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date: 19 October 2021

Privatization of State-Owned Enterprisesfree

Privatization of State-Owned Enterprisesfree

  • David ParkerDavid ParkerSchool of Management, Cranfield University


Theoretical developments in economics, alongside evidence that state-owned enterprises were often inefficient and unresponsive to consumers, led to a substantial program of privatizations from the 1980s. Privatization can take a number of forms, from the outright sale of state-owned assets to private investors to forms of public-private partnership, such as contracting out and franchising of public services. Privatization was promoted in both developed and developing countries, and large-scale privatizations occurred in Europe, Latin America, China, and the former communist economies of Central and Eastern Europe, in particular. Privatization revenues rose substantially from the late 1980s internationally. Taking the years 1988 to 2016, revenues from sales are estimated to have been around $3,634bn. In terms of main sectors of the economy affected, privatizations have particularly occurred in telecommunications, transport and logistics (mainly railways, airlines, and airports), other utility businesses (especially energy companies), and finance. Numerous empirical studies suggest that the performance of the privatized businesses and services has been mixed. While privatization has led to some impressive economic gains, in a number of countries, wider governance issues relating to political and legal systems have led to disappointing outcomes. Privatization has not always led to the removal of state interference in the management of businesses and services. Corruption and cronyism have blighted a number of privatizations. State sell-offs have led to income and wealth redistribution with gainers and losers from the process. Some privatizations have led to spectacular capital gains for investors. The impact of privatization on employment and working conditions remains unclear.

There are a number of issues that deserve further investigation, namely the consequences of privatization for technological change and innovation, competition policy, and income and wealth distribution. A further subject for investigation is how the effective and efficient management of state-owned enterprises can be best achieved. The boundary between the private and public sectors remains fluid, with a number of enterprises returning to state ownership as political and economic conditions change.


  • Business Policy and Strategy
  • History
  • International Business


The word “privatization” came into common usage during the 1980s to describe the policy of transferring assets from the state (public) sector to the private sector. The origin of the word is obscure. Prior to the 1980s the terms “denationalization” or simply “asset sales,” or similar, were often used to describe the disposing of state property. It seems that the term “reprivatization” (reprivatisierung) was employed when discussing the transfer of state enterprises in Nazi Germany in the 1930s, and there was sporadic use of the terms “privatization” and “reprivatization” after 1945 (Bel, 2006). The Organization for Economic Cooperation and Development (OECD) defines privatization as the “transfer of ownership and control of government or state assets, firms and operations to private investors” (OECD, 2003).

The term “privatization” is best interpreted as embracing a wide set of means of attaining the transfer of state property, including policies such as public-private partnerships, contracting out, franchising, concession agreements, and management contracts, in addition to the outright divestiture of state-owned businesses (Mercille & Murphy, 2017). Outright sales may take the form of public share flotations (Initial Public Offerings [IPOs]) or the transfer of assets to existing private-sector companies or strategic investors, such as the sale in Czechoslovakia of Skoda to the German vehicle manufacturer VW in 1991. Typically, share flotations occur where there are developed stock markets, such as in Europe. Such markets are missing in a number of countries, and in these the change of ownership frequently involves attracting direct investors, such as international corporations, often alongside a local investor to ensure some retention of domestic control. Alternatively, privatization may take the form of the state contracting out or franchising the entire production or service to private-sector companies for a period of time (say, 10 years), preferably after competitive bidding for the contract. In some cases, through management contracts and some types of public-private partnership, the government retains ownership of the productive assets but allows the private sector to manage the business, again for a given period. Various forms of contracting and franchising have been commonplace in industries such as water services in developing countries. They have also been used in industrialized countries, such as the franchising of passenger rail routes in the United Kingdom between 1996 and 2021.1

To make matters more complex, the outright sale of state assets can take various forms, from 100% share sales to minority sales. Even when a majority of the equity in a business is sold to private investors, the government may still retain an input into key management decisions, such as the usage and transfer of productive assets, and even an outright veto over certain strategic decisions. This may be achieved through the state retaining sufficient shareholding to control or at least heavily influence management or by keeping a “special” or “golden” share. In some of the privatizations in the United Kingdom in the 1980s, this took the form of a single preference share retained by government, which could be used to outvote the rest of the equity if it were felt that a management decision was not in the national interest.2 The government might also be empowered to appoint board members in the privatized company or could introduce legally binding restrictions on management actions in the company’s articles of association. Or continued government oversight may be achieved through other means in countries where the political system is such that governments can, and do, overtly and covertly manipulate business decisions. For example, China has had a large privatization program, but it is unclear to what extent the enterprises have been entirely or even largely removed from state influence. The government still has shareholdings in many of the companies, and politically connected CEOs are appointed (Liao & Young, 2012; Milhaupt & Zheng, 2015; Yeo, 2020). In the United Kingdom, the government retains an oversight of the privatized defense businesses British Aerospace, sold in 1981; and Rolls Royce, sold in 1987; the energy sector (gas privatized in 1986 and electricity in the early 1990s); local bus transport and the railways (sold-off from 1986 and in the mid-1990s, respectively); and the water utilities in England and Wales (privatized in 1989). The United Kingdom introduced the first large-scale privatization program in Europe, with the cumulative value of business asset sales totaling around £70bn between 1979 and 1998 (Parker, 2012, p. 505). In 1979, state-owned enterprises accounted for around 10% of UK GDP; by 1997 this had fallen to less than 2%. Table 1 provides a list of the major UK privatizations in the 1980s and 1990s. The United Kingdom’s example provided a model for privatization in other parts of Europe, and the wider world.

