Global success of privatisation

July 31, 2012

Free Market Foundation

Privatisation, the sale of state-owned enterprises (SOEs) or assets to the private sector, has grown worldwide since the early 1980s beginning in Great Britain and expanding in the 1990s to developing countries. More than 100 countries utilise it, indicating that it is one of the most important elements in the increasing global use of markets to allocate resources.

A survey of empirical studies on the performance of privatised firms compared to SOEs comes to the following conclusions, among others:

Due to privatisation, the SOEs’ share of “global gross domestic product” has declined from more than 10 percent in 1979 to less than 6 percent today.

Research supports the claim that privately owned firms are more efficient and more profitable than otherwise-comparable state-owned firms.

Evidence suggests that non-privatising reform measures, such as price deregulation, market liberalisation and increased use of incentives can improve the efficiency of SOEs although these reforms would likely be more effective coupled with privatisation.

Divested firms almost always become more efficient, more profitable and financially healthier, and increase their capital investment and spending.

Three basic techniques used to privatise SOEs are share issuing privatisations (SIPs), asset sales, and voucher or mass privatisations. In 91 percent of SIPs, employees of the SOE are offered stock at below market prices.

Source: William L. Megginson and Jeffry M. Netter, From State to Market: A Survey of Empirical Studies on Privatisation, Journal of Economic Literature, June 2001.

For JEL abstract http://www.aeaweb.org/journal/contents/june2001.html#megginson
For more on Selling Government Enterprises
http://www.ncpa.org/pi/internat/intdex7.html

RSA Note:
The benefits to consumers are arguably the most important aspect of privatisation of state-owned enterprises. No measure of efficiency can simulate the effects of competition in a market that is free of statutory barriers to entry. Even if privatisation were to have no effect on prices, which is doubtful, there would be a marked improvement in the range, quality and availability of services. Open competition amongst entrepreneurial competitors seeking to secure the business of consumers who are free to exercise choices exercises a discipline on service providers that no regulatory authority can emulate.

Eustace Davie, Director, FMF.

FMF\25 September 2001