Evidence from Privatization - Essay Example

Evidence from Privatization Privatisation involves the transfer of ownership and the management of state owned enterprises to private firms. Governments should be less corrupted so as to increase the efficiency of state owned corporations and the public sector, promoting national security. Recently, pressure from the IMF and World Bank, has made privatization a major dimension in the worldwide capital market. Many countries and regions are directly adopting this as most of them had historically taken a direct role in the economy, security, social policy, control of enterprises, prevention of inequality and the ownership of national assets (Ioannis, 2012). However, due to limited budgets, governments have been unable to develop all part of the economy equally. Further problems like inadequate use of knowledge, experience and specialization in the management of the various sectors occur and citizens may not receive goods and services from the public enterprises effectively. Lack of competition in the public sector contributes a great deal in the inefficiencies, corruption and lack of motivation in public enterprises (Khan et al., 2012). The main reason governments have opted for privatization is the belief that private firms can make a more efficient and effective use of available resources than governments and at the same time profit the government from the higher revenues privatisation creates. It is also believed that privatisation may result to increased efficiency productivity and liquidity in the financial markets but on the other hand, lead to unemployment and dependency on foreign capital from multinational companies hence decline in a nation’s wealth and social welfare (Han, 2012). Full privatisation may have occurred especially in the services sector but it is generally not ideal for governments to conduct a full privatisation. Where natural resources and sensitive goods and or services for instance nuclear energy, partial privatisation is preferred. In this case, the government gives part of the ownership to a private firm, so that it can still have active control in the operations. Privatisation can take place either through share issue privatisation (SIP) which involves selling shares on the stock market or selling the whole firm or part of it to a strategic buyer by auction, asset sale, voucher privatisation or shares of ownership distributed to all citizens (at a low fee or even for free). SIP is the most common and it extends the domestic capital markets and increases the investment opportunities which in turn will stimulate economic growth though some risk is involved. Finding enough buyers could be a problem and as a result the prices drop and the capital gains become insignificant, in turn the transaction costs become high. Asset sale privatisation is common in developing countries. Voucher privatisation was common in the former socialist economies during the transition process. Asset sale and share privatisation are usually beneficial to the government as bidders normally compete and hence offer a high price which makes more money for the government (Walailuck and Christian-Oliver, 2011). Evaluation of privatisation should be from a point of view of the society’s well-being, not from the profit maximisation of the firms. The welfare of the people and the country in general and the state of its economy should be continually improved. There is a general view that all government involvement in the market represents some restrictions to business liberty so it has become intrinsically detrimental. Privatisation is a form of withdrawal of government involvement in business. Since 1980, many European countries have launched privatisation programs with the Great Britain being referred to as the origin of modern privatisation (Ioannis, 2012). Privatisation leads to enhanced economic performance. Those in favour of privatisation including schools of thought and politicians points out that production growth and the allocative efficacy of private proprietorship compared to that of government ownership are significantly superior. It has been observed that privatisation consistently increases efficiency in competitive industries with well-informed clients. Improvement in productivity, profits and efficiency increases as the competition between firms increase. This greatly contributes to the national output. Privatisation also leads to change in the economic prospects that allow profit-maximising investors and entrepreneurs be the major source of economic performance (Borisova & Megginson, 2011). Operational efficiency leads to reduced production costs. Pressure from politics and other government operations that direct firm’s activities are eliminated and hence improve market efficiency. After privatisation, large subsidies or other special grants and economic considerations are greatly reduced. Profitability of the privatised firms is expected in most cases given public enterprises in most cases make little to no profits (Matsumura & Shimizu, 2010). This is beneficial to the country as all the borrowing which often ended up counting as government borrowing or use of tax-payer’s money will be considerably reduced and the government can use the funds. On the other hand, privatisation could be less beneficial or even detrimental to the consumer. It can be very expensive and generate a lot of money in fees for the specialist advisers like financial institutions (Borisova & Megginson, 2011). Monopolies that existed are turned to private monopolies with very little competition and tight barriers of entry. This end up not benefiting the consumers as it had been expected. Also, firms are charged with limited and specialized capabilities they could be incapable of effectively handling thus hampering coordination with the government. Privatised businesses tend to close down or even sell off some part of the firms that are unprofitable, contributing to unemployment. This also contributes to poor distribution of income in the country especially where the privatised firm is multi-national, as they benefit few people. Motivation for privatisation has emanated greatly from subjective and imposed objectives. Most have nothing to do with efficiency or social welfare while others are fiscal. New private firms in most cases stimulate business and the development of local capital markets and offer much better and more investment opportunities to the citizens and also foreigners. However, privatisation does not always guarantee improved performance especially in the short and medium-run. The government should check the type of private ownership, corporate governance, legal and institutional system and the access to know-how markets before firm reconstruction. It takes some time for the benefits of privatisation to the citizens to fully materialise. References Borisova, G. & Megginson, W. (2011). Does Government Ownership Affect the Cost of Debt? Evidence from Privatization. Review of Financial Studies, 2693-2737. Han, L. (2012). Strategic Privatization and Trade Policies in an International Mixed Oligopoly. Manchester. Ioannis, N. K. (2012). Privatization and its Effect on European Unemployment.” Northeast Business & Economics Association 35th Annual conference, 99-103. Khan, T., Ahmed, N. & Mahmood, K. (2012). Privatization Effects on Consumers and Employees: A Literature Review. International Journal of Management , 474-484. Matsumura, T. & Shimizu, D. (2010). Privitization Waves: The Manchester School Privatization Waves. Manchester. Walailuck, C., & Christian-Oliver, E. (2011). Privatization of businesses and flexible investment: a real option approach. New York: Springer-Verlag. Read More