When Privatization Makes Sense--and When It Doesn't

Governments are often bad at running businesses, but when there's no actual market, they may still be a better choice.

I was just reading about Bolivia's privatization of Transportadora de Electricidad (TDE), it's national power transmission grid. There's been a trend (again) towards nationalization of industries in South America. Argentina recently nationalized an oil company there owned by a Spanish company. Bolivia is paying the Spanish firm for the nationalization, however, whereas Argentina just expropriated the parent company's property.

The moral questions about confiscating property aside, however, there's a more important issue: Is private ownership always better? If not, when is it better for a government to own something? As hinted in the subtitle, it has to do with whether there's a market or not.

There are certain areas, like transportation networks, utilities, and infrastructure, where natural monopolies tend to arise. Monopolies are bad news because people are forced to buy from them, giving them too much power to jack up prices to whatever they want and make a ton of money. That obviously hurts everyone else. Think about city streets. Imagine if private companies ran them and had toll booths for their use. Not only would it be really irritating, but you would be forced to use certain streets. There wouldn't really be competition between "providers." You have to use the street you live on or cross that bridge into town. This is why it makes sense for governments to build and maintain roads. Some highways are privatized, but you can often use other roads and the pricing is generally controlled by a government authority.

Ports (including airports), suppliers of water, electricity, and telecommunications, public transportation, and rail networks (i.e. the tracks the trains use if not the train operators) are other good examples. It doesn't make sense to have five different companies running subway lines competing with each other, each with their own tracks. It would be wasteful and the price would be higher. It makes sense in such a case to have the government running it. Government provision of water and sewage treatment is also sensible. (Notice that waste collection is good in private hands, as the companies drive to consumers and can compete fiercely with each other.) Electricity grids, if not the providers, can also be sensibly placed in government hands. If they're not, the alternative is that the government sets rules on the prices the companies may charge to transmit competitors' electricity. The point is: there has to be a functioning, competitive market, regulation, or government ownership.

Bolivia's privatization of its power grid, therefore, is not necessarily unreasonable. If it is capable of doing a decent job expanding and maintaining it, and doesn't give special prices to favored power generators, then it may be an improvement. It would probably have been easier to solve any problems with targeted regulation instead, however.

Argentina's nationalization of an oil company, by contrast, makes no sense from the start (if the point is to improve things for consumers, that is). Oil producers compete heavily with each other. There are loads of them. If the government felt too much money from oil extraction in its territory was going abroad, it could have raised the taxes on oil companies (much as Australia has raised taxes on mining companies). Nationalizing an oil company serves no purpose except that the government can get its hands on a bunch of cash and assets without paying for them. In other contexts we call that what it is: theft. There are also other dangers: if the Argentinian government fails to invest in production, the oil company will return less and less money (Mexico and Venezuela are cases in point). This would reduce world oil supplies and rob Argentina of a viable industry, killing jobs along the way.

So privatization is no panacea. It makes sense in most cases as long as there is a real market (Britain's privatization of its water supply was probably a mistake, for example). If there's a competitive market, private companies will almost certainly do a better job than the government at providing goods and services efficiently. Where there's no market, however, there can be good arguments in favor of public provision. US Republicans would do well to remember that toll booths on sidewalks are silly and that some government money is needed to make sure bridges don't collapse. Privatizing all of them instead is, at best, a second-rate solution.