Three Questions of Privatization

Daphne Barak-Erez*

Introduction: The Challenge of Privatization

Privatization policies have become dominant in a manner that cuts through borders and cultures
motivated by complex factors, partially ideological and partially economic. In many countries all
over the world privatization leads to the creation of new forms of government action. As a result, it
should serve as a major focus of interest for public law - including both constitutional and
administrative law. With this consciousness in mind, the current article discusses the challenges
posed by privatization initiatives to public law.1 Privatization is indeed a matter of public policy,
but it is important to unfold the relevance of law to its discussion as well. Interestingly, the opposite
phenomenon of nationalization has always been discussed not only as a matter of public policy
but also as a matter of law (due to its clear impact on property rights). This understanding should
serve as a catalyst for a further study of what has been so far neglected.
It is worth adding that the focus on privatization is still important despite the tendency to adopt
certain nationalization initiatives against the background of the economic crisis which started in
2008. Nationalization is still perceived as an exception and such initiatives are considered
provisional steps, with the long term intent to return to privatization when the time is ripe.
Moreover, this crisis is yet another illuminating example of the necessity for regulation of private
activities; one of the focuses of the proposed analysis of the implications of privatization for public
law.
Indeed, legal scholarship has already started to discuss the implications of privatization for public
law. However, so far, the discussion did not profess to offer a general framework for addressing
privatization as a central component for the understanding of public law. In contrast, the view
offered here is that privatization is not only a phenomenon that merits some doctrinal adjustments,
but rather a central process that calls for a re-evaluation of area of public law, which would lead to

* Professor of Law and Stewart and Judy Colton Chair of Law and Security, Faculty of Law, Tel-Aviv University, email: barakerz@post.tau.ac.il. I thank Omer Netzer for his research assistance.
1
It is worth noting that privatization may be a subject matter for discussion also in other legal areas, such as labor law,
with respect to the rights of employees when their work place is privatized. In addition, privatization also poses a
challenge to private law, in the sense that the growing role of private entities in the public sphere may lead to a growing
demand for social responsibility of businesses. In the area of criminal law, new questions touch on the application of
offenses which have been traditionally limited to employees of public agencies, such as bribery, to the employees of the
private contactors of the government. See: Crim.F.H. 24/08 Barak Cohen v. The state of Israel (2.3.2009, not yet
published).

the development of a new sub-area focusing on the public law of privatization.2 Accordingly, the
article offers an initial outline for the development of the public law of privatization.
More concretely, the article offers a model for analyzing questions of privatization from a public
law perspective. This model is intended to reflect the complexity of the social and economic
challenges posed by privatization policies. It is aimed at dealing with the various implications of
privatization decisions which have to be considered not only with regard to their managerialutilitarian aspects, but also with regard to their social and distributive implications, as well as their
potential effect on human rights.
The approach suggested is based on distinguishing between three different questions raised by
privatization decisions. The first question considers the boundaries of privatization: are there any
limitations on the types of actions or types of powers that can be privatized? The second question
relates to the administrative process of privatization: what are the constraints that should apply to
the implementation of a privatization decision (for example, is there a duty to set a privatization
policy before proceeding with a concrete privatization initiative, or is there a duty to disclose
information regarding privatization initiatives)? The third question refers to the outcomes of
privatization and its regulation: which legal regime should apply to privatized activities, and will
they be subject to special regulation or special duties?
The article does not present a normative viewpoint on the proper scope of the privatization
phenomenon. As explained later, this is usually determined by ideology and political philosophy3.
Accordingly, the decisions on the scope of privatization will usually be left to the public arena. In
other words, it is important to maintain the distinguishing line between presenting a policy view on
operations that should not be privatized and a legal view on this matter. However, as explained
below, this deferral to the political arena may also have its limits.
Following this introduction, Part I of the article will present the different patterns of privatization.
Part II will present the traditional approach of the public law to privatization. This approach has
indeed recognized that privatization might raise specific legal questions, but mainly sided with
limited judicial intervention in decisions in the area, while focusing principally on the aspect of
equality in competition for business opportunities created by privatization. Part III points out the
blind spot of the traditional discussion in this subject, while referring to additional juridical
questions that need to be examined regarding privatization initiatives. The article will conclude by
offering directions for developing the public law of privatization.

Such sub-specialties have been developed in other areas, e.g. with regard to government procurement.
At the same time, in some cases, legal analysis may also reflect one's value judgments. For instance, one's view
regarding privatization initiatives of social services will probably reflect one's political philosophy regarding the status
of social rights. However, it is important to stress that it is also possible to protect social rights by supplying social
services by private bodies with state funding.

I. The Many Faces of Privatization

In order to offer a comprehensive framework for discussing privatization it is important to start by
characterizing this phenomenon and describing its scope. Traditionally, privatization was identified
by the transfer of ownership transferring government assets (land, holdings in government-owned
companies) to private hands. Indeed, such transfers were usually the first expressions of
privatization policies. 4 However, in fact, the privatization phenomenon is much more complex, and
as a consequence it has no universal accepted definition.5 Generally speaking, privatization is a
policy that aims to reduce governmental intervention in social and economic life. This aim may be
reached through the use of diverse means including, contracting with private companies for the
supply of services which the state believes that it is obliged to supply,6 and opening the door for
private activity in new sectors through governmental passivity. The discussion below is intended to
present the many faces of the privatization phenomenon.7
Awareness as to the different expressions of the privatization phenomenon is essential for several
reasons. Firstly, defining a phenomenon and identifying its scope in the social and public reality are
preliminary conditions for developing a suitable form of legal regulation to apply to it. Secondly,
and connected to the first point, the unsatisfactory analysis of the phenomenon of privatization
derives from the fact that the privatization terminology is used by different authors with regard to
different forms of action, without paying attention to relevant distinctions. In some cases,
privatization entails the complete withdrawal of government from operating in certain fields, based
on the recognition that they will be served better if left to the market. In other cases, responsibility
and even management remains in the hands of the government, and privatization is expressed only
in the transfer of the supply of social services to private entities. Yet, in other cases, it entails also a
withdrawal from the obligation to supply services on an equal and universal basis (since they are
provided only to those who can afford paying for them).
4

For example, see: Chapter 8-1 of the Government Companies Law, 1975 (Israel).
See Paul Star, The Meaning of Privatization, 6 YALE L. & POLS REV. 6 (1988)
6
The answer to the question which services the government considers itself obliged to supply would vary both in
accordance to ones political philosophy as well as the economic categorization of some of these services as "public
goods". It is worthwhile to stress that even this categorization may be controversial. For example, the lighthouse is
traditionally considered a classic example of a public product, yet this classification has since been criticized, while
pointing to examples of privately operated lighthouses during history. See Ronald H.Coase, The Lighthouse in
Economics, 17 J. L. & ECON. 357 (1974); David E. Van Zandt, The Lessons of Lighthouse: Government or Privats
Provision of Good, 22 J. LEGAL STUD. 47 (1993).
7
The categorization offered here of the different formats of privatization is based on a report prepared for the
International Conference for Comparative Law that was held in 2002. See Daphne Barak-Erez, Applying Administrative
Law to Privatization in Israel, ISRAELI REPORTS TO THE XVI INTERNATIONAL CONGRESS OF COMPARATIVE LAW 47
(2006). See also: Daphne Barak-Erez, The Privatization Continuum (Simon Chesterman and Angelina Fisher eds, 2009,
forthcoming). Due to the pace of the developments in the field of privatization, the observations in this article are more
detailed and different in some of their details from those that appeared in these former writings.
5

The analysis which follows offers a wide range of cases, which reveals the many faces of
privatization. Some of them are closer to the core case of privatization policies, whereas others are
more peripheral. However, there are important points of resemblance among the different cases,
they all entail; broadening the role of private bodies in social and economic life, intensive
cooperation between the government and private bodies, and the application of private market logic
to government action. The discussion takes as a starting point existing governmental traditions
regarding the extent of government involvement in different sectors. Government withdrawal from
operating in sectors in which it used to operate in the past will be considered acts of privatization8.

