Privatization

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Privatization (alternately "denationalization" or "disinvestment") is the transfer of property or responsibility from the public sector (government) to the private sector (business). The term can refer to partial or complete transfer of any property or responsibility held by government. A similar transfer in the opposite direction could be referred to the nationalization or municipalization of some property or responsibility.

The term was coined in 1936 in a chronicle published in The Economist. It is thought to have been popularized by The Economist during the 1980s. The term also has been used to describe an unrelated, nongovernmental interaction involving the buyout, by the majority owner, of all shares of a holding company's stock- privatizing a publicly traded stock.

Contents

[edit] Overview

Although there is a large middle-ground between these polar positions, the pro and con ideologies pertaining to privatization are these:

[edit] The Pro-Privatization Argument Synopsis

Proponents of privatization believe that private market actors can more efficiently deliver any good or service than government can provide. The controlling ethical issue in the pro-privatization perspective is the need for responsible stewardship of tax money. Privatization proponents' faith in the market is philosophically based in an economic principle of competition: that where there is a profit to be made, competition will inevitably arise, and that competition will inevitably draw prices down while increasing efficiency and quality. By the same principle, privatization proponents feel that government lends itself to waste because it has no competition. A related argument for privatization says that it is preferable to maximize the number of social arenas open to entrepreneurship- charging government with robbing would-be entrepreneurs, and society at large, by meddling in the market.

[edit] The Anti-Privatization Argument Synopsis

Opponents of privatization believe certain parts of the social terrain should remain closed to market exploitation in order to protect them from the unpredictability and ruthlessness of the market (such as Private prisons).

The controlling ethical issue in the anti-privatization perspective is the need for responsible stewardship of social support missions. Market interactions are all guided by self-interest, and successful actors in a healthy market must be committed to charging the maximum price that the market will bear. Privatization opponents believe that this model is not compatible with government missions for social support, whose primary aim is delivering affordability and quality of service to society. Opponents also would claim that many of the utilities which government provides benefit society at large and are indirect and difficult to measure. As a result, many functions which government provides, such as defense, have been historically identified as being unproductive and unable to produce a profit. In such functions, the incentives of profits would be negated.

Many privatization opponents also warn against the practice's inherent tendency toward corruption. As many areas which the government could provide are essentially profitless, the only way private companies could, to any degree, operate them would be through contracts or block payments. In these cases, the private firm's performance in a particular project would be removed from their performance, and embezzlement and dangerous cost cutting measures might be taken to maximize profits.

Some would also point out that privatizing certain functions of government might hamper coordination, and charge firms with specialized and limited capabilities to perform functions which they are not suited for. In rebuilding a war torn nation's infrastructure, for example, a private firm would, in order to provide security, either have to hire security, which would be both necessarily limited and complicate their functions, or coordinate with government, which, due to a lack of command structure shared between firm and government, might be dificult. A government agency, on the other hand, would have the entire military of a nation to draw upon for security, whose chain of command is clearly defined.

There are various precedents in history which some would claim as examples in which improper privatization, or the failure of government to conduct certain functions, caused various complications.

  1. In the 18th Century, military functions such as maintaining forts and garrisons along the African coast were, in effect, privatized to the East India Company, with parliament obliged to pay 13,000 pounds a year to support the East India Company in this end. The East India Company proceeded to shirk various expenses, most notably in the maintenance of fortifications. In one case, a shipment of inferior bricks sent to repair the walls of one fortification were of such low quality that it became necessary to rebuild the entire wall from its foundation.
  2. Prior to the great depression, various state governments and the Hoover administration attempted to provide relief through private firms like the Red Cross. However, due to their limited capabilities, the firms were often unable to provide for the various functions that people required, and could only provide them in specific areas besides. Also, because they depended on limited resources (even with occasional payments from the government) they would usually be unable to provide them for very long.
  3. During World War Two, the Truman Commission uncovered various instances in which contracts given out to various private firms to provide various military materials fostered considerable profiteering which often resulted in inadequate weapons and equipment being sent to the front.
  4. In the reconstruction of Iraq, the government decided to contract out many different reconstruction functions to private firms. Shortly thereafter, those firms have been accused of cutting corners and being generally ineffective in reconstructing the country. Halliburton, in particular, was accused of, among other things, skimping on the cost of providing meals to soldiers. Various other complaints include the lagging reconstruction of water and electricity utilities, and providing defective equipment to soldiers.
  5. Many, such as Dick Polman of The Philadelphia Inquirer, noted that prior to Hurricane Katrina, the government had "privatized many of FEMA's basic functions". The uncoordinated action between private emergency relief agencies, as well as the military (which would often turn back relief trucks) resulting in the poor response to the storm that many would claim was a result of this privatization.

[edit] Types of Privatization/Methods of Government Disinvestment

There are three main methods of privatization:

Share issue privatization is the most common type.

