The Concept of Privatization
Discuss how the process of privatization can be seen as related to risk, fear and insecurity using the example of the growth of the private security industry.
This essay is going to examine the concept of privatization and its impact on Australia. Further examination will be made of the various risks and insecurities associated with privatization. In order to elaborate the concepts of privatization, the essay also tries show various examples to depict the evolution of privatization.
Privatization is a process which involves the private organizations in the functions of the government organizations. After the completion of the functions it is duty of the government to decide if they need the involvement of the private sector or not. Privatization can also be referred as the shifting of ownership of a particular property from the government to the private sector (Hodge, 2018).
The first privatization was observed in Greece when the government had handed over all of its properties to the private entities. But the first proper privatization was observed in Germany in the 1930s when many of the government properties were sold to the private companies. UK had adopted privatization in the 1950s when the steel industry in the UK had taken the route of privatization. Privatization took place in America in the 1980s when many companies of transportation and telecommunication sectors were getting privatized (Lenard, 2018). One of the largest and most successful privatizations were seen for two of the companies in UK named British Telecom(BT) and British Gas (Parker, 2016.).
There can be various causes of privatization. The primary reason of privatization is the inability of the government to continue the operations of an organization. Sometimes the confusing natures of the politicians are also the reason behind privatization. Most of the times it is observed that, the government organizations function without any proper goal or objective. The employees are also reluctant and negligent towards their responsibilities (Hodge, 2018). Also, the politicians are hardly interested in the betterment of the organizations. All these result in declining productivity of an organization and this is a huge disadvantage for an economy. Another reason behind the growing popularity of privatization is that the government industries hardly participate in the competitive business environment. Lack of competition makes these industries outdated and the employees of these organizations are not familiar with any of the current business trends and techniques.
Types of Privatization
Another important reason behind privatization is the failure of many government organizations. There are many such organizations which are weak in trade activities and the government is actually generating loss for bearing those organizations. And by taking the route of privatization, and by selling those organizations to various private authorities, government can easily reduce the amount of budget deficit. Many of the under developed and developing countries had adopted privatization to reduce their debts and tax percentage (Kamerman and Kahn, 2014).
In this context, the examples of Germany and UK can be taken into consideration. A few years ago, more than 10000 companies in Germany were privatized. And out of these companies, around 85% were under the ownership of the state government (Chang et al. 2018). In this scenario, privatization had helped Germany to reduce the debts of its states by taking the route of privatization. It was reported that the UK government had earned more than £60 billion in 1997 from privatization. Statistics show that countries like New Zealand, Italy etc. had earned high revenue in the past by adopting privatization (Obinger et al. 2014).
From the perspective of Australia, in the 1990’s, parts of the public sector were privatized. It had since brought mixed results. Privatizing various public properties like electricity have led to productive and effective industries. Today, privatization exists with regulation. Though there is much efficiency of privately owned companies, the benefits of privatization are found to be more government focused.
Following are the various types of privatization;
- De- nationalization
De-nationalization is a process of privatization where the ownership of a government owned company is completely handed over to private organization. As an example of de-nationalization the case of Japan can be taken into consideration. Japan had denationalized Japan post. UK had also adopted de-nationalization to privatize its railroads in 1994. In Australia, this failed due to the countrywide protests by the banks against the governmental interferences. The government, back in the 1940’s, had wanted to take control of the economy, as an effort to reconstruct the post-War country. But private banks refused and even today are not letting the government take complete control.
- Joint venture
Joint venture is another type of privatization where a public sector organization is not completely owned by a private sector organization. Only some percentage of shares of the government owned company is sold in this process (Hodge, 2018). In Australia, there is no specific law governing joint ventures. Only certain types of joint ventures are allowed- contractual, corporate, investment-oriented, parallel, dual headed and a few others.
- Token privatization
Causes of Privatization
This is another type of privatization where the ownership of a government owned organization is transferred to a private organization for the purpose of reducing the budget deficit of the government (Kamerman and Kahn, 2014).
