Privatising Public Infrastructure: Rationale and Key Issues

Abstract

The scope for privatisation has increased as markets have developed and our knowledge of how to ensure a competitive environment and deal with equity objectives has improved. Other factors in favour of a move towards privatisation include: a realisation that government failure is often worse than market failure; that there are fundamental weaknesses in the system of incentives that apply to public enterprise managers; and that public enterprise performance is greatly hampered by the scope for arbitrary political interference. Privatisation promises improved economic performance because it naturally takes advantage of a superior system of incentives. However, success is more likely to be achieved if priority is given to establishing a competitive environment. In the infrastructure area this could be achieved by implementing the concept known as “competition for the field” as opposed to “competition on the field”. Competitive franchising arrangements could be established for most of the public infrastructure in Australia. In implementing privatisation, the key issues to be addressed are making competition the primary objective and managing transitional problems, particularly employment issues. It is suggested that privatisation policies emphasise competition, be implemented quickly and comprehensively and that compensation for those who are adversely affected may be warranted in certain circumstances.