5.2.2 Privatisation and decline of public services

Helpful prior knowledge and learning objectives

Helpful prior learning:

Section 1.1.1 The economy and you, which explains what an economy is and how it is relevant to students’ lives
Section 1.1.2 The embedded economy, which explains the relationship between the economy and society and Earth’s systems
Section 3.2.5 Moral limits of markets, which discusses the ethical issues involved with using markets as a provisioning institution, including the impact on economic inequality and the crowding out of important social values
Section 4.3.2 Enclosure, which explains what enclosure is and how it impacts commons

Section 5.1.1 The state as a system, which defines the state, its parts and their relationships, and some ways to classify states
Section 5.1.2 Origins, legitimacy and power of states, which explains how states came about, how they gain legitimacy and maintain power
Section 5.1.3 Functions of the state, which explains the various roles of the state in providing goods and services, protecting the population, and stabilising and guiding change
Section 5.1.4 Balancing state and non-state power, which explain the importance of balancing state and non-state economic power and strategies to achieve such a balance
Section 5.1.5 State narratives: Neoliberalism, which describes the neoliberal narrative and explains how it came to dominate economic thinking
Section S.1 What are systems?, which explains what a system is, the importance of systems boundaries, the difference between open and closed systems and the importance of systems thinking
Section S.2 Systems thinking patterns, which outlines the core components of systems thinking: distinctions (thing/other), systems (part/whole), relationships (action/reaction), and perspectives (point/view)

Learning objectives:

discuss how privatisation threatens the state’s ability to meet human needs within planetary boundaries

In 2000, protests broke out in Cochabamba, Bolivia, after the state gave control of the city's water supply to a private company, Aguas del Tunari. Water prices soared, and even collecting rainwater was banned. Many families couldn’t afford the new prices.

Protests grew, and after months of resistance, the state ended the contract with the water company. This event, now called the Cochabamba Water War, shows how privatising essential services can harm people’s access to essential services. But why do states privatise, and what are the impacts?

Figure 1. People taking over the streets of Cochabamba during the Water War of 2000.

(Credit: Tom Kruse)

What is privatisation?

Privatisation happens when the state transfers services like healthcare, education, water, or transport to private companies (Figure 2). Instead of being funded through taxes and managed by public authorities, private firms take over and usually charge users directly. This shift affects how services are run, who can access them, and how much they cost.

An illustration showing the various assets that pass from public to private hands with privatisation

Figure 2. Privatisation transfers resources and services from the state to private businesses who aim to profit from them.

(Credit: various artists, Noun Project)

Sometimes governments sell entire state-owned companies, such as national railways or energy providers. Other times, they sign contracts with businesses to manage services. In some cases, the state keeps ownership but runs services like a business, focusing more on generating revenue.

Why do states privatise?

States privatise for various reasons (Figure 3):

financial pressure;
neoliberal narratives about private business efficiency, and state incompetence;
business incentives to earn profits from providing essential goods and services;
demands of international organisations and banks as a condition of new loans.

One major reason is financial pressure. Public services are expensive to maintain. If a state has a large budget deficit or high debt, selling services can raise funds quickly or reduce state spending. This has been a key part of austerity policies (Section 5.2.1), especially after the 2008 financial crisis. In countries like Greece and Portugal, states sold public assets and outsourced services to private firms as conditions for receiving loans from the European Union (EU) and the International Monetary Fund (IMF).

International organisations like the International Monetary Fund (IMF) and World Bank support privatisation. They offer loans to countries in crisis but often require privatisation as a condition. Their goal is to reduce public spending and promote economic growth, but this can harm people if services become unaffordable or lower in quality.

Another reason states privatise is the belief that private firms run services more efficiently. Many states follow neoliberal narratives (Section 5.1.5), which claim that competition and profit always drive innovation and better service. These ideas are often taught in economics courses, which focus on cost efficiency, producing more while spending less. But this focus sidelines social goals like fair access to essential services or good conditions for workers.

Private companies are also motivated to gain control over services people need, like healthcare or transport. They argue they can provide better service at lower cost. But they also want to make profits from things people cannot live without.

What are the impacts of privatisation?

Privatisation is often promoted as a way to improve efficiency, reduce costs, and encourage innovation. This may work sometimes, but it can also lead to poor service quality, worse working conditions and reduced public access to essential goods and services.

Efficiency and quality

In theory, private companies in competitive markets try to improve quality and lower costs to attract customers. However, essential services like water, electricity, or public transport may not work well in markets. People need the services and often have little choice of provider; the markets may be a monopoly (Section 3.2.4). This makes it easy for private companies to cut cost of production without improving quality.

Privatisation can increase productivity when companies invest in new technologies. In services that depend on human workers, however, cost-cutting usually means reducing staff or lowering wages. In services that rely on people like healthcare or transport this usually leads to worse service. For example, fewer nurses mean longer wait times and more stress for hospital workers. In transport, fewer maintenance staff can lead to delays or safety issues. In cases like this, public management can be better for ensuring fair pay, good working conditions, and reliable services.

Figure 3. In labour-intensive industries like health care, reducing costs often means worse-quality care.

