THE MARKET SYSTEM 12 PRIVATISATION 81
12 PRIVATISATION
LEARNING OBJECTIVES
Understand how privatisation is defined
Understand the effects of privatisation on consumers, workers, businesses and the government
SUBJECT VOCABULARY
GETTING STARTED
monopolies situation where a business
activity is controlled by only one Since the 1980s, some governments around the world have
company or by the government, and other
transferred public sector resources to the private sector. This
companies do not compete with it
privatisation act of selling a
process is called privatisation. In Europe, some large industrial
company or activity controlled by the
government to private investors monopolies were privatised to improve competitiveness and
efficiency. In Eastern Europe, privatisation was a result of the
GENERAL VOCABULARY political and economic changes that took place after the break-up of
bankrupt not having enough money to
the Soviet Union. Look at the example below.
repay your debts
CASE STUDY: GREEK AIRPORT PRIVATISATION
After the financial crisis in 2008, it was discovered
that the Greek government had acquired extremely large
debts. To help deal with these debts, Greece had to
borrow large amounts of money from the EU to prevent
the country from going bankrupt. In order to receive a
package of loans worth €86 000 million, it had to promise
international lenders that It would start selling some state
assets. One significant deal was made in 2015 when the
Frankfurt airport operator, Fraport, obtained a 40-year
agreement to upgrade and operate some Greek airports,
including those on the tourist islands of Corfu, Mykonos,
Rhodes and Santorini. The deal raised €1230 million for
the Greek government. Fraport will also pay Greece an
annual operating fee of €22.9 million and invest €330
million
in airport facilities. The investment was expected to
■ Fraport began operating Corfu airport in 2015
improve the quality and efficiency of airport
operations.
In the future, Greece is expected to sell other assets such as the railways, the national lottery, utilities, ports and
perhaps some of its islands.
1 Why were the Greek airports privatised?
2 Describe the possible benefits of the privatisation to consumers.
3 In pairs, carry out some research to see if any state organisations have been privatised in your country. Try to
identify the reasons why they have been transferred to the private sector and how much money the government
raised. Present your results in a report.
82 THE MARKET SYSTEM 12 PRIVATISATION
Privatisation involves transferring public sector resources to the private sector.
During the 1980s and 1990s in the UK, the government sold off a large number of
state assets to the private sector. For example, in 1987, British Airways,
Rolls-Royce, Leyland Bus, Leyland Truck and the British Airport Authority were all
SUBJECT VOCABULARY privatised. It was argued that these organisations would be more efficient if they
nationalised industries public were operated without government interference. Privatisation has taken a number
corporations previously part of the of forms in the UK.
private sector that were taken into
state ownership ■ Sale of nationalised industries: Nationalised industries such as British
natural monopolies situation that Rail, British Airways and British Telecom were once private sector business
occurs when one firm in an industry organisations. However, for a number of reasons they were taken into public
can serve the entire market at a lower ownership. For example, it was felt that they should supply services that
cost than would be possible if the were unprofitable, such as railways in remote areas. Many were natural
industry were composed of many monopolies and would serve consumers more effectively under state
smaller firms control. However, after years under state control, they were sold off. They
became private sector businesses, owned by private shareholders.
■ Contracting out: Many government and local authority services have been
`contracted out' to private sector businesses. This is where contractors are
given a chance to bid for services previously supplied by the public sector.
Examples include the provision of school meals, hospital cleaning and
refuse collection.
■ The sale of land and property: During the 1980s, people renting local,
council-owned properties were given the right to buy their own homes. They
were given generous discounts to persuade them to buy. As a result, about
1.5 million council-owned houses were sold to private individuals in the UK.
Different reasons have been put forward for privatisation.
■ To generate income: The sale of state assets generates income for the
government. Figure 12.1 shows the revenue raised globally by privatisation
between 2000 and 2015. The graph suggests that governments around the
world are still keen to sell off state assets for money. As outlined in 'Getting
started', Greece has been under pressure in recent years to raise money
from the sale of state assets in order to meet the demands of international
lenders.
■ Public sector organisations were inefficient: Some nationalised industries
lacked the incentive to make a profit and often made losses. It was argued
that in the private sector they would have to cut costs, improve services and
return profits for shareholders. They would also be more accountable. For
example, in the private sector, if customer needs were not met, a company may
lose customers and struggle to generate enough revenue and profit to survive
GENERAL VOCABULARY
(assuming there was competition in the market).
accountable being responsible for the
effects of your actions and willing to ■ To reduce political interference: In the private sector, the government
explain or be criticised for them could not use these organisations for political aims. They would be free
incentive something that is used to to choose their own investment levels, prices, product ranges and growth
encourage people to do something, rates, for example. In the past, some nationalised industries have been
especially to make them work harder,
unstable due to constant government interference. This has often held back
produce more or spend more money
their performance.
