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Privatization is the process by which ownership of government-owned businesses or from the public sector is transferred to the private sector or private businesses. In a wider sense, it entails a transfer of any government utility to the private sector. There are three methods that governments use to privatize their functions. These methods include Share issue privatization, Asset sale privatization and Voucher privatization.
Of the three methods, share issue privatization is the most common in the United Kingdom. Share issue privatization involves the selling of shares on the stock market. Share issue mostly widens and extends domestic capital markets, boosts liquidity and potentially economic growth and development within that economy especially in cases of large and well-developed capital markets. For underdeveloped market economies, privatization may be undesirable as it may prove difficult to get enough buyers and hence transaction costs tend to be higher.
For developed countries or economies like the United Kingdom, government listing in the stock exchange markets is usually a success. Asset privatization involves the selling of the entire business to the public. This form of privatization is more common in developing economies due to the lack of enough buyers in case of share issue privatization coupled with higher political and currency risk which discourage foreign investors (Dagdeviren 2006).
Voucher privatization is widely used in transition economies of Central and Eastern European countries which include Russia, Poland, the Czech Republic and Slovakia. Of the three methods of privatization, the United Kingdom employs the share issue and the asset sale privatization methods. These methods yield maximum revenues to the government because the bidders compete to offer the government the highest price possible hence generating higher revenues to the government.
Voucher privatization consequently, is usually a genuine return from the government assets in the private hands into the general public. This creates a true sense to the public regarding their contribution and inclusion into government income-generating programs. Despite the numerous benefits associated with privatization, some conditions make privatization lead to technical and locative inefficiency. In both developed and developing countries.
Privatization of government-owned institutions and assets does not always result in inefficient allocation of resources. The government can ensure that the public business enterprises are well run since these governments are directly answerable to their citizens. A government that runs public enterprises poorly often lacks public confidence and as a result, they lose public support and hence they collapse. However, those governments that run public enterprises profitably get public confidence and trust, and hence they are kept in power.
Privatization of some public-owned functions such as health, education, and prisons should not be privatized and hence should remain closed to market forces to protect them from volatility and cruelty of forces of demand and supply, as a free market cannot meet the requirements of these institutions. Another technical and allocative inefficiency that occurs of privatization is that some functions provided by the government benefit the entire society at large and it is not easy to measure the number of utilities the public derives from those functions.
These privatized institutions sometimes develop into natural monopolies, and due to lack of competition, they lack technical efficiency, and hence they are better managed by the government. Privatization can also lead to technical inefficiency in that where these privatized businesses acquire monopolistic status lacks ethical considerations in the need for responsible management of social support missions. (Demetz $ Harold 1968).
These business organizations are guided by profit maximization interests and other self-interest. This makes these institutions charge higher prices than the market price hence exploiting the public. This mission is however against the government mission for public well being whose basic goal is providing quality and inexpensive services to the public. Privatization may also lead to corruption.
This is because most public institutions are not for profit-making, the only possible operation means that private institutions would use in operation is through contracts and block payments. This in turn would remove the actual performance in a bid to maximize profits through misappropriation of funds and strict cost-cutting procedures, resulting in substandard performance. Large business organizations in some cases through public relations experts might influence the government policymakers that privatization is the best method of enhancing performance in public institutions even if it is not the case.
This may lead to inefficiency in the allocation of public goods to the general public. Privatization of some government institutions may results in poor coordination of government functions as those firms may lack specialized skills to perform these functions resulting in inefficiency in technical terms as firms are left to do what they are not suited to do. (DiLorenzo, Thomas J.1996).
It is oblivious undesirable to privatize public-owned assets because in most cases these move results in technical and allocation inefficiency in various ways. This is because; the government must strive to provide the public goods by making sure that public institutions perform to their best. The government that is elected by people should be accountable to its citizen and hence motivated to safeguard the properties of the country.
The government unlike the private sector should be geared towards improvements in its performance in running the institutions to generate maximum government revenue. Unlike in the private sector, all government officials must uphold high standards of ethics. This is because government employee’s code of conduct is guaranteed through and interest declarations. This ensures that the civil servants cannot engage in corrupt practices, resulting in the good catering of public interest.
Privatization of public goods reduces the government involvement and control of private companies resulting in overstretching of economic resources and sometimes displacement of the resources. In most private companies public rights concerns are not adhered to (Chowdhury, F.L. 2006)
Public companies have a responsibility to cater to the civil liberty of their citizens. Since private businesses’ major concern is the maximization of profits they care less or not at all in observation of public lights. This in turn results in technical inefficiency. The state might result in using government-owned and controlled companies to provide resources that private sectors cannot be able to provide or to fund projects that private sectors consider less profitable for the common good of the general public. Some institutions due to the sensitivity of their functions cannot be left and trusted in the hands of the private sector.
Some companies have strategic importance to the public while others are very sensitive. Such sectors might include security, health and education. These sectors require maximum market discipline. In cases where a state-owned company is involved in providing an essential commodity such as water to the public is privatized, the then private company may abandon the original responsibility of providing the commodity to all citizens and concern itself with the provision of the commodity to those who can afford it. Privatization of some government-owned functions may result in the creation of natural monopolies and hence there will be no fair competition.
