Privatization

Privatization refers to the shift of functions and responsibilities, in whole or in part, from the public to the private sector. Its best-​known form is the transfer of state-​owned assets and enterprises to private hands, while another takes the form of the granting of long-​term franchises or concessions by government, under which the private sector finances, builds, and operates major infrastructure. The best-​known American form of privatization is the outsourcing or competitive contracting of public services. Some theorists also consider the issuance of government vouchers as a form of privatization, in which government provides the purchasing power to an eligible subset of citizens, who are then free to select their own service provider.

Although the specific application of privatization dates back to the 18th century (with franchised British turnpikes), the term dates to 1969, when the management expert Peter Drucker coined the term reprivatize in predicting that Europe’s nationalized industries would one day be returned to ownership of private investors. Shortened to privatize, the term was later used in the United States primarily in the context of urging governments to seek private bidders to deliver municipal services. The term was employed in Great Britain in the latter part of the 1970s, again initially in the context of municipal service delivery and later in Drucker’s original sense, meaning the divestiture of state-​owned enterprises, as put into practice by Prime Minister Margaret Thatcher beginning in the early 1980s.

A useful typology for identifying various forms of privatization can be produced by separating the questions of which party—the public or private sector—is responsible for the funding for an activity and its delivery. If government acts as the purchasing agent for the citizenry as a whole, by selecting a firm to produce a service or operate a facility, we call this outsourcing or competitive contracting. But if government gives the purchasing power and decision making to each individual making up a category of eligible citizens (e.g., low-​income renters), we call that form vouchers.

We do not have many examples of the private sector paying for a function while the government produces it, but private parties do sometimes purchase services from government (e.g., police crowd control at sports events). Additionally, there are important cases in which both the funding and the production of traditional governmental functions are carried out by the private sector. This private production of traditionally state-​provided goods is certainly the case when government sells a state-​owned enterprise, which then becomes a private enterprise. But it also is the case where government sees to it that a major infrastructure project—a wastewater plant, railroad, airport, or toll road—is developed and operated, by granting a long-​term franchise whose terms are such that the winning franchisee can finance, build, and operate the project as business.

The sale of state-​owned enterprises became one of the trademark issues of the government of Margaret Thatcher in the United Kingdom during the 1980s. Initially limited to selling off formerly nationalized companies such as British Airways, British Petroleum, British Steel, and eventually British Rail, the policy expanded to utilities and infrastructure that had always been in the public sector, including British Telecom, the British Airports Authority, and the electric, gas, and water industries. Thatcher’s motivation was partly economic—to modernize and improve the efficiency of costly and bureaucratic state enterprises. But it was partly political and ideological, which is why it emphasized widespread public stock offerings to create a “share-​owning democracy” in which average people owned equity stakes in companies.

These rapid and largely successful privatizations gave the idea considerable credibility as well as provided exportable expertise for British law firms, investment bankers, and consultants. During the 1980s, similar divestitures spread to France and several other parts of Europe, as well as to Australia and New Zealand. Both the idea and practice became far more widespread in the 1990s as privatization by divestiture spread to developing countries in Latin America, southern and eastern Europe, and Southeast Asia. By the end of 1999, the two decades of privatization had shifted more than $1 trillion of asset value from the public to the private sector. Even Russia—where privatization was plagued with corruption and insider dealing—shifted more than half of its productive enterprises out of state ownership by the end of the decade.

The United States participated in the divestiture wave to a limited degree. During the Reagan administration, Congress privatized Conrail for $1.6 billion, but efforts to sell other federal assets and enterprises languished until the Clinton years. Then the combination of New Democrat influences in the administration and Republican control of Congress led to the sale of the National Helium Reserve, the Elk Hills Naval Petroleum Reserve, the uranium-​processing United States Enrichment Corporation, the Alaska Power Administration, and tens of billions of dollars’ worth of electromagnetic frequency spectrum—all ideas proposed during the Reagan years, but considered politically impossible then. However, the decade ended with a long list of proposed divestiture candidates—Amtrak, air traffic control, the U.S. Postal Service, the Tennessee Valley Authority—still more talked about than seriously considered. At the state and local levels, despite many billions of dollars’ worth of government-​owned businesses (parking structures, electric and gas utilities, water and sewer systems, airports) that were being divested in other countries, only a handful of such enterprises were transferred to private ownership.