THE MARKET SYSTEM 12 PRIVATISATION
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A Figure 12.1 Global revenue from privatisation, 2000-15
In recent years, a number of countries around the world have adopted
privatisation programmes. For example, because of the economic crisis, and
pressure from the World Bank and the International Monetary Fund, in 1991, India
began privatising state assets. It began by selling the Bharat Aluminium Company
and a few airports such as Bangalore, Delhi, Hyderabad and
Mumbai. More recently, in 2016, India has said it will sell off controlling stakes
(ownership of more than 50 per cent of shares in a company) in 22 companies.
This includes some large state-run companies such as Container Corporation of
India, Bharat Earthmovers, three steel plants and the Cement Corporation of India.
There have also been huge privatisation programmes in many Eastern
European countries. Before the break-up of the Soviet Union, public sector
groups conducted nearly all production. Afterwards, governments decided to
develop mixed economies (see Chapter 1 1, pages 70-80) and began
privatising vast quantities of public sector resources.
ACTIVITY 1
CASE STUDY: PRIVATISATION MOTIVES
Below is an extract from a government White Paper 'Working Together'.
`Just as a strong government is required to steer the economy through a
recession, it is also the case that a responsive state should withdraw from
areas in which it is no longer required. Now more than ever government must
prioritise its interventions and secure the greatest possible efficiency for
every pound of taxpayers' money it spends. As we redouble our
efforts to reform and renew our public services, it is vital we are bolder in our
efforts to strip out waste, improve productivity and sell off public assets that
the state no longer needs to own. The government will set out proposals on
these issues at the budget.'
1 To what extent does this extract suggest that the government is
committed to more privatisation in the future?
2 According to this extract, what are the motives for future possible
privatisation?
3 Suggest two other possible reasons for privatisation.
84 THE MARKET SYSTEM 12 PRIVATISATION
EFFECTS OF PRIVATISATION Privatisation has had a big impact in some nations. The effects have been felt in a
number of areas and some evidence suggests that there have been both
advantages and disadvantages resulting from privatisation.
CONSUMERS
It is hoped that consumers will benefit from privatisation. Once in the private
sector, businesses are under pressure to meet customer needs and return a
profit for the owners. This should mean that businesses will be efficient, try to
provide good quality products, charge a reasonable price and grow. However,
consumers have seen both improvements and a decline in price and service. For
example, in the UK, according to the water and sewerage regulator Ofwat, since the
privatisation of ten water providers in 1989, the number of customers at
risk of low water pressure has fallen by 99 per cent. In telecommunications, the
waiting time for a new BT line has fallen from around 6 months to just 15 days. In
contrast, though, since the privatisation of the rail industry in the UK, the amount of
government subsidies given to the rail industry rose from just over £1000
million in the late 1980s to more than £6000 million in 2006/07. Even in 2014/15 the
subsidy was still £4000 million. Taxpayers feel this increased financial
responsibility. Rail fares to consumers have also risen sharply. Rail users in the
KEY FACTS: CONSUMERS
UK now pay some of the highest fares in the world. For example, tickets similar
In 2016, the UK regulatory body Ofwat
to the £357.90 monthly season pass from Chelmsford to London would cost
proposed fining South West Water
just £37 in Italy, £56 in Spain and £95 in Germany. There have been suggestions in
£1.7 million for missing performance
recent years from some UK politicians that the country's railways could be
targets after it was discovered leaking
sewerage into the sea. Another water renationalised in future to improve service to customers.
company, Southern Water, was
threatened in 2014 with a £176 million WORKERS
fine for poor customer service and Quite often in the run up to privatisation, and after an organisation has
mismanaging sewerage systems.
moved into the private sector, quite large numbers of people are made
redundant. Although this may reduce costs, many see this as a negative effect.
Evidence of this is provided by what happened in the UK after a number of
privatisations. For example:
■ when the coal industry was privatised, more than 200 000 jobs were lost
■ British Telecom shed more than 100 000 jobs when it was sold to the private
sector
■ the Rail, Maritime and Transport Union suggested that there were 20 000 to
30 000 job losses as a result, of rail privatisation
■ British Energy shed one-quarter of its workforce just before privatisation
■ British Steel shed 20 000 jobs before it was privatised.
Mass redundancies often weaken companies through the loss of experienced
staff and make it more difficult and more expensive to scale up in future. In
addition to job losses, in an effort to improve efficiency, many workers may have
been pressed into raising their productivity. They might have been forced to adopt
more flexible working practices, for example. Those who support the process of
privatisation would suggest that these measures were necessary in order compete
in global markets. However, the impact on many communities of mass
unemployment within the UK is still felt today.