[edit] Pro-Privatization and Anti-Privatization Arguments in Detail

[edit] Pro-Privatization

  • Performance. 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 is easily reversed by another regime.
  • Improvements. 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.
  • Corruption. A monopolized function is prone to corruption; decisions are made primarily for political reasons, personal gain of the decision-maker (i.e. "graft"), rather than economic ones.
  • Accountability. Managers of privately owned companies are accountable to their owners/shareholders and to the consumer, and can only exist and thrive where needs are met.
  • Civil Liberty concerns. A company controlled by the State may have access to information or assets which may be used against dissidents or any individuals who disagree with their policies.
  • Goals. A political government tends to run an industry or company for political goals rather than economic ones.
  • Capital. Privately held companies can more easily raise investment capital in the financial markets, investment decisions are governed by market interest rates. State-owned industries have to compete with demands from other government departments and special interests.
  • Security. Governments have had the tendency to "bail out" poorly run businesses when, economically, it may be better to let the business fold, often due to the sensitivity of job losses.
  • Lack of market discipline. Poorly managed state companies are insulated from the same discipline as private companies, which could go bankrupt, have their management removed, or be taken over by competitors.
  • State monopolies. Political governments can enact or are armed with anti-trust, collusion, and other legislation and bodies to deal with "anti-competitive" behaviour of companies while maintaining their own advantages.
  • Concentration of wealth. Ownership of and profits from successful enterprises tend to be dispersed and diversified. The availability of more investment vehicles stimulates to capital markets and promotes job creation.
  • Political influence. Nationalized industries are prone to interference from politicians for political or populist reasons. Examples include making an industry buy supplies from local producers (when that may be more expensive than buying from abroad), forcing an industry to freeze its prices/fares to satisfy the electorate or control inflation, increasing its staffing to reduce unemployment, or moving its operations to marginal constituencies.
  • Profits. Private companies make a profit by enticing consumers to buy their products in preference to their competitors'. Private corporations exist to serve exactly the needs of their clients; their clients' propensity to pay is usually correlated with how well they serve the needs. Corporations of different sizes may target different market niches in order to focus on marginal groups and satisfy their demand.

The basic economic argument given for privatization is that governments have few incentives to ensure that the enterprises they own are well run. Governments have the de facto monopoly to raise money by taxation should revenues be insufficient. As Governments may borrow money more cheaply from the debt markets than private enterprises, they will squeeze out more efficient private companies through this misallocation of resources. The high costs of tax subsidies are not readily seen.

Where governments lack it, it is said that private owners do have profit motive. The theory holds that, not only will the enterprise's clients see benefits, but as the privatized enterprise becomes more efficient, the whole economy will benefit. Ideally, privatization propels the establishment of social, organizational and legal infrastructures and institutions that are essential for an effective market economy.

Privatizing a non-profitable (or severe loss-making) company which was state-owned would shift the burden of financing off taxpayers, as well as freeing some national budget resources which may be subsequently used for something else. Especially, proponents of the laissez-faire capitalism will argue, that it is both unethical and inefficient for the state to force taxpayers to fund the functions or industries that they oppose or do not require. Also, they hold that the privatized entity would have to adapt to market forces or be penalised if it fails to adapt to the market reality by offering goods and/or services which are preferred by the customers.

The main political argument for privatization is that of civil liberties and privacy. A very substantial benefit to share or asset sale privatizations is that bidders compete to offer the state the highest price, creating revenues for the state to redistribute in addition to new tax revenue. Voucher privatisations, on the other hand, would be a genuine return of the assets into the hands of the general population, and create a real sense of participation and inclusion. Vouchers, like all other private property, could then be sold on if preferred.

[edit] Anti-Privatization

Opponents of privatization dispute the claims concerning the alleged lack of incentive for governments to ensure that the enterprises they own are well run, on the basis of the idea that governments are proxy owners answerable to the people. It is argued that a government which runs nationalized enterprises poorly will lose public support and votes, while a government which runs those enterprises well will gain public support and votes. Thus, democratic governments do have an incentive to maximize efficiency in nationalized companies, due to the pressure of future elections.

Furthermore, opponents of privatization argue that it is undesirable to transfer state-owned assets into private hands for the following reasons:

