Privatisation Most Important Political Issue

Abstract

Privatisation is gradually becoming the most important political issue of all time,it has been adopted and practised by most countries in the world, Privatisation was practised before it gained its world recognition, In Ancient Greece the government contracted out, most of its government owned enterprises to the public sector,in places like China, Indonesia, Korea,etc. governments are seeking private investment in state owned manufacturing enterprises.

Privatisation in more recent times,Winston Churchill’s government privatized the British steel industry in the 1950s, and West Germany’s government embarked on large-scale privatisation, including selling its majority stake in Volkswagen to small investors in a public share offering in 1961

However, it was in the 1980s under the leaderships of Margaret Thatcher In the UK and Ronald Reagan in the USA, that privatization gained its worldwide recognition and it is been practised in almost all countries in the world, One of which, was a sale of council housing to tenants,this was when privatisation was pursued to full political commitment.

Government owned enterprises have failed to show more efficiency than private enterprises,the government owned enterprises are mostly controlled by politicians who have little or no interest on the well being or growth of the industry, In such cases there Is a clash of Interest and they almost every time go after there own interest,due to this conditions the industries or enterprises suffer good governance. In situations like this the Government decides to privatise the companies to private owners that way there will be competition, choice, it also helps to reduce corruption.

This essay talks about how efficient privatisation is and how it has improved the service of the state owned enterprise,it will also explain some strains that occurs or may occur after privatisation and how they have been approached.

Thou efficiency of private enterprises to public enterprises depends on a state to state basis,for example in countries with a hight rate of corruption in the government parastatal, privatisation might be the way forward,though expensive but more efficient ,compared to state where corruption is on the increase.

I will not base my analysis on a particular country but I will weigh it globally,as on man’s meat is another man’s poison,while some people believe in privatisation, some see it as a curse on the society.

I will also address how privatisation, has become a source of revenue to the government and how it has helped the government prevent raising tax when in search of revenue.

Introduction.

privatisation brought about the transfer of state owned enterprises to private institutions or body,It is believed that companies become more efficient when they are privatised, It is not a doubt that privatisation has come to make Government enterprises work better but the Question is how effective and efficient has it been on the economy?

Most state owned enterprises were miss managed by the managements put in place, In Africa, monies that were allocated for the improvement of state owned enterprises were misused and channelled into some other things, mostly for personal reasons, there by leaving the industry disorganized.

Privatisation has been efficient but has not been and cannot be an automatic saviour of what the state owned industries has become and how it affects the economy, in some cases private owned enterprises are also not handled well especially when there are too many private owners involved.

According to Peter M. Jackson, efficiency of privatisation is judged on the organizational profitability, but this is a problematic term because there are a lot of alternative measure to choose from and it is incomplete since it does not include consumer welfare,there are two distinctions to the measure of profitability,accounting rates of return which focus upon accounting definition which are essentially revenues minus recorded cost and economist definition of rates and return which attempt to measure normal profit. It will be wrong to judge the efficiency of privatisation mainly on cost basis because society has other goals and they were in large measures reflected in the objectives of the public enterprise.

The issue of whether privatisation has been effective has been discussed by some scholars,according to ownership and performance in competitive environment,the property rights theory of the firm suggests that public enterprise should perform less efficiently and less profitably than private enterprises, however the existing empirical evidence actually provides weak support for this, most of the evidence is based upon north American firms and has compared the performance of matched public and private firms where at least on of the following limitations applies:

1. Firms have a natural monopoly

2. There is regulated duopoly e.g. airlines, rail roads non rail transits etc.

3. Output is not or cannot be priced by competitive environment.

In fact with the exception of two studies that examine Indonesia and Tanzania, no study has explicitly compared the effect of ownership while controlling for relevant factors.

This paper will show how privatisation has helped the government to raise revenue.

Privatisation also serves as a means of raising revenue,In some countries government do not get enough revenue they desire from taxation, so privatisation is considered for example in Britain, Government was looking for ways to raise revenue but they did not want to raise tax so they privatised and used the proceeds for the reduction of public borrowing and lowering of interest rate.

