PRIVATIZATION OF SOEs 2021 PARKER PDF

Privatization of State-Owned Enterprises
David Parker, School of Management, Cranfield University
https://doi.org/10.1093/acrefore/9780190224851.013.93
Published online: 29 September 2021
Summary
Theoretical developments in economics, alongside evidence that state-owned enterprises
were often inefficient and unresponsive to consumers, led to a substantial program of
privatizations from the 1980s. Privatization can take a number of forms, from the
outright sale of state-owned assets to private investors to forms of public-private
partnership, such as contracting out and franchising of public services. Privatization was
promoted in both developed and developing countries, and large-scale privatizations
occurred in Europe, Latin America, China, and the former communist economies of
Central and Eastern Europe, in particular. Privatization revenues rose substantially from
the late 1980s internationally. Taking the years 1988 to 2016, revenues from sales are
estimated to have been around $3,634bn. In terms of main sectors of the economy
affected, privatizations have particularly occurred in telecommunications, transport and
logistics (mainly railways, airlines, and airports), other utility businesses (especially
energy companies), and finance. Numerous empirical studies suggest that the
performance of the privatized businesses and services has been mixed. While
privatization has led to some impressive economic gains, in a number of countries, wider
governance issues relating to political and legal systems have led to disappointing
outcomes. Privatization has not always led to the removal of state interference in the
management of businesses and services. Corruption and cronyism have blighted a
number of privatizations. State sell-offs have led to income and wealth redistribution with
gainers and losers from the process. Some privatizations have led to spectacular capital
gains for investors. The impact of privatization on employment and working conditions
remains unclear.
There are a number of issues that deserve further investigation, namely the
consequences of privatization for technological change and innovation, competition
policy, and income and wealth distribution. A further subject for investigation is how the
effective and efficient management of state-owned enterprises can be best achieved. The
boundary between the private and public sectors remains fluid, with a number of
enterprises returning to state ownership as political and economic conditions change.
Keywords: privatization, state ownership, competition, regulation, public choice, agency theory,
natural monopoly, economic efficiency, productivity, static and dynamic efficiency
Subjects: Business Policy and Strategy, History, International Business
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Introduction
The word “privatization” came into common usage during the 1980s to describe the policy of
transferring assets from the state (public) sector to the private sector. The origin of the word
is obscure. Prior to the 1980s the terms “denationalization” or simply “asset sales,” or similar,
were often used to describe the disposing of state property. It seems that the term
“reprivatization” (reprivatisierung) was employed when discussing the transfer of state
enterprises in Nazi Germany in the 1930s, and there was sporadic use of the terms
“privatization” and “reprivatization” after 1945 (Bel, 2006). The Organization for Economic
Cooperation and Development (OECD) defines privatization as the “transfer of ownership and
control of government or state assets, firms and operations to private investors” (OECD,
2003).
The term “privatization” is best interpreted as embracing a wide set of means of attaining the
transfer of state property, including policies such as public-private partnerships, contracting
out, franchising, concession agreements, and management contracts, in addition to the
outright divestiture of state-owned businesses (Mercille & Murphy, 2017). Outright sales may
take the form of public share flotations (Initial Public Offerings [IPOs]) or the transfer of
assets to existing private-sector companies or strategic investors, such as the sale in
Czechoslovakia of Skoda to the German vehicle manufacturer VW in 1991. Typically, share
flotations occur where there are developed stock markets, such as in Europe. Such markets
are missing in a number of countries, and in these the change of ownership frequently
involves attracting direct investors, such as international corporations, often alongside a local
investor to ensure some retention of domestic control. Alternatively, privatization may take
the form of the state contracting out or franchising the entire production or service to private-
sector companies for a period of time (say, 10 years), preferably after competitive bidding for
the contract. In some cases, through management contracts and some types of public-private
partnership, the government retains ownership of the productive assets but allows the private
sector to manage the business, again for a given period. Various forms of contracting and
franchising have been commonplace in industries such as water services in developing
countries. They have also been used in industrialized countries, such as the franchising of
1
passenger rail routes in the United Kingdom between 1996 and 2021.
To make matters more complex, the outright sale of state assets can take various forms, from
100% share sales to minority sales. Even when a majority of the equity in a business is sold to
private investors, the government may still retain an input into key management decisions,
such as the usage and transfer of productive assets, and even an outright veto over certain
strategic decisions. This may be achieved through the state retaining sufficient shareholding
to control or at least heavily influence management or by keeping a “special” or “golden”
share. In some of the privatizations in the United Kingdom in the 1980s, this took the form of
a single preference share retained by government, which could be used to outvote the rest of
2
the equity if it were felt that a management decision was not in the national interest. The
government might also be empowered to appoint board members in the privatized company
or could introduce legally binding restrictions on management actions in the company’s
articles of association. Or continued government oversight may be achieved through other
means in countries where the political system is such that governments can, and do, overtly
and covertly manipulate business decisions. For example, China has had a large privatization
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program, but it is unclear to what extent the enterprises have been entirely or even largely
removed from state influence. The government still has shareholdings in many of the
companies, and politically connected CEOs are appointed (Liao & Young, 2012; Milhaupt &
Zheng, 2015; Yeo, 2020). In the United Kingdom, the government retains an oversight of the
privatized defense businesses British Aerospace, sold in 1981; and Rolls Royce, sold in 1987;
the energy sector (gas privatized in 1986 and electricity in the early 1990s); local bus
transport and the railways (sold-off from 1986 and in the mid-1990s, respectively); and the
water utilities in England and Wales (privatized in 1989). The United Kingdom introduced the
first large-scale privatization program in Europe, with the cumulative value of business asset
sales totaling around £70bn between 1979 and 1998 (Parker, 2012, p. 505). In 1979, state-
owned enterprises accounted for around 10% of UK GDP; by 1997 this had fallen to less than
2%. Table 1 provides a list of the major UK privatizations in the 1980s and 1990s. The United
Kingdom’s example provided a model for privatization in other parts of Europe, and the wider
world.
Table 1. Major Privatizations in the United Kingdom
Enterprise Year of Sale
British Aerospace 1981
Cable & Wireless 1981
Amersham International 1982
National Freight Corporation 1982
Britoil 1982
Associated British Ports 1983
Enterprise Oil 1984
British Telecom 1984
British Gas 1986
Royal Ordnance Factories 1986
British Airways 1987
Rolls-Royce 1987
British Airports Authority 1987
Rover Group 1988
British Steel 1988
Water authorities in England & Wales 1989
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Enterprise Year of Sale
Electricity industry 1990–96
British Coal 1994
British Rail 1995–97
National Air Traffic Services 2001
QinetiQ (Defence Evaluation and Research Agency) 2003
Royal Mail 2013
Note: A number of enterprises were sold in tranches. The date refers to the first major state disposal of assets or the public share
flotation. In some cases, subsidiary assets of an enterprise were sold prior to the main disposal.
The Scale of Privatization
Privatization has occurred in both developed and developing countries, although