1. Establishing companies for business-nature operation

The first signs of a privatization policy are usually connected to the practice of establishing
companies for initiating business operation by the authorities - government-owned corporations,
when speaking about operation of the central government, or municipal companies when speaking
about local authorities. Indeed, historically, the establishment of government-owned corporations
was also a form of government involvement in economic life, even if by doing so through the
business activity. However, later the activities of such companies served as a basis for additional
privatization initiatives. Firstly, the existence of such companies creates a constant temptation to
transfer sectors of operation from government authorities to the companies they control. When an
operation is transferred to the management of a company, it is rearranged in a format aimed at
gaining profits.9 In many cases, the way to achieve this goal is to collect fees for services that were
supplied for free in the past. Second, when the policy of selling assets to private bodies is ripe, the
most convenient way to implement it is to sell the stocks of government-owned corporations to
private investors. When a government operation which is selected for privatization does not
operated through a company, a convenient first step in this direction is to organize it in the
framework of a government-owned corporation.10 In this case, the selling of the companys stocks
is intended to be next phase in the process, as explained below in more detail.

2. Selling government-owned corporations

In other words, the presentation of the different aspects of privatization is not based on a normative assumption
regarding the scope of government action.
9
Earning profits is the main ethos of companies management. In this spirit, the government companies law in Israel
clarifies that a government company, in contrast to an administrative authority, should usually instruct itself in light of
commercial considerations.
10
This was the model adopted in the privatization of British Petroleum.

The policy of selling companies that are owned by the authorities, mainly government-owned
companies, is probably one of the most known expressions of privatization policies.11

3. Carrying out of governmental activity through private contractors (outsourcing)

Another format of privatization is expressed by the gradual reduction of administrative activity
performed by the authorities themselves, together with a growing inclination to hire private
contractors to carry out government activities. Privatization by outsourcing is currently a major
feature of privatization.12 This type of privatization began with the transfer of technical activities to
private contractors in such areas as construction, garbage collection, school bussing and computer
services. In time, contracting with external entities gradually expanded to matters that are technical
by definition but contain discretionary elements, such as collection services. The next stage
involved the transfer of governmental functions that devolved a significant measure of discretion to
private entities, as in the cases of the operation of welfare-to-work programs13 and the establishment
of privately owned and operated prisons. Occasionally, this type of privatization has the potential to
indirectly influence public service, as in the case of privatizing the training of public service
professionals.

4. Construction of public infrastructures by private investors (BOT Initiatives)

A unique form of contracting with private entities centers on the construction of new infrastructure
by means of private entrepreneurs, who undertake not only to execute the construction work but
also to invest in the project and then operate the infrastructure through special concessions which
apply to the period which follows the construction phase. In this context, government collaboration
with private entrepreneurs stems principally from a desire to secure private funding for construction
at the initial stage. The concession-owners, who bear the costs of the project, ensure a profitable
return on their investment by way of long-term administration of the project, during which they
charge the public a fee for use of the infrastructure. In the framework of this model, known as buildoperate-transfer (BOT), the private investor builds the infrastructure at his expense, operates it over
an extended period of time, as promised to him in advance, and in the end, transfers ownership or

11

For example, in Britain, the government sold its shares in Cable & Wireless, British Petroleum, Jaguar Motors and
Rolls-Royce.
12
See e.g. IAN HARDEN THE CONTRACTING STATE (1992); Dru Stevenson, Privatization of State Administrative
Services 68 LA. L. REV. 1285 (2008).
13
See e.g.: Matthew Diller, The Revolution in Welfare Administration: Rules, Discretion, and Entrepreneurial
Government, 75 N.Y.U. L. REV. 1121 (2000), 1128, 1198-99.

control of the infrastructure to the state. This type of privatization has been used for transportation
projects and water infrastructure. 14

5. Licensing and giving permits in new sectors

The expansion of private activity at the expense of government action has also been made possible
by the granting of licenses to private service providers. Accordingly, in the area of education, for
example, a growing tendency to privatize could manifest itself in the licensing of new private
schools and universities (thus partially avoiding the need to establish more public schools and
public universities). In the area of telecommunications, licensing private companies to operate
cellular phone networks (as this new technology became available) was a similar example of
privatization, although no transfer of shares or other assets was involved.
The central difference between privatization through outsourcing and privatization through
licensing is that when the authority turns to outsourcing, it still recognizes its basic responsibility to
supply the service. In contrast, privatization through licensing is generally conducted in areas in
which the government does not see itself as responsible for the supply of the service.

6. Privatization by omission through limited governmental activity

At times, the states contribution to privatizing certain activities is the result of the failure of the
government and other public authorities to act effectively in that area, thereby making room for
private initiatives. The areas of education and health are illustrative of this particular process. Thus,
for example, when the public education system provides fewer hours of study or a poorer quality of
teaching, more parents opt for private education.15 In some cases the missing governmental
operation is not the result of a retreat from a service that was supplied at a better level in the past,
but derives from the abstention of the government to furnish an answer to a new public necessity
that did not previously exist.,

7. Provision of services for a fee

The privatization of areas of government action also occurs when the relevant agency continues to
operate the same activities but decides to collect a fee for the services it supplies (a growing
phenomenon in various public places such as museums and parks).16 As noted above, sometimes
this phenomenon is combined with the transfer of an area of activity from the government to a
14

See, e.g. Laura A Malinsky, Rebuilding with Broken Tools: Build-Operate-Transfer Law in Vietnam, 14 BERKELEY J.
INT'L L. 438 (1996).
15
For a discussion of the opting out problem, see Clayton P Gillette, Opting Out of Public Provision, 73 DENVER U. L.
REV. 1185 (1996).
16
See, for instance, HCJ 8676/00 Adam Teva Vdin-Israel Union for Environmental Defense v, Municipality of
Raanana 59(2) PD 210 (2004) (as follows: the Rannana Park case) .

company it controls and operates as a separate budgetary unit, based on commercial profit
considerations. However, privatization of this type can also be effected through the direct collection
of fees by the agencies themselves. Generally, the fee is required for services that are provided at a
higher level than the usual public standard, like in the context of private health services in public
hospitals.

