Ludwig von Mises Institute

Privatization

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Privatization is the change (of an industry or business, for example) from governmental or public ownership or control to private enterprise.[1]

Examples[edit]

USA[edit]

By 2007, Indiana governor Mitch Daniels has auctioned the rights to operate the Indiana Toll Road — a 157-mile road linking the Chicago Skyway in the west to the Ohio Turnpike in the east — to a private group for $3.8 billion. Meantime, Chicago mayor Richard Daley has harvested $1.8 billion auctioning the Skyway to a private group, and another half-billion or so turning city-owned garages over to private operators. Across the country, cash-strapped governors and mayors were discovering that their airports, bridges, toll roads, water systems, and other revenue-generating operations are worth far more than they thought, and were eyeing auctions that might produce windfalls similar to those in Chicago and Indiana. They’re also looking to recruit private investors to build and operate new toll roads, bridges, and other infrastructure.

Confronting a $3 billion transportation-funding shortfall, Indiana decided to use an auction to extract the Toll Road’s long-term value. In effect, a private operator gave Indiana an up-front payment in exchange for the right to collect tolls on the road for 75 years. Like the Chicago deal, which hands over the Skyway for 99 years, the Indiana lease is basically a sale, since its term exceeds the road’s anticipated life. Each agreement requires the private operator to invest in rebuilding the road as it falls apart and to follow a lengthy list of operating standards, from how best to fill potholes to how quickly to clear roadkill.

Texas has made private capital a key ingredient in a vast road-building project known as the Trans-Texas Corridor. In California, a private company was constructing a nearly ten-mile, $800 million extension of Route 125, south of San Diego, in exchange for a 35-year lease to manage the road and collect tolls. Utah contemplated private financing to build the Mountain View Corridor, a road connecting Salt Lake City Airport to towns in Salt Lake and Utah Counties, instead of raising its gas tax by up to 50 cents per gallon. Virginia has inked an agreement with Australian toll-road firm Transurban, which already leases the state’s nine-mile Pocahontas Parkway, to study expanding Interstate 95 with high-occupancy toll lanes. If approved, the project would cost nearly $1 billion. "These roads don’t exist and in many cases they won’t ever exist unless the private sector builds them," says Mark Florian, a Goldman Sachs investment banker and an advisor on several such transactions in Texas.

In the United States, the Dulles Greenway, one of the few roads built and run privately during the nineties, opened six months ahead of schedule.[2]

England[edit]

In England, the revolution started in 1979, when Margaret Thatcher's new government inadvertently privatized British Petroleum (BP). Inadvertently, because some of BP's shares were already in private hands, and when the government dumped a few more, its holding slipped below 50%. Perplexed Treasury officials noted that if the government did not control a company, it could hardly be kept on the books as an asset; nor could it be subject to all the borrowing and other constraints on nationalized industries. BP had simply floated into the private sector.

Thatcher's administration sold in February 1981 51.6% of the state planemaker, British Aerospace. By November it was selling Cable & Wireless - a minority at first, but later, when it failed to take up a rights issue, its holding slipped to 45%, and another state enterprise floated away.

When the radio-chemicals company, Amersham International, was sold, there was another innovation. To sweeten the deal with employees, they were offered shares on a buy-one-get-one-free basis. Four out of five of them bought into it. Encouraged by that, the state trucking business, National Freight Corporation (NCC), went to Downing Street with a worker-management proposal. Some 9,000 NFC employees and 1,300 NFC pensioners chipped in an average of £700 (E1,000, $1,300) each to take it private. A shrewd investment: seven years later, that stake would be worth £7,000. Later, when the government sold 51.5% of Associated British Ports, its workers snapped up 12.2% of it.

In 1983-84, some 27 railway hotels - now among the poshest in Britain - went private. So did Jaguar, the carmaker. Sealink ferries went; and the ailing cross-Channel hovercraft service was sold to staff for £1 (they quickly turned things round and sold it on two years later for £4.3m).

In 1984, 2.4m Britons scrambled to buy shares in the state-owned telephone company, British Telecom (BT), before it was floated on the stock market. At almost £4bn, it was the biggest stock market sale in history. It gave the world the concept of mass-market privatization. And it provided a model from which many other countries, including ex-communist ones, were happy to borrow.

The employees of BT were cut in too, getting 4.6% of the stock. Service improved: after all, the engineer coming round to fix your phone was also a shareholder in the company. And buyers were delighted: the 50p part-paid shares quickly rose to 95p. That sale also notched up some other firsts. It introduced limited competition, in the shape of a new company, Mercury. It set up Oftel, charged with extending competition and curbing BT's abuse of its network monopoly. It introduced the RPI-X formula, whereby BT's prices would have to fall faster than the retail price index. Originally set at RPI-3%, Oftel soon raised the target to RPI-4.5% and by 1992 to RPI-7.5%.

Lots more followed. British Gas, valued at £5.7bn, and loaded with new debt to counteract its monopoly power. Vickers shipyards, bought by a consortium of staff and local people. Rover, the carmaker, was sold to an already privatised company, British Aerospace. The National Bus Company, was split into small units and sold mostly to management buyouts. The airports followed.

By 1987, even the famous name of Rolls-Royce was up for sale. And in 1989 and 1990 were sold water and electricity utilities, split into regional companies prior to the introduction of full-blown competition.[3]

Ex-communist countries[edit]

By the time the Berlin Wall crumbled in 1989, the ex-communist countries had a wealth of British experience to draw on. In 1991, Czechoslovakia, with 97% of its economy state-run, soon took mass privatization to a new level. The government encouraged the public to buy vouchers, giving them a stake in a number of new investment funds that would hold the stock of 1,491 old state industries - the idea being to spread the risk of ordinary people buying into a dud. Some 98.9% of the vouchers were taken up, and by 1998, four-fifths of state enterprises had been privatized - a remarkable turnaround in just seven years.

Bulgaria did much the same, though on a far smaller scale. Poland and Romania tried their own variants that they hoped would create more concentrated holdings in the privatized companies. Russia went for it too, with free privatization certificates that people could put into new investment funds.[3]

Europe[edit]

Privately financed infrastructure has made another appearance in post–World War II Europe. Starting with 1955 legislation, France began to tap private investors to build and operate what eventually amounted to 3,400 miles of autoroutes between cities. The Soviet Union’s collapse led to extensive privatization in former Eastern bloc countries during the nineties. As of 2007, the U.S. Department of Transportation estimated that worldwide, more than 1,100 public-private deals have taken place in the transportation field alone over the last two decades. Total value: approximately $360 billion.[2] Germany has sold a chunk of its postal service, as did the Netherlands.[3]

References[edit]

  1. "privatize", The Free Dictionary, referenced 2013-02-15.
  2. 2.0 2.1 Steven Malanga. "The New Privatization", City Journal, Summer 2007, referenced 2013-02-15.
  3. 3.0 3.1 3.2 Dr Eamonn Butler. "The mother of all privatizations", Adam Smith Institute, 28 November 2004, referenced 2013-02-15.

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