comprehensive data on sale proceeds is not easy to obtain because governments and the
international agencies such as the World Bank do not publish continuous and consistent data.
The Privatization Barometer (PB) attempted to collate international data from numerous
3
sources. In its last report, for the year 2015–2016, PB concluded that worldwide governments
raised a record $319.9bn through privatizations in 2015, beating the previous high of
$265.2bn in 2009. China accounted for 54.1% of the amount raised, with the European Union
(EU) countries responsible for a further 27.2% (Privatization Barometer, 2016, p. 4).
Privatization revenues rose substantially from the late 1980s internationally. Taking the years
1988 to 2016, revenues from sales recorded by PB were around $3,634bn. Breaking the
period down: from 1988 to 1990 annual privatization receipts averaged around $30.3bn, in
1991–1995 $60.2bn, in 1996–2000 $144.4bn, 2001–2005 $78.7bn, 2006–2010 $168.7bn, and
2011–2016 $213.8bn (Table 2). While interest in privatization has fluctuated over the years,
reflecting changing macroeconomic conditions and the appetite of investors, there was a
definite upward trend especially after 2006. Throughout, the sale of state-owned assets in the
EU countries has accounted for a significant slice of the privatization revenues, averaging
about 46% of the total between 1988 and 2000, 49% between 2001 and 2010, and 27% from
2001 to 2016. The United States was the largest privatizer in the years 2009, 2010, and 2012
(Megginson, 2017).
Table 2. Estimates of Worldwide Privatization Proceeds: 1988–2016
Years Average Annual Privatization Percent of the Total Accounted for by EU Countries
Revenues ($bn) (Average Over the Time Period)
1988– 30.3 41.1

1990
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Years Average Annual Privatization Percent of the Total Accounted for by EU Countries
Revenues ($bn) (Average Over the Time Period)
1991– 60.2 49.1

1995
1996– 144.4 46.2

2000
2001– 78.7 58.1

2005
2006– 168.7 39.0

2010
2011– 213.8 26.7

2016
Source: From the annual data in Privatization Barometer (2016), Table 1, p. 9.
In terms of main sectors of the economy affected, the OECD reported in 2009 that
telecommunications dominated, accounting for 31% of privatization proceeds, followed by
transport and logistics (mainly railways, airlines, and airports) accounting for 19%, other
utility businesses, especially energy companies, totaling 17%, and finance responsible for
15%. Manufacturing accounted for 10% of the total proceeds (OECD, 2009, p. 7). However,
the various forms privatization can take and questions about whether privatization has really
occurred when the state can still determine a firm’s strategic direction, alongside difficulties
in obtaining accurate data, mean that all privatization figures should be used with caution.
Typically, transport, telecommunications, and the energy sectors remain state regulated in
terms of prices or profits, market entry and exit, and service standards.
Throughout history assets have transferred backward and forward between the state and
private sectors. For example, from the mid to late 19th century, state involvement in some
economic sectors expanded, notably in postal services and telecommunications, water and
sewerage services, energy, and transport. This took differing forms in different countries,
from outright state ownership to state contracting for services from the private sector (for
example, in the French water sector) and to heavy state regulation. To a large extent this was
because of perceived failures in private-sector delivery. In the face of rapid urbanization and
the associated overcrowding and lack of sanitation in cities, during the 19th century,
municipal enterprises were established to provide water, gas, and later electricity and public
transport systems (Millward, 2011). Millward also identified the role of defense
considerations, which were particularly important in explaining in Europe the state’s interest
in having an effective rail network to move troops and supplies in times of military conflict.
Also, there was a major program of state ownership after 1945 in Western Europe as a
consequence of both collaboration by businesses with Fascist administrations and under
investment during the interwar and war years.
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In developing countries in the 1960s and 1970s, international aid agencies were largely
ambivalent toward state ownership, and the emphasis was on how firms were managed rather
than their ownership. However, from the early 1980s this began to change. A World Bank
report in 1981 criticized public-sector agencies for failures in sub-Saharan Africa (World Bank,
1981). The Bank’s 1983 World Development Report argued for reforms to state enterprises
including market pricing and a reduction in state subsidies. From the early 1990s, further
World Bank publications noted the failure of public-sector reforms with privatization seen as
the best solution (Kikeri et al., 1994; Shirley, 1999; Shirley & Nellis, 1991; Shirley & Walsh,
2000). International agencies began actively promoting and sponsoring privatization
programs and smaller government, often tying continuing development aid to government
restructuring.
Across developing countries, privatization receipts rose during the 1990s. In addition, the
collapse of the Soviet Union in the late 1980s triggered huge privatization programs in
Central and Eastern Europe. In the years from 1990 to 2003, 120 countries recorded
privatizations, with two-thirds of the proceeds emanating from 10 states, including China and
the so-called transition economies of Poland, Russia, and the Czech Republic. There was also
important privatization activity in parts of Latin America (notably Brazil, Argentina, and
Mexico). However, privatizations were generally smaller in scale in the Middle East, Africa,
and parts of Asia (Kikeri & Kolo, 2005).
At the same time, there have been cases of enterprises transferring from the private sector to
state ownership. The movement has not been all one way. Some businesses, notably banks, fell
into state ownership during the international financial crisis of 2007–2008 (Voszka, 2016) and
during the COVID-19 epidemic in 2020, emphasizing that the boundary between the state and
private sectors remains fluid.
Why Privatize?
Privatization from the 1980s reflected disappointment with the economic performance of
state-owned businesses in terms of service delivery and efficiency (Aharoni, 1986). In
addition, changes in technology meant that it was becoming possible to introduce effective
competition into what had previously been considered “natural monopolies,” such as in
telecommunications, for example, through developments in cellular communications.
Economists define natural monopolies as occurring where there are pervasive economies of
scale or scope in production or service delivery, so that having more than one supplier raises
the costs of production. Competing firms lead to higher costs. Classic examples are railway
routes, electricity transmission, and fixed-line telecommunications, where laying competing
lines and cables is typically not economic. New directives reflected this change in the EU
beginning in the late 1980s with the gradual liberalization of telecommunications markets,
alongside air travel. Later, there were measures introduced to promote competition in energy
supplies, the railways, and postal services in Europe. The introduction of competition reduced
the incentive and rationale for the continuation of state ownership in Europe (Parker, 1998).
Monopolies might be expected to abuse their market power through higher prices and
indifferent services. By contrast, there is a long tradition in economics that competition
improves public welfare and that private ownership promotes competition.
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In parallel with growing criticism of the performance of state-owned enterprises, there was
research by economists and political scientists into decision-making within governments and
the management of state businesses. This tended to identify the superiority of private over
public ownership in terms of product and capital market incentives (Bös, 1991; Boycko et al.,
1996; Vickers & Yarrow, 1988). Private enterprise was associated with competition for
consumers and investors, whereas state ownership was associated with monopoly provision
and taxpayer subsidies. State ownership was also associated with rent seeking behavior as
special interest groups, such as input suppliers and trade unions, lobbied government for
favorable treatment. Consequently, privatization was expected to lead to improved allocative
efficiency, with prices more closely aligned with long-run marginal costs of supply, and
productive efficiency, with costs of production minimized to raise profitability.
In this context, especially important from the 1970s were the theories of public choice and
principal-agent.
Public Choice Theory