Argentina, for example, launched a major privatization program that included the sale of its telephone monopoly, national airline, and petrochemical company for more than

$2.1 billion. Mexico’s aggressive efforts to reduce the size and operating cost of the public sector have resulted in proceeds of $2.4 billion

Privatisation is a means of making revenue,this is true because when SOE’s are privatised, they are sold to private body and the proceeds from the sale can be used for other things, also the burden of the growth and resources the company requires is no longer the responsibility of the government and the money used for such companies will be used for other things, on the other hand when it comes to efficiency to say that private enterprises are more efficient than SOE will be true to a very large extent though not without its problems, e.g what is the guarantee that the new management will be more efficient bearing in mind that the enterprise might not have been what they expected or might run into problems because privately owned enterprises are run differently from Government enterprises.

In situations where, the new management makes life unbearable for the people or changes the work force of the company,where the Government sells off the enterprise but still retains some amount of shares in the company, then there becomes a problem in ownership, for example, Nigerian airways was privatized and metamorphosed into Virgin Nigeria in Nigeria, but the Federal government of Nigeria did not give them the freedom to operate effectively which lead to the pull out of Virgin group from Nigeria and will leave most Virgin staff in Nigeria jobless. e.t.c.

If a dispute arises then the people are left to suffer the consequences of the effect of post privatisation,like in the case of ATORNEY GENERAL OF BELIZE VS BELIZE TELECOM LTD(2009) UKPC 11 e.t.c, then on the long run it cannot be said that it is more efficient.

Global Overview On The Growth Of Privatisation.

Privatisation of infrastructure can contribute broadly to the economy’s growth,it can lead to an obvious improvement in public finances through the removal of unproductive subsidies and avoidable transfers to state owned enterprises that do not yield profits,as well as the generation of privatisation revenues.

The World Bank states that “privatisation became an important feature in the Bank’s

adjustment lending from the mid-1980’s. This reflected both the concurrent ideological shift in favour of private ownership as well as the Bank’s long, and painful, experience with failed attempts at reforming public enterprises”.

Public enterprise inefficiency imposes great costs in terms of foregone social welfare e.g. improving the real operating efficiency of the public enterprise sector only by 5percent without changing prices or making new investment.(Jones 1980,1981 a,b)

Galal et al (1994) estimates the welfare consequences of divestiture across a variety of sectors in Chile, Malaysia, and the United kingdom, the study found out that the net welfare consequences of privatisation are almost invariable positives overall, however the picture of consumers was ambiguous, In about half of the cases consumers welfare improves and in the other half it deteriorates,The Author attributed the negative impacts primarily to prices being raised to efficient cost recovery levels.

There is a general feeling that private sector led privatisation will aggravate the problem of non access of the poor to utility because private providers would focus on high income areas in which they can maximize the profit on their Investment, when privatisation takes place improved quality standards will take place, things will be done differently because the management ,aims and objectives of the company has changed,and this changes may lead to an increase in cost of production which may cause hardship to the economy,people may not be able to afford the price of utility especially in cases where no initiative has been set by the government, in cases like this the economy is bound to suffer especially the poor people, the fee for obtaining connection to the infrastructure services is likely to increase substantially when privatised firm reflect their cost of connection.

In Nigeria a survey report shows that as at 1984 they were about 1500 public enterprises in Nigeria,they accounted for about 30-40 percent of aggregate fixed capital investment and about 50-50percent of formal sector employment, the Nigerian government invested about 800 billion Naira into the public enterprise sector and these investments yielded only 1.5 billion in dividend and loan repayments form 1980 to 1987.

In Nigeria the issue of privatisation was frowned upon by a lot of people especially the national assembly,all this were based on political and emotional reasons,according to world bank (2001b):

“While the Obasanjo administration is strongly committed to an accelerated privatization program, significant stakeholder groups are resisting the reforms.

These include PE [public enterprise] managers and employees, senior government officials and civil servants, notably in sectoral ministries, who perceive that their current power and perquisites will be reduced as the privatization program is implemented. In the National Assembly, a range of politicians view privatization as a threat to national sovereignty, and an unwarranted reduction in the role of the state”.

Transparency Gives Room For Cooperation And Efficiency.