8. Commercialization of the public space

Traditional government activity created a zone free from commercial activity. However, in
conditions of budgetary restraints authorities gradually introduce commercial aspects to the public
space. For instance, when the authorities collect fees for advertising on signs, they actually privatize
the public space. Consequently, the face of the public space is determined, among other factors, by
the wishes and the preferences of bodies that can afford paying for advertising in the public sphere.
Similarly, when advertising in education institutions is permitted in exchange for consideration, this
constitutes a partial privatization of the public space of the school, which used to be immune to the
commercial market, occurs.

9. Cooperation with third-sector bodies

Another type of privatization is the institutionalized cooperation between the government and
associations and funds from the third sector (Non Governmental Organizations - NGOs) - for the
fulfillment of duties that the government should have fulfilled by itself had it not been pressed by
budget limitations. Examples include cooperation with private associations which help the poor.
Cooperation between the third sector and the authorities may not always be perceived as
privatization, but it should be considered as such when it is institutionalized and constitutes part of
the standard operation of the agencies.17

10. Vouchers Systems

The government may choose to provide services by subsidizing the buying of these services from
private suppliers (such as private schools or private health care providers).18

II. The Traditional Approach to Privatization

17

See Martha Minow, Partners, Not Rivals?: Redrawing the Lines between Public and Private, Non-Profit and Profit,
and Secular and Religious, 80 B. U. L. REV. 1061 (2000).
18
Michael J Trebilcock, Ronald J Daniels, and Malcolm Thorburn, Government by Voucher, 80 Boston University Law
Review 205 (2000); Klint Alexander and Kern Alexander, Vouchers and the Privatization of American Education:
Justifying Racial Resegregation from Brown to Zelman, U. ILL. L. REV. 1131 [2004].

The traditional starting point for the debate on the privatization phenomenon was that it is a matter
of policy, and therefore the law should minimize its intervention. Accordingly, the legal discourse
on privatization was limited to islands of limitations, without addressing it as a centra challenge
to public law. This part of the article will introduce the narrow manner in which the privatization
phenomenon was addressed in traditional public law, in order to expose the need to reassess this
partial perspective on privatization.

1. The boundaries of privatization: loose limitations

In general, the traditional approach regarding the boundaries of privatization was that the decision
to privatize does not raise legal questions. The few limitations that were applied to privatization
decisions were caused by addressing specific concerns, such as conflict of interests or self-defense
from hostile bodies, as detailed below.

(A) Constitutional Neutrality

The traditional baseline of the discussion assumed that privatization does not raise any
constitutional concerns. In Israel, Justice Barak contended that the basic laws of the state could live
both with a capitalist legislator and with a socialist one.19 This viewpoint seems reasonable as long
as privatization regards only the selling of assets. There is no doubt that the selling of many
government companies has no constitutional meaning. Decision on such issues may be the subject
for disputes, but these will be confined to economic and ideological issues. On the other hand, as
explained below, when privatization changes its nature, and is applied also to social services and
even core government functions, the assumption that constitutional law is extraneous should be
subject to a reassessment.20 Another perspective on the alleged constitutional neutrality regarding
privatization policies is that, in fact, in some instances constitutional law has been used also in order
to promote privatization initiatives. This has been the case when petitioners have brought arguments
aimed at pushing the state to open the possibility for a private market in areas in which in the past

19

According to Barak: the court applies judicial review. It checks the legitimacy of the law, not its wisdom. The
question is not whether the law is good, efficient, or justified. The question is whether it is constitutional. A socialist
legislator and a capitalist one might legislate different and contradictory laws, which will all fulfill the demands of the
limiting paragraph. Indeed, the basic laws are not a plan for concrete policy. Privatization and nationalization could
both exist in their framework. Market economy or central management of the economy can both find a living space, as
long as the economy activity which harms the human rights will fulfill the demands of the limiting section. HCJ
1715/97 Bureau for Inv. Advisors v. Minister of Finance 51(4) PD 367, 386 (1997).
20
In the past, when the privatization phenomenon was more limited, I was willing to share the view that as a rule
constitutional law should not limit the decision to privatize, but rather focus only on questions regarding the
consequences of privatization. See: Daphne Barak-Erez, Constitutional Limitations on Privatization in Israel, ISRAELI
REPORTS TO THE XV INTERNATIONAL CONGRESS OF COMPARATIVE LAW 317(1999); Daphne Barak-Erez, Human
Rights in an Age of Privatization 8 LABOR, SOCIETY AND LAW (2001) 209. As explained below, the new patterns of the
privatization phenomenon renders the approach that privatization does not raise legal questions, but rather only
questions of economic policy, outdated.

only public services were legally available in the name of promoting their freedom of choice or
other liberties. An illuminating example in this regard is the Canadian case of Chaoulli21 in which
the Supreme Court of Canada held that the prohibition on private health insurance in Quebec
violated the basic rights of the petitioners, who were interested in such insurance against the
background of an unsatisfactory level of public health care.22 It has been pointed out that also
European law has not been neutral to privatization trends, and that in fact it has served as a driving
force which encouraged member states to introduce privatization initiatives.23

(B) The ultra vires principle

Theoretically, even without imposing constitutional limitations on the scope of privatization, the
ultra vires principle could serve as a potential limitation on privatization, assuming that
privatization decisions should be based on legislative authorizations. However, in practice, this
aspect of the ultra vires principle was not addressed, under the assumption that administrative
authorities can exercise their powers also by way of contracting with private actors. In other words,
usually, no express authorization for action through privatization was expected. In Israel, for
example, the Supreme Court adopted a permissive approach regarding the development of market
activity by an administrative authority, when it was added to its regular activity in the context of
collecting fees for entering a public park that was built as an addition to the regular parks that are
operated in the city.24 In many cases, legislatures were open for promoting privatization enabling
statutes.

(C) Limitations on delegations to private bodies

Another source for specific limitations on the framework of privatization may be a presumption
against delegation of government powers to private bodies, thus insisting on basing privatization on
express legislation.25 This limitation can be relevant to privatizations which entail government
powers or discretion, in contrast to technical functions such as transportation, garbage collection
etc. At any rate, it seems that legislators are willing to support the possibility to delegate the
exercise of functions to external actors.26
21

Chaoulli v. Attorney General of Quebec [2005] 1 S.C.R. 791.