The public choice literature draws from neoclassical economics and especially the notion of
individual utility maximization, applying market economics to the study of political decision-
making, hence, its alternative moniker “the economics of politics” (Mueller, 1976; Shleifer &
Vishny, 1994). Early exponents were James Buchanan (1972), William Niskanen (1971), and
Gordon Tullock (1965, 1976). Central to the theory of public choice is the notion that
politicians and civil servants can be expected to pursue self-interest when making economic
decisions. Niskanen equated this with the pursuit of “salary, perquisites of the office, public
regulation, power, patronage, output of the bureau, ease of making changes, and ease in
managing the bureau” (Niskanen, 1971, p. 38). All but the last two relate to the size of
government, thus Niskanen’s claim that public-sector outputs will be oversupplied.
In this literature, for politicians, individual utility maximization takes the form of maximizing
the chances of remaining in office by focusing on vote-winning spending programs and
courting influential pressure groups and potential sources of political funding. While the
resulting policies might be promoted as being in the public interest, the reality is government
spending that advances the utility of particular interest groups, both inside and outside
government (Mitchell, 1988). In public choice theory, state ownership is associated with
empire building, gold-plating of state investments, trade union restrictive practices, and other
economic waste. The message is that state ownership is associated with political interventions
that lead to considerable economic inefficiency.
Principal-Agent Theory
Public choice theory was complemented in the 1970s and beyond by an interest in agency
relationships (Jensen & Meckling, 1976). In the early years, the term “property rights theory”
was commonly used, but the description “principal-agent” or more simply “agency theory” has
become more prominent in the literature when discussing critical differences in management
incentives under different forms of ownership. If “complete contracts” could be written by the
principals (owners) covering all possible contingencies during the contract period, so as to
determine agent (management) behavior, and agent behavior could be monitored and
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enforced without cost, the precise form of ownership should not matter. However, this
conclusion relies on strong assumptions, the main ones being full information and the ability
of the parties to enter into complete contracts. A complete contract is one in which the parties
to the contract specify all their rights and duties for every possible eventuality during the
contract term. In reality, because the future is uncertain, longer-term contracts are typically,
to some degree, incomplete.
Principal-agent theory has been applied to both the public and private sectors and differences
in the efficacy of monitoring and controlling agent behavior in the two sectors identified. In
private-sector companies, the principals are the owners or the shareholders who appoint
boards of directors as agents to manage their assets. In state enterprises, members of the
public are the principals and through the political process, officials are appointed as agents to
manage the resources. In the opinion of many economists, in the private sector corporate
governance regimes have evolved that facilitate efficient agent monitoring of management
behavior. Shareholders can sell their shares if they are unhappy with the performance of their
firms, perhaps triggering a takeover bid by new management. Also, management can be
incentivized to tackle inefficiencies through profit-related pay, stock options, and the like and
by being challenged by investors at companies’ annual general meetings (AGMs) (Fama &
Jensen, 1983; Jensen & Meckling, 1976; Ross, 1973). By contrast, in the state sector such
incentives are assumed to be absent or at least attenuated (Alchian, 1965; Bös, 1991; De
Alessi, 1980). Managers of state-owned enterprises may have fixed salaries, no stock options
(there was no publicly quoted stock in the UK nationalized industries), no AGMs, and there
may be no credible takeover threat. In addition, politicians may be reluctant to allow state
industries to fail. Like public choice theory, principal-agent theory leads to the conclusion that
state enterprises will be managed less efficiently than private enterprises and will be less
responsive to changes in consumer demand and input costs.
Other Relevant Theoretical Developments

