Privatization is perhaps not quite the popular policy it was in the 80s when the Thatcher and Reagan administrations pursued it with particular gusto.   Since that era, privatizations have raised around $3.5 trillion for governments around the world.

New research from Cambridge Judge Business School argues that the Covid-19 pandemic has put privatization back into the spotlight as support for a robust public sector has resurfaced.  It’s a level of support that has called into question the belief that privatization is necessary because of the inefficiencies of state-run institutions.

False assumptions

After reviewing over 300 policy papers and academic articles, it’s an assumption that the authors don’t think holds water.  Instead, privatizations have produced mixed results, with considerable variations across countries and industries.

The authors suggest that the success of privatizations often depends on things such as the right incentive systems, the presence of competitive pressures, adequate regulatory frameworks, and strong managerial expertise.  What’s more, it’s crucial that the right things are privatized and that they do so under the right regulatory regime.

For instance, the data suggest that when commercial enterprises, such as banks and airlines, are privatized, they are able to produce significant efficiency improvements as a result.  For less competitive areas, such as water and electricity companies, however, the results are far less positive.

In these instances, the importance of effective regulation cannot be overstated, and the authors argue that strong regulation would actually prove more effective than privatization.

Mixed success

Not all governments have been as successful in stimulating competition in a bid to transform sectors, however, with the very nature of some services restricting the opportunities for competition.  For instance, technological advancements have made competition feasible in areas such as electricity and telecoms, it’s much less effective in areas such as water.

The review also shows that some privatizations are driven less by the desire for greater efficiency and more by the need to pay down debt by the government, or even for political expediency.

As such, while privatization can be an effective policy instrument, it’s important that the nuances surrounding it are fully understood and appreciated so that a blanket approach isn’t taken.  The authors warn that if this nuance isn’t used then it’s quite possible that a scenario will emerge where profits are privatized but losses socialized.