A strong reversal of the trend of statist economic expansion set in globally around 1980 and has become the hallmark of the new wave of economic reforms that has been sweeping the world. Privatization refers to the transfer of ownership and/or management of a business from the public to the private sector. It also refers to the partial or total withdrawal of the government from an industry or sector. Another aspect of privatization is the opening of an industry previously reserved for the public sector to the private sector. Privatization represents a shift from dogmatism to pragmatism and represents a policy reversal.
Ways of Privatisation
There are various methods for achieving privatization. “Every country has its own set of gimmicks. In the United Kingdom, employees of a privatized company have first priority in purchasing shares and are entitled to a discount. For example, despite trade union opposition, 96 percent of British telecom employees bought stock in their company. Although some of them later sold them (at a higher price), privatization provided them with certain benefits (at least financial ones). Another interesting example is the use of ESOP (Employee Share Ownership Plan) practices in the United States. The ESOP provides for the formation of a special fund that uses bank credit to purchase company shares and distribute them to employees at face value or for free. The credit is repaid from the company’s profits.”
One important method of privatization is divestiture, or the privatization of ownership through the sale of equity. This entails selling stock to the general public in countries with well-functioning capital markets. Privatization in industrial countries has primarily occurred through the divestiture of government economic activities. There are numerous examples of privatization taking the form of denationalization or reprivatization. In countries such as Chile, Bangladesh, and Pakistan, a sizable number of businesses were denationalized. Contracting is another method of privatization. Governments may contract out planned and specified services to other organizations that produce and deliver them.
Franchising—It is common in utilities and urban transportation to authorize the delivery of specific services in designated geographical areas. Contracting is common in the public sector, defense, and a variety of specialized services. Contracting is efficient when suppliers compete for contracts and there is no loss of economies of scale. However, there is room for corruption in contracting, and long-term contracts encourage monopolistic behavior on the part of the private supplier.
Another option for the government is to withdraw from the provision of certain goods and services, leaving them to the private sector entirely or partially. Privatization can also take the form of management privatization, which uses leases and management contracts.
The government can also relieve the burden through liquidation, which can be formal or informal. Formal liquidation is the closing of a business and the sale of its assets. Under informal liquidation, a company’s legal status is preserved even if some or all of its operations are halted.
Benefits of Privatisation
Privatization benefits society in a variety of ways. Countries such as the United Kingdom have demonstrated how it can help the state solve its fiscal crisis and usher in a new industrial democracy. The following are some of the advantages of privatization:
- It reduces the State’s fiscal burden by relieving it of SOE losses and reducing the size of the bureaucracy.
- The privatization of SOEs allows the government to collect funds. The Government of India’s Budget for 2000-01 proposed raising ‘10,000 crore through privatization during the year. (The achievement, however, was dismal as the privatization plan could not be carried out in real earnest due to various reasons).
- Privatization assists the government in reducing the size of its administrative apparatus.
- It allows the government to focus more on essential government functions.
- Privatisation hastens economic development by attracting more resources from the private sector for development.
- It could lead to better enterprise management.
- Privatization may also encourage entrepreneurial activity.
- Privatization may increase the number of shareholders among workers and the general public. This may subject the businesses to increased public scrutiny.
Impact of Privatization
Wealth is created as a result of privatization. Profits are maximized while production costs are reduced. It is unquestionably a positive step if the government believes that opening up a specific sector to competition will benefit both the market and the consumer.
In other words, it primarily seeks to improve the quality of services provided to people. Furthermore, by taking over certain industries, it reduces the government’s burden. Privatization has undoubtedly had a significant impact on the world. Like the two sides of a coin, there are advantages and disadvantages to living here.
Benefits that can be received:
The primary justification for privatization is that private companies have a financial incentive to cut costs and become more efficient. Managers in government-run industries do not typically share profits. A private company, on the other hand, is motivated by profit, so it is more likely to cut costs and be efficient. Companies such as BT and British Airways have demonstrated increased efficiency and profitability since their privatization.
Governments are frequently seen to be poor economic managers. Political pressures drive them rather than sound economic and business judgment. A state enterprise, for example, may employ inefficient surplus workers. Because of the negative publicity associated with job losses, the government may be hesitant to fire the employees. As a result, state-owned enterprises frequently employ an excessive number of workers, increasing inefficiency.
A government spends a lot of time planning for the next election. As a result, they may be hesitant to invest in long-term infrastructure improvements that will benefit the firm because they are more concerned with projects that will benefit the firm prior to the election, which is a major concern for public welfare. Cutting public sector investment is easier than cutting front-line services like healthcare.
Wealth is created as a result of privatization. Profits are maximized while production costs are reduced. It is unquestionably a positive step if the government believes that opening up a specific sector to competition will benefit both the market and the consumer.
Disadvantages
One significant disadvantage to be aware of is the increased opportunity for bribery and corruption that comes with privatization. Private companies are typically less transparent than government offices, and this lack of transparency, combined with a desire for profit, can be a breeding ground for corruption.
If we look at the United Kingdom, we can argue that the increasing inequality of the 1980s was caused in part by privatization. The government was selling off state assets (which everyone owned) to a wealthier subset of the population, widening the gap between rich and poor. Although it can be argued that improved services have benefited the poor, this is not true of all utilities, and those at the top have become ridiculously wealthy.
Private monopolies, like rail and water firms, are created as a result of privatization; these need to be regulated to avoid the misuse of monopoly power. As a result, government regulation, similar to under-state ownership, is still required.
Furthermore, there is the disadvantage of price increases. Because private owners typically have a monopoly, they take advantage and charge exorbitant prices, knowing full well that consumers have no choice but to do so.
Furthermore, standard privatization economic models imply that new private owners increase productivity and reduce costs, potentially resulting in job losses and wage cuts for workers. This scale effect of privatization will tend to increase employment, working against the productivity effect.