In this article on privatization, the issues involved in selling off public corporations to the private sector, and the resulting change in objectives that often follows, are considered.
Definition of privatization
Privatization means the transfer of public sector resources to the private sector. Selling some public sector businesses which are owned and controlled by the government to privately-owned businesses or individuals.
Forms of privatization include sale of nationalized industries or parts of nationalized industries; deregulation which means lifting restrictions that prevented private sector competition (companies to compete with government-owned industries); contracting out which is bidding for governmental projects (contractors are given a chance to bid for services previously supplied by public sector); and sale of land, forests and state property to private owners.
Why privatize?
The reasons for privatization include:
- To improve accountability. Nationalized industries and behemoth public companies were inefficient, and became complacent because of no competition.
- For additional revenue. Sale of state assets for receiving government revenue.
- To improve competition.
- To deregulate the industry. Many national monopolies were broken apart as a result of privatization.
- For less political interference. Politics became mostly separated from the market and less involved in business-decision making.
- To increase share ownership. Thus, more individual people would care about the economy and actively participate in the market.
Advantages of privatization
Arguments for privatization include:
1. Higher efficiency. Businesses in the private sector are more efficient because their main objective is to make profit, therefore costs must be strictly controlled.
2. New sources of finance. New owner(s) invest more capital in the business than the government can afford.
3. Better product quality and more choices. Competition helps to improve product quality, choices and availability.
Disadvantages of privatization
Arguments against privatization include:
1. Lay-offs. Businesses in a private sector might make more workers unemployed than a public sector in order to cut costs and streamline business operations.
2. Too much focus on profits at the expense of the society. A private sector business is also less focused on social objectives.
3. Nationalized industries were sold off too cheaply. Many cases of corruption may emerge.
4. May not lead to competition in the end. In some cases, privatization has not led to greater competition.
5. Less products available to customers. Services that are not profitable become no longer available. Some services have even been cut or reduced in order to lower costs for a company in the private sector (bus routes, air travel, train connections, etc.).
6. Developmental delays. May delay the development of the whole country, some industries will not push on to improve because they are not earning any money.
7. Duplication of resources. Natural monopolies have been sold off, thus duplications of resources among new businesses. To prevent duplication of resources, the government should control the market to some extent. To prevent monopolies, monopolies and mergers commissions are created to monitor private firms which might act against the public’s interest. In the UK, there are two examples of regulatory bodies controlling the market:
A. OFGEM – Regulatory body set up to monitor and control the activities of public utilities such as gas and electricity.
B. OFCOM – Regulatory body set up to monitor and control the activities of public utilities such as telecommunications.
Impact of privatization on businesses includes:
- To achieve a profit is more important now, so the owner(s) of the business care about its current performance and future growth.
- Prices have changed both up and down depending on demand and supply. Some businesses went bankrupt.
- Some staffing has been cut to streamline the business operations, so many employees previously employed by the state were left without jobs.
- New and more services are offered to customers who now have greater choice.
- Mergers and takeovers often happen. Some businesses went out of the market or were taken over by a stronger competitor.
In summary, the core aspect of privatization is the transfer of ownership of state-owned companies from the public sector into the private sector by creating private limited companies and public limited companies.
