Privatization

Privatization, in economic terms, is the act of transferring some good or service or the management of a good or service from the public sector to the private sector. It is typically used in reference to state-owned enterprises (SOEs), which are enterprises that are either partly or fully owned and operated by the government. The act of privatization often changes a company’s operating model, as it essentially becomes a for-profit company. SOEs, by comparison, often aim to provide some public good even if it means operating with little profit or even at a financial loss (wherein lies the interest of government funding). Furthermore, since SOEs tend to be natural monopolies, privatization can often give rise to rent-seeking, in which these for-profit companies use their position as the primary provider of a good (such as utilities or public transportation) to keep prices high. The findings regarding privatization remain highly mixed, with many proponents arguing that it leads to improvements in services while also cutting down on government expenses (until, of course, the government has to inevitably step in … one just has to look at the sewage discharge in the UK to question the validity of this idea).

Note that privatization and outsourcing are not necessarily the same thing. A SOE might “outsource” some of their work or essentially employ a private company for a given job on a short-term or ongoing basis. This does not necessarily mean, however, that the private company owns shares in the SOE or has any control over its operations, although it is certainly possible. For this reason, the boundary between private and public enterprises is not always clear. Beginning in the 1980s, many shares in SOEs were sold off to the private sector although the government remained the majority shareholder, essentially making many SOEs public-private enterprises. Similarly, many private companies that represent a “national interest” such as defense receive subsidies or other forms of financial support from the government, even if they are technically privately owned. This is the case for Boeing, a US-based aerospace manufacturer, as well as its European equivalent Airbus, although some European governments (France, Germany, Spain, etc.) still have significant shares in the latter.