The single most important issue in any privatisation exercise is transparency. It is key to privatisation, Transparency creates a general perception of a level playing field which helps to build support for the privatisation process,In the Nigerian case, the privatisation process has been largely transparent in design and so far, in implementation.

In Ghana the world bank withdrew their funding for the privatisation of water due to lack of transparency, the issue of transparency is very important in privatisation.

On the process of privatisation of the electrical company of Macedonia,the Government did not present to the Macedonian public the need for privatisation or explain the benefits and risks from the privatisation process. No public discussions and debates took place in the first period of the privatisation process. The first model of privatisation was chosen only by the Government on and the decision was announced in the public. This caused a lot of dissatisfaction and serious opposition to the process of privatisation among the public, as well as among the experts.

Because of the great public opposition,the privatisation process was not effective so the

Government decided to make it more transparent. The Government asked the non governmental group “Transparency-Macedonia” for cooperation in designing a more transparent process for ESM privatisation. Both sides signed the Memorandum of Collaboration, and Transparency-Macedonia was included in the process as a neutral party,financially independent from the Government with the role of advising the Government and implementing actions which would lead to the transparent process of privatisation.

For privatisation to be effective and efficient there must be a good response from the public who are the future consumers and most importantly beneficiaries, for this to happen there should be transparency by the government,the public should be well informed as highlighted in the case above.

Efficiency In The Private Sector.

It is widely accepted that private enterprises are more efficient than government owned enterprise but this assertion may be true but it is fully rebuttable ,In July 2003 the wall street journal ran a story headed “The World bank as privatisation Agnostic” quoting senior WB officials on the re-appraisal of their policies on privatisation:

“There’s certainly a lot of soul-searching going on’ says Michael Klein, the World Bank’s vice president for private-sector development” :

and the article announced that “World Bank officials have now decided it doesn’t matter so much whether infrastructure is in public or private hands”.

In 2002 Willner and Parker surveyed the large number of studies on the question of private versus public efficiency, in both developed, developing and transition countries, and observed that there is no consistent conclusion to be drawn some show greater private sector efficiency, some showing greater public sector efficiency or no difference., and so they conclude that “it appears from the empirical evidence that a change of ownership from public to private is not necessarily a cure for an under-performing organisation.”

The United Kingdom, which pioneered large-scale privatisation under Mrs Thatcher, experienced a significant productivity gain as a result, this is not supported by evidence, which indicates that there has been no general efficiency gain from the privatisations. Studies in the early 1990s found that most of the improvements in productivity came before privatisation, not afterwards and municipal refuse collection services improved as much as privatised ones.

A comprehensive and exhaustive analysis by Massimo Florio, published in 2004, she said “I reviewed all the privatisations and concluded”:

“These results confirm the overall conclusion of previous studies that although the business cycle (and restructuring, while the company is under public ownership) has a discernible effect on a company’s performance, privatisation per se has no visible impact.

I have been unable too find sufficient statistical macro or micro evidence that output, labour, capital productivity in the UK increased substantially as a consequence of ownership change at privatisation compared to the long-term trend.”

According to John Nellis in privatising basic utilities in Africa an enjoinder, the solution of badly managed state owned enterprises is not to eschew private investment but rather find mechanism to make it more politically acceptable, more socially responsible and more mutually beneficial.

According to Christopher Johnson,in Robinson’s article on coal,there are two types of efficiency to be expected from privatisation, production efficiency from lower cost(which is consistent with, though less likely to occur,under monopoly), and allocative efficiency from lower prices reflecting lower cost which depends on an injection of competition,he also points out that privatisation of coal will transform prospects for electricity if it no longer had to buy British coal at prices so far above world levels,and pointed out that coal should therefore be privatised.

He also noted that privatisation will generate benefit for customers because privately owned enterprises have a greater incentive to produce goods and services in the quantity and variety which consumers prefer, and also that eliminating inefficient production and restrictive labour practices means the release of resources,this will pay tax payers and consumers outside the industry.

