In most cases of privatisation, some outcomes benefit some, which serves to legitimise the change. Nevertheless, overall net welfare improvements are the exception, not the rule.
Never is everyone better off. Rather, some are better off, while others are not, and typically, many are even worse off. The partial gains are typically high, or even negated by overall costs, which may be diffuse, and less directly felt by losers.
Privatised monopoly powers
Since many SOEs are public monopolies, privatisation has typically transformed them into private monopolies. In turn, abuse of such market monopoly power enables more rents and corporate profits.
As corporate profits are the private sector's yardstick of success, privatised monopolies are likely to abuse their market power to maximise rents for themselves. Thus, privatisation tends to burden the public, e.g., if charges are raised.
In most cases, privatisation has not closed the governments' fiscal deficits, and may even worsen budgetary problems. Privatisation may worsen the fiscal situation due to loss of revenue from privatised SOEs, or tax evasion by the new privatised entity.
Options for cross-subsidisation, e.g., to broaden coverage are reduced as the government is usually left with unprofitable activities while the potentially profitable is acquired by the private sector. Thus, governments are often forced to cut essential public services.
In most cases, profitable SOEs were privatised as prospective private owners are driven to maximise profits. Fiscal deficits have often been exacerbated as new private owners use creative accounting to avoid tax, secure tax credits and subsidies, and maximise retained earnings.
Meanwhile, governments lose vital revenue sources due to privatisation if SOEs are profitable, and are often obliged to subsidise privatised monopolies to ensure the poor and underserved still have access to the privatised utilities or services.
Privatisation burdens many
Privatisation burdens the public when charges or fees are not reduced, or when the services provided are significantly reduced. Thus, privatisation often burdens the public in different ways, depending on how market power is exercised or abused.
Often, instead of trying to provide a public good to all, many are excluded because it is not considered commercially viable or economic to serve them. Consequently, privatisation may worsen overall enterprise performance. “Value for money” may go down despite ostensible improvements used to justify higher user charges.
SOEs are widely presumed to be more likely to be inefficient. The most profitable and potentially profitable are typically the first and most likely to be privatised. This leaves the rest of the public sector even less profitable, and thus considered more inefficient, in turn justifying further privatisations.
It is often argued that privatisation is needed as the government is inherently inefficient and does not know how to run enterprises well. Incredibly, the government is expected to subsidise privatised SOEs, which are presumed to be more efficient, in order to fulfil its obligations to the citizenry.
Such obligations may not involve direct payments or transfers, but rather, lucrative concessions to the privatised SOE. Thus, they may well make far more from these additional concessions than the actual cost of fulfilling government obligations.
Thus, privatisation of profitable enterprises or segments not only perpetuates exclusion of the deserving, but also worsens overall public sector performance now encumbered with remaining unprofitable obligations.
One consequence is poorer public sector performance, contributing to what appears to be a self-fulfilling prophecy. To make matters worse, the public sector is then stuck with financing the unprofitable, thus seemingly supporting to the privatisation prophecy.
Benefits accrue to relatively few
Privatisation typically enriches the politically connected few who secure lucrative rents by sacrificing the national or public interest for private profit, even when privatisation may not seem to benefit them.
Privatisation in many developing and transition economies has primarily enriched these few as the public interest is sacrificed to such powerful private business interests. This has, in turn, exacerbated corruption, patronage and other related problems.
For example, following Russian voucher privatisation and other western recommended reforms, for which there was a limited domestic constituency then, within three years (1992-1994), the Russian economy had collapsed by half, and adult male life expectancy fell by six years. It was the greatest such recorded catastrophe in the last six millennia of recorded human history.
Soon, a couple of dozen young Russian oligarchs had taken over the commanding heights of the Russian economy; many then monetised their gains and invested abroad, migrating to follow their new wealth. Much of this was celebrated by the Western media as economic progress.
Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.