PROS AND CONS OF PRIVATISATION

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.