Privatization is defined by either financial or organizational aspects: the transfer of assets owned by government to the private and not-for-profit sectors, or the participation of these organizations in public service delivery which were previously limited to the government.
Privatization is the reconsideration of priorities in government intervention and redefines boundaries between the public and private sector. Privatization has appeared as one of the key features in Anglophone public administration reform since the 1980s due to economic stagnation, which required public expenditure reductions to balance budgets and ending government protection of declining industry. It has subsequently been adopted in countries facing similar economic issues, including formerly communist countries and Lower and Middle-income countries, where the World Bank and International Monetary Fund are influential advocates of privatization. They view privatization as a key solution to reform failing governments and to achieve economic recovery, and attached privatization to conditions for loans to countries facing sovereign debt crisis. These reforms may have contributed to stabilizing fiscal order and encouraging economic growth in these countries but also draw criticisms of unnecessary or excessive privatization, ignoring social structure and historical background of recipient countries.
Though privatization is a global phenomenon, it takes a wide variety of forms depending on the political, legal, organizational, and economic context in which a specific target is privatized. Furthermore, privatization is applied to a range of public functions, including industries which have required a huge initial investment and protection to develop, for example, transportation, airport, and energy, but need fewer commitments from the government after services have matured. Privatization could also indicate the construction of public facilities, such as energy plants, public housing, and hospitals, using full or part-based direct investment from the private sector. In this case, the ownership of these facilities is vested in the government or is expected to return to the government when contracts are terminated. The target of privatization is not limited to public assets but also encompasses public services which could be either back office functions or services directly provided to citizens, including waste collection, education, health care, and social care. In this sense, privatization has a similar meaning as the marketization of public service delivery. In addition to these variations in forms of privatization, its rationale varies from case to case. Drivers of privatization include: reducing public expenditure by cutting back the government’s role; gaining proceeds from sale of assets; introducing management knowledge and innovation developed in the private sector (for example, outcome measurement, consumer satisfaction, and technological development); improving efficiency and quality of service through competition among providers; and increasing user choice. Overall, privatization introduces market principles into the public sector.
Means of Privatization
There are numerous means to implement privatization. In terms of asset transfer, this could involve sale of a public asset to private organizations or individuals. Sometimes public assets are managed at arms-length by a state-owned enterprise rather than the government itself. In that case, transferring the ownership of the enterprise from the government to the private sector is another way of privatization. Stocks, loans, limited partnerships, joint ventures, and other financing schemes developed in private markets are used to privatize public assets, either individually or in combination. For example, when the national railways were privatized in the United Kingdom (UK) in the late 1990s, basic infrastructures such as tracks, signals, and stations were transferred from British Rail, a state-owned enterprise providing railway services, to a newly established railway company, and then the government sold off its stocks in the stock exchange market in 1996 to complete privatization (Gourvish and Anson 2002). Engines and carriages were sold to rolling stock companies, which had been established as state-owned enterprises, to lease them to passenger service companies, and these rolling stock companies were sold to the private sector (ibid.).
Privatization of public services could be implemented by contracting out a part of the service to private organizations. For example, local governments in some countries are responsible for waste collection and commission private companies to deliver it, thereby replacing direct service provision. Another form of privatization is granting a concession to manage a public facility, for example, airports, water plants, and libraries to private organizations by contracts. Unlike the privatization of a facility itself as an asset, the main focus becomes services provided by the facility, and the facility still remains government-owned.
Moreover, contracts between the government and private organizations are not necessarily a prerequisite of public service privatization. For example, in 2000 Japan introduced a long-term care public insurance system replacing conventional services provided directly by local governments or organizations commissioned by them. The model allows eligible elderly people to receive care services from a wide range of providers, which meet requirements and get approval to enter the elderly care market (MHLW 2016). In the UK, the government has introduced personal budgets for adult care so that people could purchase necessary services from private organizations other than services commissioned by local governments (NAO 2016). In these cases, there is no direct contract between local governments and service providers, but changes could be perceived as a form of privatization.