(Credit: D Lahoud, licensed from Adobe Stock)

Access to essential services

Essential services like healthcare, transport, and electricity have inelastic demand (Section 3.1.3). People need them, even if the prices are high. When privatised, companies charge users directly for services, which may be unaffordable for many.

The United States is a clear example. Its healthcare system is mostly private. People without insurance face very high prices, and many avoid treatment. Even though the US spends more on healthcare per person than any other country (Figure 4), health outcomes are worse than in many countries with public systems. Life expectancy is lower (Figure 5), and child mortality is higher.

Canada, in contrast, has a publicly funded healthcare system that offers free access to everyone. It spends less per person on healthcare but has better results. This shows how public systems can be more effective at providing equal access and improving public health.

Graph showing that the USA has the most expensive health care in the world

Figure 4. US health care per capita costs are by far the highest in the world.

(Credit: Statista, based on OECD data)

Graph showing life expectancy in the USA lower than comparable countries.

Figure 5. US life expectancy is far lower than other (income) comparable countries.

(Credit: Peterson Center on Health Care, based on public life expectancy data)

Can privatisation be reversed?

Privatisation is not always final. When services become too expensive, too poor in quality, or too unequal, national governments or local communities sometimes take them back. This is called remunicipalisation at the local level or renationalisation when done by national governments (Figure 6).

Illustration showing various assets being passed back from the private sector to state hands

Figure 6. Remunicipalisation or renationalisation transfers resources and services from the private sector back to the state.

(Credit: various artists, Noun Project)

Here are some examples:

Paris, France (2010): The city regained control of its water services after years of poor performance under private firms. Public management improved infrastructure and lowered prices. Other cities like Grenoble and Nice followed.
Germany (2000s–present): Over 350 towns reclaimed control of electricity services after private companies raised prices and failed to support renewable energy. Public providers now focus on stable prices and sustainability.
Bolivia (2000s): After the Cochabamba Water War, the government returned water services to public control. Later, it also renationalised electricity, improving access and keeping prices stable.

Public control of essential services can work better for people and the planet. While private companies may do well in competitive markets for non-essential goods, essential services need different goals: fair access, long-term investment, and public benefit rather than profit.

Activity 5.2.2

Concept: Power, systems

Skills: Thinking skills (transfer)

Time: varies, depending on the option

Type: Individual, pairs, or group

Option 1: How does privatisation threaten state functions?

Time: 25 minutes

Look back at what you learned about the three main functions of the state in Section 5.1.3 (Figure 7). Then reflect on what you have learned in this section about privatisation.

Working individually, with a partner, or in a small group:

Explain how privatisation can hinder the state from carrying out its functions.
Are there some functions that might be more affected than others? If so, why?

Figure 7. Three broad functions of the state. How does privatisation threaten them?

Option 2: The Bolivian Water Revolt

Time: varies, depends on how long students are given to explore the website, whether they divide and share the work, or whether they develop a case study or exhibit with the information

The water protests in Cochabamba in early 2000 became a global symbol of defending vital natural resources from enclosure. On the tenth anniversary of the protests The Democracy Center put a set of resources online to help people understand what happened there:

The Bolivian Water Revolt

Explore the website to learn about this case study of water enclosure and how the community of Cochabamba were able to resist it.
If you are working with other students, you may wish to divide up the exploration of the website and then share what you found with each other.
You could write up a short case study, being sure to highlight some key points about commoning learned in Topic 4, or you could even do an exhibit on the case for your classroom or in the school.

Option 3: Which goods and services should states provide?

Time: 30 minutes

Consider the goods and services listed in Table 1, and decide to what extent states should provide them.
Check the box that indicates the level of state involvement and for each one explain your reasoning.
Note that it is also possible for some things to be provided by the commons. If you have studied Topic 4: Commons, you could also argue that this provisioning institution should provide the good or service instead of state or markets.
If you can, discuss your ideas with a partner, small group or whole class.

Table 1. Which services and goods should the state provide?

Ideas for longer activities and projects are listed in Subtopic 5.5

Checking for understanding

Coming soon!

Further exploration

Healthcare spending - An extensive article from Our World in Data article on health care spending. Difficulty level: medium
Section 3.2.5 Moral limits of markets - explores the ethical issues involved with using markets as a provisioning institution, including the impact on economic inequality and the crowding out of important social values. Difficulty level: easy
Remunicipalisation - A page from Public Services International website that describes the remunicipalisation movement and examples from around the world. Difficulty level: easy

Sources

The Democracy Center. (n.d.). The Bolivian water revolt. https://www.democracyctr.org/the-bolivian-water-revolt

Public Services International. (n.d.). Remunicipalisation. Public Services International. https://publicservices.international/resources/page/remunicipalisation?id=13693&lang=en

Wagner, O. (2015). The establishment of 72 new municipal power utilities. Wuppertal Institut für Klima, Umwelt, Energie. https://epub.wupperinst.org/frontdoor/deliver/index/docId/5920/file/5920_Wagner.pdf

Zacune, J. (2013). Privatising Europe: Using the crisis to entrench neoliberalism. Transnational Institute. https://www.tni.org/en/publication/privatising-europe

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