  • Performance. A democratically elected government is accountable to the people through Parliament, and is motivated to safeguarding the assets of the nation. The profit motive may be subordinated to social objectives.
  • Improvements. the government is motivated to performance improvements as well run businesses contribute to the State's revenues.
  • Corruption. Government ministers and Civil servants are bound to uphold the highest ethical standards, and standards of probity are guaranteed through codes of conduct and declarations of interest. However, the selling process could lack transparency, allowing the purchaser and civil servants controlling the sale to gain personally.
  • Accountability. The public does not have any control or oversight of private companies.
  • Civil Liberty concerns. A democratically elected government is accountable to the people through Parliament, and can intervene when civil liberties are threatened.
  • Goals. The government may seek use state companies as instruments to further social goals for the benefit of the nation as a whole.
  • Capital. Governments can raise money in the financial markets most cheaply to re-lend to State-owned enterprises.
  • Lack of market discipline. Governments have chosen to keep certain companies/industries under public ownership because of their strategic importance or sensitive nature.
  • Cuts in essential services. If a government-owned company providing an essential service (such as water supply) to all citizens is privatized, its new owner(s) could lead to the abandoning of the social obligation to those who are less able to pay, or to regions where this service is unprofitable.
  • Natural monopolies. Privatization will not result in true competition if a natural monopoly exists.
  • Concentration of wealth. Profits from successful enterprises end up in private, often foreign, hands instead of being available for the common good.
  • Political influence. Governments may more easily exert pressure on state-owned firms to help implementing Government policy.
  • Downsizing. Private companies often face a conflict between profitability and service levels, and could over-react to short-term events. A state-owned company would have a longer-term view, and be less likely to cut back on maintenance or staff costs, training etc, to stem short term losses.
  • Profiteering. Private companies do not have any goal other than to maximize profits. A private company will serve the needs of those who are most willing (and able) to pay, as opposed to the needs of the majority, and are thus anti-democratic.

[edit] Successes and Failures of Privatization in the United Kingdom

Most economists agree that consumers may be worse off if a natural monopoly is privatized without being subject to a strong and effective regulation and creating independent regulatory institutions, otherwise it will be prone to serious market failures when in private hands. This seems to have been the case with rail privatization in the UK and in telecommunications in Mexico; in both countries, public disaffection has led to government intervention. Another notable example of this is Thames Water.

Privatization has been notably successful in telecommunications in Europe because genuine competition has arisen: the former state-owned enterprises lost their monopolies due to legislation and technological change, competitors entered the market, and prices for broadband access and telephone calls fell dramatically.

British Rail is an example of privatization program that has been deemed a failure. The track-owning company has been effectively repossessed by the British government, and many of the train-running companies are at risk of having their concession removed on the grounds that they fail to provide adequate services. One of them, Connex, actually had its franchise cut short in June 2003 by the government for what the Strategic Rail Authority called "poor financial management." In this case Stephen Byers (then Secretary of State for Transport) decided to call in administrators with regard to Railtrack (the infrastructure company created in 1993 and privatised in 1996) and transferring the infrastructure to the new Private Company Limited by Guarantee, Network Rail (a not for profit private company with no shareholders), Train Operation remains in the hands of private operators with franchises awarded by the Department for Transport (except for Merseyrail the franchise of which is awarded by Merseyside Passenger Transport Executive).

[edit] Alternatives to privatization

[edit] Municipalization

Transferring control of a nationalized business to municipal government is an alternative sometimes proposed to privitization.

[edit] Sub-contracting

It is possible that national services may sub-contract or out-source functions to private enterprises. A notable example of this is in the United Kingdom, where many municipalities have contracted out their rubbish collection or administration of parking fines by tender to private companies.

In addition, the British government is debating the possibility of involving the private sector more in the workings of the NHS, principally by referring patients to private surgeries to ease the load on existing NHS human resources, and covering the cost of this.

[edit] Part ownership

An enterprise may be privatized, with a number of shares in the company being retained by the state. This is a particularly notable phenomenon in Germany, where the state owns around a third of Deutsche Telekom. As of 2005, the state of North Rhine-Westphalia is also planning to buy shares in the energy company E.ON in an attempt to control spiraling costs.

Whilst partial privatization could be an alternative, it is more often a stepping stone to full privatization. It can offer the business a smoother transition period during which it can gradually adjust to market competition. Some state-owned companies are so large that there is the risk of sucking liquidity from the rest of the market, even in the most liquid marketplaces, and thus must be sold off bit by bit. The first tranche of a multi-step privatization would also in the first instance establish a valuation for the enterprise to mitigate complaints of under-pricing.

[edit] Notable privatizations

See also: List of privatizations

Privatization programmes have been undertaken in many countries across the world, falling into three major groups. The first is privatization programmes conducted by transition economies in Central and Eastern Europe after 1989 in the process of instituting a market economy. The second is privatization programmes carried out in developing countries under the influence of international financial institutions such as the World Bank and IMF. The third is privatization programmes carried out by developed country governments, the most comprehensive probably being those of New Zealand and the United Kingdom in the 1980s and 1990s.

[edit] Negative Popular Responses to Privatization

Privatization proposals in key public service sectors such as water and electricity are in many cases strongly opposed by opposition political parties and civil society groups. Usually campaigns involve demonstrations and political means; sometimes they may become violent (eg Cochabamba Riots of 2000 in Bolivia; Arequipa, Peru, June 2002). Opposition is often strongly supported by trade unions. Opposition is usually strongest to water privatization - as well as Cochabamba (2000), recent examples include Ghana and Uruguay (2004). In the latter case a civil-society-initiated referendum banning water privatization was passed in October 2004.

[edit] Popular Cultural References

[edit] See also

[edit] References

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[edit] Unindexed

[edit] External links

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