The idea of governments granting charters or franchises under which investors can develop and operate major infrastructure dates back to early toll roads, canals, and railroads in both the United States and Britain. Often, especially when some degree of monopoly power was judged to be present, such franchises provided for government regulation of rates or profits, or both. It was under this model that the United States—almost unique in the world—developed a largely investor-​owned electricity and telephone industry. Interestingly, in the case of water supply, the United States instead generally opted for the European model of government enterprise. The original New York subway systems, as well as most trolley systems, also were developed and operated by private firms under long-​term franchises and were generally taken over by government only after decades of price controls had driven them into bankruptcy.

The idea of long-​term infrastructure franchises was revived in France and Italy in the 1950s to encourage the building of intercity toll-​road networks. It later spread to Spain and Portugal, and it may have served as the inspiration for what became the $15 billion Channel Tunnel in the 1980s, the largest privately financed project to date. During the 1990s, it spread rapidly to the developing countries in the form of numerous toll road, electricity, railroad, and water/​wastewater projects in Latin America and Southeast Asia. Many of these projects actually aimed at the expansion and modernization of run-​down and inadequate state-​owned infrastructure, rather than the construction of entirely new facilities.

In the United States, the 1990s brought a modest revival of the infrastructure franchise idea. Some 15 states passed enabling legislation for private toll roads, although only a handful of projects had been built by the end of the decade. A small number of new water and wastewater treatment plants also had been developed by private firms using this model. In addition, a $1.2 billion international airport terminal was under construction at New York’s Kennedy airport under a 25-​year franchise agreement.

The United States leads the world in outsourcing public service delivery to private firms. Tens of thousands of such contracts are in effect at the municipal level, for everything from ambulance service to zoning inspection. The practice began in the 1960s and 1970s, generally in newly incorporated cities in the Sunbelt with populations less than 100,000. During the 1980s, it spread to larger and more-​established cities and to a wider range of services. By the 1990s, competitive contracting was being practiced even in large, heavily unionized cities like Chicago, Cleveland, Milwaukee, Philadelphia, and New York. Some mayors used outsourcing selectively, in part, to threaten unionized workforces. But others used it systematically, as a basic change in modus operandi. A case in point is two-​term Indianapolis mayor Steve Goldsmith, who put more than 75 city services through the competitive process, saving taxpayers some $400 million in the process. Many state governments became practitioners of outsourcing in the 1990s, in areas ranging from inventory management to highway maintenance to prison operation.

Outsourcing has gradually spread to other countries. The Thatcher government mandated outsourcing for certain local public services, and reforms that encouraged outsourcing were adopted in Australia and New Zealand. In selected public service fields (e.g., water supply, jails and prisons, and garbage collection), outsourcing can be found in cities in other European countries and, increasingly, in Latin America.

The final broad category of privatization is vouchers, in which government designates a certain subset of the population as eligible and provides those people with a piece of paper that they can use to purchase the service in question. Food stamps are a classic example: Recipients can make their own selection from a large variety of private providers. For several decades, the federal Department of Housing and Urban Development has provided housing vouchers as a partial alternative to providing a larger supply of public housing projects. Ever since the end of World War II, the federal government has offered higher education vouchers to veterans under the GI bill and its successors. Additionally, a growing number of counties and states make use of vouchers for a variety of social services, where a variety of providers make it more likely that individual clients can find a match that meets their needs.

It was only in the 1990s, when serious efforts were made to implement vouchers for K–12 education, that vouchers became highly controversial. Pilot voucher programs were established in Milwaukee, Cleveland, and Florida—in every case subject to court challenges on a variety of grounds. The underlying idea of injecting competition into the delivery of K–12 schooling expanded into the charter school movement, under which nominally public schools are largely deregulated and, in some cases, can be operated by private (nonprofit and for-​profit) organizations.

Further Readings

Donohue, John D. The Privatization Decision: Public Ends, Private Means. New York: Basic Books, 1989.

Drucker, Peter F. The Age of Discontinuity. New York: Harper & Row, 1969.

Eggers, William D., and John O’Leary. Revolution at the Roots. New York: Free Press, 1995.

Goldsmith, Stephen. The Twenty-​First Century City. Washington, DC: Regnery, 1997.

Hudson, Wade, ed. Privatization 1999. Los Angeles: Reason Public Policy Institute, 1999.

Pirie, Madsen. Dismantling the State: The Theory and Practice of Privatization. Dallas, TX: National Center for Policy Analysis, 1985.

Poole, Robert W., Jr. Cutting Back City Hall. New York: Universe Books, 1980.

Savas, E. S. Privatization and Public–Private Partnerships. New York: Seven Bridges Press/​Chatham House, 2000.

Vickers, John, and George Yarrow. Privatization: An Economic Analysis. Cambridge, MA: MIT Press, 1988.

Walker, Michael A. Privatization: Theory and Practice. Vancouver, BC, Canada: Fraser Institute, 1980.