Pros, cons of privatisation of public institutions

Introduction

Privatisation refers to the transfer of a business, industry, or service from public to private ownership and control.

Privatisation is thought to improve overall economic efficiency, hence improving general welfare. Any denationalisation programme should be designed to seek Pareto improvements, meaning that employees, consumers, Government and new owners will be better off.

Nevertheless, there are arguments which claim that privatisation would reduce services available and would induce an increase in prices.

Welfare would be affected due to profit maximising firms looking for reliable and profitable customers instead of providing services for the whole society.

It is therefore imperative to evaluate the arguments for and against privatisation.

Enterprise performance

Studies for a wide range of countries show that privatisation improves enterprise performance. For firms in competitive markets, profitability usually increases, often substantially, as do efficiency (measured by real sales per employee), output, and investment.

Macroeconomic and fiscal effects

Governments are often financially better off after privatisation than before. Gross proceeds from privatisation are substantial; Privatisation has the gross potential of producing other positive impacts on government revenue.

There is a positive correlation between privatisation and overall rate of growth. Although privatisation is not the sole cause of subsequent increases in growth rates, it is a good proxy for the range of structural reform measures that contribute to the overall result.

Investors and markets view privatisation as an indicator of reform credibility, a less tangible but important macroeconomic effect.

Privatisation will expose the country’s industries to market forces from which will flow the benefits of greater efficiency, faster growth and greater responsiveness to the wishes of the consumer, the private firm is interested in making profit, and so it is more likely to cut costs and be efficient.

Privatisation has a positive effect on the development of stock markets.

Welfare effects

Privatised infrastructure firms have often recorded performance. Employing a modified form of cost-benefit analysis, the study examines the impact on all actors, compares performance before and after privatisation, and contrasts performance after privatisation with a hypothetical scenario of reformed state ownership, with new technology and more rational procedures.

Divestiture substantially has the ability to improve economic welfare mainly due to a dramatic increase in investment, improved productivity, more rational pricing policies, and increased competition and effective regulation).

Profit

An overriding aim of the private sector is to make an appropriate return on its investment.

It is this consideration which is the driving force in a competitive environment and which encourages attainment of the highest levels of efficiency.

An objective of the private sector involving itself in infrastructure development is, therefore to identify opportunities where its skills and resources can best be employed to

The downside or cons of privatisation

Creation of monopoly

Privatisation of certain state entities such as water and electricity authorities may just create single monopolies. These may eventually seek to increase prices at the detriment of the consumer with no controls.

The Government loses dividends after privatisation as seen with most successful companies that are developed through privatisation.

These dividends are instead channelled to wealthy individuals. From this assertion it is prudential to note that privatising public institutions such as ZESA and ZINWA would be no exception when it comes to the element of monopoly creation.

At the end of the day, these enterprises may charge exorbitant prices on electricity and water and if left unabated this may create a monopoly dilemma for the government while creating problems for the citizens on affordability issues.

In a husk, the government will no longer able to use these enterprises to improve societal welfare.

Inflexibility

There is also the issue of inflexibility that can come with privatisation. Typically, governments sign lengthy contracts with private service providers.

These contracts can span for decades, locking residents into one service provider for lifetimes.

Although a private company might make itself attractive to win a contract, its service can take a quality nosedive once it’s in place and its consumers are complacent.

The problem of externalities

Unexpectedly, all of the utilities create negative externalities (via pollution, spoiling the environment, etc.)

It can be argued that as public sector companies, the government can regulate output and make sure that it is at the socially optimal level (ie allow for externalities).

In the private sector, maximisation of profit is the only concern, so a socially damaging level of externalities will occur. It should be noted, though, that the government could still achieve a socially optimal output level by subsidising/taxing the privatised utilities until the desired outcome is achieved.

The abuse of public interest

Those who have opposed privatisation argue that the public utilities were nationalised in the first place in the public interest.

The utilities are products and services that are essential to all members of the general public. A private company in charge of one of these industries, interested only in profit, is likely to close down or marginalise unprofitable elements of its operations.

Conclusion

It is imperative to note that while privatization has its pros in bringing about efficiency, increased production and improved economic status quo it is noteworthy that there are banes that can emanate from denationalisation and these entail monopoly creation and societal grave negative externalities.-ebusinessweekly