Wednesday, 16 April 2008

Privatization: reviving the momentum

The Adam Smith Institute has released its latest report, Privatization: Reviving the Momentum (pdf). The report recommends that the UK government sell assets including the Royal Mail, Channel 4, BBC Worldwide, Scottish Water, Northern Ireland Water, Glas Cymru, the National Air Traffic Control System, as well as government stakes in British Energy and the Nuclear industry. It argues that such sales could net the exchequer in excess of £20bn. Given the worsening state of the economy and the increasing tightness of the public finances, the report notes that such an inflow of funds would be very welcome.

This is very bad thinking. The point of privatization isn't the amount of money raised for the government-that's just a one-off windfall gain to public finances. In fact some welfare maximising methods of privatisation yield no revenue to the government. Anbaric and Karaaslan (1998) provide one such mechanism.

The benefits of privatisation come, not from the revenue raised, but rather from the longer term efficiency gains that flow from private ownership. The report does go on to make this point. It argues that a new wave of privatizations would deliver significant operational benefits. Previous privatizations have delivered a wide range of improvements, including increased investment, lower prices, greater choice and better service for customers. Megginson (2005) and Nellis (2006) provide useful surveys of privatisation experience worldwide. Nellis, for example, summaries this experience as
The vast majority of economic studies praise privatization's positive impact at the level of the firm, as well as its positive macroeconomic and welfare contributions. Moreover, contrary to popular conception, privatization has not contributed to maldistribution of income or increased poverty - at least in the best-studied Latin American cases. In sum, the technical picture is generally positive.
As to the UK, Parker (2006) says
But as part of the wider restructuring of the economy that occurred in the 1980s, involving tax cuts, public spending caps, trade union reform and the closure of declining industries, it [privatisation] has contributed to reversing the perception of the UK as ‘the sick man of Europe’... privatisation has played an important part in reducing the burden of the state in the UK economy.
The ASI report's author, Nigel Hawkins, notes
Privatization in the UK remains unfinished business. The task for Government, of whatever colour, should be to complete it and to reap the many benefits ....
This is true not just in the UK, it is also true in New Zealand. But we are in the unfortunate position of having the current government opposed to any further privatisation and the leader of the National Party equally opposed. We are told
That in the first term of the National government there will be no state assets that will be sold either partially or fully.
This is unfortunate, to say the least.
  • Nejat Anbarcia and Mehmet E. Karaaslan (1998) "An efficient privatization mechanism", Journal of Economic Policy Reform, 2(1) February:73-87.
  • William L. Megginson (2005). The Financial Economics of Privatization. New York: Oxford University Press.
  • John Nellis (2006) "Privatization—A Summary Assessment", Center for Global Development Working Paper Number 87 March.
  • David Parker (2006) "The United kingdom's Privatization Experiment: The Passage of Time Permits a Sober Assessment" in Privatization Experiences in the European Union, edited by Marko Kothenburger, Hans-Werner Sinn and John Whalley, The MIT Press, Cambridge Mass.

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