Privatisation – V

Advantages of Privatisation

The basic economic argument given for privatization is that governments have few incentives to ensure that the enterprises they own are well run.

One problem is the lack of comparison in state monopolies. It is difficult to know if an enterprise is efficient or not without competitors to compare against.

Another is that the central government administration, and the voters who elect them, have difficulty evaluating the efficiency of numerous and very different enterprises.

State-run industries tend to be bureaucratic. A political government may only be motivated to improve a function when its poor performance becomes politically sensitive, and such an improvement can be reversed easily by another regime.

Conversely, the government may put off improvements due to political sensitivity and special interests — even in cases of companies that are run well and better serve their customers’ needs.

A monopolized function is prone to corruption; decisions are made primarily for political reasons, personal gain of the decision-make

Therefore privatization becomes necessary.

1. Improved efficiency and innovation.

In a government run industry, managers do not usually share in any profits. State monopolies tend to create inefficiency, are poor innovators and restrict consumer choice.

Private companies have a profit incentive to cut operating costs through the use of more flexible personnel practices, job categories, streamlined operating procedures and simplified procurement. Private ownership can stimulate innovation. Competition forces private firms to develop innovative, efficient methods for providing goods and services in order to keep costs down and be more efficient.

The existence of consumer sovereignty in the private sector has the potential for widening consumer choice, increasing quality and, through increased competition, lower prices [these incentives do not exist in the public sector].

Basically, the nation’s resources will be used more efficiently. Allocative efficiency and

productive efficiency will be striven for, and more likely to be achieved.

 2. Specialization

A private owner, often specializing and gaining great knowledge about a certain industrial sector, can evaluate and then reward or punish the management in much fewer enterprises much more efficiently.


3.The removal of political interference

It is argued governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense.

Nationalised industries are prone to interference from politicians for political or populist reasons.

Politicians may make decisions to further their own political ends and not those of the industry in question. For example

a state enterprise may employ surplus workers to reduce unemployment, also may be reluctant to get rid of the workers because of the negative publicity involved in job losses.

It may force an industry to buy supplies from local producers when buying from abroad may be cheaper.

It may force an industry to freeze its prices/fares to satisfy the electorate or control inflation

Therefore inefficiency of public sector undertakings increases.

In the private sector, decisions are made on the grounds of efficiency and profit

4. Capital availability

If there are both private and state owned enterprises competing against each other, then the state owned may borrow money more cheaply from the debt markets than private enterprises, since the state owned enterprises are ultimately backed by the taxation and printing press power of the state, gaining an unfair advantage, should revenues be insufficient, unlike a private owner.

 5. Long Term view.

A government many think only in terms of next election. Therefore, they may be unwilling to invest in infrastructure improvements which will benefit the firm in the long term because they are more concerned about projects that give a benefit before the election.

 6. Accountability

Managers of privately owned companies are accountable to their owners/shareholders and to the consumers, and can only exist and thrive where these needs are met.

It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover.

Managers of publically owned companies are more accountable to the broader community and to political “stakeholders”. This can reduce their ability to directly and specifically serve the needs of their customers, and can bias investment away from profitable areas.

A state owned firm therefore tends to be inefficient.

 7. Increased Competition.

Often privatisation of state owned monopolies occurs alongside deregulation – i.e. policies to allow more firms to enter the industry and increase the competitiveness of the market. It is this increase in competition that can be the greatest spur to improvements in efficiency. For example, there is now more competition in telecoms and distribution of gas and electricity.

However, privatisation doesn’t necessarily increase competition; it depends on the nature of the market. E.g. there is no competition in tap water. There is very little competition within the rail industry.

 8. Government will raise revenue from the sale

Selling state owned assets to the private sector raises significant sums for the government in the. However, this is a one off benefit. It also means we lose out on future dividends from the profits of public companies.

 9.Saves taxpayers money

By applying a variety of privatization techniques to state services, infrastructure, facilities, enterprises, and land, comprehensive state privatization programs can reduce program costs.

States also realised large one-time windfalls from the sale or lease of state infrastructure and facilities.

It has also to be remembered that these industries which were sold to the private sector, were often loss makers, no longer needed to be subsidised by the taxpayer after being privatised.

And finally, if these more efficient privatised industries began to record a profit, the government would tax these profits, ie Privatization also creates a steady stream of new tax revenues from private contractors and corporations who pay taxes and license fees, while state units do not.

This helps to keep the public sector borrowing requirement down and save taxpayers money.

 10] Quick decisions

Decisions would be taken quickly, in absence of hierarchy in the government set-up, which delays decision making

11] Flow of foreign capital

Flow of foreign capital in industries enables private enterprises to raise investment easily. Their investment decisions are governed by market interest rates. This will stimulate capital market and promote liquidity and job creation. This helps the industries to grow.

State owned industries have to compete with demands from other government departments and special interests. This may restrict their growth.

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