Privatization

Posted by Abd. Ghafar Arif RM

In a simple sense, privatization refers to a change in ownership of an activity from the public sector to the private sector. In many instances, as in the UK, privatization has returned activities that had been nationalized to new private owners. In a modern sense privatization means more than this and is now recognized to include:

• The direct sale of government-owned and operated activities to the private sector. The nature of the sale can be diverse and includes offering shares to the public, management and worker buyouts, the direct sale to new owners and, in some cases, a partial sale with the government retaining some share in the new business.
• Deregulation through the removal of barriers to entry which had protected the public sector from outside competition. Through this action, a constable market can be created.
• Franchising. This can give a new private sector owner the right to operate a particular service or activity for a given length of time. In some cases, the franchise might be an exclusive one; in other cases, some competition may be experienced.
• Contracting out of service previously provided in-house by public sector organization. Normally, this involves activities that are demanded not to be core to those organization, In some cases, contracting out allows public sector-based organizations to openly compete with private sector businesses for a particular contract

Why Privatization?

There are various reasons for the extensive privatization. Some are economic, others much more concerned with political motivation. For example:

• In the early phase of privatization, there is little argument that was a deliberate commitment to reduce government involvement in the economy. A return to market forces was seen as necessary for many nationalized industries to achieve an efficient allocation of resources. Public ownership was believed to be a serious obstacle to these industries meeting their particular objectives.
• There was also a deliberate policy to widen share ownership amongst the population and amongst the employees of the privatized companies. In this way, people who previously had no opportunity to own shares could purchase small quantities of shares in businesses where they were consumers. From an employees standpoint, share ownership was seen as a way of enhancing motivation and improving labour relations in a company.
• Privatization can generate benefits for consumers  in the form of lower prices, wider choice and a better quality product or service. 
• It is further believed that privatized companies can be successful in raising capital, lowering prices and cutting out waste. In other words they are more efficient, with managers able to operate in a market-led way, without the restriction of trying to satisfy government objectives for their companies. Managerial freedom and a highly motivated workforce become the means by which economic efficiency is realized. 

Resource: Colin Bamford, Keith Brunskill, Gordon Cain, Sue Grant, Stephen Munday, Stephen Walton, AS Level and A Level ECONOMICS, University of Cambridge, 2002.