Privatization often results in a concentration of resources to few individuals and hence this promotes unfair distribution of resources and enlargement of the income inequality gap. Where need occurs for implementation of a certain government policy, the state may not be in a position to pressurize the private sector to contribute the resources required but if the required resources can be provided by a public institution it becomes easy to implement such a policy.
Most private companies often face major obstacles between profitability and service provision, especially when considering long-term and short-time goals. Most private companies consider short-term goals in their effort to maximizing profits such as staff reduction and more working hours in their efforts to cut back on the running costs. Government-owned companies consider long-term goals and hence works towards achieving them in the long run. This in turn provides maximum returns to the public (Edwards, $ Dudley (1995).
Private companies often serve the interest of those people who are willing and able to pay without considering the needs of the majority. They only deal with those goods that have low price elasticity and are hence very necessary. Public companies are not profit-oriented and hence do not consider profitability while providing public goods. Privatization in many cases results in to increase in the level of poverty.
This is more so where the process of privatization is marred with corruption and a lack of transparency. In such cases, only a few corrupt and politically connected people benefit while the masses are left poorer. Studies have shown that the privatization of government-owned functions in the United Kingdom has not been a complete success. The privatized utilities have been riddled with various problems as the new owners struggle to maximize their profits at the expense of the public interest. A good example is the privatization of British Rail. The privatization of British rail did not yield the expected returns to the government in terms of revenues.
Consequently, the performance of the railway company in terms of provision of services declined. All in all the performance of privatized utilities in the United Kingdom went down and the intended goals were never met. Public ownership commonly referred to as government ownership or state ownership is a term used to refer to all assets, industry or business organizations owned by a particular government. This entails the process of putting an asset into community ownership (Nellis $ Kikeri 2002).
These state-owned businesses are sometimes run and managed in form of corporations with the government owning a majority of the shares. Natural monopoly on the other hand refers to a situation whereby one firm in an industry can produce the required output at a lower public cost than other firms in the industry. An industry can be said to be a natural monopoly where only one firm can operate in the long run even without putting in place the strict measures observed by monopolies.
A natural monopoly is a result of high fixed costs of entering into the industry, which in effect causes a decline in the long-run average costs as more output is produced. Public ownership may not be an ineffective policy response to natural monopoly because in some cases the government may decide various firms producing the same goods or services may be inefficient in their production and hence may prove to be more costly to the nation than it would be if one firm is used to provide those goods and or services.
From this notion, the state takes the responsibility of providing those goods and services and hence creates statutory monopolies where the state enacts laws that prohibit competition. Most of these monopolies are used to provide common goods and services in such areas as railway transport, electricity, provision of water, and telecommunications. Natural monopolies occur where the largest supplier of a certain good or service in an industry enjoys a large cost advantage over the competitors (Nellis $ Kikeri 2002).
This phenomenon mostly occurs in industries that require a huge initial amount to acquire fixed assets. After the acquisition of the fixed assets, the supplier can enjoy economies of scale which results to be more than the size of the market. Good examples of natural monopolies are the energy/electricity and the water-providing utilities. Public ownership might be an inefficient policy response to natural monopoly due to various considerations.
State ownership may lead to wastage of public resources in situations where the government is unable to motivate its employees and lacks guaranteed job security. Similarly, government ownership of an industry that can be competitive in the private sector may hinder the growth of that industry if the government fails to motivate the workers. This in turn would deny consumers the freedom of choice.
In most cases, unprofitable public companies continue to survive even when they are making huge losses due to the bureaucracy involved in changing the policies. The state, due to lack of appropriate technology in running profit-making organizations may end up misallocating labor and public money meant for the provision of public goods. The government-owned utility that assumes monopolistic powers may be used by the government to raise extra revenue by overcharging the public in form of hidden tax (Chowdhury, F. L.2006).
References
Mueller, Milton L. (1998). Competition, Interconnection, and Monopoly in the Making of the American Telephone System, American Enterprise Institute. AEI Press. pp. 14.
Baumol, William, J. (1985). Microtheory: Applications and Origins. Cambridge.
DiLorenzo, Thomas J. (1996). “The Myth of Natural Monopoly”. The Review of Austrian Economics 9 (2): 43–58. Web.
Demetz, Harold 1968). “Why Regulate Utilities?”. Journal of Law and Economics 11 (1): 55–65. Web.
Chowdhury, F. L. 2006 ‘’Corrupt Bureaucracy and Privatization of Tax Enforcement’’.
Edwards, $ Dudley (1995). The Pursuit of Reason: The Economist 1843-1993. Harvard Business School Press. pp. 946. ISBN 0-87584-608-4.
Dagdeviren (2006) “Revisiting privatization in the context of poverty alleviation” Journal of International Development, Vol. 18, 469–488.
Nellis $ Kikeri 2002 Privatization in Competitive Sectors: The Record to Date, World Bank Policy Research Working Paper No. 2860″.
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