Advantages & Disadvantages of Privatization

by David James; Updated September 26, 2017
Businesswomen shaking hands

Privatization occurs when the business sector takes over previously public services, such as roads, health care, prisons and energy. The idea behind privatization holds that the private sector, through competition, can provide better services at a lower price. Many opponents argue that privatization leads to less accountability and deterioration in services.

Advantage: Competition

Pumping gas

When services once provided by the public sector become privatized, consumers gain a greater choice. If performed properly, privatization — based on competition, as opposed to an exclusive contract — often comes at a lower price and with an increase in service quality. One example has occurred in Britain, where, according to the National Economic Research Association (NERA), the price of gas has fallen by 50 percent, telecom by 40 percent and domestic gas by 25 percent since privatization. NERA also found that since selling 33 public companies, the British government went from losing more than 100 million pounds the year before privatization to making more than one billion pounds the next year through taxes and dividends.

Advantage: Revenue

Smiling woman with paperwork

Selling, leasing and contracting out public assets and services provide quick ways to raise money usable for new projects and debt payment. Government can also avoid raising taxes or taking on more debt through privatization. As of 2011, the Chicago Skyway and the Indiana Toll Road have been leased to the private sector for $1.83 for 99 years and $3.85 billion for 75 years, respectively. These figures are equal to about 60 times the annual operating profits, and the states began receiving the money immediately.

Disadvantage: Less Transparency

When private companies agree to contracts from the government, especially long-term ones, the companies can begin to cut corners to increase profits. Unless the contracts include specific reporting criteria, these businesses' modes of operation may prove difficult to monitor. When the business becomes involved in public safety, the repercussions can become serious. For example, seven people died of E. coli in Walkerton, Ontario, in May 2000 after the privatization of water testing. According to Justice Dennis O'Connor of Ontario's Supreme Court, it could have been averted if proper monitoring procedures had been strictly followed, but the company did not make their test results public until it was too late.

Disadvantage: Methods of Awarding Contracts

Businesspeople in conference room

Privatization doesn't guarantee that the contracts will go to the best companies — those that can do a better and cheaper job. Big companies with good lobbyists and political influence often land the contracts. Bechtel, the world's largest construction firm as of 2011, won a $45 million contract with the city of San Francisco to upgrade the city's water system, then had it cancelled due to waste and overbilling. An investigation by "The San Francisco Bay Guardian" showed that Bechtel completely wasted about $5 of the $8 million it received from taxpayers in the first year.

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