Privatization is a difficult process and in order to successfully complete this process, the government of a country should take the following steps;
- It is very important for the government to create the appropriate environment which is suitable for privatization. Some of the successful countries in the field of privatization are UK, New Zealand, Mexico etc. And the key to the success of these countries lie in the creation of a competitive environment which is suitable for the purpose of privatization. Another country which can be considered as one of the leading privatizers is Chile. When this country was going through a major economic crisis, it took the route of privatization and sold some of the public sector companies to the banks (Obinger et al. 2014).
Privatization process can be successfully accomplished only if a nation holds a competitive and efficient environment suitable for privatization. Privatization should never be encouraged in a country where the legal frameworks oppose to the process of privatization. If a nation takes such a step, it would restrict the growth of the economy and would also restrict the process of privatization in the future (Hodge, 2018).
- Another essential factor in the process of privatization is transparency. Mexico is known for privatizing a huge number of its government owned firms. While conducting the process of privatization, Mexico had provided the power and control in the hands of 6 to 7 people. But it was ensured that these people were properly aware of all the confidential information related to the process of privatization. Also deciding the valuation of the public sector organization is another matter of concern in the process of privatization. A public sector company has never been traded before and therefore it is a difficult job to calculate the valuation of such an organization. There were many controversies in UK regarding this issue. So, the second important factor related to the privatization process is determining the valuation of the public sector organization and also to keep the whole matter transparent (Shiva, 2016).
- Thirdly, the most important thing about privatization is that the government should properly prepare the public sector company in question for the process of privatization. The employees working in the public sector companies are negligent and they should be trained properly to improve their efficiency and skills. Another thing is, before the government sells a public sector company to a private sector organization, they should remove the debts associated with the company. There is hardly any private organization which would like to invest in a public sector company which holds a huge percentage of debts. Sometimes the existing employees ad workers are not ready to adopt the privatization culture. For instance, Jamaica once had to sell a percentage of its shares to its employees for the purpose of gaining acceptance from them in the matter of privatization (Kamerman and Kahn, 2014).
The process of privatization is associated with certain risks and uncertainties. Some of those risks are depicted below;
- The first risk associated with privatization is the culture of the private organizations. Most of the private organizations possess a highly intimidating work environment where employees are given targets and goals to fulfill. These goals are required to be fulfilled within a specified time (Queisser, 2017). The employees who were previously working in the public sector organizations are not at all familiar with such work culture and it becomes highly challenging for them to be habituated with such work culture. As a result, the productivity of the organization reduces.
- Privatization creates a huge partition in the economy. From the point of view of the customers, private services are more costly. Schools, hospitals etc. are such entities which are highly required for the existence of every individual. But if the public sector schools or hospitals get privatized, they become highly expensive overnight. Private organizations are keener on providing services to the rich people and their services become practically unaffordable for the people belonging to middle and lower income groups. This is one of the major risks associated with privatization (Hodge, 2018).
- The services provided by private companies are limited to those areas where the rich people are residing. That is because the private organizations plan their area of operation according to their profitability expectations. For example, a private bus company would only provide transportation services in those areas which are highly populated. But as a result of this, the people who are residing in the rural or less congested areas face extreme difficulty as they are completely abandoned by the services of the private organizations (Dower and Markevich, 2014).
- Another risk associated with privatization is that most of the private organizations are keen on short term profits. They are always looking for finding ways to generate profit and in this process of profit creation, they generally forget to concentrate on long term sustainability. The problem with this is that, while these organizations are curious about earning revenue from the existing projects, they generally forget to invest in new projects. These later results in the collapsing of the whole system of the business (Kamerman and Kahn, 2014) .
- Once a public sector company becomes privatized, it is listed in the stock exchange. And the dividends offered by the company are earned by the shareholders. This is a big loss from the perspective of the government as government does not earn any dividend after it has sold the company (Queisser, 2017). Privatization also creates fragmentation. As an example, the privatization of railways in the UK can be taken into consideration. This step taken by the government had fragmented the UK railway industry back then in rail network companies and train operation companies.
