Revisiting Privatization, Now is the Time

Background

Over the past two decades, the privatization of state enterprises has gone from novelty act to global orthodoxy. More than 100 governments have sold stakes in state companies to private investors, raising $1 trillion and transforming the state’s economic role. Just as privatization’s promise may have been oversold, so its ills have been exaggerated. With state budgets under severe strain, agents at all levels, from municipalities to International Financial Institutions, have to develop best practices to transfer state assets to private hands in a way that maximizes the utility of all parties and maximizing the well-being of civil society. – William Megginson, Foreign Policy, No.118, 2000

Privatization has become a popular strategy to promote economic development in emerging, developing, and developed economies. 1Privatization is one of the most important elements of the continuing global phenomenon of the increasing use of markets to allocate resources.2 Privatization is a key strategy and tool designed to bring in structural reforms, necessary to reduce the state’s role in the economy, shrink the public sector and increase the role of the private sector as well as provide grounds for innovation, organizational and managerial improvement and overall economic development and growth.

World Bank Privatization Data

Defining Privatization

Privatization processes are all transfers of ownership or voting rights from the “State” to the private sector. The “State” includes the central or local government, ministries, bodies of the public administration, and companies where the central or local government acts as a shareholder. The private sector comprises private individuals and economic entities with private shareholders. Transfers of ownership or voting rights to economic entities fully owned by the State are therefore not considered privatizations. Privatization, in short, is the transformation of a State-Owned Enterprise into a joint stock corporation organized under company law.3

We know that privatization “works,” in the sense that divested firms almost always become more efficient, more profitable, and financially healthier, and increase their capital investment spending. These results hold for both transition and non-transition economies, though the results vary more in the transition economies.4

Furthermore, all of the following categories are considered as privatization models:

  1. Privatization through restitution
  2. Privatization through sale of state property via both direct, asset sales and share issue privatizations (SIPs)
  3. Mass or voucher privatization
  4. Privatization from below (new private businesses in formerly socialist countries)
  5. Private-public partnerships

Despite its popularity among the policymakers of the world and the general positive results it yielded, mention of privatization still causes significant public backlash and negative implications, little attention is devoted to academic research of privatization practices, results and its future implications. Furthermore, resources and advice to the authorities carrying out privatization of government enterprises or assets are scarce and rarely rely on significant academic research and policy proposals.

Lastly, few institutions and global stakeholders in the field haven’t shied away from public discussion of privatization practices, its issues and advantages and consequently, little public space resulted in decreased accountability within the process – one of the main causes for criticism of privatization practices.

Privatization Research and Discussion

In Harvard Business School’s publications database, there are around 590 cases and publications on Privatization. In comparison, there are 13864 publications on the topic of “entrepreneurship”. As privatization and entrepreneurship are two notable models of enterprise creation, there is a considerable disproportion in amount of research done in the two fields.

Data provided by OECD-Eurostat Entrepreneurship Indicators Programme, shows that the great majority of companies that were privatized in 2006 belong to an enterprise class that makes up for only around 5-10% of all enterprises in the 34 surveyed countries yet account for an average of between 55 and 65% of employment in those countries. Furthermore, the total market value of privatized firms grew from less than $50 billion in 1983 to almost $2.5 trillion in 1999—roughly 10 percent of the world’s aggregate market capitalization, and 21 percent of the non-U.S. total.5 Privatized firms are the most valuable companies in seven of the ten largest non-U.S. stock markets, including the four largest, as well as in most developing countries.

Privatized companies make up a great part of the world’s employers and producers of value and growth trends point to its growing importance, making research of privatization a field with great potential for growth, impact and rapidly increasing importance as awareness of the growing role of privatization is recognized by global policymakers.

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