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Forms of Privatization Explained

The document outlines five forms of privatization identified by Richard C. Brooks: Complete Privatization, Privatization of Operations, Contracting Out, Franchising, and Open Competition. Each form varies in how government assets and services are transferred to the private sector, with Complete Privatization involving the outright sale of government assets, while other forms focus on operational management or service contracts. Examples and implications of these privatization methods are discussed, particularly in the context of the U.S. and other economies.

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22 views2 pages

Forms of Privatization Explained

The document outlines five forms of privatization identified by Richard C. Brooks: Complete Privatization, Privatization of Operations, Contracting Out, Franchising, and Open Competition. Each form varies in how government assets and services are transferred to the private sector, with Complete Privatization involving the outright sale of government assets, while other forms focus on operational management or service contracts. Examples and implications of these privatization methods are discussed, particularly in the context of the U.S. and other economies.

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Sean Rwizi
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PRIVATIZATION STUDY

Forms of Privatization: excerpted from Government Privatization: history, Examples, and


Issues issued by the Commission on Government Forecasting and Accountability, Springfield,
IL; October 2006

Forms of Privatization

Five forms of privatization are identified by Richard C. Brooks in his paper “Privatization
of Government Services: An Overview and Review of the Literature.” These five forms of
privatization are:

 Complete Privatization
 Privatization of Operations
 Use of Contracts
 Franchising
 Open Competition

Complete Privatization

Complete privatization is the outright sale of government assets to the private sector. This type
of privatization not only confers assets but also related responsibilities of ownership to the
private sector. Government run industries and assets have generally been completely privatized
through one of three main ways. The first way is share issue privatization. The government sells
shares of the government run company which can then be traded on various stock markets. Share
issue privatization has been the most prevalent method used, though a developed secondary
market is necessary. The second method is through asset sale privatization. In this method, the
whole firm or asset is sold to an investor. This is usually done by auction. The final method is
voucher privatization in which shares of ownership are distributed to all citizens for free or for a
very low price. Complete privatizations have been seen mostly in the transition economies of
Central and Eastern Europe in recent years.

Complete privatization has been somewhat rare in the United States due to the market driven
economy and federal regulations associated with the sale of public assets that were built using
federal grants. An example of this kind of transaction in the U.S. can be seen in the sale of the
Fairbanks Municipal Utilities System for $R100 million in 1996. The company was sold by the
City of Fairbanks under provisions that kept utility rates within certain ranges and provided for
stable employment.

Privatization of Operations

The privatization of operations is the turning over of managerial and operational responsibilities
of publicly owned facilities to private sector firms. This kind of privatization is often seen with
the running of sports and concert venues. Under this arrangement, the private sector firm
generates revenue through the collection of fees from individual customers of the government
asset. For example, the sports stadiums in New York City are managed by the baseball teams
that use the facilities during the baseball season but are run by the New York City Department of
Parks during the off season. This kind of arrangement can also be seen in transactions
concerning the operation and maintenance of toll roads and toll bridges.

Contracting Out

Contracting out is the production of designated services by a private firm under a contract.
Under this scenario, the private sector firm is paid directly by the government for their services.
The government finances these services through the taxes of the collection of user fees. This
type of arrangement is commonly used for the collection and disposal of solid waste. Other
types of services that have been privatized through this type of agreement include security
services, data processing services and consulting services for numerous professions.

Franchising

Franchising is the awarding of exclusive rights to perform services within a specific geographic
area to a private firm by a governmental unit. The private firm generates revenue by collecting
user fees. Cable television is the most common example of this kind of privatization. Utilities
such as electricity, gas, and water service could also fall under this category.

Open Competition

Open competition is the last form of privatization under this classification. Open competition is
similar to pure competition as many private firms are allowed to compete for customers within a
governmental jurisdiction. This type of privatization can potentially be seen in telephone and
internet service providers. This type of privatization is not appropriate for some services as it
most likely would not be efficient to have multiple suppliers of electricity, gas or water service.

Common questions

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Contracting out in privatization can lead to cost savings, increased efficiency, and access to specialized expertise, as private firms bring their industry knowledge to public services. However, it can also result in decreased public accountability, potential loss of control over service quality, and dependency on private entities, which may prioritize profit over public interest .

Privatizing operations of public facilities can relieve local government budgets by transferring operational costs and risks to private firms, potentially resulting in cost savings. However, it could also impact service quality positively if private firms enhance efficiency and innovation, or negatively if profit motives compromise standards. The true impact depends on contract terms and effective oversight .

Successful implementation of privatization through open competition requires market conditions such as multiple capable providers, deregulated environments that encourage innovation, and consumer demand that supports competitive pricing. It is most effective in sectors where service differentiation and consumer choice can thrive, such as telecommunications, where diverse offerings from competitors benefit consumers .

The use of contracting out in privatization has expanded beyond traditional services like waste disposal to include security services, data processing, and consulting services. This expansion reflects the increasing complexity and specialization in service needs, where private sector efficiency and expertise in non-core government functions can enhance public service delivery .

Complete privatization involves the outright sale of government assets to the private sector, transferring both ownership and related responsibilities. In contrast, privatization of operations retains public ownership while only transferring managerial and operational responsibilities to private firms. This distinction in ownership and management highlights the fundamental differences in control and accountability between the two forms of privatization .

Franchising privatization can be advantageous for service delivery as it ensures exclusive rights to perform services, potentially leading to improved efficiency and accountability due to the private firm’s focus on profitability. This model also allows for consistency in service quality within the specified area. Moreover, by generating revenue through user fees, the firm is incentivized to maintain high standards to retain its customer base .

The three main methods used in complete privatization are share issue privatization, asset sale privatization, and voucher privatization. Share issue privatization involves selling shares on the stock market, asset sale privatization involves selling the asset through auctions, and voucher privatization distributes ownership shares to citizens. These methods are most commonly applied in transition economies of Central and Eastern Europe .

Federal regulations and market structures in the United States limit the extent of complete privatization, particularly due to constraints around public asset sales and the need to comply with federal grant provisions. In contrast, transition economies in Central and Eastern Europe more readily embraced complete privatization as a tool to rapidly shift from state-controlled to market economies, often supported by international fiscal and advisory support .

Open competition might be unsuitable for utilities like electricity, gas, or water services because these sectors require significant infrastructure investments that may not be efficiently duplicated by multiple firms. The inefficiencies and higher costs associated with having multiple suppliers for such essential services make a monopoly or regulated system more practical .

Voucher privatization might positively affect public perception by giving citizens a direct stake in former public enterprises, creating a sense of ownership and involvement. However, it could also lead to skepticism if the redistributed shares do not result in meaningful control or financial benefits for individuals. The perception largely depends on how equitably and transparently vouchers are distributed .

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