Privatization What is Privatization? Privatization is the process of
transferring productive operations and assets from the public sector to the
private sector. Broadly defined in this fashion, privatization is much more than
selling an enterprise to the highest bidder, as it includes contracting out,
leasing, private sector financing of infrastructure projects, liquidation, mass
privatization, etc. My testimony will argue that there is no single best
approach to privatization; the appropriate privatization path depends on the
goals that the government is seeking to attain, the individual circumstances
facing the enterprise and the economic and political context of the country. It
should be noted that privatization is fundamentally a political process as well
as a commercial and economic process. Privatization changes the distribution of
power within a society, as it diminishes control of the economy by the state and
government- appointed managers.
Workers often feel threatened by the potential
changes inherent in privatization, although employees frequently benefit from
the process. As a result, public support is a major consideration in any
privatization program and many of the choices made in designing and implementing
transactions reflect the need for such support. Two consequences flow from this
factor. 1) choices of approaches are sometimes altered due to political
considerations, meaning that equity must be promoted in the privatization
strategy, and 2) program implementation must be objective and fair to avoid
adverse publicity. What are the goals of privatization? Many goals are often
pursued through privatization programs. These goals often fall along two
principal dimensions: 1) broad social or macro economic goals, and 2) enterprise
specific or macro economic goals. Macro economic goals are numerous.
Fundamentally, privatization is advocated as a means to reduce the governments
role in the economy, partly as a philosophical matter (as in the UK) but
principally because governments have performed badly in that role. Many
countries can attribute substantial portions of their external debt to
liabilities of state-owned enterprises and significant portions of government
budgets are devoted to paying subsidies or otherwise assisting loss-making
State-owned enterprises. Government's objectives in these situations are often
simply to extricate themselves from these financial commitments, and focus
scarce resources instead on education, infrastructure, and social welfare.
A second macro economic goal of privatization is to promote the
development of the private sector by leveling the playing field and ending
subsidized competition from state-owned enterprises. There is a danger in some
countries that emerging private businesses face unfair competition from state
enterprises that have access to credit and other inputs at below market rates
and better access to government distribution channels. In order to give the
private sector a fair opportunity to compete and thrive, state-owned enterprises
are privatized. A third goal of privatization's to obtain the sales proceeds and
use them to finance shortfalls in the government's budget or retire some of the
public sector debt. While it is widely recognized that focusing on sales
proceeds may be shortsighted and ignore other important outcomes of
privatization, it is a fact that many governments are strongly influenced by the
availability of funds from privatization. A fourth goal is to broaden share
ownership so that the public has mechanisms for saving money and participating
in the economies of their countries. The macro economic goals of privatization
focus mostly on the potential improvements that private sector operators will
bring to an enterprise to improve this performance and increase chances of
survival. These goals recognize the need to improve enterprise efficiency by
introducing new technology and financing sources, improving the quality of the
product, enhancing marketing-especially in the international market, providing
information systems, and generally improving the management of the enterprise.
Obviously successful changes of this nature, when applied to a number of
individual enterprises, will have significant macro economic implications as
well. The final goals of privatization is to note that in most countries
privatization is but one part of a broad program of structural reform. This is
most evident former Communist country, where privatization is an element of the
process of developing a market economy and its associated financial
institutions. In such cases, the privatization program designed should take into
account the broader economic goals that are being pursued, as well as the goals
specific to the enterprise. What types of privatization techniques can be used?
There are a variety of techniques that can be selected to use in privatizing
state-owned enterprises of activities.
