Privatisation happens when state owned assets are sold
to the private sector. Budgetary shortfall has induced many governments to
consider privatisation in order to avoid higher taxes or also to avoid large cuts
in services. The general argument to support privatisation is that this would
help the government save money with the added advantage of the asset being run
more efficiently by the private sector because of the motivation of profit.
There are always two sides to every coin and
privatisation is no different. There are pros and cons for it, which need to be
considered before selling any asset of the state to a private sector.
Advantages of privatisation:
·
Reduces burden on government in terms
of underutilization of resources, redundant employment and fiscal burden.
·
Profit motive acts as a great
incentive for making the business successful
·
There is improved efficiency as private
companies have a profit incentive to cut costs and increase efficiency. Sincce
privatisation, companies such as BT and British airways have shown improved
efficiency and better profits.
·
Long term projects help the company iwhen
run by private sector as a government may only think of short term impressions
up to the next election
·
Increase in competition increases
efficiency
·
Pressure from shareholders ensures
consistent responsibility for performance and profit
·
Political interference and pressure from
government makes public sector make unwise choices , like employing surplus
workers which reduces efficiency
·
Government earns revenue from sale of
their state owned asset (This is a short term gain as they also lose out on
future dividends from profits of these companies)
Disadvantages of privatisation:
·
The risk of private monopoly which
could set higher prices to exploit consumers. For example, tap water has significant
fixed costs. There would be no competition between firms and thus it would just
create a private monopoly that would lead to increased prices. In such cases,
it is better to have a public monopoly as the consumer will not be exploited.
·
As mentioned earlier, government
loses out on dividends on profitable companies.
·
Private monopolies (like rail
companies and water companies) which are created out of privatisation, need to
be regulated by government constantly. This becomes similar, in a way, to state
ownership
·
Profit motive could seriously harm
the cause of certain public services like the Health service and public
transport. These industries are for the care of the people where profit should
not become the primary objective.
·
Private firms may take short term decisions
to please shareholders. For example, private companies in UK aren’t investing
in new energy sources as they want to avoid long term projects which would displease
shareholders.