Public Management and Administration - Owen E.hughes

Economic arguments for privatization
Public Enterprise 101
Economic arguments for privatization include: reducing taxes by using the proceeds
from sales; exposing activities to market forces and competition; and
reducing both government spending and the government’s share of the economic
cake. In addition, there could be reductions in the Public Sector
Borrowing Requirement (PSBR) locally and overseas. Arguments against
include the problem of monopolies, in which new private monopolies could use
their power to raise prices, cut services and make consumers worse off.
Stimulating competition is an attractive part of the privatization programme.
In theory, competition provides powerful incentives to both produce and price
efficiently. When faced with competition, public enterprises that do not operate
in accordance with consumer demand, or who overprice their products, will
lose custom. Any failure to match the performance of competitors will soon
become apparent in the form of loss of market share and deteriorating financial
performance. Effective competition in the markets served by public enterprises
would also reduce the need for detailed, intrusive and costly government control
and monitoring mechanisms.
If competition is seen as desirable, the different instruments of privatization
need to be compared. Competition could be introduced by selling or deregulating
to allow the entry of competitors. Selling assets only improves competition
if an enterprise is already in a competitive environment; selling a
monopoly with its regulation intact does nothing for competition. While a government
might sell a public enterprise to improve competition, it is financially
tempting to effectively sell the monopoly, as was done with a number of the
United Kingdom privatizations. British Telecom was privatized in 1984 with its
regulatory protection largely intact and without effective competition being
established. Only one competitor – Mercury – was licensed and that only with
a host of restrictions on its operations. Only much later did the government
alter the regulatory environment to improve competition. Specific industry regulators
were set up – Oftel for telecommunications, Ofgas for gas, Ofwat for
water and so on – a model that was less effective than a single competition regulator
would have been. As Wilks argues, the British system of utility regulation
grew up in an ‘almost unbelievable haphazard manner from 1982’ as the Thatcher
government prepared to privatize British Telecom and the British government
‘stepped almost absent-mindedly through the door from an interventionist mixed
economy to a regulated private sector economy’ (Wilks, 1999, p. 15).
There is need to sequence reforms so that a public monopoly is not converted
to a private monopoly (Kay and Thompson, 1986). And as Stiglitz argues
(2001, p. 350):
A regulatory structure can be created to ensure that some of the efficiency gains from privatization
are shared by consumers and other users and that other social objectives, such
as universal service, are enhanced. But the proposition that privatization can, in principle,