The results of privatisation, back in the public eye due to the pandemic, often depend on the type of industry and its competitive framework, says study co-authored by Dr Kamal Munir of Cambridge Judge.
Throughout the last four decades, through the sale of state-owned enterprises, governments have raised around $3.5 trillion, making privatisations one of the most radical economic policies. The COVID-19 (coronavirus) pandemic has put privatisation back in the public eye, as support for a resilient and robust public sector seems to have risen, with many questioning the implications of privatisation.
Privatisation programmes have been based on (or at least justified by) the assumption that a shift from state to private ownership would make organisations more efficient.
However, a review of 316 academic and policy papers on privatisation co-authored at Cambridge Judge Business School challenges some long-standing assumptions about privatisation, offering a more nuanced and contextualised understanding of the practice.
The study highlights that despite theoretical predictions, past studies have produced mixed results – as “considerable variation can be observed, across countries as well as industries, in the impact of privatisation on the governance, structure, systems, strategy, culture, and performance of state-owned enterprises”.
Indeed, the study argues that whether privatisation will deliver efficiency improvement largely depends on the presence of competitive pressures, incentive systems, governance mechanisms, regulatory frameworks, and availability of managerial expertise. Specifically, the authors argue that mixed results of privatisation programs could be partly explained by what was privatised, how it was privatised, and the regulatory regime under which it was privatised.
For example, they show how privatisation of commercial enterprises such as banks and manufacturing companies – which even before privatisation operated in a competitive environment – on average tend to show significant efficiency improvement after privatisation. In contrast, privatisation of public service providers such as electricity and water companies show more mixed results.
In these latter cases, it is effective regulation and liberalisation, rather than privatisation per se, that leads to improved service quality and performance.
The review highlights, however, that not all governments were equally successful in transforming sectors in a way that would stimulate competition, and that the nature of certain services restricts the potential for competition; while technological advancements have enabled competition in services like telecommunications and electricity, it is less possible to do so in services like water provision.
The review also finds that not all privatisations are necessarily motivated by the desire to make state owned enterprises more efficient, as many privatisations are driven by a need to pay off foreign or domestic debt, political expediency or the desire to enrich crony capitalists.
The authors conclude by arguing how privatisation can be a powerful device for increasing efficiency of enterprises’ and competitiveness of economies. However, they also warn that “if a more balanced perspective is not taken, we can end up in a situation where profits are privatised while losses are socialised”.