Table 1. Major Privatizations in the United Kingdom


Year of Sale

British Aerospace


Cable & Wireless


Amersham International


National Freight Corporation




Associated British Ports


Enterprise Oil


British Telecom


British Gas


Royal Ordnance Factories


British Airways




British Airports Authority


Rover Group


British Steel


Water authorities in England & Wales


Electricity industry


British Coal


British Rail


National Air Traffic Services


QinetiQ (Defence Evaluation and Research Agency)


Royal Mail


Note: A number of enterprises were sold in tranches. The date refers to the first major state disposal of assets or the public share flotation. In some cases, subsidiary assets of an enterprise were sold prior to the main disposal.

The Scale of Privatization

Privatization has occurred in both developed and developing countries, although comprehensive data on sale proceeds is not easy to obtain because governments and the international agencies such as the World Bank do not publish continuous and consistent data. The Privatization Barometer (PB) attempted to collate international data from numerous sources.3 In its last report, for the year 2015–2016, PB concluded that worldwide governments raised a record $319.9bn through privatizations in 2015, beating the previous high of $265.2bn in 2009. China accounted for 54.1% of the amount raised, with the European Union (EU) countries responsible for a further 27.2% (Privatization Barometer, 2016, p. 4).

Privatization revenues rose substantially from the late 1980s internationally. Taking the years 1988 to 2016, revenues from sales recorded by PB were around $3,634bn. Breaking the period down: from 1988 to 1990 annual privatization receipts averaged around $30.3bn, in 1991–1995 $60.2bn, in 1996–2000 $144.4bn, 2001–2005 $78.7bn, 2006–2010 $168.7bn, and 2011–2016 $213.8bn (Table 2). While interest in privatization has fluctuated over the years, reflecting changing macroeconomic conditions and the appetite of investors, there was a definite upward trend especially after 2006. Throughout, the sale of state-owned assets in the EU countries has accounted for a significant slice of the privatization revenues, averaging about 46% of the total between 1988 and 2000, 49% between 2001 and 2010, and 27% from 2001 to 2016. The United States was the largest privatizer in the years 2009, 2010, and 2012 (Megginson, 2017).

Table 2. Estimates of Worldwide Privatization Proceeds: 1988–2016


Average Annual Privatization Revenues ($bn)

Percent of the Total Accounted for by EU Countries (Average Over the Time Period)



















Source: From the annual data in Privatization Barometer (2016), Table 1, p. 9.

In terms of main sectors of the economy affected, the OECD reported in 2009 that telecommunications dominated, accounting for 31% of privatization proceeds, followed by transport and logistics (mainly railways, airlines, and airports) accounting for 19%, other utility businesses, especially energy companies, totaling 17%, and finance responsible for 15%. Manufacturing accounted for 10% of the total proceeds (OECD, 2009, p. 7). However, the various forms privatization can take and questions about whether privatization has really occurred when the state can still determine a firm’s strategic direction, alongside difficulties in obtaining accurate data, mean that all privatization figures should be used with caution. Typically, transport, telecommunications, and the energy sectors remain state regulated in terms of prices or profits, market entry and exit, and service standards.

Throughout history assets have transferred backward and forward between the state and private sectors. For example, from the mid to late 19th century, state involvement in some economic sectors expanded, notably in postal services and telecommunications, water and sewerage services, energy, and transport. This took differing forms in different countries, from outright state ownership to state contracting for services from the private sector (for example, in the French water sector) and to heavy state regulation. To a large extent this was because of perceived failures in private-sector delivery. In the face of rapid urbanization and the associated overcrowding and lack of sanitation in cities, during the 19th century, municipal enterprises were established to provide water, gas, and later electricity and public transport systems (Millward, 2011). Millward also identified the role of defense considerations, which were particularly important in explaining in Europe the state’s interest in having an effective rail network to move troops and supplies in times of military conflict. Also, there was a major program of state ownership after 1945 in Western Europe as a consequence of both collaboration by businesses with Fascist administrations and under investment during the interwar and war years.

In developing countries in the 1960s and 1970s, international aid agencies were largely ambivalent toward state ownership, and the emphasis was on how firms were managed rather than their ownership. However, from the early 1980s this began to change. A World Bank report in 1981 criticized public-sector agencies for failures in sub-Saharan Africa (World Bank, 1981). The Bank’s 1983 World Development Report argued for reforms to state enterprises including market pricing and a reduction in state subsidies. From the early 1990s, further World Bank publications noted the failure of public-sector reforms with privatization seen as the best solution (Kikeri et al., 1994; Shirley, 1999; Shirley & Nellis, 1991; Shirley & Walsh, 2000). International agencies began actively promoting and sponsoring privatization programs and smaller government, often tying continuing development aid to government restructuring.

Across developing countries, privatization receipts rose during the 1990s. In addition, the collapse of the Soviet Union in the late 1980s triggered huge privatization programs in Central and Eastern Europe. In the years from 1990 to 2003, 120 countries recorded privatizations, with two-thirds of the proceeds emanating from 10 states, including China and the so-called transition economies of Poland, Russia, and the Czech Republic. There was also important privatization activity in parts of Latin America (notably Brazil, Argentina, and Mexico). However, privatizations were generally smaller in scale in the Middle East, Africa, and parts of Asia (Kikeri & Kolo, 2005).