More specifically, the court held that the prohibition infringed the rights protected by section 7 of the Canadian
Charter in Liberties and Freedoms (which protects the security of the person).
23
Amaryllis Verhoeven, Privatization and EC Law: Is the European Commission 'Neutral' with Respect to Public
versus Private Ownership of Companies? 45 INT'L & COMP. L. Q. (1996) 861.
24
See the Raanana Park case, supra note 16.
25
Such presumption exists in Israeli law. See: HCJ 2303/90 Filipovitz v. The Registrar of Companies , 46(1) PD 410
(1992).
In Britain, the Deregulation and Contracting Out Act 1994 any statutory function of a minister which is exercisable 26
by an officer of his may, if any order of the minister so provides, be made exercisable by any person (or employee)
authorized by either the officer or the minister. This does not apply to judicial or legislative functions, or to powers
22

(D) Limitations on the transfer of rights to foreign bodies

Other limitations, originate from concerns about the transfer of ownership of assets which are vital
for the economy or for the security of the state (electric infrastructure etc.) to hostile bodies, or
bodies that may be controlled by citizens of foreign countries. The initial phase of sale is easier to
control because the authorities can subject it to specific terms (i.e. purchasers citizenship).
Controlling later transfers of the assets is harder, because the ownership is no longer in the hands of
the state. For this purpose, special mechanisms designed for limiting the transfer of assets of
national interest to third parties, even in the phase when the ownership is already private, were
developed. Those mechanisms are the golden share which gives the state (or its authority) a right
to veto future business transactions,27 or legislation that defines conditions for the transfer of
ownership in the stocks of the privatized company.28

2. The decision-making process on privatization: equal opportunities and fairness

The traditional discourse in the area of privatization was focused on issues of equal opportunities
and fairness. In this context, the main question is how to ensure that the new opportunities created
in the privatization era will be allocated in the optimal way both from the aspect of the right for
equality and from the aspect of maximizing the economic benefit of the privatization (for instance,
through a sale to the purchaser that will offer the best price for governmental property). The debate
on this question was heightened in recognition that decisions to privatize create real temptation to
base such decision on irrelevant and inappropriate considerations deriving from bias to close
associates or even corruption based on bribes.29 Accordingly, the main emphasis used to be on
developing mandatory bidding rules, or at least mandatory competition between a few potential

affecting personal liberty or search or seizure of property. A similar act applies also in the area of local government
Local Government (Contracts) Act 1997.
27
"Golden shares", however, restrict the free movement of capital and therefore is liable to be struck down in the
context of European law, unless justified on public policy or security grounds. See: Case C-98/01 Commission v. UK
(13 May 2003) (Golden share in British Airport Authority held a breach).The British government frequently held
golden shares in privatised companies. In most cases it later on dispensed them, but refrained from doing that in the
electricity area. TONY PROSSER LAW AND THE REGULATORS 170 (1997).
28
For example, see, in Israel: Security The Security Corporations Law (Protection of Security Interests) Law, 2005.
29
See, for instance, SUSAN ROSE-ACKERMAN, CORRUPTION AND GOVERNMENT CAUSES, CONSEQUENCES AND
REFORM 35-38 (1999).

10

contractors,30 and on rules concerning conflicts of interest (to prevent those who may have interest
in the privatization tender to be involved in selecting the contractors).31

3. The regulation of privatized functions and activities

A crucial aspect of the discourse around privatization consists of the norms that apply to the
privatized activity, to its regulation. As explained by Justice Zamir, the disintegration of the state
from the duty of supplying services and necessities must be followed by supervision on the supply
of services and necessities by the private sector. The open market gives the private sector an
opportunity to accumulate a great economic power. Economic power can also corruptespecially
in conditions of free market the state is required to protect the weak".32 Indeed, the focus here is not
only on the regulation of the economic aspects of the privatized activity, but rather on the norms
that will apply to the private bodies which are involved in operating government-like functions.
This matter was not discussed in a systematic manner prior to the initiation of privatization policies,
and was later only raised in several contexts. In the United States, the case law touched on the
question whether privatized activities should be subject to the "state action" doctrine, which was
narrowly interpreted and hence was limited to "traditional functions" of the state. Accordingly, this
doctrine could apply to private prisons but not to private housing for the elderly and other privatized
social services.33 In other jurisdictions, the courts tended to be hesitant in applying public law
norms to private bodies, in varying degrees.34 In Israel, these bodies were defined as hybrids in
order to express their combined character, comprising of both private and public aspects
simultaneously. Originally, the first decision of the Supreme Court in this area related mainly to
government-owned corporations, like the Israeli electric corporation.35 However, the reason for the
implementation of public law in such cases was not the governmental ownership itself, but rather

30

See e.g. Mandatory Tenders Law, 1992 (Israel); Janna J. Hansen, Limits of Competition: Accountability in
Government Contracting 112 YALE L.J. 2465 (2003) (addressing the focus on competition and discussing competition
in government procurement in New York, while pointing at the limits of the focus on competition rules).
31
And accordingly many attacks on privatization decisions were focused on issues of corruption and preference of
cronies. For challenges to privatization on this basis in India, see: Delhi Science Forum v. Union of India AIR SC 1356
(1996); Public Interest Litigation v. Union of India 8 SCC 606 (2000).
32
See HCJ 7721/96 Union of Insurance Assessors v. the Inspector of Insurance 55(3) PD 625, 650 (2001).
33
See: Daphne Barak-Erez, A State Action Doctrine for an Age of Privatization 45 SYRACUSE L.REV 1169. (1995).
34
In Britain, the answer to this question is based on the definition of the term "public authority" for the purposes of
section 6 of the Human Rights Act, 1998, according to which it applies also to "any person certain of whose functions
are functions of a public nature" (section 6(3)(b)). For a narrow application of this definition with regard to its
applicability to a private care home providing accommodation to elderly residents under contract with a local authority,
see: YL v Birmingham City Council and others [2007] UKHL 27. Accordingly, the care home was not bound under
section 6(1) of the Humam Rights Act to act in accordance with rights protected by the European Convention on
Human Rights.
35
See HCJ 731/86 Microdaph Ltd v. The Electricity Corporation 41(2) PD 449 (1987).

11

other substantive considerations, for example the nature of the function fulfilled by the company or
its monopolist status.36

III. The New Public Law of Privatization

So far, the discussion has shown that privatization is partially addressed by public law doctrines.
Moreover, it also illustrated that for many years public law did not offer a comprehensive analysis
of privatization but rather specifically addressed certain aspects of this phenomenon. The issues that
received most attention concerned the relationship between the privatizing agency and the
participants in the privatization process while the public aspects of privatization were relatively
neglected. In other words, the most important questions remained at the periphery.
This article seeks to propose a more comprehensive analysis of the matter following the three stages
presented above - limitations on privatization decisions, the process of privatization and the
regulation of privatization. My analysis will recognize the contribution of scholars that have already
started to address substantive questions raised by privatization. At the same tine, it will add to their
writings by locating their discussion in the framework of the broader picture offered by the
distinction between the three stages described.

1. The boundaries of privatization

(A) Constitutional boundaries

As noted earlier, the traditional premise of public law has been that the choice of activities for
privatization is a matter of policy and not of law. This premise warrants reconsideration. Indeed, it
is indisputable that privatization decisions are an expression of policy and, normally, should not be
removed from the political arena to the constitutional sphere. However, even given this premise, it
is necessary to challenge the convention that a decision to privatize is solely a matter of policy.
The question of the boundaries of privatization should be addressed through two discrete forms of
analysis an institution-based analysis and a rights-based analysis. The institution-based analysis
focuses on the question of whether there are certain activities that cannot be privatized because they
are an integral part of the state. The rights-based analysis focuses on the question of whether the
privatization initiative includes safeguards against infringements of fundamental rights by those
private actors vested with the responsibility to execute functions formerly performed by public
officials.

