Privatization

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 responsibilty held by government. A similar transfer in the opposite direction could be refered to the nationalization or municipalization of some property or responsibility.

The term was coined in 1948 and 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.

=Overview=

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

The Pro-Privatization Argument Synopsis

Proponents of privatization believe that private market actors can more efficiently deliver any good or service that government can provide. The controlling ethical issue in the pro-privatization perspective is the need for responsible stewardship of tax dollars. 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. 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 prefereable 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. This position is associated with what has traditionally been called classical liberalism, but is now more commonly identified as economic conservatism, and by its critics as free-market fundamentalism or market theology.

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. 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 affordabilty and quality of service to society. Many privatization opponents also warn against the practice's inherent tendency toward corruption. We live in a time when the lines between public advocacy and commercial activism are blurred to an unprecedented extent, and many view shopping out vast social programs not as tempation to graft but a promise of it. The anti-privatization perspective is in line with the US traditions of the New Deal. Critics of this position attack it as communist in nature.

=Types of Privatization/Methods of Government Disinvestment=There are three main methods of privatization:
* Share Issue privatization (SIP) - selling shares on the stock market
* Asset Sale privatization - selling the entire firm to an investor, usually by auction
* Voucher privatization - shares of ownership are distributed to all citizens, usually for free or at a very low price.

Share issue privatization is the most common type.

=Pro-Privatization and Anti-Privatization Arguments in Detail=

Pro-Privatization

* Performance. The government may only be motivated to improve a company when that poor performance becomes politically sensitive.
* Improvements. Conversely, the government may put off improvements due to political sensitivity — even in cases of companies that are run well.
* Corruption. The company may become prone to corruption; decisions may be made for political reasons, personal gain of the decision-maker (i.e. "graft"), rather than business ones.
* Accountability. Managers of privately owned companies are accountable to their owners/shareholders.
* Civil Liberty concerns. A company controlled by the State may have access to information or assets which may be used against dissidents or individuals who disagree with their policies.
* Goals. The government may seek to run a company for goals other than business 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 ones have to compete with demands from other government departments.
* 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.
* Natural monopolies. These exist also in the private sector, and Governments can enact or are armed with anti-trust legislation and bodies to deal with anti-competitive behaviour of all companies public or private.
* Concentration of wealth. Ownership of and profits from successful enterprises are 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.

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 business that it can't make work for itself. 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. 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.

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.

=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, 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.

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 and largely abandoned. 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, one of the causes for the necessary renationalization was the incomplete nature of the privatization, not leaving enough incentive for the firm to make capital investments.

Outcomes

Nellis and Kikeri have shown that in competitive industries with well-informed consumers, privatization consistently improves efficiency. Such efficiency gains mean a one-off increase in GDP, but through improved incentives to innovate and reduce costs also tend to raise the rate of economic growth. The type of industries to which this generally applies include manufacturing and retailing. Although typically there are social costs associated with these efficiency gains, many economists argue that these can be dealt with by appropriate government support through redistribution and perhaps retraining.

In sectors that are natural monopolies or public services, the results of privatization are much more mixed, as a private monopoly behaves much the same as a public one in liberal economic theory. In general, if the performance of an existing public sector operation is sufficiently bad, privatization (or threat thereof) has been known to improve matters. Indeed, Megginson & Netter showed that the greatest gains from privatization are achieved in the pre-privatization period as reforms are made to prepare for the transfer to private hands. Changes may include, inter alia, the imposition of related reforms such as greater transparency and accountability of management, improved internal controls, regulatory systems, and better financing, rather than privatization itself.

=Alternatives to privatization=

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.

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.

=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.

=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.

References

unindexed

* Clarke, Thomas (ed.) (1994) "International Privatisation: Strategies and Practices" Berlin and New York: Walter de Gruyter, ISBN 3110135698
* Clarke, Thomas and Pitelis, Christos (eds.) (1995) "The Political Economy of Privatization" London and New York: Routledge, ISBN 041512705X
* Juliet D'Souza, William L. Megginson (1999), "The Financial and Operating Performance of Privatized Firms during the 1990s", Journal of Finance August 1999
* von Hayek, Friedrich, (1960) "The Constitution of Liberty"
* Smith, Adam (1994) "The Wealth of Nations"
* Stiglitz, Joseph Globalization and its Discontents

External links

*Privatization Database - World Bank data on privatization in developing countries (1988 to 2003).
*Stop Privatization
*Cato Institute
*Privatization.org (pro-privatization)
*Privatization page on the NCPA website
*Privatization of Social Security The original 1983 Cato/Heritage plan—now almost complete.
*TheVanguard.Org

Privatization: Encyclopedia BETA

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