The benefits and limits of privatisation

SOME 40 years ago, the UK became a pioneer in the privatisation of publicly owned industries. Initially the focus was upon a few large businesses. But over time this changed, as the government privatised monopolies or quasi-monopolies and then went on to contract with private suppliers of a wide range of sensitive public services. The experience has now been lengthy and varied enough to learn some important lessons, the most important of which is that the basic principles of economics matter.

If a number of suppliers compete in the market for a good or service, consumers are properly informed about what they are buying and able to switch easily to other suppliers, and business owners bear the cost of failure, then private profit-motivated enterprises are going to be the best way to provide the goods or services in question. But things are very different if consumers have no effective choice or, by virtue of their vulnerability or frailty, are unable to make informed choices at all. In such cases, the state must step in, by writing and monitoring contracts and instructing and appointing regulators.

Whenever that is the case, no general presumption in favour of supply by profit-seeking entities can exist. The fundamental argument in favour of private suppliers is that they would still be motivated to supply goods and services as cheaply as possible. A purely political reason is that private contracts allow government to evade self-inflicted constraints on public sector borrowing, even when the proceeds are used to create productive assets.