At the same time, there have been cases of enterprises transferring from the private sector to state ownership. The movement has not been all one way. Some businesses, notably banks, fell into state ownership during the international financial crisis of 2007–2008 (Voszka, 2016) and during the COVID-19 epidemic in 2020, emphasizing that the boundary between the state and private sectors remains fluid.

Why Privatize?

Privatization from the 1980s reflected disappointment with the economic performance of state-owned businesses in terms of service delivery and efficiency (Aharoni, 1986). In addition, changes in technology meant that it was becoming possible to introduce effective competition into what had previously been considered “natural monopolies,” such as in telecommunications, for example, through developments in cellular communications. Economists define natural monopolies as occurring where there are pervasive economies of scale or scope in production or service delivery, so that having more than one supplier raises the costs of production. Competing firms lead to higher costs. Classic examples are railway routes, electricity transmission, and fixed-line telecommunications, where laying competing lines and cables is typically not economic. New directives reflected this change in the EU beginning in the late 1980s with the gradual liberalization of telecommunications markets, alongside air travel. Later, there were measures introduced to promote competition in energy supplies, the railways, and postal services in Europe. The introduction of competition reduced the incentive and rationale for the continuation of state ownership in Europe (Parker, 1998). Monopolies might be expected to abuse their market power through higher prices and indifferent services. By contrast, there is a long tradition in economics that competition improves public welfare and that private ownership promotes competition.

In parallel with growing criticism of the performance of state-owned enterprises, there was research by economists and political scientists into decision-making within governments and the management of state businesses. This tended to identify the superiority of private over public ownership in terms of product and capital market incentives (Bös, 1991; Boycko et al., 1996; Vickers & Yarrow, 1988). Private enterprise was associated with competition for consumers and investors, whereas state ownership was associated with monopoly provision and taxpayer subsidies. State ownership was also associated with rent seeking behavior as special interest groups, such as input suppliers and trade unions, lobbied government for favorable treatment. Consequently, privatization was expected to lead to improved allocative efficiency, with prices more closely aligned with long-run marginal costs of supply, and productive efficiency, with costs of production minimized to raise profitability.

In this context, especially important from the 1970s were the theories of public choice and principal-agent.

Public Choice Theory

The public choice literature draws from neoclassical economics and especially the notion of individual utility maximization, applying market economics to the study of political decision-making, hence, its alternative moniker “the economics of politics” (Mueller, 1976; Shleifer & Vishny, 1994). Early exponents were James Buchanan (1972), William Niskanen (1971), and Gordon Tullock (1965, 1976). Central to the theory of public choice is the notion that politicians and civil servants can be expected to pursue self-interest when making economic decisions. Niskanen equated this with the pursuit of “salary, perquisites of the office, public regulation, power, patronage, output of the bureau, ease of making changes, and ease in managing the bureau” (Niskanen, 1971, p. 38). All but the last two relate to the size of government, thus Niskanen’s claim that public-sector outputs will be oversupplied.

In this literature, for politicians, individual utility maximization takes the form of maximizing the chances of remaining in office by focusing on vote-winning spending programs and courting influential pressure groups and potential sources of political funding. While the resulting policies might be promoted as being in the public interest, the reality is government spending that advances the utility of particular interest groups, both inside and outside government (Mitchell, 1988). In public choice theory, state ownership is associated with empire building, gold-plating of state investments, trade union restrictive practices, and other economic waste. The message is that state ownership is associated with political interventions that lead to considerable economic inefficiency.

Principal-Agent Theory

Public choice theory was complemented in the 1970s and beyond by an interest in agency relationships (Jensen & Meckling, 1976). In the early years, the term “property rights theory” was commonly used, but the description “principal-agent” or more simply “agency theory” has become more prominent in the literature when discussing critical differences in management incentives under different forms of ownership. If “complete contracts” could be written by the principals (owners) covering all possible contingencies during the contract period, so as to determine agent (management) behavior, and agent behavior could be monitored and enforced without cost, the precise form of ownership should not matter. However, this conclusion relies on strong assumptions, the main ones being full information and the ability of the parties to enter into complete contracts. A complete contract is one in which the parties to the contract specify all their rights and duties for every possible eventuality during the contract term. In reality, because the future is uncertain, longer-term contracts are typically, to some degree, incomplete.

Principal-agent theory has been applied to both the public and private sectors and differences in the efficacy of monitoring and controlling agent behavior in the two sectors identified. In private-sector companies, the principals are the owners or the shareholders who appoint boards of directors as agents to manage their assets. In state enterprises, members of the public are the principals and through the political process, officials are appointed as agents to manage the resources. In the opinion of many economists, in the private sector corporate governance regimes have evolved that facilitate efficient agent monitoring of management behavior. Shareholders can sell their shares if they are unhappy with the performance of their firms, perhaps triggering a takeover bid by new management. Also, management can be incentivized to tackle inefficiencies through profit-related pay, stock options, and the like and by being challenged by investors at companies’ annual general meetings (AGMs) (Fama & Jensen, 1983; Jensen & Meckling, 1976; Ross, 1973). By contrast, in the state sector such incentives are assumed to be absent or at least attenuated (Alchian, 1965; Bös, 1991; De Alessi, 1980). Managers of state-owned enterprises may have fixed salaries, no stock options (there was no publicly quoted stock in the UK nationalized industries), no AGMs, and there may be no credible takeover threat. In addition, politicians may be reluctant to allow state industries to fail. Like public choice theory, principal-agent theory leads to the conclusion that state enterprises will be managed less efficiently than private enterprises and will be less responsive to changes in consumer demand and input costs.

