Privatization takes us deep into the public finance realm, where several aspects are put into consideration, aside from the primary aim of making profit.
Definition of Privatization
Privatization has everything to do with the transfer of government and otherwise publicly held assets into ownership by private entities, whether a single individual, a group of shareholders, or by another company. In the realm of finance, privatization as a concept is mainly focused on corporations that have economic productivity, rather than just assets.
Privatization may involve corporations in any industry. Governments have before privatized stand-alone companies such as food processing plants, infrastructure companies such as road construction and maintenance authorities, energy corporations such as electricity suppliers, transport companies such as airlines and mass transit systems, telcos, and utility services such as water suppliers.
Privatization is utterly a fiscal policy, developed by a government as a strategy to serve particular economic objectives.
Reasons for Privatization
Governments decide to lay off companies for the following causes:
- For better efficiency – one of the reasons for privatization in most cases is to streamline the efficiency of the company, report substantial profits, and make strides in business partnerships and job creation through a sustainable financial health.
- To separate individual businesses from politics. Government parastatals are often mixed up in political activities, deviating from the primary goal of efficiency, service/product delivery, and creating value. By establishing corporations privately, deeds such as corruption are curtailed, while company officials work diligently with accountability as they report to the shareholders who have the power to dismiss anyone in the company.
- To boost trade – overally, corporations may be privatized to boost trade and business in the economy. Private corporations, when streamlined properly, may function to complete the cycle of trade, by either introducing raw materials, facilitating services, and the end product.
Different Methods of Privatization
Governments and transacting partners will develop particular terms of exchanging ownership of the asset in question. These methods of privatization differ in the returns from privatization, the recipients of privatized corporations, and the role the government plays in privatizing corporations.
- The conventional way of privatization is the sale of a public corporation to a private entity, and the government transfers full ownership to the private buyer. Most commercial corporations are subjected to this kind of privatization, and investors begin the possession of shares to the privatized asset/corporation.
- The government may issue vouchers in a socialist environment, such that all citizens are shareholders in the public corporation. Vouchers may be issued free of charge, and at the same time they may be sold at affordable prices to citizens. Afterwards, the citizens get a chance to exchange the shares with real money.
- Restitution is privatization where the government returns back assets to their original owners. Historical predicaments are the main reasons for the restitution approach, with the government attempting to reparate victims of injustice by returning their resources. Getting the original owner has always been an uphill task, as well as conducting accurate valuation for the assets, making restitution quite difficult.
- In internal privatization, ownership is transferred to a senior employee in the corporation, who has shown positive indications of excellent management of the public corporation.
The first option, i.e. privatization by sale to private investors has become the most common method due to its convenience. The government makes money, and accords the company its real value through transferring it into the stock market.
Impact of Privatization on Economy
Almost every impact of privatization touches on income distribution, showing that the concept of privatization is not only financial, but rather socio-economic, in a way that the privatization initiative corrects social inequalities.
This has been one of the cons associated with privatization, such that corporations in their public nature will employ as much as it can, while as a private entity, overemployment is one of the impediments of profit-making that the private corporation will want to deal with. By limiting and overhauling employment, privatization boosts its efficiency and gains the trust of shareholders as a result of promising profit margins.
Privatization introduces new players to the industry. However, the competition may not be very perfect, as some corporations may have been monopolies in their preceding states, bringing on the monopolism in a community of private businesses.
Competition best takes place without political interference, whereby corporations cannot be bailed out, or given preferential treatment by oversight authorities. Without political interference, privatized corporations bring in additional competition to the market, sparking product enhancement, and ultimately better living standards.
3. Price Changes
By the simple explanation of introduction of competition, privatization generally lowers the price for different products in the industry. Consumers have increased options and the supply may go higher than demand in the said market. Consumers cherish low prices, but in the long run they will do a lot of saving to prepare for uncertainties in the market. We all can tell of how savings build the economy; investments are made, business booms, and the cycle goes on and on.
4. Balance of Trade
While privatization’s efficiency boosts productivity on a national scale, there are high risks that public corporations once listed as up for sale will attract foreign investments more than the targeted local investors. In developing nations, the local investors may not have the financial muscles like foreign investors. Foreign investments accumulation in a country may have some positives in terms of job creation and others, but in the long run the country suffers from political and economic subjugation by the foreign powers.
5. Fiscal-monetary impacts
Massive privatization may be government efforts to repossess money in circulation, the same way it happens with the sale of government securities. This strategy, though less elastic, may help in efforts against hyper-inflation, setting an economy up for moderate financial health.
Privatization also promotes the culture of saving and investment in a country, allowing people the avenues to invest their savings through the private corporations. A highlight to mention, moreover, is the impact of privatization on the quality of life. Privatization increases the efficiency of services than they would have been in the hands of government operatives. Though empirically undetermined, privatization of utilities such as water, electricity, transport etc., may improve living standards for the people, as the services have now been separated from unnecessary political upheavals.