The transfer of business ownership from the public sector to the private sector is privatisation. The lack of profit motive has made it difficult for government businesses to achieve efficiency and hence the sale to the private sector. Many firms which provide services that were formerly handled by the government such as gas, electricity and water distributions have been privatised in many countries, e.g. British Rail, Air India, etc. The government may decide to sell off part of its business (partial privatisation) or the whole (full privatisation). Privatisation may not involve the sale of a government asset but the contracting of some services which were once provided by the government to private contractors,e.g. waste collection, airport operation, etc.
Advantages of privatisation
Choice and quality for the consumers
Privatised businesses provide consumers with a variety of goods to choose from due to competition. Also, they ensure that goods meet the requirements of consumers. Failure to provide the consumers with what they want and quality products will lead to a loss of market share to competitors.
A privatised business produces at the lowest cost possible in order to assure a high profit. It reduces wastage and ensures maximum output is obtained from a given amount of inputs, thereby producing at the lowest unit cost. This may result in consumers paying lower prices. Government-controlled enterprises do not embark on cost-reduction techniques since the welfare of citizens is more important than profit-making.
Responsive to consumers’ wants
Businesses in the private sector ensure that they meet the changing demands of the consumer by being innovative. They constantly invest in research and development in order to come up with new technologies, better production methods and product features to satisfy the consumers. Without this, they will lose the market to competitors and ultimately shut down.
The sale of government businesses to private investors produces revenue for the government. Besides, private businesses pay taxes to the government. Therefore, more money is available for spending on infrastructure which can boost the productive potential of the country and increase its Gross Domestic Product (GDP).
No political interference in management
The government does not interfere in their operations as they no longer belong to it. This ensures that only qualified managers are appointed to manage the business and there is no need for government to ratify its decisions. Consequently, there is better management and quick decision-making.
Creation of employment opportunities
Some workers may lose their jobs following privatisation. But there will be more jobs created in the long run as a result of expansion and efficient management. Also, with privatisation government deregulates the economy, thereby attracting more private investors (foreign and domestic).
Prevents misappropriation and corruption
They are better run and more transparent. This reduces misappropriation and embezzlement endemic in the public sector.
Disadavantages of privatisation
May exploit consumers
Privatised businesses may charge high prices in order to make a profit. This means that a lot of consumers may not be able to afford a lot of goods. Also, they may become monopolies and cut their supply in order to raise prices and make high profits.
Duplication and unhealthy rivalry
There is duplication as many of them are often involved in the provision of a particular product. They have to promote their products to show their unique features. The money spent on advertising and promotion could be used for other purposes. Competition may prevent firms from enjoying economies of scale. Economies of scale are cost savings resulting from large-scale production.
Negative production externalities
Private businesses do not consider the negative impacts of their operations on others in the society such as pollution, congestion, etc. Without government intervention, their activities can lead to the deterioration of the health and living conditions of the people in the society.
They do not protect workers’ interests
workers’ welfare may be neglected in a bid to maximise profit. Managers may only focus on making profits for the owners of the business for the purpose of attracting more investments. They may also do this to earn fat bonuses attached to the financial performance of the company. So expenses, including labour costs, have to be controlled to maintain profitability.
Employment is not guaranteed
The profit motive may lead to the substitution of capital for labour if machines are relatively cheap. The widespread adoption of capital-intensive production method would have an effect on employment. The primary objective of the public sector is not profit; so, they use labour-intensive method even if it is cheaper to use machines.