Supporters of privatization claim that the government should privatize public companies to let the efficiency be improved by better management in the private sector.
Adversaries of privatization claim that the government should not privatize public companies because privatization almost always leads to job losses caused by cutting costs and price increases as private owners pursue profit maximization.
Let’s see for ourselves and explore in details arguments for privatization and arguments against privatization.
Arguments to privatize public companies
Major arguments for privatization include:
- Higher efficiency. Higher profitability as a result of more efficient use of resources, less wastage of time and money, and strict cost controls.
- Easier access to capital. New owner(s) can invest more capital in the business than the government can afford to spend because of being constrained by limited money from TAXes. Private businesses can also sell their shares to investors which may lead to increased investment.
- Improved product quality and more choices. Increased competition tends help with improving product quality, product choices and product availability. It is because private companies do not want to lose any potential sale.
- Faster decision making. Decision-making in state-owned companies can be slow and bureaucratic due to hierarchical organizational structures, long chains of command and all decisions being politically correct.
- Improved motivation of employees. Professional managers, not the politicians, are responsible for their workers’ performance and job satisfaction. They have appropriate knowledge and skills to keep the workforce motivated and productive.
- Higher-quality economy. Market forces will push poor-performing companies to either improve and expand, or to stop trading and cease operations.
- Higher profits. Private owners care about earning profits. They will not run the business for any political reasons, nor to influencing the national economy. Private owners treat profitability and future growth as the most important. Thus, decisions will be taken only for commercial reasons.
- Additional revenue for the government. Sale of public assets can raise additional finance for the country’s budget. The money can be further spent on improving public infrastructure or building new public projects.
Arguments not to privatize public companies
Major arguments against privatization include:
- Lay-offs. Businesses in a private sector will most likely make some workers redundant in order to cut costs, streamline business operations and maximize profits.
- Focusing on profits instead of the society. Private sector businesses are much less focused on social objectives comparing with the state-owned businesses. The state will make decisions about essential industries based on the needs of the society, not just the interests of greedy shareholders.
- Selling off public companies too cheaply. Obviously, private investors would love to acquire valuable assets at discounted prices. Hence, some corrupted politicians might be tempted to sell public property way too cheaply.
- Poor coordination. It is very difficult to achieve efficient coordination when the public company is very large. Many state companies provide services to the whole country such as the railway system, electricity grids and bus services. It is way easier to manage smaller businesses.
- Less products available. Unprofitable goods and services will no longer be available to customers such as remote bus routes or air flights to small cities.
- Developmental delays. Those industries that are not earning money for the investors will be shut down. It may lead to poor development of the whole country or certain regions.
- Duplication of resources. To prevent duplication of resources provided by two separate private companies, the government should control the market to some extent by using different regulatory bodies.
- May not lead to competition, but to monopolized industries. In some cases, privatization may not lead to greater competition in the end. Instead, many strategic industries could be operated as ‘private monopolies’ where one or two market leaders exploit customers by setting high prices.
The debate whether the government should sell out public assets to private owners remains unresolved and ongoing. One approach to creating more cooperation between the public sector and the private sector is the creation of a Public-Private Partnership (PPP). In this way, the government of the country can work together with the private sector to jointly provide certain goods and services in the country.
You can find more information about Public-Private Partnerships (PPPs) in the article called Types of Business Organizations: In Private Sector & Public Sector.
