The Methods, Advantages And Disadvantages Of Privatization
Privatization
is defined as a process of transferring government function
or assets to
non-government group or individuals. There are many ways in implementing
privatization process. However, privatization has its own advantages and
disadvantages.
Methods of privatization (top)
The main method of privatization is the transfer of ownership and control from the public to the private sector. It can be in the form of complete, partial or selective transfer. The control of the enterprise would depend on the amount of percentage ownership acquired by the government. The examples in this type of privatization are PROTON and Malaysia Airlines. (Abdul,1996a)
The
second method is selling
a government enterprise to the workforce.
The employees will buy their own company and have control over it from the
government. As employees acquired their own company, there would be increased
labour productivity and declined labor strike. The case of National Freight
Corporation in Britian is an example of this. (Griffiths, 1997)
The
third way is liberation,
which introducing
private sector competition
into areas, which reserved for a government monopoly. This includes
encouragement of private institutions to compete with public universities. Thus,
quality of education in the country would improve.
Contracting out service to private firms is another way of privatization. It is the most popular form of privatization. Private firms are paid by government in supplying goods and service. Here, the government has responsibility to set up and control the quality of services provided. Contracting water supply service to Indah Water Konsortium in Malaysia is an illustration of this method. The process of collecting solid waste by Trienekens in the local setting is another example. Solid waste collection was previously under the responsibility of the local municipal council.
The fifth method is granting a private firm an exclusive franchise to supply a particular defined locality. The example is selling concessions in publicly owned sporting stadiums and national parks. Here, there is presence of competition to bid for the franchise. The franchise would be revised from time to time. Thus, the private firm which successful get the franchise would has to maintain a good record in order to secure it again.
The allocation of grants is another way pf privatization. Grants are given to assist non-government organization (NGO) to perform responsibilities, which previously were bear by the government. These include giving grants in setting up private nursing home, old people homes, orphanages and community sport facilities. The welfare activity is run by non-profit organization and not by government.
The BOT method (Build-Own-Transfer) is an alternative way towards privatization. Under BOT, construction and operation of public utilities such as highway will be operated by private firms for 15 to 25 years. At the end of the period, the ownership of the asset would be transferred to the government (McMaster, 1996).
The last method is mobilizing government function to voluntary community association. For example, a government child day care center is privatized to a parents’ association. Home owners’ association which hire private firm to dispose solid waste is a similar case. Thus, residents themselves can effectively monitor the service delivery rather than the government.
There are 4 main advantages in privatization. Firstly, in privatization, industry is exposed to market forces. This would create efficiency of administration; faster growth and greater responsiveness to market forces. Through market forces, presence of greater and stiffer competition in goods market would drive cost and price down. This eventually would be beneficial to consumer. Consumer could afford goods at a lower price. Privatized firms would compete with each other to obtain financial aids. Thus, this would force them to utilize their own fund effectively. In relation to accountability for shareholders, privatized firms must portray a good growth performance to the public. Otherwise, price share will fall because public demand for the share of uncompetitive firms decline. Example was the privatization of national railway in Malaysia, Keretapi Tanah Melayu (KTM) that had enjoyed tremendous growth after competing with other transportation services such as bus and taxi. Productivity of the privatized Tenaga Nasional Berhad, the electricity supply industry in Malaysia had increased from 1.12 GWh in 1993 to 2.23 GWh in 2000. (www.metering.com, 2001)
Secondly, privatization would lead to reduce government interference in administration. (Sloman,2000a) Thus, privatized firms could make rational economic decision. In comparison, nationalized industry will manipulate its objective for political reason. Such moves include keeping price of goods low as an effort to fight inflation or increasing price as to maintain high government revenue. These political moves are usually implemented during campaign election and do not serve the purpose of free market forces. Moreover, privatization could reduce problems arising from bureaucracy. Implementation of policies can be done smoothly. Thus, the time from policy planning to the implementation process can be reduced. Thus, efficiency of administration can be achieved as well. For example, the construction of 882km North South Highways was completed 15 months ahead of schedule by private firms in Malaysia. (Abdul, 1996b)
Privatization can also reduce the public-sector borrowing requirement (PSBR). Selling share in privatized firm would earn revenue for the government. (Sloman,2000b) Government also could reduce the expenditure cost of running too many industries. High revenue income enables government to cut tax of privatized firm, which would lead to increasing initiative to work harder thus achieving higher productivity. Selling state-owned enterprises would generate much income as well for the government. For example, the British treasury collected about $60 billion in the year 1990. (Reza, 1996)
By privatization, there would be increased share ownership by the public. There is a greater sense of involvement as compared to nationalized industry. When there is involvement, this means that the hired top management would plan and implement proper strategy for the benefit of the company.
