Privatization Policies and Public Enterprise: A Survey*

This paper surveys and analyzes the economic literature on ‘privatization’ policies, restricting coverage to policies designed to improve the operating efficiency of public sector enterprises through increased exposure to competitive market forces. These include asset sales, liberalization (or deregulation) and franchising. The objectives, incentives and constraints of public and private enterprises are examined, and evidence on their comparative performance is analyzed. Public sector revenue effects from asset sale are also explored. On the basis of these considerations, the paper concludes that liberalization is an important ingredient in any policy package designed to improve the operating efficiency of public sector enterprises. Asset sale may enhance the beneficial impact of deregulation but asset sale in the absence of deregulation is unlikely to improve efficiency, and may introduce additional market distortions. Franchising is seen as an appropriate mechanism for privatization when the market is inherently monopolistic and when the government desires to retain control over output and/or price.