There were also other developments in economics from the 1970s that supported the move to
privatize state assets, namely monetarism, Austrian economics, and the economics of
regulation and market contestability.
Monetarism
After 1945, many economists believed that it was important to manage demand in the
economy to maintain full employment using fiscal policy. In 1936, in his The General Theory of
Employment, Interest and Money, John Maynard Keynes argued that governments could
reverse unemployment by stimulating demand using their tax and spending powers. In the
1970s, monetarism began to challenge Keynesianism as the dominant paradigm of
macroeconomics. At the core of monetarism is the contention that inflation, a serious problem
in the 1970s, is the result of government monetary expansion or, more simply, “printing too
much money.” Through the banking system, the issue of government debt can expand the
money supply. Consequently, monetarism drove many governments in the 1980s to attempt to
sharply reduce public-sector spending and borrowing. Monetarism did not require
privatization, but its leading proponents, such as Milton Friedman at the University of
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Chicago, were prominent free marketeers (Friedman & Friedman, 1980). Reducing public
spending and borrowing made privatization attractive both to raise government revenues and
to remove the need for governments to fund the deficits of state-owned industries.
Austrian Economics
Modern Austrian economics emphasizes the important roles of information, market incentives,
and entrepreneurship in economies (Kirzner, 1973, 1985; Littlechild, 1978). The term
“Austrian economics” refers to its origin in the writings of free market intellectuals born in
Austria, such as Ludwig von Mises (1949) and Friedrich Hayek (Hayek, 1944, 1948).
According to Austrian economics, private enterprise seeks out new markets and production
methods through a discovery process. In the absence of the profit motive and private property
rights, state-owned enterprises lack the incentive and ability to respond similarly to changes
in demand and supply. Moreover, even if politicians and civil servants desired to mimic private
markets, they would lack the information to do so. Government planners cannot know what
decisions to take to maximize economic efficiency and satisfy consumers in the absence of
competitive price signals. In Austrian economics, private property is a precondition for
effective competition and efficient economic transactions.
Regulation and Market Contestability

Finally, there was new thinking about the ownership of natural monopolies. In many countries,
state ownership had been the preferred option in the 20th century for tackling the market
failure associated with monopoly. A privately owned monopoly might be expected to exploit its
market power. However, from the later 1960s, there was a theoretical challenge based on the
notion of government regulating rather than owning monopolies (Demsetz, 1968; Sharkey,
1982). Utilities such as electricity and telecommunications could be privatized, and the
government would regulate the prices or profits and service levels to avoid monopoly abuse.
Alternatively, it might be possible to choose the monopolist or dominant supplier from time to
time through competitive tendering or franchising, thereby making the supply contestable.
The service would be put out to contract, with the winning bidder typically offering the
required level of customer service at the lowest price. After the agreed contract period, the
business or service would be put out to tender again and be subject to another round of
bidding. This process is potentially consistent with market contestability theory, which argues
that even when companies have few actual competitors, they will act like competitive firms
when setting prices and outputs if they face the threat of competition from other firms
wishing to enter the market (Baumol et al., 1982).
From Theory to Practice
These developments in economic theorizing undoubtedly provided an important intellectual

underpinning for privatization. In the 1980s and 1990s, dissatisfaction with the performance
of state-owned enterprises was accompanied by developments in economics that challenged
the need for state ownership Without these developments, the policy of privatization would
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have lacked a strong intellectual underpinning. It would have been simply a matter of political
ideology. Instead, privatization gained an economic rationale, although the theories did not go
unchallenged. The ideas had their critics at the time, and since.
Public choice theory relies upon self-seeking dominating over altruistic behavior within
government. Studies of actual decision-making within government, including budget
allocations, suggest that the process and outcomes are much more complex and less
predictable than the public choice theorists tend to argue (Dunleavy, 1991; Dunsire et al.,
1988; Dunsire & Hood, 1989; Rainey, 1991; Udehn, 1996). A different assumption about
management behavior in the state sector leads to significantly different conclusions (for
example, Willner & Parker, 2007). Equally, agency theory emphasizes the takeover threat as a
discipline to penalize management failure in the private sector. If a company’s share price is
depressed because shareholders lose confidence in the management, the firm becomes
vulnerable to a hostile takeover bid and a change of leadership. However, studies of actual
capital markets suggest that takeovers are not necessarily a reliable vehicle for policing
managerial behavior. For example, it is by no means always the worst performing firms that
are takeover targets, and shareholders in firms with falling share prices may choose to hold
on to their shares rather than sell and capitalize a loss (Grossman & Hart, 1980; Jenkinson &
Mayer, 1994; Singh, 1975).
Turning to the literature on regulation and contracting out, there is substantial evidence that
state regulation of the profits of private-sector monopolies may lead to disincentives for
optimal pricing and investment (Averch & Johnson, 1962; Bailey, 1973; Crew & Parker, 2006).
Efficient and effective state regulation requires that the regulator has perfect (or at least
good) information about the efficient costs of production in the privatized monopoly. This may
not be the case. There is an obvious incentive for the regulated firm to disguise its efficient
costs to encourage the regulator to permit higher prices. Similarly, the regulated firm may
successfully conceal the true reason for service failures. In addition, the literature suggests
that regulation is open to capture by special interests. Studies of regulatory capture suggest
that although state regulation may be designed to serve the public interest, over time it
becomes distorted to serve the interests of the industries rather than consumers (Peltzman,
1976; Stigler, 1971). The industries through information flows and day-to-day interaction with
the regulator overly influence the regulator’s decisions, for example, encouraging regulatory
measures that protect the incumbent’s market position from potential competitors.
Meanwhile, contracting out and related policies such as franchising may not lead to efficient
services if contracts are poorly negotiated and monitored or there is insufficient competition
for the contract during the bidding process or the contract period is so long so that the
incumbent operator faces very infrequent or no competition for the contract.
Economic theorizing has its limitations. The conclusions from theories depend upon the
assumptions made about human behavior. Theorizing on privatization is rooted in the
dominant methodology of modern economics, the hypotheitico-deductive model. In this
methodology, a hypothesis is generated from theory in a form that is falsifiable using observed
data. It is therefore crucial before the conclusions of a theory are accepted that they are not
contradicted by empirical analysis. In other words, it is essential to test the theories by
observing privatization behavior and its actual results.
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Empirical Studies
Fortunately, there is now a voluminous literature on the consequences of privatization,
including econometric studies and case studies, covering numerous countries. The
econometric studies have looked at changes in economic performance using time series data
(performance over a number of years before and after a privatization) and cross-sectional data
(comparing state-owned enterprises with private-sector comparators). Time series studies
have tended to dominate in the literature because of the frequent difficulty of identifying
suitable private-sector comparators to state-owned firms.
It is not possible to review all or even a substantial number of the studies undertaken into the
results of privatizations internationally. Instead, the following account is simply an overview of
the research. For more detailed reviews of the performance studies see, for example,
Boubakri and Cosset (1998), Shirley and Walsh (2000), Megginson and Netter (2001), Kikeri
and Nellis (2004), Mühlenkamp (2015), Megginson (2017), and Radic et al. (2021). In
summary, the empirical studies suggest that in many cases privatization has indeed improved
economic performance, providing better services and at lower cost to the consumer. In some
but not all cases, economic growth and public welfare have benefited, with more choice,
improved services, and lower prices to consumers.
International Studies
Early international studies by Megginson et al. (1994), Boubakri and Cosset (1998), and
D’Souza and Megginson (1999) found that privatization led to important economic gains,
especially in terms of higher profitability, productivity and output and lower leverage. Galal et
al. (1994) in a widely cited study estimated the welfare effects of privatization in 12 large
firms, mainly infrastructure businesses, in four countries: Chile, Mexico, the United Kingdom,
and Malaysia. They compared the performance after privatization with estimates of the
expected performance had the businesses remained in the state sector. They concluded that
there were net improvements in public welfare in 11 of the 12 cases, largely resulting from
higher investment and productivity. Megginson and Netter (2001, p. 380) in a review of such
early studies concluded: “Research now supports the proposition that privately-owned firms
are more efficient and more profitable than otherwise-comparable state-owned firms.”
Similarly, Megginson (2017), reviewing more recent performance studies, concluded that,
generally, privatization improves the financial and operating performance of formerly state-
owned enterprises.
However, a number of studies have questioned such an unconditional conclusion, suggesting a