Other Relevant Theoretical Developments

There were also other developments in economics from the 1970s that supported the move to privatize state assets, namely monetarism, Austrian economics, and the economics of regulation and market contestability.


After 1945, many economists believed that it was important to manage demand in the economy to maintain full employment using fiscal policy. In 1936, in his The General Theory of Employment, Interest and Money, John Maynard Keynes argued that governments could reverse unemployment by stimulating demand using their tax and spending powers. In the 1970s, monetarism began to challenge Keynesianism as the dominant paradigm of macroeconomics. At the core of monetarism is the contention that inflation, a serious problem in the 1970s, is the result of government monetary expansion or, more simply, “printing too much money.” Through the banking system, the issue of government debt can expand the money supply. Consequently, monetarism drove many governments in the 1980s to attempt to sharply reduce public-sector spending and borrowing. Monetarism did not require privatization, but its leading proponents, such as Milton Friedman at the University of Chicago, were prominent free marketeers (Friedman & Friedman, 1980). Reducing public spending and borrowing made privatization attractive both to raise government revenues and to remove the need for governments to fund the deficits of state-owned industries.

Austrian Economics

Modern Austrian economics emphasizes the important roles of information, market incentives, and entrepreneurship in economies (Kirzner, 1973, 1985; Littlechild, 1978). The term “Austrian economics” refers to its origin in the writings of free market intellectuals born in Austria, such as Ludwig von Mises (1949) and Friedrich Hayek (Hayek, 1944, 1948). According to Austrian economics, private enterprise seeks out new markets and production methods through a discovery process. In the absence of the profit motive and private property rights, state-owned enterprises lack the incentive and ability to respond similarly to changes in demand and supply. Moreover, even if politicians and civil servants desired to mimic private markets, they would lack the information to do so. Government planners cannot know what decisions to take to maximize economic efficiency and satisfy consumers in the absence of competitive price signals. In Austrian economics, private property is a precondition for effective competition and efficient economic transactions.

Regulation and Market Contestability

Finally, there was new thinking about the ownership of natural monopolies. In many countries, state ownership had been the preferred option in the 20th century for tackling the market failure associated with monopoly. A privately owned monopoly might be expected to exploit its market power. However, from the later 1960s, there was a theoretical challenge based on the notion of government regulating rather than owning monopolies (Demsetz, 1968; Sharkey, 1982). Utilities such as electricity and telecommunications could be privatized, and the government would regulate the prices or profits and service levels to avoid monopoly abuse. Alternatively, it might be possible to choose the monopolist or dominant supplier from time to time through competitive tendering or franchising, thereby making the supply contestable. The service would be put out to contract, with the winning bidder typically offering the required level of customer service at the lowest price. After the agreed contract period, the business or service would be put out to tender again and be subject to another round of bidding. This process is potentially consistent with market contestability theory, which argues that even when companies have few actual competitors, they will act like competitive firms when setting prices and outputs if they face the threat of competition from other firms wishing to enter the market (Baumol et al., 1982).

From Theory to Practice

These developments in economic theorizing undoubtedly provided an important intellectual underpinning for privatization. In the 1980s and 1990s, dissatisfaction with the performance of state-owned enterprises was accompanied by developments in economics that challenged the need for state ownership Without these developments, the policy of privatization would have lacked a strong intellectual underpinning. It would have been simply a matter of political ideology. Instead, privatization gained an economic rationale, although the theories did not go unchallenged. The ideas had their critics at the time, and since.

Public choice theory relies upon self-seeking dominating over altruistic behavior within government. Studies of actual decision-making within government, including budget allocations, suggest that the process and outcomes are much more complex and less predictable than the public choice theorists tend to argue (Dunleavy, 1991; Dunsire et al., 1988; Dunsire & Hood, 1989; Rainey, 1991; Udehn, 1996). A different assumption about management behavior in the state sector leads to significantly different conclusions (for example, Willner & Parker, 2007). Equally, agency theory emphasizes the takeover threat as a discipline to penalize management failure in the private sector. If a company’s share price is depressed because shareholders lose confidence in the management, the firm becomes vulnerable to a hostile takeover bid and a change of leadership. However, studies of actual capital markets suggest that takeovers are not necessarily a reliable vehicle for policing managerial behavior. For example, it is by no means always the worst performing firms that are takeover targets, and shareholders in firms with falling share prices may choose to hold on to their shares rather than sell and capitalize a loss (Grossman & Hart, 1980; Jenkinson & Mayer, 1994; Singh, 1975).

