Privatization
History of Privatization:
There had been a tremendous growth in the use of SOEs throughout much of
the world, especially after World War II, which in turn led to privatizations
several decades later.
Most people associate modern privatization programs with Margaret
Thatcher’s Conservative government, which came to power in Great Britain
in 1979.
However, the Adenauer government in the Federal Republic of Germany
launched the first large-scale, ideologically motivated "denationalization"
program of the postwar era. In 1961, the German government sold a majority
stake in Volkswagen in a public share offering heavily weighted in favor of
small investors. Four years later, the government launched an even larger
offering for shares in VEBA. Both offerings were initially received favorably,
but the appeal of share ownership did not survive the first cyclical downturn
in stock prices, and the government was forced to bail out many small
shareholders.
Conti….
Although the Thatcher government may not have
been the first to launch a large privatization
program, it is without question the most important
historically.
Margaret Thatcher adopted the label “privatization”
which was originally coined by Peter Drucker and
which replaced the name denationalization.
What is Privatization?
A very broad term--but most simply, privatization is the
transfer of assets or service delivery from the government
to the private sector.
Privatization runs a very broad range, sometimes leaving
very little government involvement, and other times
creating partnerships between government and private
service providers where government is still the dominant
player.
Merely defining "privatization" is difficult. In its purest
form, the term refers to the shifting of the production of a
good or the provision of a service from the government to
the private sector, often by selling government-owned
assets. Officials took this rather narrow view. "When we
talk about privatization, we don't mean contracting out,"
said Elaine Kamarck, "We mean purely divesting the
government function."
Modes and Techniques of Privatization
Contracting Out (also called "outsourcing"). The government
competitively contracts with a private organization, for-profit
or non-profit, to provide a service or part of a service.
Management Contracts. The operation of a facility is
contracted out to a private company. Facilities where the
management is frequently contracted out include airports,
wastewater plants, arenas and convention centers.
Public-Private Competition (also called "managed
competition," or "market testing"). When public services are
opened up to competition, in-house public organizations are
allowed to participate in the bidding process.
Franchise. A private firm is given the exclusive right to
provide a service within a certain geographical area.
Internal Markets. Departments are allowed to purchase
support services such as printing, maintenance, computer
repair and training from in-house providers or outside
suppliers. In-house providers of support services are required
to operate as independent business units competing against
outside contractors for departments’ business. Under such a
system, market forces are brought to bear within an
organization. Internal customers can reject the offerings of
internal service providers if they don’t like their quality or if
they cost too much.
Vouchers. Government pays for the service; however,
individuals are given redeemable certificates to purchase the
service on the open market. These subsidize the consumer of
the service, but services are provided by the private sector. In
addition to providing greater freedom of choice, vouchers
bring consumer pressure to bear, creating incentives for
consumers to shop around for services and for service
providers to supply high-quality, low-cost services.
Commercialization (also referred to as "service shedding").
Government stops providing a service and lets the private
sector assume the function.
Self-Help (also referred to as "transfer to non-profit
organization"). Community groups and neighborhood
organizations take over a service or government asset such as a
local park. The new providers of the service also are directly
benefiting from the service. Governments increasingly are
discovering that by turning some non-core services—such as
zoos, museums, fairs, remote parks and some recreational
programs—over to non-profit organizations, they are able to
ensure that these institutions don’t drain the budget.
Volunteers. Volunteers are used to provide all or part of a
government service. Volunteer activities are conducted
through a government volunteer program or through a non-
profit organization.
Corporatization. Government organizations are reorganized
along business lines. Typically they are required to pay taxes, raise
capital on the market (with no government backing—explicit or
implicit), and operate according to commercial principles.
Government corporations focus on maximizing profits and
achieving a favorable return on investment. They are freed from
government procurement, personnel and budget systems.
Asset Sale or Long-Term Lease. Government sells or enters
into long-term leases for assets such as airports, gas utilities or real
estate to private firms, thus turning physical capital into financial
capital. In a sale-leaseback arrangement, government sells the
asset to a private sector entity and then leases it back. Another
asset sale technique is the employee buyout. Existing public
managers and employees take the public unit private, typically
purchasing the company through an Employee Stock Ownership
Plan (ESOP).
Private Infrastructure Development and Operation. The
private sector builds, finances and operates public infrastructure
such as roads and airports, recovering costs through user charges.
Several techniques commonly are used for privately building and
operating infrastructure.
BOOT -BOT -BTO
Objectives of Privatization
Raise revenue for the state,
Promote economic efficiency,
Reduce government interference in the economy,
Promote wider share ownership,
Provide the opportunity to introduce competition,
Subject state owned enterprises (SOEs) to market
discipline
Develop the national capital market.
Pitfalls of Privatization
Overstated Cost Savings. Estimates of savings usually ignore
the costs of transferring and administering the contract, the
increased unemployment premiums, and the impact of the
private sector skimming the cream and leaving the public sector
without the balance of more profitable ventures. Ultimately, cost
savings largely consist of shifting from union to non-union and
contingent workers who receive lower wages and limited, if any,
health and pension benefits, an income transfer from workers to
contractors.
Quality of Service. Profit making requires maximizing
revenues and minimizing costs. Contractors reduce costs by
hiring cheaper and less well-trained labor, by cutting the quality,
quantity or the scope of service, or by “service creaming”
(serving the easiest to serve at the expense of the more difficult
or costly recipients).
Corruption. The process of privatization creates well-
documented opportunities for corruptions, including bribery,
kickbacks, campaign donations, collusive bids, and “revolving
door” public officials.
Cont…
Dependency. Governments may become dependent upon
contractors when the ability and expertise to perform a service is
given up. Without skilled, knowledgeable managers and
technicians, the government is at the mercy of knowledgeable
private parties in contract negotiations.
Accountability and Loss of Authority. The activities of a
contractor are much harder to direct and monitor than those of
public employees, yet the government’s responsibility to provide
the service remains, as does the liability for the result.
Impact on Employees and the Community. Increased
unemployment and the diversion of profits outside the
community impose real costs on the community. In addition,
women and minority workers disproportionately bear the costs of
privatization. Public employment has provided stable jobs and
decent income for many women and minorities.
Democracy. Shrinking the public sector and public sector
unions makes citizens more dependent on the private sector.
