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What to Privatize

August 16, 2015

A local politician recently announced that her party would consider privatizing a government company, if that party was voted into power.  This news led me to think about which companies should be privately-owned, and which should be government-owned.

Let’s start with some ground rules, ones with which many people will agree.  Private companies are more efficient, with proper competition.  They can easily be identified from their low profits.  However, companies that dominate their markets, be they monopolies or oligopolies, are generally not efficient.  These companies can be identified from their high profits.  Governments must regulate these companies.  Of course, they must also tax their profits.

Efficiency in a company is generally a good thing.  The result is usually lower prices for their products.  Efficiency is not automatically connected with private enterprise.  It requires real competition.  Of course, a drive for lower prices may also affect the employees by keeping their salaries low or by reducing their number.  Still, efficiency is generally a good thing.

The big factor is the political ideology of the government in power.  People on the extreme right of the spectrum want as many companies as possible to be privately-run.  They also want minimal regulations, so that companies can look after their own affairs without government interference.  Those on the extreme left want the opposite.  They want more government agencies, with as much control over private companies as possible.  Fortunately, most people fall somewhere in the middle, between the extremes.  They want a more balanced mixture of companies, with regulations where they are necessary.

Money is the root of all evil, they say.  It’s also the reason behind many privatization attempts.  Governments often privatize companies because they want the money they can get by selling them.  I’d say that that’s not a good reason.  Also, government companies sometimes compete against private companies.  In general, they shouldn’t be doing this.  If the industry can function well with private companies, the government shouldn’t be in that market at all.  The CBC often draws this accusation, but I see this as a special case.  As long as the CBC sticks to its mandate, which is to provide services that private broadcasters do not provide, they are not competing with them.  Finally, government companies can be a source of income for the government, or can require subsidies from the government.  Neither of those facts should be a reason to move them into private hands.  Service to the public should be the only consideration.

The traditional government companies are the utilities, companies that supply water, electrical, or telephone services.  That’s because most of their investment goes into pipes or cables to each home.  Lately, governments have found innovative ways to privatize these companies.  Take the water utility as an example.  They set up one company that owns the pipes, the pumps, and storage ponds.  This company charges a delivery fee to pay for all of this.  They also set up many private companies to deal with the customers.  These companies pay the delivery fee.  It all sounds good because most of it is private, but there’s still no real competition.  I call it false competition.  It would be better for the government to continue to operate the water utility.

When I was on vacation in Utah, I was surprised to find that all of the state and national park employees were working for a private company.  In this country, they would all be provincial or federal government employees.  In Utah, there was one contractor for all of the parks.  Sure, it was a private company, but there was no competition.  There was no gain in efficiency.  It’s another instance of false competition.

Governments, naturally enough, often want to reduce costs.  Sometimes, employee’s salaries are the major cost.  The magic solution is to transfer the work to a contractor instead.  Then the contractor will be responsible for hiring all of the people it needs.  This is really a tactic to reduce salaries.  There is no magic.  There is no competition.  There is no efficiency.  All there is are lower salaries, which of course does reduce costs.  Likely also, there is reduced service to the public.

I haven’t developed a specific way to determine which companies should be in the private sector and which should be in the government sector.  However, the decision should be pretty clear from a knowledge of the industry involved.  Some are naturally private.  Some are naturally government.  Going beyond that for ideological reasons only results in false competition or false monopoly.

 

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