Sunday, September 20

Advantages and Disadvantages of Privatisation

There has been a growing demand for privatisation as well as public-private partnerships in many local and state governments. With uncertain times ahead, it is important to understand how it affects us and our economy. Here is a look at what privatisation is as well as its benefits and drawbacks.

WHAT IS PRIVATISATION?

The concept of privatisation does not just have one fixed meaning. It can mean different things on the basis of its context. This includes privatisation of a public sector enterprise to the private sector, outsourcing government services to private entities, or even a strictly regulated private firm becoming less organised. So it is an umbrella term giving private players a greater role in decisions about what, where, and how to produce goods and services. However, for brevity let’s include the dictionary meaning which states that it is the transfer of a business, industry, or service from public to private ownership and control.

This system has certain important guiding principles. These include preservation of the general interest, transparency of institutional frameworks, and balance between revenue maximization and policy objectives. In other words, privatisation aims to give control of an entity to a private enterprise to make better-informed choices for the said entity.

A 2018 report of the Organisation for Economic Co-operation and Development (OECD) estimated that from 2008 through 2016, privatisation revenues have more than doubled from around USD 110 billion in 2008 to USD 266 billion in 2016. So, this shows that the privatisation system has been steadily moving upwards.

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ADVANTAGES OF PRIVATISATION

Efficiency

One of the major reasons for privatisation of public entities is because it increases efficiency. As we are aware, state-run companies are likely to be bureaucratic in their functioning. A bureaucratic company works for political gains and seldom worries about improving a company’s performance. That is to say that this adversely affects the overall output of the company. Hence, divesting a public enterprise to a dedicated team of private players could strengthen the company and even expand its productivity. In 2015, Chinese authorities received divestment revenues estimated at US $173 billion and over 40 individual transactions exceeding $1 billion each. This is a good example of how much the economy depends on privatisation. Hence, efficiency is necessary to gain maximum profits.

Advantages and Disadvantages of Privatisation

Competition

Deregulation is a process of eliminating the power of the government over an industry. This is usually in the economic sphere. So basically it is the repealing of government regulation of the economy. The rationale behind doing this is to increase competition within the said industry. What happens is deregulation helps increase the number of companies that enter the industry. So, there is more competition in the market. Now the advantage of this competition is that it increases economic free-flow as well as provides for a sustainable free-market system. There is more incentive to be efficient since you have more firms to compete with.

More Capital

Economically, privatisation is a very viable option. At the outset, a privately held establishment is capable of easily raising investment capital without any interference from government departments. In order to make more profits, private firms reduce prices, cut costs, and find different ways to raise profits. Additionally, it generates direct cash flow from asset sales and aims to capitalize on the local stock markets.

Increase in Economic Growth

Apart from the abovementioned, there are several other aspects of privatisation that directly and indirectly benefit the economy. The quality of products and services of privately-run companies is generally superior due to added incentives. There is scope for innovation, willingness to expand their range of customers, and value for money. It also means attracting foreign investments, being mindful of excessive spending, and investing in long-term infrastructure improvements. Privatising a public sector enterprise may also improve government fiscal health in the longer run. In short, all of these contribute to an increase in economic growth.

DISADVANTAGES OF PRIVATISATION

Monopoly

Privatisation gives way for natural monopolies to rise in the market sector. A natural monopoly exists in a particular market if a single firm can serve that market at a lower cost than any combination of two or more firms. Simply put, one firm derives the most benefits available to an entire industry. This eliminates the scope for competition among companies which is a necessary characteristic for the positive functioning of privatised firms. For example, privatisation of public utility services like water and electricity could lead to exploitation of consumers, especially people from low economic backgrounds.

No Accountability

We know that private companies are accountable to their owners as well as shareholders. But they are not directly accountable to the public or the community at large. They are carrying out public utility services that directly affect the public. So there are chances of misuse and concentration of wealth in a few if the public has no control or oversight over these companies.

Advantages and Disadvantages of Privatisation

Profit-Driven

The main aim of privatising a firm or company is to make profits. That is all there is to it. And this goal is achieved by whatever means possible. So there is zero regard for what the majority wants, no checks and balance system in place, and it only serves the needs of those that are willing to show them the money.

In several developing nations, foreign investors acquire divested assets of these privatised firms. So the majority of the profits made go out of the country without any local investments. Thus there is no benefit to the country’s economy when you look at the bigger picture.

Social Ramifications

Privatisation is advantageous from the economic point of view. However, it magnifies social inequalities prevalent in our society. In other words, what it does is turn public services into profit-making enterprises. So when the focus shifts from the social service aspect to just making money, you are essentially denying access to basic necessities to people who live hand-to-mouth. For instance, privatisation of basic healthcare, education, or access to water goes against the ethos of public service and public good. In addition to this, private companies cut corners for maximum profit which results in reduced wages as well as job loss.

To sum up, based on the pros and cons weighed here, it can be deduced that privatisation will not achieve anything unless it is accompanied by careful reforms. And these reforms have to be goal-oriented and sector-specific. Because at the end of the day, no policy works or yields the same consequences.

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Pros and Cons

PROS

CONS

Efficiency

Monopoly

Competition

No Accountability

More Capital

Profit-Driven

Increase in Economic Growth

Social Ramifications