Turning to the literature on regulation and contracting out, there is substantial evidence that state regulation of the profits of private-sector monopolies may lead to disincentives for optimal pricing and investment (Averch & Johnson, 1962; Bailey, 1973; Crew & Parker, 2006). Efficient and effective state regulation requires that the regulator has perfect (or at least good) information about the efficient costs of production in the privatized monopoly. This may not be the case. There is an obvious incentive for the regulated firm to disguise its efficient costs to encourage the regulator to permit higher prices. Similarly, the regulated firm may successfully conceal the true reason for service failures. In addition, the literature suggests that regulation is open to capture by special interests. Studies of regulatory capture suggest that although state regulation may be designed to serve the public interest, over time it becomes distorted to serve the interests of the industries rather than consumers (Peltzman, 1976; Stigler, 1971). The industries through information flows and day-to-day interaction with the regulator overly influence the regulator’s decisions, for example, encouraging regulatory measures that protect the incumbent’s market position from potential competitors. Meanwhile, contracting out and related policies such as franchising may not lead to efficient services if contracts are poorly negotiated and monitored or there is insufficient competition for the contract during the bidding process or the contract period is so long so that the incumbent operator faces very infrequent or no competition for the contract.

Economic theorizing has its limitations. The conclusions from theories depend upon the assumptions made about human behavior. Theorizing on privatization is rooted in the dominant methodology of modern economics, the hypotheitico-deductive model. In this methodology, a hypothesis is generated from theory in a form that is falsifiable using observed data. It is therefore crucial before the conclusions of a theory are accepted that they are not contradicted by empirical analysis. In other words, it is essential to test the theories by observing privatization behavior and its actual results.

Empirical Studies

Fortunately, there is now a voluminous literature on the consequences of privatization, including econometric studies and case studies, covering numerous countries. The econometric studies have looked at changes in economic performance using time series data (performance over a number of years before and after a privatization) and cross-sectional data (comparing state-owned enterprises with private-sector comparators). Time series studies have tended to dominate in the literature because of the frequent difficulty of identifying suitable private-sector comparators to state-owned firms.

It is not possible to review all or even a substantial number of the studies undertaken into the results of privatizations internationally. Instead, the following account is simply an overview of the research. For more detailed reviews of the performance studies see, for example, Boubakri and Cosset (1998), Shirley and Walsh (2000), Megginson and Netter (2001), Kikeri and Nellis (2004), Mühlenkamp (2015), Megginson (2017), and Radic et al. (2021). In summary, the empirical studies suggest that in many cases privatization has indeed improved economic performance, providing better services and at lower cost to the consumer. In some but not all cases, economic growth and public welfare have benefited, with more choice, improved services, and lower prices to consumers.

International Studies

Early international studies by Megginson et al. (1994), Boubakri and Cosset (1998), and D’Souza and Megginson (1999) found that privatization led to important economic gains, especially in terms of higher profitability, productivity and output and lower leverage. Galal et al. (1994) in a widely cited study estimated the welfare effects of privatization in 12 large firms, mainly infrastructure businesses, in four countries: Chile, Mexico, the United Kingdom, and Malaysia. They compared the performance after privatization with estimates of the expected performance had the businesses remained in the state sector. They concluded that there were net improvements in public welfare in 11 of the 12 cases, largely resulting from higher investment and productivity. Megginson and Netter (2001, p. 380) in a review of such early studies concluded: “Research now supports the proposition that privately-owned firms are more efficient and more profitable than otherwise-comparable state-owned firms.” Similarly, Megginson (2017), reviewing more recent performance studies, concluded that, generally, privatization improves the financial and operating performance of formerly state-owned enterprises.

However, a number of studies have questioned such an unconditional conclusion, suggesting a more subtle approach to evaluating the record of state-sector and private-sector firms. For example, research into privatized telecommunications by Wallsten (2003), Gutierrez and Berg (2000), and Bortolotti et al. (2002), across a number of countries, found that privatization alone is associated with limited performance benefits and that effective competition or, in its absence, effective state regulation is important in bringing about efficiency gains. Bortolotti et al. (1998), using data on the privatization of electricity generation in 38 countries, concluded similarly that effective state regulation is crucial to the success of privatization. Mühlenkamp (2015) argued that privatization does not necessarily improve business performance, and Palcic and Reeves (2015) reported that after the privatization of Ireland’s largest agribusiness, the Irish Sugar Company, there was no strong evidence of improvements in financial performance or productivity. Radic et al. (2021) suggested that the mixed results of privatizations may be partly explained by what was privatized, how it was privatized, and the nature of state regulation after privatization.

Privatization in the United Kingdom

The United Kingdom’s substantial privatization program has been studied in considerable detail. Studies have looked at whether economic performance improved after privatization, for example, in terms of productivity, prices, and services (for reviews see Florio, 2004; Parker, 2020). In an early study of productivity in nine privatized enterprises across a range of UK industries, Bishop and Thompson (1992) reported mixed results. Martin and Parker (1997) studied 11 privatized companies and a range of economic and financial measures and similarly found that outcomes varied. Green and Haskel (2001), reviewing performance in four privatized and two non-privatized businesses in the United Kingdom from the 1970s to the 1990s, concluded that in three of the four privatized companies there was a slight decline in productivity growth after privatization. Firms seemed to improve their productivity ahead of privatization but did not necessarily sustain the growth rate afterward. Bishop and Green (1995) suggested that the degree to which competition increased after privatization might be important in determining the outcome. Saal and Parker (2000, 2001), studying productivity and costs in the water industry of England and Wales before and after privatization in 1989, discovered that there was no obvious performance improvement until state regulation of the industry became more effective, in the mid-1990s. Similarly, Florio (2004) concluded that productivity growth in British Telecom, privatized in 1984, rose noticeably only after competition and regulatory pressures intensified in the early 1990s. Overall, the numerous UK studies suggest varying results, with outcomes sensitive to the performance measure chosen and the degree of competition and effective state regulation accompanying the state sell-offs.