Quoting May Ifeoma Nwoye, Ph.D., Nigerian Institute of Management, Nigeria Privatization in Nigeria has not been a popular reform. It has received so much criticism from labor, academia, and individuals. There have been numerous strikes against proposed sell-offs by unions fearing loss of jobs. While proponents of privatization see that aspect of economic reform as an instrument of efficient resource management for rapid economic development and poverty reduction, the critics argue that privatization inflicts damage on the poor through loss of employment, reduction in income, and reduced access to basic social services or increases in prices. Whatever are the views of the two parties, the only group that has no voice in the matter is the poor. The author is of the view that privatization is not inherently good or bad, but the poor performance or effectiveness depends on implementation (Nightingale and Pindus, 1997).

Privatisation: A Means Of Raising Revenue:

Privatisation serves as a means of raising revenue,when governments need financial aid for a certain state purpose,instead of raising taxes and other means, privatisation could be used especially by selling state owned enterprises that are not functioning properly and profitably,Government turn to privatisation for revenue to fill budgetary gaps, i.e. shortfalls in cash flows.

In some countries,privatisation has been exercised merely for raising revenue, for example, Chile’s main revenue was collected between 1974 and 1985 during its first two privatisation waves.

In Nigeria, A committee was set up solely for the determination of the political, economic and social objectives of privatization and commercialization of Nigeria’s public enterprises called the National council on privatisation.

Colorado State University executives raised partial privatization as a possible answer to the state’s de funding or severely reducing its support for higher-education institutions.

Conclusion

The fact that Privatisation is a means of raising revenue cannot be over emphasized,In my view privatisation has come to stay,It has made state owned enterprises more efficient, when companies are privatised they perform better,it becomes a private business and things will be done differently, the goals and objectives of the companies will be different from state owned enterprise, the management will be people who share the same interest to move the business forward and services rendered will be better.

Though privatisation is good for the economy especially developing countries,it also has its negative effect, for example for the privatised business to perform or function better,cost has to be incurred and because they are more profit driven than state owned,the cost of things will increase for the citizen who in turn may not be so happy with privatisation,so it becomes a question to ponder about,would you rather prefer bad inefficient services but low cost than efficient and good services to average/high cost.

Further more, it is also arguable that the the state have more resources than a group of investors and will be better able to manage the enterprise,to an extent this is true but this ideology will not be beneficial in all countries,especially in countries with an average level of corruption.

In my view I would say privatisation is good but it is more favourable to the rich of the society.

Privatisation also raises revenue for the government,when the government sells out the enterprise,the money gotten from the sale can be put into other things,To an extent it is true that privatisation is more efficient than state owned enterprise and it also fetches revenue for the government.

Privatisation:The Aftermath.

The decision to privatize state owned enterprises comes with its own pitfalls, but how can a state avoid them?

Litigation can be one of the biggest problems faced by post privatisation,when an enterprise is privatised,there might be pending legal issues in the company,which if not properly research on can pass on from the old managers to the new managers,for this to be prevented,proper investigation should be carried out to avoid pending legal issues.

Also,In situations where there is no competition in the industry the tariffs and prices will go up,Using Nigeria as a case study, when telecommunication was privatized in Nigeria in 1999,it began with Mtn and Econet,as a result of this there was increment in tariffs and prices and it affected the economy because it was not affordable especially to the mass public.

However, In the telecommunication sector in Nigeria in recent times,the problem has been dealt with by other players who have come into the telecommunication industry which has made it more competitive to source for more consumers and therefore decrease in tariffs or prices and it is more affordable and easily accessible by the mass public as compared to when it was first introduced.

Another example is the deregulation policy of the downstream oil sector that the Nigeria government has just embarked upon,there is a mass problem of scarcity of fuel, affordability of petroleum products because the prices have gone up from about 70Naira to 200Naira per litre depending on the petroleum distributors or marketers.

The deregulation of the downstream oil sector in Nigeria,at the earlier stages there will face some difficulties and as time goes on in the later stages people will start seeing the benefits of the deregulation policy.

One of the tensions experienced by privatisation in most cases at the earlier stages it creates unemployment,Rising Prices, Creates Poverty, Breaking of Unions, Corruption, Injustice, Exploitation by Capitalist Countries,Privatization Is Foreign, Labour’s Demands for Job Protection.

