Last Updated 05 Jul 2021

Privatisation Policy

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It was the intention in the UK that subsequent regulation of privatised companies would be as light and unobtrusive as possible. For this reason, the changes were sometimes called deregulation. In industries without big scale economies this was indeed possible. In industries such as electricity, gas water,telecommunications- more extensive regulation, with regard to structure not just conduct, is required whenever international competition is not vigourous

Privatisation was a response to the view that some state companies were not natural monopolies, and that even natural monopolies were better handled by arms length regulation that committed the government not to intervene perpetually Transfer of ownership makes credible the fact that the firm does not have limitless government backing( although governments do bail out even private companies from time to time) for example it bailed out the rail companies and railtrack because transport is vital to the economy

Selling assets at a fair price leaves government wealth unaltered. If prospects of tougher treatment in the future lead to productivity improvements in state firms the government becomes better off when the productivity improves not when(or if ) the firm is sold Many privatised firms now face intense competition often from abroad. However , natural monopolies have aquired a new framework of regulation. This has favoured price capping, administered by independent regularity agencies (quangoes) and subject to periodic review

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Increasingly, the UK has been driven to regulate not merely conduct but structure. This presupposes that some parts of a natural monopoly can be hived off and become suitable for competition. In practice, this has usually been down stream activities in a vertically related industry ie union of firms at different production stages in the same industry Recent privatisations include

  1. British Rail (now taken back into public ownership as a not for profit organisation)
  2.  British Air Ways
  3. Air Traffic Control
  4.  British Steel
  5.  British Gas
  6. British Telecom
  7. The Water Companies
  8. And most Power Companies

To assess the effects of the present governments nationalisation policy we would have to take in to consideration the fact that we have a socialist government, one of whose key beliefs is that public ownership is the better way to run the country , although this government does not appear to be as hard line in that respect as previous.

Labour Governments Arguments for Privatisation:

  1. Opening up production and consumption to market forces, increase competition, economic efficiency and consumer choice
  2. Breaking down monopolies into more competitive industries and introduces competition into the goods market
  3. Enables the privatised firms to compete for finance on the private capital markets both home and abroad
  4. Ensures that firms become accountable to their shareholders and their desire for profit
  5. Ensures that businesses are run on commercial rather than political grounds
  6. Reduces the burden on the governments finances to support nationalised industries

Arguments against Privatisation

1. Privatisation may simply create private sector monopolies with high barriers to new firms entering the industry. There are a number of reasons why these might exist;

  • The existing firm has significant economies of scale that new firms cannot compete as in the case of natural monopolies
  • The start up costs for new firms are prohibitive

Privatised firms make decisions based on commercial profit maximising grounds.

2. Nationalised firms make decisions in the public interest. If the government want to focus on poverty reduction and development then production can be organised appropriately. Privatisation may increase capital investment and reduction in the firms long run average costs

3. Privatising strategic industries means that government revenue will diminish as profits are directed to the shareholders, many of whom, in the case of multinationals live abroad, Lower government revenue may mean lower government spending on education and health etc.

Privatisation Policy essay

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