However, there are also disadvantages of privatization. One main disadvantage is the effect of natural monopoly (Sloman,2000c). The advantages of market forces would break down if a public company were solely replaced by a single private monopoly. Examples of such monopoly are in the area of electricity, gas and water supplier. A private monopoly would increase price to gain much profits. Thus, customer would be exploited in the process of privatization. This scenario happened with rail privatization in New Zealand and Britain. However the reverse is true in European long distance telecommunication industry in which the former state-owned enterprise lost their monopolies as competitors enter the market. (www.voyagenow.com,2003a)
Privatization would also leads to the effect of barrier to entry. This usually happens when high capital cost industry is privatized. Due to its high expenditure, smaller firm could not gain the momentum to enter the field of competition and thus would achieve loss of profit.
Privatization
could also cause social
upheaval if not
properly planned. Mass retrenchment would happen because private firms want to
reduce operating costs. For example, 16% of the workforce became unemployed in
both Eastern Germany and Poland. (www.voyagenow.com,2003b) Many post-Communist
countries have worsened as their wealth distributions becoming wide compared to
its former Soviet era. In Pakistan, 43% of workforce was laid off as a result of
privatization. (Samad,1996) Country assets fall into a few wealth people, known
as oligarchy. This notable seen in Brazil , Mexico and Russia. Absence of market
forces discredits their process of economic reform as well.
Through privatization, there would be inefficient planning and co-ordination of industry. By comparison, nationalized industry would be able to co-ordinate plan for public interest such as coal, gas, oil and electricity. Oligopolistic collusion might purposely raise price of goods to gain extra profits. This unfair policy would leads to the loss of consumers and the public.
There would also be problems of externality and inequality with privatization. Industry would not care less of pollution in expense of its profit. Example is burning coal in power station without proper filtering process, which produce air pollution thus subsequently acid rain. Due to poor society, rural bus service is reluctantly to be offered.
Privatization could also leads to increased PSBR in the sense that profits of ‘nationalized’ industry are reduced. It also means that some nation’s capital asset being sold. Example is Argentina, which sold its profitable energy industry, resulted in low government revenue, which could be used to improve its much-demanded public services such as health and education.
The
entire privatization process has its own
disadvantage. It lacked accountability and
transparency from the outside (Mangralingam,2001).
It benefited individuals with close ties to the government. This has led to
allegations of corruption, nepotism and
cronyism and such allegations are difficult to prove. The acquisition of wealth,
not through market forces but by means of influence speculation and manipulation
has altered the social life of the new rich into unhealthy and unnecessary
conspicuous consumption, building mansions and acquiring private jets, yachts
and expensive cars.
In conclusion, there are advantages and disadvantages of privatization. To benefit much from privatization, a country should impose regulations to protect the environment and public interest besides preventing the effects of creating a natural monopoly. The process requires experience, expertise and experimentation. Past experiences had revealed that privatization model of one country cannot be emulated in another without tailoring it to suit local conditions. In the long term, benefits derived from privatization would outweigh its disadvantages if it were properly implemented as in developed country.
(1575words)
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A (1997) Applied Economic, 7ed., New York, Addison Wesley Longman Inc.
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M (2001), Still much to learn [Internet], Consumers Association of Penang,
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[Accessed 11 October 2004]
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[Accessed 5 October 2004]
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J (2000). Economics 4 ed., New York, Pearson Education Limited