Removing barriers to enter markets or terminating the government’s monopoly by deregulation could also be recognized as having characteristics associated with privatization. Where a state-owned enterprise monopolizes energy supply, opening the energy market to private organizations would be one way to introduce competition into public services and increase user choice. It should also be noted that privatization in assets and that in services are sometimes undertaken simultaneously. During the UK railway reform in the late 1990s, the passenger service was delegated to private companies which won the competitive bidding and agreed franchise contracts between the government (Department for Transportation 2004). Thus, the terminology of “privatization” needs to be interrogated carefully because it takes a variety of forms and serves different objectives.
Advantages and Disadvantages of Privatization
Privatization has been presented as a solution to structural problems of the public sector, such as budget restraint, cost-inefficiencies, and limited service choice. In many cases, privatization has been argued to benefit service users and taxpayers. The UK government argued that privatization attracted large investments including new rail line construction and upgrades of existing line, which could not have realized in the nationalized industry (Department for Transportation 2004). Privatization has also contributed to improve passenger services by increasing the number of journeys and diversifying the ticket options for off-peak travels (ibid.).
On the other hand, privatization has drawn a series of criticisms: less affordability of service; decline in service quality; conflict between profitability and requirements originating from public characteristics of assets or services such as equity among service users; blurred accountability of the government; and lack of actual competition (Dassiou et al. 2015; Smith and Jones 2015) . First, prices or charges for facilities or services may rise after privatization, and some privatization may involve charges for services previously provided for free. It is essential for a private organization to make the privatized business profitable and price rises or new charges may be unavoidable in some cases. Nevertheless, if these privatized facilities or services are indispensable for daily lives, the additional payment could be a considerable burden on people especially those with low incomes or in precarious employment.
Second, privatization does not automatically improve the quality of public assets or services and may even lead to deterioration in quality. There are many examples of service quality decline following privatization driven by a focus on short-term profitability, excessive pursuit of cost-efficiency, or lack of coordination among fragmented providers. The Department for Transportation (2004) admits that insufficient knowledge and investment on tracks of the railway company succeeding British Rail was one cause of the Hatfield rail accident in 2000.
Third, there is a fundamental contradiction between rational economic decisions in the market and the demand to secure values, such as equality and universality, originating from remaining public characteristics in privatized assets or services. For example, within privatized social services, those providing the services may focus on users who are likely to bring larger profits regardless of each user’s service need.
Fourth, privatized facilities or services may be closed or withdrawn when they become unfeasible for the private organization managing them. For example, in some countries the withdrawal of elderly care home providers caused unwilling transfer of the residents to other care homes, and sudden bankruptcy of a provider in a privatized electricity market lead to blackouts. Ensuring service continuity in a privatized market may incur the government additional costs including public financing or even re-nationalization as a last resort.
Fifth, privatization blurs accountability of the government to the parliament and the general public. Privatization is typically accompanied by transfer of discretion to manage privatized assets or services out of the government. Contracts for privatization and/or related legislation usually stipulate the lines of accountability between the government and private organizations. However, in practice, it is not always clear who is to solve problems regarding the privatized asset or service. Accountability issues are likely to be more salient when the government still supports private organizations with public money. Moreover, even if the private organizations make the most desirable decision regarding their role in the market, it is sometimes difficult for them to redress deep-seated problems arising from the overall market structure.
Finally, privatization does not necessarily achieve real competition among private organizations. With the privatization of large public assets such as railways and power plants, it is possible that only one or a few private organizations are capable of managing the assets. It might be partly due to bidding criteria on turnover, capital size, and technical capacity, which are sometimes necessary to guarantee financial and administrative feasibility of the privatized business. Alternatively, even when apparent competition among the private organizations exists at a regional level, the market could be dominated by subsidiaries of a large company at the national level. Lack of competition increases financial risks to government and undermines the legitimacy of privatization.
