What They Tell You

Private companies are more efficient than government. Privatization introduces competition, innovation, and market discipline. Public enterprises are wasteful, bureaucratic, and prone to political interference. Privatization has been a worldwide success, improving services while reducing costs. The less government does, the better.

What They Don’t Tell You

The evidence for privatization is much weaker than claimed. Many privatizations have failed, with higher prices, worse service, and reduced access. Natural monopolies don’t benefit from privatization. Private companies have their own inefficiencies. Public enterprises can work well when properly managed. And privatization often serves ideological and political purposes more than efficiency.

The Privatization Wave

Starting in the 1980s, especially under Thatcher and Reagan, privatization became global orthodoxy:

  • Telecommunications

  • Airlines

  • Railways

  • Water and electricity

  • Prisons

  • Healthcare services

  • Social security (in some countries)

The Washington Consensus made privatization a condition for developing country loans.

The Theory

Privatization is supposed to improve efficiency through:

Competition: Private firms compete, driving innovation and cost reduction

Profit motive: Owners have incentives to reduce waste

Market discipline: Poorly performing firms lose customers or go bankrupt

Reduced political interference: Professional managers replace political appointees

The Reality

Many privatizations raised prices: UK rail, water, and electricity costs rose after privatization. California’s electricity deregulation led to the Enron crisis.

Quality often declined: Privatized services cut corners to boost profits. UK rail had serious safety problems.

Access narrowed: Private companies focus on profitable customers, neglecting unprofitable ones (rural areas, poor communities).

Cream-skimming: Private firms take the profitable segments, leaving public systems with the costly ones.

Transaction costs: Contracting, monitoring, and enforcement create new costs.

Corruption: Privatization processes are often corrupt, with assets sold to cronies below value.

Natural Monopolies

Some services are natural monopolies—it’s inefficient to have competing water pipes or rail tracks. For these:

  • Competition is impossible, so market discipline doesn’t apply

  • Regulation is needed anyway, so government is involved

  • Private monopolists extract rents rather than compete

Privatizing natural monopolies often just creates private monopolies that need heavy regulation.

Public Enterprise Can Work

The claim that public enterprise is inherently inefficient is contradicted by:

Singapore Airlines: Government-owned, consistently profitable and well-regarded.

Statoil (Norway): State oil company, highly profitable and professionally managed.

POSCO (South Korea): State-owned steel, became world-class before privatization.

Public utilities: Many public water and electricity systems work well at reasonable cost.

Good public enterprises share features: professional management, operational independence, clear mandates, and accountability.

Private Inefficiencies

Private companies have their own inefficiencies:

Principal-agent problems: Managers don’t always serve shareholders

Executive compensation: CEOs paid hundreds of times worker wages

Short-termism: Quarterly profit pressure leads to underinvestment

Bureaucracy: Large private companies are just as bureaucratic as government

Marketing waste: Billions spent on advertising that adds no value

Financial engineering: Focus on stock manipulation rather than productive investment

The Cherry-Picking Problem

Successful privatizations are often in competitive sectors where the market works anyway. Failed privatizations are often in natural monopolies or essential services where markets don’t work.

Comparing the best privatizations to the worst public enterprises isn’t a fair comparison.

The Political Economy of Privatization

Why does privatization happen despite mixed evidence?

Ideological commitment: Free-market belief that private is always better

Short-term revenue: Selling assets brings one-time cash

Reducing accountability: Privatization shifts blame for unpopular decisions

Benefiting allies: Assets often go to political supporters

International pressure: IMF and World Bank conditionality

Lobbying: Private firms that benefit from privatization push for it

What Works

The evidence suggests:

Competition matters more than ownership: Public enterprises in competitive markets perform well; private monopolies perform poorly.

Good management matters: Whether public or private, good governance produces good outcomes.

Some things shouldn’t be privatized: Natural monopolies, essential services, sectors with major externalities.

If privatizing, regulate well: Many privatization failures are really regulatory failures.

The Democratic Question

Beyond efficiency, there’s a question of democratic control:

  • Public enterprises are (at least theoretically) accountable to citizens

  • Private enterprises are accountable to shareholders

  • Essential services (water, healthcare, prisons) raise special concerns about private control

Privatization is not always wrong, but it’s not always right either. The blanket assumption that private is better is ideology, not evidence. Each case should be judged on its merits, with careful attention to market structure, regulatory capacity, and social goals.