more subtle approach to evaluating the record of state-sector and private-sector firms. For
example, research into privatized telecommunications by Wallsten (2003), Gutierrez and Berg
(2000), and Bortolotti et al. (2002), across a number of countries, found that privatization
alone is associated with limited performance benefits and that effective competition or, in its
absence, effective state regulation is important in bringing about efficiency gains. Bortolotti et
al. (1998), using data on the privatization of electricity generation in 38 countries, concluded
similarly that effective state regulation is crucial to the success of privatization. Mühlenkamp
(2015) argued that privatization does not necessarily improve business performance, and
Palcic and Reeves (2015) reported that after the privatization of Ireland’s largest
agribusiness, the Irish Sugar Company, there was no strong evidence of improvements in
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financial performance or productivity. Radic et al. (2021) suggested that the mixed results of
privatizations may be partly explained by what was privatized, how it was privatized, and the
nature of state regulation after privatization.
Privatization in the United Kingdom

The United Kingdom’s substantial privatization program has been studied in considerable
detail. Studies have looked at whether economic performance improved after privatization, for
example, in terms of productivity, prices, and services (for reviews see Florio, 2004; Parker,
2020). In an early study of productivity in nine privatized enterprises across a range of UK
industries, Bishop and Thompson (1992) reported mixed results. Martin and Parker (1997)
studied 11 privatized companies and a range of economic and financial measures and
similarly found that outcomes varied. Green and Haskel (2001), reviewing performance in four
privatized and two non-privatized businesses in the United Kingdom from the 1970s to the
1990s, concluded that in three of the four privatized companies there was a slight decline in
productivity growth after privatization. Firms seemed to improve their productivity ahead of
privatization but did not necessarily sustain the growth rate afterward. Bishop and Green
(1995) suggested that the degree to which competition increased after privatization might be
important in determining the outcome. Saal and Parker (2000, 2001), studying productivity
and costs in the water industry of England and Wales before and after privatization in 1989,
discovered that there was no obvious performance improvement until state regulation of the
industry became more effective, in the mid-1990s. Similarly, Florio (2004) concluded that
productivity growth in British Telecom, privatized in 1984, rose noticeably only after
competition and regulatory pressures intensified in the early 1990s. Overall, the numerous UK
studies suggest varying results, with outcomes sensitive to the performance measure chosen
and the degree of competition and effective state regulation accompanying the state sell-offs.
As Florio (2004, p. xiv) concluded: “the great British privatization was not the unconditional
success it is commonly thought to have been.” Where significant performance improvements
have been recorded, these were often the result of increased competition or interventions by
the state regulatory offices, notably a tightening of the price caps imposed on the privatized
utilities. At the same time, it is arguably the case that in the absence of privatization the
competition and regulatory improvements would have been more difficult to achieve. State
enterprises are often protected from competition and ineffectively regulated. Also, as in all
studies of performance pre- and post-privatization, the counterfactual is a problem; that is to
say, what would performance have been had the industries remained under state ownership?
It is never possible to be sure whether performance would have been better or worse had the
firms remained state owned. Nevertheless, the evidence from the UK suggests that it is not
axiomatic that privatization will lead to an improvement in economic performance. This
conclusion is reinforced by the fact that in the United Kingdom, some businesses have failed
after privatization, notably in the iron and steel, coal, shipbuilding, motor vehicle, and rail
industries, sectors that had struggled for financial viability while under state ownership.
Page 12 of 26
Emerging Economies
Turning specifically to studies of privatization in developing countries and the transition
economies, again the results vary. Reviewing numerous studies, Kikeri and Nellis (2004)
argued that most of the research assessing performance before and after privatization shows
that privatization improves enterprise performance. Consistent with this, studies of
privatization in China suggest economic gains (Megginson, 2017). However, not all research is
so favorable. For instance, Bayliss (2009) suggested that the results of privatization in Africa
have been disappointing; while Kirkpatrick et al. (2006), in a statistical study of water services
in Africa, found no evidence that private-sector water utilities in Africa are necessarily more
efficient than state-owned utilities. This result may very well reflect the technology of water
provision, which restricts the scope for competition, alongside regulatory weaknesses in
developing economies. In the absence of effective state regulation, privatized utilities can
continue with inefficient prices and poor service quality.
All studies of the effects of privatization are subject to the methodological problems of
establishing causality, separating the effects of ownership change from other factors that
impinge on performance. There is also the possibility of the selective use of data—picking and
choosing the countries or the most favorable financial and economic performance indicators
to make a point (Cook, 1997). For example, some studies may be criticized for neglecting the
failure of a number of privatizations in the former Soviet Union and elsewhere (Black et al.,