As Florio (2004, p. xiv) concluded: “the great British privatization was not the unconditional success it is commonly thought to have been.” Where significant performance improvements have been recorded, these were often the result of increased competition or interventions by the state regulatory offices, notably a tightening of the price caps imposed on the privatized utilities. At the same time, it is arguably the case that in the absence of privatization the competition and regulatory improvements would have been more difficult to achieve. State enterprises are often protected from competition and ineffectively regulated. Also, as in all studies of performance pre- and post-privatization, the counterfactual is a problem; that is to say, what would performance have been had the industries remained under state ownership? It is never possible to be sure whether performance would have been better or worse had the firms remained state owned. Nevertheless, the evidence from the UK suggests that it is not axiomatic that privatization will lead to an improvement in economic performance. This conclusion is reinforced by the fact that in the United Kingdom, some businesses have failed after privatization, notably in the iron and steel, coal, shipbuilding, motor vehicle, and rail industries, sectors that had struggled for financial viability while under state ownership.

Emerging Economies

Turning specifically to studies of privatization in developing countries and the transition economies, again the results vary. Reviewing numerous studies, Kikeri and Nellis (2004) argued that most of the research assessing performance before and after privatization shows that privatization improves enterprise performance. Consistent with this, studies of privatization in China suggest economic gains (Megginson, 2017). However, not all research is so favorable. For instance, Bayliss (2009) suggested that the results of privatization in Africa have been disappointing; while Kirkpatrick et al. (2006), in a statistical study of water services in Africa, found no evidence that private-sector water utilities in Africa are necessarily more efficient than state-owned utilities. This result may very well reflect the technology of water provision, which restricts the scope for competition, alongside regulatory weaknesses in developing economies. In the absence of effective state regulation, privatized utilities can continue with inefficient prices and poor service quality.

All studies of the effects of privatization are subject to the methodological problems of establishing causality, separating the effects of ownership change from other factors that impinge on performance. There is also the possibility of the selective use of data—picking and choosing the countries or the most favorable financial and economic performance indicators to make a point (Cook, 1997). For example, some studies may be criticized for neglecting the failure of a number of privatizations in the former Soviet Union and elsewhere (Black et al., 2000; Sachs, 1992; Tankha, 2009). Gupta and Kumar (2020) confirmed that performance comparisons of state-owned and private enterprises are complicated by the social, economic, and political objectives of state enterprises. State-owned enterprises might be expected to pursue broader objectives than private-sector profit maximization, so that a finding that privatization leads to improved profitability is not surprising. Some studies have concentrated upon financial performance indicators and taken little or no account of income redistribution effects, including any reductions in employment after privatization (Bayliss & Cramer, 2001). Even where economic gains occur, there may be important income and wealth redistribution effects, suggesting that there are both winners and losers from privatization (Birdshall & Nellis, 2003; David, 2008; Nixson & Walters, 2006). In the transition economies of Central and Eastern Europe, it seems that the rapid privatization programs pursued in the 1990s led to some diverse economic results and particularly regressive wealth transfers (Estrin et al., 2009; Nellis, 1999). This is probably also true of China. Moreover, many of the published empirical studies are concerned with developed economies that have well-developed institutional environments (Goldeng et al., 2008; Lioukas, 1985; Mazzolini, 1980; Nielsen, 1982). Arguably, caution is necessary when generalizing the findings from such studies to emerging economies where the institutional environment and business structures are different. A number of studies have used a public versus private dichotomy that does not reflect the heterogeneous nature of governments and private-sector firms in many emerging economies (Bruton et al., 2015; Chakrabarti & Ray, 2018).

Outstanding Issues

The evidence from both the developing and transition economies suggests that if privatization is to improve economic performance significantly, it needs to be complemented by policies that promote more effective state governance (Chong & López-de-Silanes, 2003; Kessides, 2005; Senderski, 2015; Tan, 2008, 2011). Privatizations may disappoint because of a lack of adequate technical capacity within governments to handle the sale process, a lack of accountability and transparency in public policy, corruption and cronyism, ongoing regulatory problems because of inadequate resourcing, and significant income and wealth transfers with resulting social costs. The message seems to be that privatization programs need to be accompanied by policies aimed at improving political and legal systems, establishing more effective protection of property rights, reducing bureaucracy, making capital market improvements, instituting improved regulatory regimes, and promoting competition, anti-corruption programs, and social programs. In other words, privatization needs to be integrated into a broader program of state structural change (Parker & Kirkpatrick, 2005). Consistent with this view, Estrin and Pelletier (2018) concluded that privatization alone cannot be relied upon to raise economic efficiency and that it needs to be complemented by a number of policy objectives, including improved processes of sale, creation of regulatory capacity, and attention to poverty and social consequences.