36

See C.A. 294/91 The Burial Society Jerusalem Community v. Kastenbaum 46(2) P.D. 464 (1992)

12

Institutional analysis - Setting the boundaries of privatization from the institutional perspective is a
complex task. There is no universal definition of the core activities of the state. There is a wide
range of views on this matter, from the night-watchman conception of the state, whose primary
task is to secure personal safety,37 to rich notions of a developed welfare state, with a wide spectrum
of approaches in-between: identifying the state with the use of violent force, with activities that
signify sovereignty, or with supplying public goods, etc.
The difficulty in formulating a legal stance on this matter also stems from the different
understandings of the public missions being privatized. For example, in the area of education,
advocates of privatization insist that instruction and educational services can be supplied by private
entities, under state supervision, because they perceive education as a product.38 In contrast, those
opposing privatization emphasize the spirit of education, asserting that the values of equal and
democratic civil education are likely to be eroded if educational services are supplied by private
entities, even under state supervision.39 Nevertheless, it is clear that given the relatively diverse
traditions regarding the functions that have to be carried out by the state, the definition of core
government functions that cannot be privatized under any conditions would be relatively narrow
(and hence the majority of privatization initiatives will not be constitutionally precluded). Some
constitutional provisions may be interpreted as precluding privatization of certain activities, but
even they may leave room for experimentation in privatization. It is a common feature of
constitutional texts that they include provisions defining the main branches of government the
executive, the legislature and the judiciary and these provisions may be interpreted as implying
that it would not be possible to completely privatize their functions (for example, in the US context,

37

See ROBERT NOZICK, ANARCHY, STATE AND UTOPIA (New York: Basic Books, 1992).
Milton Friedman, who espoused the application of free-market principles in education as well, proposed an action
outline for running private education as follows: Governments could require a minimum level of schooling financed by
giving parents vouchers redeemable for a specified maximum sum per child per year if spent on approved educational
services. Parents would then be free to spend this sum and any additional sum they themselves provided on purchasing
educational services from an approved institution of their own choice. The educational services could be rendered by
private enterprises operated for profit, or by non-profit institutions. The role of the government would be limited to
insuring that the schools met certain minimum standards, such as the inclusion of a minimum common content in their
programs, much as it now inspects restaurants to insure that they maintain minimum sanitary standards. MILTON
FRIEDMAN, CAPITALISM AND FREEDOM (Chicago: Chicago University Press, 1962) 89.
39
Realization of the civic-democratic objectives of education is contingent on the way in which schools are run. This
includes the way in which integration is achieved in schools, not only in its formal aspect of accepting students into the
school, but also at the ongoing administrative level, for example, the distribution of students into different classes and
learning groups. See AMY GUTMANN, DEMOCRATIC EDUCATION (Princeton: Princeton University Press, 1987) 66-68.
Under this approach, education is in itself a social objective, and therefore state intervention cannot be limited to the
prevention of harm or fraud with regard to the quality of the service provided, in contrast to Friedmans example of
state regulation of restaurants. As Gutmann explains, [t]he analogy implies that our common educational standards
consist only of preventing schools from physically harming children or fraudulently claiming to educate them. Were our
public interest in regulating schools as analogous to our interest in regulating restaurants as Friedman suggests, it would
be hard to explain why we should subsidize schooling for every child. A necessary condition for justifying public
subsidy of schools but not of restaurants is the fact that citizens have an important and common interest in
educating future citizens. Ibid, 67.
38

13

the Constitution probably implies that article III courts cannot be privatized,40 and that the power to
legislate cannot be delegated to private professionals.41 At the same time, these general provisions
do not refer to the scope of the functions that the executive has to execute (for example, should the
government guarantee the provision of education through a public education system, or can it also
rely upon provision by private schools).42
The relatively obscure nature of constitutional texts on such matters can be illustrated by reference
to the example of the privatization of prisons. Should constitutional texts on executive power be
interpreted as implying that functions traditionally associated with sovereignty cannot be executed
outside the executive branch? This argument was raised in Israel in a petition wishing to challenge
the first initiative aimed at establishing a private prison in Israel.43 In the US, the question of which
functions are inherently governmental is not asked at the constitutional level, but rather is situated
in the context of applying Circular A-76, which uses this terminology to define the limits on
contracting-out.44 At any rate, it is clear that such an argument may be made only with regard to
some core activities (such as policing and intelligence services), but not with regard to many other
matters that are at the centre of current privatization initiatives, such as education, health, and
welfare. Moreover, defining the core of executive actions poses the risk of indirectly legitimizing
the privatization of all remaining functions that do not fall within the scope of the definition. In the
US, a constitutional analysis of this sort is problematic in the area of corrections, since the
privatization of prisons is already a living reality.45
Rights-based analysis - From the perspective of the protection of human rights, the question should
be whether privatization initiatives are liable to cause infringements of fundamental rights. Thus,
40

It is interesting to note that despite Milton Friedmans capitalistic approach, which espouses minimal state
intervention in social and economic life, under his view, one of the prominent functions of the state is to define and
interpret property rights. He claims that coordinating economic activity through a free exchange is based on the premise
that we have ensured, through the government, maintenance of law and order to prevent coercion of one individual by
another, the enforcement of contracts voluntarily entered into, the definition of the meaning of property rights, the
interpretation and enforcement of such rights, and the provision of a monetary framework. FRIEDMAN, CAPITALISM
AND FREEDOM, 27. This view implies that there should be limitations on the possibility of privatizing judicial functions.
41
It is possible that the non-delegation doctrine would apply here.
42
Commentators have tried to offer interpretations that will infer from Constitutional texts some limitations on
privatization despite the lack of specific provisions on the matter. See e.g.: Jack M. Beermann, Privatization and
Political Accountability, 28 FORDHAM URB. L. J. 1507, 1509-1519 (2001) (discussing the US Constitution); David
Mullan and Antonella Ceddia,The Impact on Public Law of Privatization, Deregulation, Outsourcing, and Downsizing:
A Canadian Perspective, 10 IND. J. GLOBAL LEGAL STUD. 199 (2003) (discussing the Canadian Charter of Rights and
Freedoms).
43
HCJ 2605/05 The Human Rights Section of the Academic College in Ramat Gan Law School v The Minister of
Finance (Supreme Court of Israel) (pending).
44
See PAUL R. VERKUIL, OUTSOURCING SOVEREIGNTY WHY PRIVATIZATION OF GOEVERNMENT FUNCTIONS
THREATENS DEMOCRACY AND WHAT WE CAN DO ABOUT IT (2007) 125-7.
45
For an overview of the history of the privatization of prisons in the United States, see Martin E Gold, The
Privatization of Prisons 28 URBAN LAWYER 359 (1996) 359. See also: Oliver Hart, Andrei Shleifer & Robert W.
Vishny, The Proper Scope of Government: Theory and an Application to Prisons, 112 Q. J. ECON. 1127, 1151 (1997).
The privatization of prisons is based on the distinction between the allocation of punishment (in the judicial process),
which is not privatized, and its administration, which may be privatized. However, in fact, even the administration of
imprisonment involves discretionary decision-making that affects prisoners everyday life and discipline.