In Malaysia,Tenaga Nasional Berhad (TNB) took over Sabah Electricity Board (SEB) a government owned enterprise and renamed it SESB. According to the Independent national newspaper of Malaysia.

“The privatisation of Sabah Electricity Board (SEB) in 1998 was to improve electricity supply in the State, but only ended up making things worse for Sabahans. Now, they are pressing hard for the setting up of the harmful coal-fired power plant in Felda Sahabat, Lahad Datu.according to him, SESB carried out load shedding exercise because of the lower capacity generated by Patau-Patau Station in Labuan, Batu Sapi Station in Sandakan and the Independent Power Producer (IPP) at Salut Bay.”

“He said the Patau-patau Station generated less electricity because it is now operating using diesel after Petronas stopped supplying gas to the facility. In this respect, he said the TNB, being the parent company of SESB, should be held responsible for the hardship faced by the people in the State, particularly in the East Coast, who have been enduring constant power failures.”

He also said that many citizens have been complaining that SESB be returned to the State Government to manage as TNB had failed.

Sarawak power supply, he said are doing well as it is managed by an entity under the control of the Sarawak Government.”Sabah could do the same because it has the experience and capable manpower to carry out the task efficiently” .This is a clear analysis of what the Malaysians have suffered after the privatisation of their electrical industry.

An expert on renewable energy spoke on the remedy to the problem Adrian Lasimbang, He disclosed that east coast power woes could be addressed without resorting to dirty energy such as coal,Richard said Lasimbang had mentioned that a palm oil company in Kunak is producing 14MW electricity at its bio-integrated complex using empty fruit brunches, a natural waste product of cultivating palm oil.Sabah has 1.4 million hectares of oil palm and hundreds of oil palm mills and most of these are found at the east coast.Lasimbang who heads Pacos Trust Resource Management Programme, which includes Renewable Energy also said that Sabah has alternatives to having a coal-fired power plant and the technology is readily available. Richard said only 10 companies out of so many in the east coast is needed to produce the targeted 300MW of electricity to resolve the power woes there.24b

Final Conclusions

There is a school of thought of scholars who are of the opinion that privatisation is good and efficient,and there is another who believe that privatisation is bad.

I strongly believe that privatisation is good,for example In countries where corruption is on the increase,privatisation will be more beneficial,because there will be bad management of the state owned enterprises,In Nigeria for example,industries which are managed by the state are poorly managed,bad services are rendered and there is always a bad annual report on such industries because the management are more interested in their selfish motives rather than on the growth of the industry and the services rendered to the citizens.

Privatisation brings productivity and it also encourages competition into the sector that is been privatised,it also helps the society develop,and it does not create bureaucratic red tapping. In some cases it also creates employment but it is vice versa.

Also,regarding industries that are a burden to the government or industries that have a bad profit report,privatisation will be helpful,privatisation is good but like every other concept it has its own disadvantages but its advantages far out weigh its disadvantages.

Talking about raising revenue,privatisation is a good means of raising revenue for the government,Though Tax is another means of raising revenue,but in situations where the tax is already high or the government do not want to raise taxes then privatisation is an option,Also In most African countries where it is a problem for people to pay tax,the government have to turn to privatisation.

It could also be raising revenue in the sense that when the state owned enterprises are privatised,budgets that would ordinarily be set aside for the development of the state owned enterprises for the day to day running of the industry would be used for other state projects.

When companies are privatised what happens afterwards, there might be a negative response from the public,or the private management might not be happy with the conditions or the way things are handled especially in situations where the government has some form on ownership.

Using Nigeria as a case study,Vodafone a private telecommunication in Nigeria,pulled out of Nigeria leaving workers Jobless,also in Nigeria the education sector is privatised,due to this reason more people have access to education and can also graduate at the appropriate time,but it has made education very expensive,private universities are not so affordable to the poor,therefore to an extent you can say that privatisation is more favourable to the poor.

The best way for government to handle issues after privatisation will be to create better regulations,laid down guidelines for the industries to follow and, set out strict penalties for the privatised sector that fail to abide by those regulations.

Another form is, in a situation where the industry was better handled by the government,then nationalisation will be the most probable option.