Overall, the numerous studies of actual privatizations in developed, developing, and transition economies confirm that the economic failings of state-owned enterprises, identified by economic theory, do exist. However, the relationship between privatization and performance improvements is more nuanced than is sometimes suggested. The empirical research identifies privatization successes and failures. It turns the spotlight on the prerequisites for effective privatization, including better state governance and the promotion of effective competition and state regulation and social protection. In the 1980s and 1990s privatization was, arguably, oversold as both an essential and a simple economic reform. As Kikeri and Nellis (2004, p. 92) commented: “In many ways privatization in the early years was a leap of faith. . . . There was neither great theoretical justification nor hard evidence at the beginning of the 1980s that the performance problems of state enterprises could be altered by change in ownership.” Since then, economists have learned a lot about the conditions for successful sell-offs and the results of actual privatizations, although there are still a number of issues that deserve to be adequately addressed. In particular, the longer-term effects of privatization, the consequences for income and wealth distribution, the implications for state regulation and competition policy, and the future management of state-owned industries. These are summarized in Box 1.

Box 1: Outstanding Issues

Static Versus Dynamic Efficiency Gains

What are the longer-term effects of privatization, notably on investment, innovation, research and development (R&D), and entrepreneurship?

Income and Wealth Distribution

To what extent does privatization lead to income and wealth redistribution that is regressive in nature? How are the adverse consequences for income and wealth distribution in future privatizations best ameliorated to reduce any socially regressive effects?

Competition Policy and Regulation

Competition, or, in its absence, effective state regulation, seems to be important in bringing about economic efficiency gains following privatization. What are the implications for future competition policy and for the operation of state regulatory institutions, especially given the economics literature on the potential inefficiencies of state intervention?

Managing State-Owned Industries

Despite extensive privatization activity internationally since the 1980s, state-owned industries may still account for around 10% of world GDP. How are they to be more effectively managed given past evidence that they can be economically inefficient and unresponsive to consumer demand?

Static Versus Dynamic Efficiency Gains

The many studies of the efficiency gains from privatization have generally compared performance over a relatively short period of time, typically a few years before and after transfer to the private sector. This means that the performance changes identified are mainly or wholly what economists refer to as static efficiency gains, involving the more efficient combination of resources with existing technology and know-how. For example, producing essentially the same products or services using less labor, thereby bringing about an increase in labor productivity. However, sustained economic performance relies on dynamic efficiency, which is concerned with changes in the economics of production over time. Dynamic efficiency gains result from innovation in products and production processes, resulting from technological change, investment, R&D, and entrepreneurial behavior (Zahra et al., 2000).

Typically, the achievement of dynamic efficiency gains requires longer periods of time than attaining static efficiency. It involves innovation and investment, usually with long gestation periods. Dynamic efficiency gains associated with privatization, notably the effects on R&D expenditures and innovation, have been largely ignored in most studies even though over time the dynamic efficiency effects of privatization could easily outweigh any static gains in performance. A reason why performance studies fail to address the dynamic effects of privatization is because studying performance over long periods of time is problematic. It is complicated by the problem of isolating the results of an ownership change from other variables that may impact on the firm, for example, variations in the macroeconomic environment, fiscal changes, changes in the competitive environment, and so on.

There have been a few studies of the effects of privatization on R&D expenditures and outcomes in terms of patenting. For example, Munari and Oriani (2002) examined R&D expenditures in 20 privatized firms in Western Europe. They concluded that the stock market may undervalue R&D investments of newly privatized companies. Munari and Sobrero (2002) studied R&D and patenting behavior in 25 companies that were wholly or partially privatized in nine European countries and found that, overall, there was a reduction of R&D intensity. However, at the same time, the volume of patenting increased, suggesting an improvement in terms of R&D productivity by privatized companies. This finding is consistent with the notion that in the private sector businesses may tend to invest less than state-owned firms in “blue sky” or speculative research and more in R&D that is likely to guarantee early financial returns.

There is a need for more research into the dynamic efficiencies resulting from privatization, not only in terms of R&D spending and outcomes but also in other investments and management changes leading to improved products and production processes. Related to this, there has been limited study of innovation and management behavior following privatization to bring about dynamic efficiencies, and to identify the reasons for management failure where gains fail to materialize.

Income and Wealth Redistribution

Privatization involves the transfer of assets from one group of people (the state/taxpayers) to another (private-sector shareholders/owners). If the sale value reflects accurately the present value of the firm’s future profit stream, the buyers should fully compensate the sellers and there is no wealth redistribution. However, accurately valuing the assets to be sold and the intervention of corruption and cronyism in the privatization process mean that too often privatization has led to a wealth transfer. This has been particularly obvious in some of the privatizations in Central and Eastern Europe but also elsewhere. Equally, internal restructuring of the businesses at and after privatization can be expected to lead to gainers and losers, for example through changes in employment.

There has been some research into share flotations and their valuation and into the effects of privatization on workers. For example, in the United Kingdom there was some undervaluation of privatized assets leading to significant capital gains for investors (Parker, 2009, 2012). Newberry and Pollitt (2003) concluded that the cost reductions achieved in UK electricity generation after privatization were in large part reflected in gains to investors rather than to consumers or government. In terms of the effects on labor, it might be expected that privatized firms pursuing cost savings to boost profits will reduce employment and wages and worsen employment conditions. However, it is equally possible that improvements in competitiveness and productivity after a sell-off to the private sector lead to higher employment and improved wages and terms of employment. The studies that have been undertaken into actual changes paint a mixed picture (Brown et al., 2010; Dessy & Florio, 2004; Kikeri & Nellis, 2004, pp. 100–102; La Porta & López-de-Silanes, 1999).

What is clear is that perceived and actual cases of the regressive wealth and income redistribution effects of privatization have had an effect in terms of increasing public opposition to privatization programs, thereby slowing the implementation of these programs and sometimes leading to their reversal. More research is needed into the actual outcomes of privatization for different groups in society.