BUSINESSES
Once in the private sector, firms are left without government interference and
have to face competition. They have been affected in a number of ways in
the UK.
THE MARKET SYSTEM 12 PRIVATISATION 85
■ Their objectives have changed. For most firms, profit has become an
important objective. For example, the profits of British Telecom increased
from around £1000 million in 1984, when the company was first privatised, to
nearly £3170 million in 2016.
■ Many firms have increased investment following privatisation. For example,
many of the water companies raised investment levels to fund new sewerage
systems and water treatment plants. Immediately after privatisation, investment
rose by about £1000 million in the water industry. However, more recently, some
figures suggest that investment levels are falling.
■ There have been a number of mergers and takeovers involving newly
privatised firms. For example, Hanson bought Eastern Electricity and an
American railway company bought the British Rail freight service. North
West Water and Norweb joined together to form United Utilities and Scottish
Power bought Manweb.
■ Many privatised businesses have diversified into new areas. For example,
British Telecom now provides television programmes and has invested heavily
in broadcasting Premier League and Champions League football in the UK.
GOVERNMENT
One way in which governments have benefited from privatisation is the huge
amount of revenue that has been generated. However, privatisation has been
SUBJECT VOCABULARY
expensive. in particular, the amount of money spent advertising each sale has
diversified if a company or economy
been criticised. The money spent on television advertising was at the taxpayer's
diversifies, it increases the range of expense. It has also been suggested that some state assets were sold off
goods or services it produces
too cheaply. As a result, governments failed to maximise the revenue from
hostile takeover takeover that the
sales. Governments are no longer responsible for running the newly privatised
company being taken over does not
want or agree to
companies. As a result, it can focus more sharply on the business of government.
takeovers act of getting control of a The Polish government has almost completely stopped the privatisation process.
company by buying over 50 per cent of In 2016, a minister said that the privatisation policies of previous governments
its shares
were wrong and would be ended. Only companies in trouble, or those 'without
importance to the national economy', would be sold off in future. One reason
for the change in policy was that too many state-owned companies were the
subject of a hostile takeover after privatisation. Furthermore, the government also
said that it might try to renationalise some of the companies that had been
privatised. One target would be energy, it was claimed.
ACTIVITY 2
CASE STUDY: PRIVATISATION IN CHINA
In recent years, China has begun to sell off state-owned assets.
However, in 2014, the government made a statement saying that it
planned to accelerate the process in order to 'clean up and integrate
some of China's state-owned enterprises (SOEs)'. Little detail was given
in the announcement but it was clear that the government wanted
make its SOEs more innovative and internationally competitive. SOEs
have underperformed in recent years and it is felt that private sector
involvement will help to increase investment and improve efficiency. The
announcement also made it clear that mixed ownership was preferred.
Over 100 companies were under central government ownership in China in
2014 with local governments also owning and managing around 25 000 SOEs.
This sector employs nearly 7.5 million people. The privatisation
••
THE MARKET WIST.P1 12 PRIVATISATION
process will allow state firms to attract investors to help spread share
ownership. In addition, many state firms will be encouraged to reorganise so
that they are eventually suitable for a stock market listing. Some
felt that the slowing of growth in the Chinese economy caused the
acceleration of privatisation. The government said growth in China's
investment and factory output had missed forecasts. As a result, it was felt
that Chinese economic growth might dip below 7 per cent for the first time
since the global financial crisis.
Finally, it has been suggested that there may be some opposition to the
acceleration in privatisation. For example, many local governments may not
be happy about sharing ownership of SOEs with private investors. This is
because their ties with SOEs are very strong. Another problem might be
attracting interest from the private sector. There was a stock market crash in
China in 2016 and many private investors will be wary of buying shares
again.
— State owned
10
— Afl firms
8- — Non state owned
6
cc 4
2
0
2000 2002 2004 2006 2008 2010 2012 2014
Year
A Figure 12.2 Performance of state-owned enterprises compared to private sector
organisations
1 What is meant by mixed ownership in this case?
2 Discuss why the government wants to accelerate the privatisation
process in China. Include two reasons in your answer.
3 Assess one possible difficulty that might be encountered when
encouraging the private sector to get involved in the running of SOEs in
China.
■ 1 Which of the following is a motive for privatisation?
A Improve the welfare of shareholders
B Generate money for the government C
Increase growth in the public sector D
Reduce externalities
■ 2 Many workers suffer as a result, of privatisation because of which of the
following reasons?
A They are often relocated
GENERAL VOCABULARY
B They are not allowed to belong to a trade union C
trade union organisation representing
people working in a particular industry Their jobs are at risk
or profession that protects their rights
D They have to pay more tax
