Privatization

Privatization, the selling off of state-owned assets to the private sector. Since nationalization went out of fashion, privatization has become all the rage. The United Kingdom under Margaret Thatcher, who was first elected prime minister in 1979, led the way. During the 1980s the British government sold off state assets worth about £29 billion, roughly halving the size of the public sector. Other countries have followed: in Europe, in Asia, and, more recently in Latin America and the former Communist countries of Eastern Europe. Some African states have taken tentative steps towards privatizing state assets or at least increasing private sector involvement. Since 1992, states in the United States have been allowed to privatize their infrastructure, and faced with budget problems many may be keen to sell off such things as airports and toll roads. Between 1985 and 1992 more than US$300 billion-worth of state assets were sold worldwide.

Governments choose to privatize for a number of different reasons. However, of their two main aims, one is to cut the size of the state sector in pursuit of greater economic efficiency, and the other is to raise cash. In the United Kingdom privatization receipts were counted as negative expenditure rather than a way to finance expenditure. It was this that led to Mrs Thatcher being accused by one of her (Conservative party) predecessors in office of “selling the family silver”.

There are numerous ways to privatize companies. In Great Britain many publicly owned companies such as British Telecom and British Gas were offered to investors for a fixed price per share to be paid in several instalments, with limits on how much of the company would be sold to overseas investors, to corporate investors, and to private individuals. In many instances the government held on to what are called “golden shares” as a means of retaining the right to block any major deals, such as a takeover by a foreign firm, affecting the newly privatized concern. For utility companies, regulators were also appointed with the powers to rule on price increases and to refer the company to the Monopolies and Mergers Commission should there be any question that it might be operating in ways that were against the public interest. Encouraging individuals to buy (or giving them vouchers that can be used to buy) shares in companies that are being privatized is one way of building popular support for the process. In most of the former Communist countries of Eastern Europe governments have tried to spread the ownership of privatized companies as widely as possible. However, this approach almost always means that the government does not raise as much cash from privatization as it would from, say, a trade sale. Another important factor regarding privatization in former Communist countries is that the companies being privatized were often not attractive investments.

In general, privatization has proved successful in increasing the efficiency of firms that had suffered from public-sector control. Firms such as British Telecom and British Airways are now much more efficient and provide a better service than they did when owned by the state. On the other hand, privatization (at least in some instances) has not been without its critics. In Britain, many felt a much greater element of competition should have been introduced when British Gas was privatized. Other privatizations of utilities, especially of the water companies, have also been controversial, as with the proposed privatization of British Rail. Big rises in the share prices of privatized companies have encouraged many to take the view that the businesses were sold off too cheaply. More recently there has been widespread condemnation of the salaries paid and share options granted to those who are running privatized companies. Some of those who manage privatized firms are now paid several times what they were paid for doing more or less the same job when the business was in the public sector. Some also stand to gain immense sums from the exercise of share options. At the same time, most privatized industries have cut their workforce substantially and have kept a tight rein on wage increases for the bulk of the workforce.