Privatization and the Emergence of New Governance Arrangements
In the process of privatization, new governance structures are introduced aiming to prevent or minimize market failure. Thus, typically new regulations on privatized assets or services are established, linked to market structure and the primary aims of privatization. There may be minimum requirements for entering the market or basic standards on quality and safety in order to maximize free competition in the market. On the other hand, public characteristics remaining in privatized assets or services usually require a guarantee of essential principles such as universality and equality in service, and additional regulations are necessary to avoid private organizations overriding these principles. These include pricing rules, procedural requirements for withdrawal to avoid a service vacuum, and legal framework for government emergency intervention. In addition to contents of regulation, there is the question of who is to regulate. The regulator may be either government or a public body independent from the government. During UK railway service privatization in the 1990s, two regulatory bodies were established: the Office of Passenger Rail Franchising was in charge of establishing and monitoring franchise contracts for the passenger service; the Office of the Rail Regulator was responsible for regulating access to track and stations, and managing licenses regarding the whole rail network, trains, and stations (Gourvish and Anson 2002).
Secondly, the government may introduce new market oversight schemes inside the government or an independent public body, sometimes combined with regulatory functions (Hardiman 2012; Dassiou et al. 2015). The level of oversight depends on market characteristics. In some cases, the oversight body aims to secure free and fair competition in the privatized market, though applicability of competition law to the privatized market is still controversial. In other cases, an oversight body checks financial stability in the market and is expected to issue an early warning to stakeholders on the withdrawal of a hard-to-replace provider. Alternatively, an oversight body may focus on benchmarking quality of privatized assets or services for users to promote better quality through competition or aim to secure value for public expenditure in the whole privatized system by making recommendations to the government.
A third arrangement involves management tools to control the outcomes or to promote desirable competition in the market, for example, performance measurement with regular evaluation. Where the government directly agree contracts with the private organizations or the market is heavily subsidized by the government even after privatization, financial incentives are usually combined with performance evaluation. Nevertheless, establishing appropriate measurement is not straightforward, and distorted performance measurement risks unexpected side effects.
Privatization is a cornerstone of public sector reform bringing market discipline and innovation to what are seen to be failing or under-performing public services. However, there is no standardized pattern for privatization, and its form and process are shaped by political climate, legal systems, organizational settings, and economic system. Privatization benefits are seen to include those of attracting large private sector investment and in providing more tailored service for users. On the other hand, privatization may give rise to new problems such as price rises, declining service quality, and gaming behavior by private organizations, which primarily result from the market structure after privatization.
Privatization was perceived an effective measure for scaling down the governmental role, but in practice rarely results in complete withdrawal of government from the privatized business. Public characteristics typically remain in the privatized assets or services, and thus new arrangements are essential to avoid private organizations overriding essential values originating from these public characteristics, such as service universality and equal accessibility of users. They are also necessary to maintain safety standards; to promote better quality of services; and to hold the government accountable regarding the privatized assets or services. New arrangements could be regulations; market oversight scheme; outcome measurement; and evaluation schemes. In brief, privatization is the reconfiguration of the government role from direct provider of public assets or services to supervisor of quasi-private markets by partial ownership or indirect governance.
- Department for Transportation (2004) The future of rail, white paper. (Cm 6233). The Stationery Office, LondonGoogle Scholar
- Gourvish TR, Anson M (2002) British rail, 1974–97: from integration to privatisation. Oxford University Press, OxfordGoogle Scholar
- Hardiman N (2012) Governance and state structure. In: Levi-Faur D (ed) The Oxford handbook of governance. Oxford University Press, Oxford, pp 228–241Google Scholar
- Japan. Ministry of Health, Labour and Welfare (MHLW) (2016) Long-term care insurance system of Japan. Retrieved 10 July 2017 from the MHLW: http://www.mhlw.go.jp/english/policy/care-welfare/care-welfare-elderly/dl/ltcisj_e.pdf
- National Audit Office (NAO) (2016) Personalised commissioning in adult social care. (HC 883). National Audit Office, LondonGoogle Scholar