Privatization Unbound

Outside the postcommunist world, the great wave of industrial privatization has crested. In the postcommunist countries privatization remains focused on areas traditionally associated with the private sector. But governments can do much more, suggests Sir Alan Walters, the intellectual architect of Britain’s privatization revolution, and the reformers in Eastern Europe, Russia, and the NIS should take note. Britain’s experience with telecoms, railroads, water, gas, and other utilities shows that "unconventional" privatizations in areas which many had believed to be "natural monopolies" also benefit by a shift to the private sector.

LONDON: Although a few privatizations had been tried in the 1970s, the process was usually hesitant and incomplete. Only when inflation had been substantially reduced and capital markets started to develop in the 1980s, was it possible to begin, at first modestly, what turned into the great wave of privatization of the latter half of the decade.

I was at the inception of the Thatcher privatization program in Great Britain which began in 1980. We had only limited experience in this area, mostly having to do with the reprivatization in the 1950s of British Road Services and other transport concerns. Not surprisingly, then, we began rather cautiously with returning to competitive environments previously nationalized businesses, most of which retained their former private sector structures and could be easily delivered from the dead hand of politicized bureaucracy and into the bracing air of the marketplace. State enterprises dominated by bloody minded or politicized trade unions were also put high on the priority list.

Conventional wisdom told us that there were many industries -- typically the so-called "natural monopolies" -- where privatization would be, at best, irrelevant and probably harmful. In the early 1980s, commonplace opinion held that these industries included telecoms, water, electricity generation and distribution, gas, and various services. The argument was that the efficiency of telecoms dictated that there should be only one connection from the switching box to the household or office, and that, in the case of the other utilities, there needed to be only one wire or pipe per customer. The enormous size of electricity, gas generation, and water supply reinforced the seeming "naturalness" of these monopolies. Insofar as the idea behind privatization was to reap the benefits of increased efficiency through competition, it appeared that little could be achieved and much lost through the privatization of such utilities.