Privatisation is the transfer of ownership of state enterprises into private ownership
Forms of Ownership.
1. Liberalisation or deregulation
This refers to the complete removal of barriers of entry of private individuals to certain investment undertakings, so as to increase competition. This is often done in the export sector, foreign exchange markets, etc.
2. Divestiture
This involves the complete sale of all shares of government to private sector.
3. Partial Privatisation
Also known as joint venture ownership. This occurs when both government and the private sector own shares in any given undertaking though the private sector may dominate in the ownership of shares.
4. Repossession
It is the return of property or enterprises to their former rightful owners e.g the NRM government returned, to their rightful owners, all the properties under the Departed Asian Custodian Board.
5. Cost Sharing
This is where government removes or withdraws its financial support from an enterprise and leaves it to the direct beneficiaries; e.g. hospitals, schools, etc.
6. Contracting-Out
This occurs when the provision of goods or services is transferred from the government to the private sector, but the state still retains the sole authority over ownership. E.g. it could involve privatising only management, but not ownership; therefore, management contracts, leases, concessions, etc; have to be signed.
7. Leasing
It involves the renting or leasing out of a state owned enterprise to private Individuals. In Tanzania, for example, this has been done in toilets, markets, parks, taxi and bus parks, etc.
Arguments in Favour of Privatisation
There is a popular view by some economists that market forces tend to allocate resources optimally and more efficiently. The privatization exercise is deep rooted in a number of arguments usually advanced in its favour.
1. The government is often faced with the problem of inadequate capital to finance and maintain state owned enterprises.
2. Corruption and embezzlement by government officials, consequently results intomismanagement. This, therefore, calls for the privatization drive.
3. There is the argument that state enterprises require a lot of protection, which is not often common with the private sector undertakings.
4. The privatization programme is vital as it can increase the contribution of the private sectors to the Gross Domestic Product (GDP).
5. State firms require a lot of subsidies from the government, which is not always thecase with the private sector.
6. There is urgent need to reduce the monopolistic tendency, which often creates inefficiencies. Privatisation can help to avoid this.
7. Capital inflow. Privatisation of state enterprises can encourage foreign investment. This will in turn lead to foreign capital inflow.
8. Privatisation leads to optimum utilization of the domestic resources, because government control is often characterized by excess capacity resource utilization.
9. Reduction of bureaucratic tendencies of the state sector. With privatization quick decision making is made possible.
10. Accountability. Management of firms under private individual on profit motive promotes efficiency and accountability.
11. To raise revenue. The government can raise adequate revenue by transferring its enterprises or assets into the hands of the private sector.
12. Employment. Privatisation tends to create employment opportunities in the private sector.
13. A wide tax base. Public sector enterprises being transferred into the hands of private individuals can help to widen the tax base.
14. Reduction of a public debt. Privatisation helps to reduce the country's indebtedness especially when the government incurs a reproductive (self liquidating) debt.
Arguments against Privatization
Privatization has the following disadvantages:
1. Capital and Profit Outflow
When state enterprises are sold to foreign investors, excessive capital flight (outflow) is possible. Also most, of the profits can be swindled to outside the country.
2. Social Costs
The society is likely to suffer from negative externalities such as pollution, noise, poor and quality of products.
3. Difficulty in Planning
Privatization may cause difficulties in planning since the private sector tends to make its own plans and decisions some of which may contradict those of the government.
4. Widening of Income Inequality
Privatization shift wealth of the society from the public/ government hands to few individual hands that become richer than other individuals in the society hence income inequality.
5. Production of Essential Goods May Be Ignored
Private sector prefer producing luxury expensive and profitable goods to essential but low profit goods such as social services and therefore lead to fall in the living conditions of the poor majority.
6. Unemployment Problem May Increase
Private sectors prefer applying capital intensive technique of production to labour intensive because of its efficiency.
7. Inefficient Supply of Public Services
The private sector may fail to provide public services sufficiently due to reasons such as heavy investment required like construction of railways and ports.
8. Emergence of Private Monopolies
Privatization may transfer state monopolies, which are more accountable to both the public and the government, to private monopolies which are less considerate to the public interests.