14

for example, the privatization of enforcement and punishment powers has significant potential to
infringe liberty and dignity (because the powers would be wielded by corporations guided by
economic incentive vis--vis people who are removed from society and often even despised by it).
Arguably, this concern can be addressed by effective administrative supervision over the operation
of the private prison (or any other privatized activity of this kind).46 However, it is difficult to
conceive of effective modes of supervision with regard to actions that are conducted on a daily basis
vis--vis other individuals, and which involve a high degree of discretion and immediacy (such as
policing).47

(B) Legislative boundaries and the ultra vires principle

The view that privatization is an important policy matter should be reflected also in the adherence to
the view that privatization initiatives should at least be based on express legislative authorizations.
This will ensure that privatization is based at least on a democratic decision-making. As explained,
the traditional application of the ultra vires principle did not insist on specific authorizations for
privatization decisions. This view should be reassessed with regard to actions which include
discretion. Though, this is only a procedural safeguard, since in many cases privatization decisions
were indeed based on legislative schemes which enabled them.48

2. The decision-making process on privatization

The process by which the decision to privatize is made is of great importance. In this context, it is
vital to develop legal doctrines that will guarantee that privatization decisions are made in a
framework which ensures public debate, broad participation and public access to relevant
information. In other words, it is necessary to consider whether the decision-making process that led
to the decision to privatize took into account the ramifications of the privatization decision on the

46

On the aspect of supervision as a condition of the constitutionality of a privatization initiative, see Gillian E Metzger,
Privatization as Delegation, 103 COLUM. L. REV. 1367 (2003).
47
A noteworthy example in this context is the failure of the American authorities to supervise the administration of the
Abu Ghraib prison facility in Iraq, which was operated by a private contractor. See Steven L Schooner, Contractor
Atrocities at Abu Grhaib: Compromised Accountability in a Streamlined, Outsourced Government 16 STANFORD L. &
POL'Y REV. 549 (2005). It is worth adding that in other contexts, privatization may have an effect on the realization of
social rights. For example, privatization that entails charging fees for certain social services is likely to have
ramifications for social rights in systems that recognize such rights. Thus, it will be necessary to examine whether the
privatization of services in the area of health or education is conducted in a way that guarantees universal access to
those services and prevents discrimination. At the same time, it is clear that not every privatization of a social service
will necessarily result in a constitutional violation (as in circumstances in which the service is supplied by a private
entity but through state funding or subsidization). There are also mixed examples in which the potential for
infringement of rights involves both a civil rights aspect and a social rights aspect. This is the case when the police wish
to charge demonstrators for the expenses of policing their demonstration. See HCJ 2557/05 Majority Headquarters v
Israeli Police, (12 December 2006) (Supreme Court of Israel).
48
The Israeli law that enables the establishing of a private prison was accepted almost without any public debate.
Another example comes from the area of workfare legislation which was enacted in Israel with very litter public debate
prior to its enactment.

15

quality of the services provided to the public and enabled public scrutiny. As explained before,
traditionally, the discussion of the decision to privatize tended to focus on the facet of competition;
that is, on ensuring that the decisions were not aimed at benefiting government cronies. From this
perspective, rules of bidding and contracting proved to be important. In contrast, the current
discussion calls for scrutiny of the preliminary decision to privatize not only of the
implementation of the decision to privatize in a fair and equal manner vis--vis other potential
competitors for the privatization initiative. Generally speaking, the procedural concerns that should
be addressed include the requirement to ground privatization decisions in a pre-formulated policy,
public participation, and freedom of information rights.

(A) A Duty to Formulate Policy

To ensure informed decisions regarding privatization, it is necessary to recognize an administrative
duty to formulate a policy on privatization in a certain area of activity before promoting a specific
privatization initiative in that area. Thus, for example, the agency should be obligated to formulate a
policy regarding the idea to transfer public schools to private management before it can enter into a
contract with a private education network for the privatization of a specific school. The duty to
formulate a policy on privatization shifts the focus from the question of the minimum that the state
must do, to a duty to justify the change (even when the state continues to provide the required
minimum).49

(B) Participation Rights

It is important to ensure public participation in the decision-making process that leads to
privatization50. This additional requirement is consistent with the general trend towards reinforcing
the democratic dimensions of the administrative process. In order to guarantee meaningful

49

So, for instance, the authority will have to formulate a principal policy in the matter of handing public schools for
private bodies before it could sign a contract regarding the privatization of a specific school through making a
connection with a private education network. The necessity for this development in the Israeli case law rose from the
debate regarding the decision to hand over the management of the only public high school in the city of Sderot to the
hands of a private school network. From the appellants point of view, this decision was especially problematic because
of the religious characteristics of the private network. The court rejected the petition in a very contextual manner, while
referring to the declaration of the respondents regarding their intention to maintain the schools secular character.
However, it did mention that it is necessary to be very cautious when a municipal education authority hands out its
responsibilities and the management of an educational institution to the hands of an associationin this issue, it is
appropriate that the ministry of education will formulate a principal stance regarding the policy which guides the
authorities in this issue. HCJ 7947/05 The Chairman of the City of Sderot Parents Committee v. Ministry of Education,
Culture and Sports (not published, 28.8.2005). A word of caution: The obligation to formulate a policy is not
necessarily contradictory to the option of including in the policy gradual steps and experimentation- for instance, by
starting in a limited and experimental framework. However, in this situation it is necessary to define the objectives of
the first phase and the process in which the question of whether it succeeded will be examined.
50
For the potential of privatization to curtail participation, see: Steven Rathgeb Smith, The New Politics of Contracting:
Citizenship and the Nonprofit Role, in PUBLIC POLICY FOR DEMOCRACY 198, 213-16 (Helen Ingram & Steven Rathgeb
Smith eds, 1993).

16

participation, privatization initiatives should be publicized well in advance, before their execution,
in order to enable the submission of comments and objections. It is important to stress that public
participation in the formal stage of rule-making is not enough with regard to privatization conducted
by contracting out. In this context, many significant details are not set in the framework of a statute
or regulations, but rather in the contract with the private entity (and perhaps even in the tender that
preceded it). Therefore, in addition to guaranteeing meaningful participation, the tender and
proposed contract must also be publicized properly, because at least some of their terms are likely
to include matters of public significance (for example, the terms that define the living conditions of
the inmates in a privatized prison and the quality of education and professional background of their
guards).

