Transfer of government-held assets to the private sector, whether local or foreign. Where economies of scale result in a natural monopoly, privatization results in the creation of a private monopoly with few gains in efficiency and competitiveness and with a deterioration in public accountability.
France cut its budget for the state sector from FFr23 billion in 1986 to FFr5 billion in 1990. By 1993, it had been announced that 20 of the biggest companies – including Air France and Renault – would be privatized. It is argued that European countries heavy social security payment and the cost of the Gulf war have made it harder for them to balance their budgets and so increased the likelihood of privatization of state industries. The UK, Spain and Portugal have all sold some of the biggest nationalized industries in the early 1990s. France has agreed to allow private investors to take a stake of up to 49% in state businesses, provided they meet certain conditions. By early 1994 Russia claimed to have successfully privatized 11,000 of its largest state-owned industrial enterprises to the benefit of all the citizens of Russia.
Much of the profit increase achieved by privatized corporations is virtually guaranteed by the way in which they are privatized. Their debt is often written off and their market position guaranteed and they are left with the additional freedom to reduce the workforce and increase prices dramatically. This cannot be considered as wealth creation.
In response to problems of prison administration throughout the world, some governments have considered implementing programmes of private incarceration. This creates four problems of particular concern: (a) a state may argue that there has been a shift of liability: that prisoners' claims of mistreatment are claims against private entity, not against the government, even if under human rights law the government is responsible for maintaining prisoners' rights; (b) private incarceration will be structured toward financial gain, which will come true when the greatest possible number of prisoners were incarcerated over the longest possible period of time consuming the smallest possible quantity of resources, producing the greatest possible quantity of labour under conditions requiring the cheapest possible maintenance and supervision costs; (c) the sequestration of such a vital political phenomenon as imprisonment from public or international scrutiny threatens to distance citizens from their right and duty to participate in the penal process; (d) private entities may not held to the same standards regarding prisoners' rights as are state prison administrators.
Rapid privatization alone will not restore growth. It does not ensure adequate corporate governance, nor does the domestic private sector so far have the necessary financial and technological means in the case of former socialist countries, for example.
From a developing country perspective, privatization can result in the transfer of publicly held assets to foreign capital, raising questions of sovereignty. Where the transfer is to members of the national elite, questions of social justice are raised.
Rapid privatization, notably of Eastern European public sectors companies, ignores the social role played by such companies. Companies are often virtual communities in themselves with their own kindergartens, schools, libraries, clinics and guest houses. Privatization resulted in the exclusion of many from both a job and from the social support network which had nurtured their lives.
Privatization can be used effectively to reduce the size of state monopolies, particularly where such enterprises have been judged to have entered into or continued activities which private firms could carry out more efficiently. It can be used to counteract the tendency for publicly owned firms to be managed on excessively bureaucratic principles, inattentive to costs and market opportunities, overstaffed, lacking in entrepreneurship and unwilling to innovate and take risks. It can be used to reduce labour market rigidities.
Privatization in developing and other countries often increases efficiency, but this is not necessarily always the case, particularly in countries with limited resources of capital or skills, or without the structures to ensure competition or managerial accountability. Privatization should be integrated into the overall context of economic reform and phased in line with the economy's absorptive capacities, with competition authorities assisting in evaluating how best to privatize in a manner that promotes competition and efficiency and screening any incentives, subsidies or regulatory protection granted in this context.