Public ownership and privatisation

The governments of different countries have in the past taken into public ownership entire industries for the following reasons:

· To promote economies of scale. Economies of scale refer to cost saving associated with large-scale production. Some industries need to be very large, even to the extent that they become a monopoly supplier, in order to take full advantage of the cost savings large-scale production can bring.

· To control natural monopolies and avoid wasteful duplication. A firm is a natural monopoly if the most efficient size of that firm is one that supplies the whole market. In a natural monopoly resources can be combined in the most productive and cost-effective way. In private hands such a large firm may abuse its market power to push up prices to consumers.

· For safety. Some industries, such as nuclear energy, were thought to be too dangerous to be controlled by private entrepreneurs.

· To protect employment. Some firms could be nationalized because they faced closure as private sector loss-making organizations.

· To maintain public services. Under public ownership, loss-making services, such as rail lines and postal services in remote areas, or supplies of gas or electricity to households that consume very little, can be subsidized using tax revenues.

Privatisation involves private firms taking over public sector activities. It can take many forms:

· The sale of public sector assets. Shares owned by the government in industries are totally or partially sold to the general public and private sector firms.

· Joint ventures with the private sector.

· Contracting out. Many local authorities invite private sector firms to compete for jobs such as parking enforcement, school catering, and road sweeping. This is known as tendering. Contracts are awarded on the basis of a private firm providing a low-price, quality service.

· Franchising. Purchase of a franchise to run a service or supply a product for an agreed period of time will be subject to certain conditions concerning minimum service levels, quality standards, and other requirements.

· Deregulation. Deregulation does not involve a transfer of ownership between the public and private sector. It refers to the removal of state controls limiting competition in markets. An example is the provision of bus and taxi services, which are now free to be provided by private operators.

Arguments for privatisation

· To stop government abuse of monopoly power. It has been argued that governments have in the past simply raised prices to fund increases in public expenditure.

· To increase efficiency. It has been argued that public sector activities were inefficient and provided poor services because they faced no competition and did not have to return a profit.

· To raise government revenue.

· To give ownership to the people. People have been encouraged to buy shares in the ownership of privatised industries. As shareholders, they have the right to vote on how these companies should be run and can earn dividends on their shares when these companies make profit.

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