(C) Administrative Transparency and Information Rights

Participation in the substantive sense must be based on information. In order to promote the
democratization of the privatization process, it is not sufficient that the public could participate
through the submission of responses and objections. Therefore, the democratization of the
privatization process must be based on the sharing of information regarding the details of
transaction made with the private body, with the public, including the details of the designated
transaction and the details of the transaction as done in practice. Disclosing those details to the
public is crucial for both the evaluation of the appropriateness of the consideration offered in a
transaction that transfers public assets or public services to private hands, and the monitoring of the
execution of the contract by the private party and the supervision over the services it provides to the
public, (when the privatization initiative does not include merely the selling of assets). For example,
it is important to know the quality of the diet which the privatized prison operator is obliged to
provide the prisoners. This is an issue suitable for public debate. Thus, the democratization of
privatization initiatives must be based on full disclosure of the details of the contractual relationship
with the private entity (both the terms of the proposed contract and the terms of the contract as
finalized), or at least guaranteed access to them.51
Providing the public with information regarding privatizations must be conducted both actively
through publications initiated by the government and passively in response to specific
requests for the disclosure of information. In practice, agencies may be reluctant to disclose the

51

Compare: Craig D. Feiser, Privatization and the Freedom of Information Act: An Analysis of Public Access to Private
Entities Under Federal Law, 52 FED. COMM. L. J. 21, 55-62 (1999), who offers to expand the implementation of the
Freedom Of Information Act (FOIA) to "private entities controlling information of interest to the public". To some
extent, corporate law may also serve basis for disclosure (as far as publicly traded companies are concerned). See Jack
M. Beermann, Administrative-Law-Like Obligations on Private[Ized] Entities, 49 UCLA L. REV. 1717, 1721-1724
(2002).

17

details of their contracts with private entities, principally in order to protect the trade secrets of their
contracting party or confidential public information (for example, the details of the security system
in a private prison). In the majority of cases, however, the details of the contract with the private
entity must be open to public scrutiny in order to facilitate public debate and supervision over the
privatization initiative. The presumption should always be in favor of disclosure of the contracting
details, and therefore when the government seeks to prevent disclosure it should be required to
provide detailed reasoning in support of its position.52 Indeed, transparency is the accepted norm in
the commercial world with respect to transactions involving a broad public interest, such as those in
the stock market. Thus, in a similar vein, transparency should also prevail in the context of
privatization.

(D) Judicial Review regarding the Terms of the Tenders and Contracts
A major concern is that the privatization transaction will not secure adequate consideration,
especially since political decisions have the tendency to prioritize short-run revenues. When the
transaction is competitive, like in the framework of a tender, the appropriateness of the
consideration is guaranteed at least partially due to the existence of competition. In contrast,
when the transaction is performed in the absence of competition, there is a greater danger that the
consideration will not be satisfactory. Therefore, it is important that courts will be willing to review
the value of the consideration, at least in extreme cases. It is also important that they will be apply
to such petitions relaxed standing rules, since it is hard to identify people who are directly affected
by inappropriate consideration in privatization transactions. In addition, judicial review should
address also the question whether the privatization contract guarantees requirements of minimum
wages and appropriate standards of service.

(E) Securing competition

Another important perspective on the process of privatization is the importance of taking actions
that will guarantee the existence of this may be specific laws regarding this area of activity (e.g.
provisions regarding the separation of control in different aspects of the privatized activity such as
production and delivery) in addition to the application of general antitrust law.
The goal of promoting competition in the privatized market may be in conflict with the interests of
the government as an asset owner interested in privatizing it for a maximal price. As long as the

52

An example could be given by the Israeli case of the tender for establishing a privatized prison. The Association for
Civil Rights in Israel which requested access to the tender documents was given access to only part of the documents in
the tenders committee offices without receiving a copy. A petition on this issue was submitted, but the litigation ended
without a principal ruling, see Adm, Pet. App. 3637/05 The Association for Civil Rights in Israel v. The Finance
Ministry (19 December 2005, not published).

18

selling of governmental assets is accompanied by privileges and exclusivity granted to the

purchaser, the revenue from their sale is expected to rise (and it is expected that the purchaser will
supply the public services for too high a price or at a non-satisfactory level). Hence, it is important
to develop rules that will balance the incentive of the government to sell activities without making
provisions for competition. One possible option may be to establish a duty to present a professional
opinion regarding the consequences of the planned privatization initiative in order to ensure that this
issue will receive attention. In addition, due to the fact that the decision regarding the sale of a
company which enjoyed aspects (whether many or few) of exclusivity when it was governmentowned, places the government in a situation of conflict of interest between its ambition to
maximize its profit from the sale and the public interest in competition it is appropriate to confer
the power to define the parameters applicable to the competitive aspects of privatization to the
antitrust agency, and not to the government.53

(F) Privatization by omission and the special difficulties it arises

The silent form of privatization by omission, meaning privatization which derives from
administrative passivity that leaves the ground for private operation, raises special questions. It is
harder to review inaction than to review action, despite the fact that the actual implications of the
two are similar. For instance, with respect to a decision to privatize a public hospital, one may ask,
what would happen if the government decides to shut down the only public hospital of the area,
while simultaneously enabling a private hospital to start operating, rather than directly transfers it to
a private owner. An even more complex case is where the government intentionally abstains from
building new schools in light of the adequate supply of private schools. In order to cope with these
difficulties it is necessary to acknowledge the importance of judicial review even in situations of
administrative passivity. For example, one should examine whether the government checked if the
educational needs of the citys residents are answered in the private institutions. Judicial review
may be based on findings regarding lack of fact-finding by the government regarding the education
needs of the population.

3. The regulation of privatized functions and activities

Finally, the regulation and supervision of the privatized bodies and functions are of paramount
importance as they touch upon the ongoing operation of activities that have undergone privatization.
Accumulated experience shows that privatization initiatives proved as successful or as failures due
53

In fact, the potential conflict outside the context of privatization. However, this conflict of interests is aggravated in
situations of privatization, when the government wishes to maximize its profits from assets selling. In addition, the fear
from exploitation of the monopoly grows when a private body operates it.

19

to the quality of the regulation that followed them.54 Assuming that notwithstanding the controversy
over privatization, considerable areas of public activity will be privatized, their long-term regulation
is crucial.55 This regulation should set the standards for the operation of the privatized activities.
The potential for criminal sanctions56 and tort actions57 in cases of grave infringements of rights is
important, but does not suffice. The regulation of privatized activities should take various forms:
direct application of constitutional duties, statutory regulation and regulation through conditions in
the tender and in the contract. The objective of this part of the debate is to examine the potential of
the publicization of privatized bodies; in other words subjecting them to public norms and public
supervision.58

(A) Regulation through constitutional standards

When private actors function as de-facto substitutes of the government in the fulfillment of
important public functions, they should be subject to duties similar to those that would have applied
to the government had it performed the same activities. The doctrinal way to achieve this goal may
vary among legal systems, in accordance with their view with respect to the application of
constitutional principles to private actors. In the US context, the way to achieve this goal would be
to use the state action doctrine, which also applies to private actors that perform traditional
functions of the government or work in close connection with it.59 The problem with using this
specific doctrine is its relatively narrow interpretation in the case law, which enables its application
only to a relatively small core of governmental activities. This narrow interpretation would not pose
a barrier to the application of constitutional standards to private actors performing traditional
military functions, but unfortunately this would not be the case (in the US) with respect to many
other privatizations.60 Substantively, a private corporation should be considered a government54