2000; Sachs, 1992; Tankha, 2009). Gupta and Kumar (2020) confirmed that performance
comparisons of state-owned and private enterprises are complicated by the social, economic,
and political objectives of state enterprises. State-owned enterprises might be expected to
pursue broader objectives than private-sector profit maximization, so that a finding that
privatization leads to improved profitability is not surprising. Some studies have concentrated
upon financial performance indicators and taken little or no account of income redistribution
effects, including any reductions in employment after privatization (Bayliss & Cramer, 2001).
Even where economic gains occur, there may be important income and wealth redistribution
effects, suggesting that there are both winners and losers from privatization (Birdshall &
Nellis, 2003; David, 2008; Nixson & Walters, 2006). In the transition economies of Central and
Eastern Europe, it seems that the rapid privatization programs pursued in the 1990s led to
some diverse economic results and particularly regressive wealth transfers (Estrin et al.,
2009; Nellis, 1999). This is probably also true of China. Moreover, many of the published
empirical studies are concerned with developed economies that have well-developed
institutional environments (Goldeng et al., 2008; Lioukas, 1985; Mazzolini, 1980; Nielsen,
1982). Arguably, caution is necessary when generalizing the findings from such studies to
emerging economies where the institutional environment and business structures are
different. A number of studies have used a public versus private dichotomy that does not
reflect the heterogeneous nature of governments and private-sector firms in many emerging
economies (Bruton et al., 2015; Chakrabarti & Ray, 2018).
Outstanding Issues
The evidence from both the developing and transition economies suggests that if privatization
is to improve economic performance significantly, it needs to be complemented by policies
that promote more effective state governance (Chong & López-de-Silanes, 2003; Kessides,
Page 13 of 26
2005; Senderski, 2015; Tan, 2008, 2011). Privatizations may disappoint because of a lack of
adequate technical capacity within governments to handle the sale process, a lack of
accountability and transparency in public policy, corruption and cronyism, ongoing regulatory
problems because of inadequate resourcing, and significant income and wealth transfers with
resulting social costs. The message seems to be that privatization programs need to be
accompanied by policies aimed at improving political and legal systems, establishing more
effective protection of property rights, reducing bureaucracy, making capital market
improvements, instituting improved regulatory regimes, and promoting competition, anti-
corruption programs, and social programs. In other words, privatization needs to be
integrated into a broader program of state structural change (Parker & Kirkpatrick, 2005).
Consistent with this view, Estrin and Pelletier (2018) concluded that privatization alone
cannot be relied upon to raise economic efficiency and that it needs to be complemented by a
number of policy objectives, including improved processes of sale, creation of regulatory
capacity, and attention to poverty and social consequences.
Overall, the numerous studies of actual privatizations in developed, developing, and transition
economies confirm that the economic failings of state-owned enterprises, identified by
economic theory, do exist. However, the relationship between privatization and performance
improvements is more nuanced than is sometimes suggested. The empirical research
identifies privatization successes and failures. It turns the spotlight on the prerequisites for
effective privatization, including better state governance and the promotion of effective
competition and state regulation and social protection. In the 1980s and 1990s privatization
was, arguably, oversold as both an essential and a simple economic reform. As Kikeri and
Nellis (2004, p. 92) commented: “In many ways privatization in the early years was a leap of
faith. . . . There was neither great theoretical justification nor hard evidence at the beginning
of the 1980s that the performance problems of state enterprises could be altered by change in
ownership.” Since then, economists have learned a lot about the conditions for successful sell-
offs and the results of actual privatizations, although there are still a number of issues that
deserve to be adequately addressed. In particular, the longer-term effects of privatization, the
consequences for income and wealth distribution, the implications for state regulation and
competition policy, and the future management of state-owned industries. These are
summarized in Box 1.
Box 1: Outstanding Issues
Static Versus Dynamic Efficiency Gains
What are the longer-term effects of privatization, notably on investment, innovation,

research and development (R&D), and entrepreneurship?
Income and Wealth Distribution
To what extent does privatization lead to income and wealth redistribution that is
regressive in nature? How are the adverse consequences for income and wealth
distribution in future privatizations best ameliorated to reduce any socially regressive
effects?
Page 14 of 26
Competition Policy and Regulation
Competition, or, in its absence, effective state regulation, seems to be important in

bringing about economic efficiency gains following privatization. What are the
implications for future competition policy and for the operation of state regulatory
institutions, especially given the economics literature on the potential inefficiencies of
state intervention?
Managing State-Owned Industries
Despite extensive privatization activity internationally since the 1980s, state-owned

industries may still account for around 10% of world GDP. How are they to be more
effectively managed given past evidence that they can be economically inefficient and
unresponsive to consumer demand?
Static Versus Dynamic Efficiency Gains

