Does Privatisation work?

Way back in the 1980s when the UK began to privatise state owned businesses, the messaging was very clear – State owned businesses were inefficient, badly run and slow to change. Managers in State owned companies were inefficient, slow, bureaucratic and made bad decisions because they didn’t face competition. Companies in the private sector by contrast were dynamic, efficient and profitable. Their managers were efficient task orientated achievers who made good decisions.

The theory was that if you changed who owned the inefficient State owned businesses and gave them private sector owners that these moribund inefficient burdens to the taxpayer would become dynamic efficient profitable businesses. The counter argument is of course that privatisation just allows the new owners to exploit monopoly positions, earn excess profit and not act for the benefit of society.

It’s been nearly 40 years since the privatisation experiment began, and so it seems as good a time as any to ask – ‘is it working’? Not surprisingly for an economics topic the evidence is mixed, and given the political profile of this topic, hotly contested.

So for example there is some evidence that privately owned firms are more efficient and more profitable than comparable public owned firms. There is also some evidence that market liberalisation measures such as price deregulation and the increased use of incentives can improve the efficiency of state owned enterprises. However, its probably also the case that these measures would have just as much or a greater effect in a privatised market. Against this, a 2015 study by the UNDP found ‘no conclusive evidence that one model of ownership (ie public private or mixed) is intrinsically more efficient than the others.’

So what are we to make of all of this? Its seems pretty clear that ownership can matter, but that its not the only thing that matters. A bad manager is a bad manager – it doesn’t matter if they are paid by the State or the private owners. A regulator asleep at the wheel is no better than a politician asleep at the wheel.

It’s really about incentives. Whether that be from encouraging dynamic competition in the sector, or from strong regulation that creates the incentives to behave like a competitive business. Without competition or a good regulator you won’t get the benefits of privatisation.

So yes, privatisation can work on many levels, but you have to do it right. When it doesn’t work, look to the degree of competition in the market, the incentives of the public business, how good the regulatory regime is and whether the regulator is doing a good job. Get those things right and it’ll work.