Competition Policy and Regulation

Many economists believe that competition in the product market is a more critical determinant of efficiency than ownership per se (Kay & Thompson, 1986; Vickers & Yarrow, 1988). Both private-sector and state-owned firms are expected to perform better when they operate in competitive product markets because competition for consumers weeds out the underperformers. It is the case that privatization can improve the competitive environment by removing legal barriers to market entry and state subsidies that deter potential competitors. At the same time, there is an inherent incentive in the competitive process for management to try to drive out the competition after privatization to boost profits.

Privatization, therefore, needs to be matched with effective competition laws that protect consumers from anticompetitive practices. These largely exist in Europe, North America, and certain other parts of the world. But while some developed countries have established and robust competition regimes, too often in emerging economies institutions are inadequate because of underfunding of the authorities, a lack of expertise, and political and legal difficulties. Also relevant is a lack of adequate state regulation of privatized monopoly utilities, such as in the energy sector. In consequence, in these countries privatization risks the development of private-sector monopoly abuse. There has been some research into the interrelationship between privatization, competition, and regulation in developing countries, but there needs to be more. The research that does exist confirms the importance of competition or, in its absence, adequate state regulation, and that the sequencing of reforms may matter; effective competition or regulatory regimes may need to be introduced ahead of the privatization of monopoly infrastructure (Kirkpatrick et al., 2005, 2008; Wallsten, 2003).

In sum, the prospects for privatization in a country need to be evaluated alongside the adequacy of competition policy and regulatory laws and institutions.

Managing State-Owned Industries

Despite the considerable worldwide privatization activity that has occurred since the 1970s, state-owned enterprises (SOEs) remain economically important (Bernier et al., 2020). As the World Bank (2014, p. 3) notes: “many SOEs now rank among the world’s largest companies, the world’s largest investors, and the world’s largest capital market players.” One estimate suggests that SOEs may still account for some 10% of global GDP (Bruton et al., 2015). Following disappointing results, some privatized businesses have already returned to state ownership, such as parts of the United Kingdom’s railways. Growing public concern about global warming is leading to more state intervention in privatized energy businesses to promote a green economy.

In other words, the boundary between the private and state sectors remains fluid. Public policy changes to reflect shifts in public opinion on the extent to which the state should intervene in the market economy and what products and services are best provided by the state versus by the private sector. As PWC (2015, p. 4) concludes: “state-owned enterprises . . . appear to be an enduring feature of the economic landscape.” In consequence, more attention needs to be focused on the methods for best managing state-owned enterprises to address their recorded weaknesses, especially in terms of damaging political direction and the absence of market disciplines, notably competition. More research is needed into better ways of managing and regulating state-owned enterprises.


As a result of theoretical developments in economics and growing evidence that state-owned enterprises are inefficient, privatization developed as a prominent public policy from the 1980s. Large-scale privatizations occurred in Europe, notably in the former communist economies of Central and Eastern Europe, and there were significant privatizations in other parts of the world, including in Latin America, Africa, and Asia, particularly China.

This study has detailed the scale of privatization activity, reviewed the theoretical developments in economics that underpinned the privatization programs from the 1980s, and assessed them alongside the actual performance of privatization in terms of improving economic efficiency. The theoretical foundations lie in the public choice and agency theory literatures, supported by developments in the free market arguments at the heart of monetarism and Austrian economics, alongside developments in the economics of regulation and contestable markets. These theoretical arguments encouraged the notion that private enterprise is superior to state ownership. Even when monopolies exist because of the technology of production, monopoly abuse can be tackled by state regulation of private-sector businesses rather than outright state ownership.

While these theories are relevant in explaining privatization, theories need to be tested. There is now a substantial literature on the performance of state-owned and privatized industries and services. The results suggest that while privatization does lead to important economic gains, these are not guaranteed. It is not unquestionable that economic performance will improve substantially when state-owned enterprises transfer to the private sector. In some countries, as a result of wider governance issues relating to their political and legal systems, sell-offs have been flawed and have led to disappointing results. Corruption and cronyism have haunted the privatization process in too many countries. Elsewhere, governments have lacked the skills and knowledge to bring about privatizations that benefit consumers and the economy while avoiding regressive income and wealth transfers. Research emphasizes the importance of effective competition after privatization to ensure that economic welfare improves. In the absence of competition, effective state regulation is essential. Unfortunately, a number of countries have lacked both effective competition policies and regulatory institutions.

Where privatization disappoints, enterprises are more likely to be brought back under state ownership. This is already occurring, and it reflects shifting government policy in the face of changes in public opinion. At the same time, any reversal of privatization raises its own set of challenges, not least in terms of how best to manage state-owned businesses, given the potential inefficiencies of state ownership. With the boundary between the private and state sectors remaining flexible, a major challenge exists for public policy in terms of ensuring economic efficiency and socially acceptable outcomes.


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  • 1. In May 2021, to improve services and reduce costs, the U.K. government announced the end of rail franchising.

  • 2. The precise scope of the “special share” varied. It commonly included restrictions on shareholdings and takeovers, sometimes for a given period of time after privatization.

  • 3. The Privatization Barometer based in Milan was developed by the Fondazione Enri Enrico Mattei (FEEM). Its website was last updated in 2016.