Privatisation involves selling state-owned assets to the private sector. For example, in the 1980s, the UK government sold many state-owned industries, such as BP, BT and British Gas on the stock market. The main arguments for privatisation includes:
- Efficiency gains. When firms are privately owned, there is a greater profit incentive to increase efficiency. In the private sector, managers are accountable to shareholders, who will want a good return on their investment. For example, a nationalised industry may be reluctant to get rid of surplus workers due to political reasons (bad publicity). But, the private firm may be more willing to cut costs and improve efficiency.
- No political interference. In the private sector, there is a pre-commitment by the government not to interfere for political reasons. A private firm isn’t held back by politics. A private firm may be more able to raise finance on the stock market to invest. Privatisation also reduces the scope for corruption.
- Increased share ownership. UK privatisation programme saw a rise in share ownership.
- Raise revenue for the government. Privatisation is a way to sell state-owned assets and generate a windfall for the government. In theory, this could be used to finance long-term investment. Though as a drawback, the government will lose annual profit dividends
- Increased competition. Often privatisation was accompanied by de-regulation, where the government also tried to increase competition. Increased competition from deregulation will bring more benefits for the consumer, such as:
- Increased competition leads to lower prices
- Increased competition encourages the development of new products
- Increased competition
- encourages better quality service
But sheltered monopolies could have little incentives to cut costs no matter who owns them. Privatisation will be most successful where there is potential for competition.
Privatisation and IMF
The IMF has often mandated countries follow a programme of privatisation in order to receive IMF funds. The IMF proposes privatisation because
- They seek to increase market-discipline in key industries
- Encourage efficiency gains as private sector look to cut costs.
- Increase in revenue which can be used to pay off debt, saved or invested.
- Privatisation can reduce the scope of government officials in business and diminish the potential for corruption.