See e.g. Mariana Mota Prado, The Challenges and Risks of Creating Independent Regulatory Agencies: A Cautionary
Tale from Brazil 41 VAND. J. TRANSN'L L. 435 (2008).
55
For an argument in favor of focusing on the supervision over privatized bodies in the American context, see Minow,
Partners, Not Rivals, supra note 17.
56
An interesting question in the context of criminal law is whether employees of private corporations who execute
public functions should be considered subject to the special offenses that have traditionally applied only to public
officials (such as bribery). See: Barak Cohen case, note 1.
57
For an action for infringement of rights in the context of a privatized prison, see Richardson v McKnight, 521 US 399
(1997). In this case, the US Supreme Court declined to apply to employees of a private prison the qualified immunity
that would have been applicable in similar circumstances in the context of a government prison.
58
Compare: Jody Freeman, Extending Public Law Norms Through Privatization, 116 HARV. L. REV. 1285 (2003).
59
See Barak-Erez, supra note 33.
60
Daphne Barak-Erez, Civil Rights in the Privatized State: A Comparative View, 28 ANGLO-AMERICAN L. REV. 503
(1999). See e.g. Blum v. Yaretzky, 457 U.S. 991, 1008-12 (1982) (holding that a private nursing home's decision to
discharge or transfer Medicaid patients to a lower level of care without notice or an opportunity for a hearing did not
constitute state action, despite state funding, licensing, extensive regulation of facilities, and specific regulations
requiring periodic reassessment of patients' needs); Rendell-Baker v. Kohn, 457 U.S. 830, 840-43 (1982) (finding no
state action on the part of a private high school to which almost all students had been referred from public schools,
despite extensive state regulation and funding of the private school). The U.S. Supreme Court treats private actors as
state actors only in rare cases. See: Brentwood Acad. v. Tenn. Secondary Sch. Athletic Ass'n, 531 U.S. 288, 291 (2001)

20

affiliated entity when it serves, de facto, as a replacement for public operation (for instance, when it
is the only private school in a settlement where there is no public school)61 or when the extent of the
authorities intervention in the management of the private body is significant (for instance, through
meaningful funding of the private operation). This definition will enable the application of public
law to private bodies that replace government operation, without infringing the freedom of
operation of corporations that operate in the public sphere alongside the authorities and not instead
of them (for an example, the operation of a complementary education in private frameworks in the
afternoon).

(B) Legislative Regulation

Statutes that open the door for privatization should include provisions stating the duties and the
supervising mechanisms that would apply to the activities of the private actors. Ensuring the
possibility of effective review of the decision-making processes in the privatized bodies has to be
one of the factors to be considered when evaluating the constitutionality of the privatization
initiative. In addition, the preparation of a detailed statutory regulation with regard to the activity
planned for privatization is valuable as the efforts invested in drafting the legislative scheme are
likely to expose the difficulties in guaranteeing effective supervision, and can even lead to a
reconsideration of the decision to privatize. Another factor to be considered is that in many cases,
the privatized activities are operated by large corporations which are not subject to domestic
control. It is likely that such corporations will not be mindful of public criticism unless this
criticism is grounded in binding legal rules.
In addition to establishing supervision mechanisms, the statutory provisions dedicated to
privatization initiatives should address the decision-making processes within the privatized bodies
with respect to matters such as, granting the right to a hearing (to those dependent on the decisions
of the privatized body), and the right to receive information (in order to enable public debate on the
operations of the privatized body).62
Another issue that requires regulation by legislation is the management of public databases by
computer systems and private information technology companies. Indeed, acquiring assistance from
private bodies for database management belongs to the technical and allegedly non-problematic
sector of privatization (as opposed to the transfer of decisions that involve discretion to private
(holding that a private association incorporated to regulate an athletic competition among public and private secondary
schools can be considered a state actor for First Amendment purposes).
61
This standard requires a material perception of the issues that should be defined as public. In my perspective a private
operation constitutes a substitute for a public operation when it is responsible for a service the supply of which is
considered a basic social right (for example education or health).
62
In other contexts, such as the privatization of utilities, the content of the regulation may have other focuses, for
example an emphasis on equal access and universal provision. See Toni Prosser, Public Service Law: Privatization's
Unexpected Offspring, LAW & CONTEMPORARY PROBLEMS 63 (2000).

21

bodies). However, in fact the control of information has significant consequences for the public
sphere. Firstly, the private operation of governmental databases could produce a situation in which
public requests to examine information will be denied due to lack of access to this information.
Secondly, it is important to guarantee to ability of citizens to correct inaccuracies in their files as
managed by the private contractors.63

(C) Contractual Regulation

The privatization contract should also play a central role in the regulation of the privatized
activity.64 It is important to define the duties of the private entity (especially with regard to the
protection of human rights) in the framework of the tender and later on of the contract itself. As far
as the tender is concerned, it is important to recognize a broad standing in order to challenge the
decisions that renounce some of the original terms of transaction or tender. With respect to the
contract, there are several important points to make. First, the privatization contract can set the
employment terms and wages of the workers employed by the private contractors. It is important to
ensure that the efficiency of the privatization project does not flow from violations of employees'
rights; or alternatively, is not based on the possibility to hire employees lacking proper training and
skills. Secondly, the privatization contract should include instructions with regard to equal access to
the privatized services. The breach of any one of these conditions would constitute a breach of
contract. In the context of social and welfare-related services, the contract should also include
detailed provisions regarding the procedural rights of the recipients of the privatized services (such
as a right to a hearing). In some cases, the privatization contract should also create a supervision
mechanism for the prices charged by the private entity. Indeed, in many instances, the privatization
endeavor is intended to release the government from the need to operate in the area of price setting
and to transfer this process to the market. However, there are privatized activities performed in
areas in which there is no market (or at least not a sophisticated market). Furthermore, it is
important to guarantee the supply of vital services even for those who cannot afford to pay. The
contract should include also detailed instructions regarding the procedural rights of the privatized
services receivers (hearing rights, rights to examine information etc).
An additional matter that should be regulated by the privatization contract is the compensation to be
paid to the private contractor if and when the government decides to terminate the contract. Indeed,
there is a danger that the prospect of paying significant compensation in the event of withdrawal

63

See also: Robert OHarrow Jr ,NO PLACE TO HIDE 125-129 (2005) (addressing the problem of non-reliable private
databases in the US).
64
For an analysis of privatization contracts as relational contracts, see: Nestor M. Davidson, Relational Contracts in the
Privatization of Social Welfare: The Case of Housing 24 YALE L. & POL'Y REV. 263 (2006).

22

from the privatization initiative may prevent the government from taking this action even when it
had established that the initiative did not achieve its goals or led to other unwanted consequences.65

Conclusion
It appears that privatization will continue to be a central phenomenon in the economic and social
life of many countries; Public law has to address it as such. This article proposed to do that by
distinguishing between three spheres of discussion: the boundaries of privatization, the privatization
process, and the regulation of privatized actions. In addition, it called for an analysis of these
questions with an emphasis not only on the commercial and efficiency aspects of privatization
policies (the focus of what was described here as the "old" public law of privatization), but rather on
the impact of privatization policies on full citizenship and on government-citizens relations. This
focus should be the core of the "new" public law of privatization.

65

This consideration places at risk, for example, the possibility of effective supervision of the operation of a private
prison. In principle, privatization contracts in this area provide for a step-in right for the state. However, the government
may be deterred from relying on this provision if the expected scope of compensation to the private concession holder is
excessive.

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