In Australia, there are concerns and issues in relation to privatization. These include the doubts regarding the sufficiency of commercial incentives to ensure continuity of supplying services during the peak of demand. For instance, in the power sector, when there is a strong need for more power facilities, private companies may not be able to provide electricity to many areas.
Some of the effects of privatization in the practical scenario are mentioned in this part of the essay. If the researches and surveys conducted in the UK are taken into consideration, then it can be seen that there were both good as well as bad effects of privatization (Parker, 2016.). While the BT group has achieved huge success post privatization, the British railway and the water industry had seen huge failures due to privatization (Shiva, 2016). If the example of Russia is taken then it can be monitored that Russia was highly unsuccessful in the field of privatization (Dower and Markevich, 2014). Therefore, it is not easy to evaluate the effect of privatization as a lot of factors come into picture while depicting the effects of privatization. On an overall basis, it can be seen that more is the competition, greater is the probability of gaining a positive result. While conducting the process of privatization, is necessary to take into account for entities namely the state, to which the organization belongs, the employees of the organization, the target customers and the company which is buying the organization i.e. the new group of owners. Therefore, it is essential to perform a thorough analysis before making any decision in the matter of privatization (Hagemejer et al. 2014).
Examples of Privatization in Germany and UK
In Australia, different privatization initiatives have brought about different effects. For instance, the privatization of the rails have brought about efficient contraction facilities in rail services, and costs were reduced in innovative ways. The negative impact was present in form of less service choices, loss of employment due to labour saving initiatives and a weakening in local regional economies. In aviation sector, private ownership has saved costs and created more access to capital funding. The mal effect was, again, loss of employment in key areas.
Conclusion
The essay has tried to cover the meaning of privatization and the causes which force the government to adopt the process of privatization. Further the essay has depicted various types of privatization elaborately and stated the process of privatization in details. The essay has also outlined the risks associated with privatization process and stated its effects. From the findings, it can be said that the process of privatization has both positive and negative impacts. And in order to avoid the insecurities and to mitigate the risks, it is essential to evaluate every aspect before conducting the process of privatization. Privatization activity in Australia was generally a feature of microeconomic reform when it was first initiated in the country. There were privatization campaigns in infrastructure and industry sectors, such as the National Rails, Corporation airports, Moomba Sydney pipeline, National transmission network, Aerospace technologies and so on. Privatization has helped Australia in emphasizing on timely delivery of services and products. Thanks to privatization, military capabilities, for instance, improved in productivity and self-sufficiency. A key disadvantage of privatization was the loss of organic manufacturing capacity in the country. Privatization has been a mixed experience for the country.
Reference
Chang, R., Hevia, C. and Loayza, N., 2018. Privatization and nationalization cycles. Macroeconomic Dynamics, 22(2), pp.331-361.
Dower, P.C. and Markevich, A., 2014. A history of resistance to privatization in Russia. Journal of Comparative Economics, 42(4), pp.855-873.
Hagemejer, J., Tyrowicz, J. and Svejnar, J., 2014. Measuring the Causal Effect of Privatization on Firm Performance. University of Warsaw, Faculty of Economic, Sciences Working Paper, (14), p.131.
Hodge, G., 2018. Privatization: An international review of performance. Routledge.
Kamerman, S.B. and Kahn, A.J. eds., 2014. Privatization and the welfare state. Princeton University Press.
Lenard, P.T., 2018. Democratic Citizenship and Denationalization. American Political Science Review, 112(1), pp.99-111.
Obinger, H., Schmitt, C. and Zohlnhöfer, R., 2014. Partisan politics and privatization in OECD countries. Comparative Political Studies, 47(9), pp.1294-1323.
Parker, D., 2016. Privatization of the UK’s public utilities: the birth of the policy 1979–1984. Annals of Public and Cooperative Economics, 87(1), pp.5-22.
Queisser, M., 2017. Privatization: more individual choice in social protection. In Building Social Security (pp. 19-30). Routledge.
Shiva, V., 2016. Water wars: Privatization, pollution, and profit. North Atlantic Books.
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