The many studies of the efficiency gains from privatization have generally compared
performance over a relatively short period of time, typically a few years before and after
transfer to the private sector. This means that the performance changes identified are mainly
or wholly what economists refer to as static efficiency gains, involving the more efficient
combination of resources with existing technology and know-how. For example, producing
essentially the same products or services using less labor, thereby bringing about an increase
in labor productivity. However, sustained economic performance relies on dynamic efficiency,
which is concerned with changes in the economics of production over time. Dynamic
efficiency gains result from innovation in products and production processes, resulting from
technological change, investment, R&D, and entrepreneurial behavior (Zahra et al., 2000).
Typically, the achievement of dynamic efficiency gains requires longer periods of time than
attaining static efficiency. It involves innovation and investment, usually with long gestation
periods. Dynamic efficiency gains associated with privatization, notably the effects on R&D
expenditures and innovation, have been largely ignored in most studies even though over time
the dynamic efficiency effects of privatization could easily outweigh any static gains in
performance. A reason why performance studies fail to address the dynamic effects of
privatization is because studying performance over long periods of time is problematic. It is
complicated by the problem of isolating the results of an ownership change from other
variables that may impact on the firm, for example, variations in the macroeconomic
environment, fiscal changes, changes in the competitive environment, and so on.
There have been a few studies of the effects of privatization on R&D expenditures and
outcomes in terms of patenting. For example, Munari and Oriani (2002) examined R&D
expenditures in 20 privatized firms in Western Europe. They concluded that the stock market
may undervalue R&D investments of newly privatized companies. Munari and Sobrero (2002)
studied R&D and patenting behavior in 25 companies that were wholly or partially privatized
in nine European countries and found that, overall, there was a reduction of R&D intensity.
However, at the same time, the volume of patenting increased, suggesting an improvement in
Page 15 of 26
terms of R&D productivity by privatized companies. This finding is consistent with the notion
that in the private sector businesses may tend to invest less than state-owned firms in “blue
sky” or speculative research and more in R&D that is likely to guarantee early financial
returns.
There is a need for more research into the dynamic efficiencies resulting from privatization,
not only in terms of R&D spending and outcomes but also in other investments and
management changes leading to improved products and production processes. Related to this,
there has been limited study of innovation and management behavior following privatization
to bring about dynamic efficiencies, and to identify the reasons for management failure where
gains fail to materialize.
Income and Wealth Redistribution

Privatization involves the transfer of assets from one group of people (the state/taxpayers) to
another (private-sector shareholders/owners). If the sale value reflects accurately the present
value of the firm’s future profit stream, the buyers should fully compensate the sellers and
there is no wealth redistribution. However, accurately valuing the assets to be sold and the
intervention of corruption and cronyism in the privatization process mean that too often
privatization has led to a wealth transfer. This has been particularly obvious in some of the
privatizations in Central and Eastern Europe but also elsewhere. Equally, internal
restructuring of the businesses at and after privatization can be expected to lead to gainers
and losers, for example through changes in employment.
There has been some research into share flotations and their valuation and into the effects of
privatization on workers. For example, in the United Kingdom there was some undervaluation
of privatized assets leading to significant capital gains for investors (Parker, 2009, 2012).
Newberry and Pollitt (2003) concluded that the cost reductions achieved in UK electricity
generation after privatization were in large part reflected in gains to investors rather than to
consumers or government. In terms of the effects on labor, it might be expected that
privatized firms pursuing cost savings to boost profits will reduce employment and wages and
worsen employment conditions. However, it is equally possible that improvements in
competitiveness and productivity after a sell-off to the private sector lead to higher
employment and improved wages and terms of employment. The studies that have been
undertaken into actual changes paint a mixed picture (Brown et al., 2010; Dessy & Florio,
2004; Kikeri & Nellis, 2004, pp. 100–102; La Porta & López-de-Silanes, 1999).
What is clear is that perceived and actual cases of the regressive wealth and income
redistribution effects of privatization have had an effect in terms of increasing public
opposition to privatization programs, thereby slowing the implementation of these programs
and sometimes leading to their reversal. More research is needed into the actual outcomes of
privatization for different groups in society.
Page 16 of 26
Competition Policy and Regulation
Many economists believe that competition in the product market is a more critical
determinant of efficiency than ownership per se (Kay & Thompson, 1986; Vickers & Yarrow,
1988). Both private-sector and state-owned firms are expected to perform better when they
operate in competitive product markets because competition for consumers weeds out the
underperformers. It is the case that privatization can improve the competitive environment by
removing legal barriers to market entry and state subsidies that deter potential competitors.
At the same time, there is an inherent incentive in the competitive process for management to
try to drive out the competition after privatization to boost profits.
Privatization, therefore, needs to be matched with effective competition laws that protect
consumers from anticompetitive practices. These largely exist in Europe, North America, and
certain other parts of the world. But while some developed countries have established and
robust competition regimes, too often in emerging economies institutions are inadequate
because of underfunding of the authorities, a lack of expertise, and political and legal
difficulties. Also relevant is a lack of adequate state regulation of privatized monopoly utilities,
such as in the energy sector. In consequence, in these countries privatization risks the
development of private-sector monopoly abuse. There has been some research into the
interrelationship between privatization, competition, and regulation in developing countries,
but there needs to be more. The research that does exist confirms the importance of
competition or, in its absence, adequate state regulation, and that the sequencing of reforms
may matter; effective competition or regulatory regimes may need to be introduced ahead of
the privatization of monopoly infrastructure (Kirkpatrick et al., 2005, 2008; Wallsten, 2003).
In sum, the prospects for privatization in a country need to be evaluated alongside the
adequacy of competition policy and regulatory laws and institutions.
Managing State-Owned Industries

