Privatization is transferring a government owned business, property or a productive venture and its assets to a private being or entity. Privatization may also mean denationalization or disinvestment of a publicly owned property. All terms suggest transferring of control of a government (public) owned enterprise to private investors. As noticed, the definition is broad, thus privatization is more than just selling a government property to the highest bidder. It also includes liquidation, mass privatization, contracting out and leasing.
Arguments for privatization claim that ownership by private investors increases the business efficiency because of greater importance private owners place on profit maximization while there is lesser concern by the government appointed managers and boards. However, workers usually feel threatened by the possible changes associated with privatization. Privatization changes the allocating economic power within the society as it decreases the economy control by the government. Therefore; deciding privatization is a political decision as well as an economic one. For such a decision, public support is important and should be considered in planning and imposing this decision. Because of seeking public support, choices for privatization approaches are altered because of political considerations. Second, privatization program implementation must be objective and fair to the public to avoid opposing publicity.
Get your grade
or your money back
using our Essay Writing Service!
Privatization aims at achieving social goals as well as enterprise goals. Both are collectively called macroeconomic goals. Privatization is adopted because government owned projects are performing badly. Thus a great part of the external debt as well as a great part of the Government budget is directed to cover loses and paying subsidies or backing loss making enterprises. In this perspective, Government concern is to get itself out of such commitments to loosing enterprises and concentrate the scarce funding on matter such as education, health and social welfare. In some developing countries, there is a danger that young rising private businesses face unjust competition from government owned and supported enterprises that have the feasibility to go with prices at levels below the market rates. Therefore; the second macroeconomic goal is to give private businesses the chance to thrive and promote their development. A third, obvious, goal for privatization is to use the sales income to treat shortages in Government budget or relief some of the public debt. Alternatively, sales income is used as funds for strategic social welfare projects. A fourth goal is to give the public the chance for saving money and actively take part in their country's economy. Privatization improves efficiency by introducing new technologies, improving products quality; improve marketing especially on the international arena and improving the management methods. Applying these changes to several enterprises should have significant macro economic implications. Privatization has to remain a part of a broad program of a social and economic reform.
Techniques of privatization are variable and depend mainly on the size of the enterprise. For small businesses, auction to the highest bidder is suitable. Auction has the added advantage of being transparent as all participants can see how the procedure is going on and know for themselves who is the highest bidder. For larger businesses, auction is not suitable as other considerations are important besides the sales income. These considerations include: What technology to bring, what investment it will make, where it will market the product, will it close down the enterprise for the benefit of other enterprises it owns. Therefore; privatization of larger enterprises and strategic businesses takes place in a case by case basis. The techniques vary; privatization of such businesses occurs as joint venture, initial public offering, mass privatization program, build own transfer program or liquidation of Government owned enterprises.
To summarize; there are three methods of privatization:
- Share issue privatization: This is the commonest type. It broadens homeland capital share in the local market, it also boosts liquidity and economic growth. However; with underdeveloped local market it may be difficult to find enough buyers and underpricing of the shares is unavoidable.
- Asset sale privatization: It is selling the entire enterprise or most of it to a strategic investor. This type is common in developing countries because of higher currency risk deterring foreign investors.
- Voucher privatization: This is giving out shares of ownership to all citizens at low prices. This is the type used mainly in the transition economies (former Soviet Republics and East European Countries).
Always on Time
Marked to Standard
An important advantage to the first two methods is they give the Government the highest price that can help boosting improvement of infrastructure and social planes.
The debate between proponents and opponents of privatization and runs around issues of performance, improvements, corruption, accountability, civil liberty concerns, capital, concentration of wealth and political influence. It is true that privatizing nonprofitable firms may raise the prices to become profitable. In a sense, this may cut out the Government need to raise taxis. Besides, strengthening the Government owned enterprises using the sales outcome create a competing industry that can lead the market and prices. Again, industries that have a notable social impact (healthcare and basic education) should remain protected from the unpredictability of the private market guided mainly by profit. Opponents to privatization claim that certain roles of the government that need coordination particularly in the areas of military and security should be protected from privatization. It remains that a democratically elected parliament is the essential safeguard of the nation's interests and to the elected members, profit will always come second to social objectives.
Countries which are able to move beyond planning and continue a successful privatization programs in Africa and the Middle East are few. Most countries in this region approached privatization to relieve the budget burden of debts produced by loosing Government owned enterprises. The countries which are keeping a successful privatization program are: Egypt, Coute d' Ivoire, Morocco, Ghana and Nigeria. Egypt and Morocco are the most successful in the transition from planning to impose phase. Political stability and meeting training and technical objectives of investors are important factors that helped both countries in the transition. According to world Bank statistics 120 developing countries 7860 transactions during the period 1990 to 2003 making close to 410 billion $. The Middle East and North Africa raised 19 billion$. During the 1990's, the privatization activity was mainly in Egypt (50%) and Morocco (40%). Transactions in both countries were mainly in the fields of manufacturing (Kikeri and Kolo 3, 4, 11, 12, 16 1).
Privatization has been a popular term for sometime. But the difference today is it is encroaching into all areas of public administration and Government enterprises are expected to change ideas to a go to the profit side or face giving up administration.
1- Kikeri, S. and Kolo, A. F: Privatization: Trends and recent developments. World Bank Research Working Paper 3765, November 2005. Retrieved from <http://www.econ.worldbank.org>