, in the 1980s, under the government of Margaret Thatcher, many of the public enterprises were privatised. Some of these firms are British Telecom (BT), British Gas (BG), British Airways (BA), British Petroleum (BP), and British Aerospace.

Another historical example of privatisation occurred after the downfall of the Soviet Union. In the Soviet Union, there was communism, and all the resources were owned and controlled by the government. The privatisation started before the blackout of the Soviet Union under the supervision of Mikhail Gorbachev. He was a leader who imposed amendments to hand over particular government enterprises to the private sector. After the fall of the Soviet Union, there was an extensive privatisation of government enterprises to a certain portion of the population in Russia, referred to as oligarchs, which strikingly increased inequality within the nation.

Sectors of an Economy

All the economies in the world are mixed economies with the following two sectors: the public and private sectors.

Public Sector

Those organisations that are owned and controlled by the central or local government fall in the public sector of the economy. In this sector, the state governments are responsible for running operations and industries within the state. For example, in the U.S., the public sector consists of the United States Postal Service, the police and fire department, schools and universities, the national defence and security services, and the National Park Services.

Private Sector

Those enterprises or businesses that are not run by government entities fall in the category of the private sector. The private entities or companies consist of a majority of firms, like finance, information technology, real estate, fast-food franchises, industrial materials, consumer fundamentals, and healthcare sectors.

Privatised Types of Institutions

Many types of facilities and institutions are typically regulated by governments and public officials that can be and have been privatised. These institutions comprise, among others, prisons, hospitals, highways, airports, and harbours; waste disposal; public utilities like electricity, water, and mail delivery; and communications infrastructure.

Arguments for Privatisation

The proponents of privatisation give many arguments in favour of privatisation. Here are some of them.

Efficiency

The supporters of privatisation claim that the privately owned enterprises can run their operations more efficiently and economically as compared to the state-run enterprises relying on government subsidies. This is mainly due to the profit-incentive to terminate wasteful spending. 

Quick Response

Decision-making in private firms is quick as opposed to the slow and bureaucratic process in state-owned firms. This means that private firms can give quick responses to the changing needs and wants of customers, leading to allocative efficiency. 

Motivation

The owners of privatised firms are motivated by profit incentives, which serve as a fuel for cost-cutting and running the businesses in a competitive way. These owners hire professional managers to run businesses in a profitable way.

Market Forces

Privatisation means that the market forces of demand and supply will work for the allocation of scarce resources in the economy. Inefficient firms will have to change or die. Efficient firms will survive and grow. This will lead to better outcomes in terms of the allocation of scarce resources.

No political Interference

Many decisions in state-owned enterprises are motivated by political interests. For example, keeping prices of utilities low to gain political benefits. This is not true in private firms that make decisions based on financial interests without any political interference. This means that the chance of corruption will also decrease. 

Government Revenue

The proceeds from privatisation are a source of government revenue. This revenue can be spent on infrastructure and welfare projects. Moreover, the government will also save money that was previously given to the state-run businesses as subsidies. This means that the burden on the government to run and finance these businesses will reduce.

Competition

If privatisation is wisely planned and executed, it will increase competition. As a result, firms will produce new and better-quality products to win customers. Prices will also decrease.

Arguments against Privatisation

Contrarily, the complainers of the privatisation give counterarguments against privatisation. Some of them are:

Necessities

The opponents of privatisation believe that the basic necessities such as water, electricity, and schools should not be exposed to market forces or operated for profit. If so, the prices of these essential goods and services will increase, leading to an increased cost of living, especially for the poor.

Monopoly

State-owned enterprises are normally run as public sector monopolies to get the benefit of economies of scale. When privatised, these firms become private monopolies, which can increase prices and exploit customers to maximise their profits. Some of these firms are natural monopolies, such as railways. This means that the cost structure does not allow for more than one firm. The absence of competition means that the customers will have no choice except to buy low-quality services from these monopolies at higher prices.

Lack of Coordination

State-owned enterprises have better coordination due to central planning. For example, the railway system and bus service may complement each other for society’s welfare. However, private firms compete with each other and lack coordination for the benefit of the whole country.

Lack of Public Interest

Private sector firms work for profit maximisation and lack public interest. They may exploit customers through high prices and shut down loss-making areas of business even if society needs them.

Externalities

Private sector firms may not take into account negative production externalities such as pollution, noise, and traffic congestion while running their operations.

Strategic Industries

Critics of privatisation also say that some strategic industries should not be privatised as they can be used against the strategic interests of the country. Some examples of such industries are national defence, electricity production and distribution, water supply, etc. 

Public Goods

Public goods are non-excludable and non-rivalrous, which means that the private companies will not produce them as price cannot be charged due to the free-rider problem. These goods include street lights, national defence, flood control systems, etc. These goods are produced by the government and cannot be privatised. 

Nationalisation

Nationalisation is the opposite of privatisation. It is the process of transferring the public ownership and control of a business from the private sector to the government. As a result of nationalisation, the private sector of the economy reduces in size while the public sector grows.

Corporate Privatisation

Corporate privatisation is the process of converting a public limited company into a private limited company. Its main objective is to increase shareholders value. The following table contains the main points of difference between public-to-private privatisation and corporate privatisation.

Privatised Prisons

Normally, prisons are owned, controlled, and run by local and federal government. However, in some countries, such as the US, the United Kingdom, and Australia, there are many prisons with private ownership as well. The supporters of privatisation claim that professional companies are better equipped and skilled at controlling the population in prisons. However, critics argue that for-profit prisons are common with scandals, prisoner abuse, cutting corners, and other ethical violations.

Conclusion

In conclusion, privatisation is a process of transferring services offered by governments to privately owned businesses. The main purpose of privatisation is to generate government revenue and to improve efficiency in the allocation of resources by relying on the workings of the market mechanism.