Despite the considerable worldwide privatization activity that has occurred since the 1970s,
state-owned enterprises (SOEs) remain economically important (Bernier et al., 2020). As the
World Bank (2014, p. 3) notes: “many SOEs now rank among the world’s largest companies,
the world’s largest investors, and the world’s largest capital market players.” One estimate
suggests that SOEs may still account for some 10% of global GDP (Bruton et al., 2015).
Following disappointing results, some privatized businesses have already returned to state
ownership, such as parts of the United Kingdom’s railways. Growing public concern about
global warming is leading to more state intervention in privatized energy businesses to
promote a green economy.
In other words, the boundary between the private and state sectors remains fluid. Public
policy changes to reflect shifts in public opinion on the extent to which the state should
intervene in the market economy and what products and services are best provided by the
state versus by the private sector. As PWC (2015, p. 4) concludes: “state-owned
enterprises . . . appear to be an enduring feature of the economic landscape.” In consequence,
more attention needs to be focused on the methods for best managing state-owned
enterprises to address their recorded weaknesses, especially in terms of damaging political
direction and the absence of market disciplines, notably competition. More research is needed
into better ways of managing and regulating state-owned enterprises.
Page 17 of 26
Conclusions
As a result of theoretical developments in economics and growing evidence that state-owned

enterprises are inefficient, privatization developed as a prominent public policy from the
1980s. Large-scale privatizations occurred in Europe, notably in the former communist
economies of Central and Eastern Europe, and there were significant privatizations in other
parts of the world, including in Latin America, Africa, and Asia, particularly China.
This study has detailed the scale of privatization activity, reviewed the theoretical
developments in economics that underpinned the privatization programs from the 1980s, and
assessed them alongside the actual performance of privatization in terms of improving
economic efficiency. The theoretical foundations lie in the public choice and agency theory
literatures, supported by developments in the free market arguments at the heart of
monetarism and Austrian economics, alongside developments in the economics of regulation
and contestable markets. These theoretical arguments encouraged the notion that private
enterprise is superior to state ownership. Even when monopolies exist because of the
technology of production, monopoly abuse can be tackled by state regulation of private-sector
businesses rather than outright state ownership.
While these theories are relevant in explaining privatization, theories need to be tested. There
is now a substantial literature on the performance of state-owned and privatized industries
and services. The results suggest that while privatization does lead to important economic
gains, these are not guaranteed. It is not unquestionable that economic performance will
improve substantially when state-owned enterprises transfer to the private sector. In some
countries, as a result of wider governance issues relating to their political and legal systems,
sell-offs have been flawed and have led to disappointing results. Corruption and cronyism
have haunted the privatization process in too many countries. Elsewhere, governments have
lacked the skills and knowledge to bring about privatizations that benefit consumers and the
economy while avoiding regressive income and wealth transfers. Research emphasizes the
importance of effective competition after privatization to ensure that economic welfare
improves. In the absence of competition, effective state regulation is essential. Unfortunately,
a number of countries have lacked both effective competition policies and regulatory
institutions.
Where privatization disappoints, enterprises are more likely to be brought back under state
ownership. This is already occurring, and it reflects shifting government policy in the face of
changes in public opinion. At the same time, any reversal of privatization raises its own set of
challenges, not least in terms of how best to manage state-owned businesses, given the
potential inefficiencies of state ownership. With the boundary between the private and state
sectors remaining flexible, a major challenge exists for public policy in terms of ensuring
economic efficiency and socially acceptable outcomes.
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Notes
1. In May 2021, to improve services and reduce costs, the U.K. government announced the end of rail franchising.
2. The precise scope of the “special share” varied. It commonly included restrictions on shareholdings and takeovers,
sometimes for a given period of time after privatization.
3. The Privatization Barometer based in Milan was developed by the Fondazione Enri Enrico Mattei (FEEM). Its website
was last updated in 2016.
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Privatization of State-Owned Enterprises

David Parker, School of Management, Cranfield University

Subjects: Business Policy and Strategy, History, International Business

Table 1. Major Privatizations in the United Kingdom

Enterprise Year of Sale

British Aerospace 1981

Cable & Wireless 1981

Amersham International 1982

National Freight Corporation 1982

Associated British Ports 1983

Enterprise Oil 1984

British Telecom 1984

British Gas 1986

Royal Ordnance Factories 1986

British Airways 1987

British Airports Authority 1987

Rover Group 1988

British Steel 1988

Water authorities in England & Wales 1989

Electricity industry 1990–96

British Coal 1994

British Rail 1995–97

National Air Traffic Services 2001

QinetiQ (Defence Evaluation and Research Agency) 2003

Royal Mail 2013

The Scale of Privatization

Privatization has occurred in both developed and developing countries, although

Table 2. Estimates of Worldwide Privatization Proceeds: 1988–2016

1988– 30.3 41.1

1991– 60.2 49.1

1996– 144.4 46.2

2001– 78.7 58.1

2006– 168.7 39.0

2011– 213.8 26.7

Source: From the annual data in Privatization Barometer (2016), Table 1, p. 9.

Public Choice Theory

Other Relevant Theoretical Developments

Regulation and Market Contestability

From Theory to Practice

These developments in economic theorizing undoubtedly provided an important intellectual

However, a number of studies have questioned such an unconditional conclusion, suggesting a

Privatization in the United Kingdom

Box 1: Outstanding Issues

Static Versus Dynamic Efficiency Gains

What are the longer-term effects of privatization, notably on investment, innovation,

Income and Wealth Distribution

Competition, or, in its absence, effective state regulation, seems to be important in

Managing State-Owned Industries

Despite extensive privatization activity internationally since the 1980s, state-owned

Static Versus Dynamic Efficiency Gains

Income and Wealth Redistribution

Managing State-Owned Industries

As a result of theoretical developments in economics and growing evidence that state-owned

Alchian, A. A. (1965). Some economics of property rights. Il Politico, 30, 816–829.

Bailey, E. E. (1973). Economic theory of regulatory constraint. D. C. Heath.

Bös, D. (1991). Privatization: A theoretical treatment. Clarendon Press.

Dunleavy, P. (1991). Democracy, bureaucracy and public choice: Economic approaches in

Gutierrez, L. H., & Berg, S. (2000). Telecommunications liberalization and regulatory

Hayek, F. A. (1944). The road to serfdom. Routledge.

Hayek, F. A. (1948). Individualism and economic order. University of Chicago Press.

Kirzner, I. (1973). Competition and entrepreneurship. University of Chicago Press.

Mazzolini, R. (1980). Are state-owned enterprises unfair competition? California Management