The term ‘privatisation’ was originally coined by management guru, Peter Drucker. In the UK, privatisation is commonly associated with the sale of nationalised industries to the private sector – a process that began in the 1970’s and one that still continues today – as evidenced by the proposed sale of Royal Mail, and more recently – the frankly bonkers scheme to sell off publicly owned woodland in the UK.

Privatisation gained dominance in liberal market economies such as the UK and the US, because the growth in private sector ownership of former state-owned enterprise coincided with regulatory shifts in the existing institutional framework for corporate governance in these countries. This changed both the way the capital markets and investors behaved.

In the UK, the process began with deregulation that removed statutory restrictions on competition in both the public and private sectors. Huge flotations of public utilities such as Water, Electricity and Rail were subsequently legitimised by the proposition that private ownership was a more efficient option, because market discipline can provide the primary regulatory mechanism that reduces agency costs and increases competition.

The ‘market’ is usually cited as the primary justification for privatisation programmes. Increasing efficiency is nearly always viewed as the primary objective for governments pursuing privatisation. The UK government of the early 1980s saw privatisation as an important means to raise state revenues and bridge fiscal deficit. But it is fair to say that other criteria such as the reduction of government interference in the economy to promote competition or encourage wider share ownership are also factors here. For exponents of privatisation, such programmes have many benefits. Competition created by privatisation is seen as driving development and innovation, creating growth and cost efficiencies.

But pursing this policy has not always been successful. Railtrack, the company responsible for the running of the UK’s railway system is a prime example of the failure of privatisation. Not only was there a mass exodus of senior staff as a direct result of the sell-off, the loss of skills and subsequent fragmentation of work led to uncontrollable costs, and a decline in safety standards that caused several fatal accidents and the ultimate re-nationalisation of the company a mere 5 years after it had floated on the London Stock Exchange.

But was privatisation to blame? To my mind, the events which unfolded at Railtrack prove the falsehood that large and complex public utilities can be managed like private sector companies, in other words by putting the profit motive first. By the same token, we cannot assume that innovation, adaptability, productivity and cost control – seen as characteristic of private sector enterprise – will automatically embed into the organisational psyche when transferring ownership of public sector utilities into private hands. Care needs to be taken in setting appropriate governance structure and balancing the tension which inevitably arises between short term profit and long term sustainability. 

This blog is an excerpt from a larger case study on privatisation. If you would like to know more, please contact Lisa Bondesio via lisa@chiridion.com