This document discusses privatization and provides an introduction, definitions, and objectives. Privatization is defined as transferring an enterprise from the public to private sector. Governments pursue privatization to improve efficiency and reduce costs. Reasons for privatization include improving resource use, operating efficiency, and dynamic efficiency through investment. Methods for privatizing include creating an enabling environment, streamlining the process, and preparing enterprises. Potential benefits are discussed such as improved efficiency and lack of political interference, as well as potential disadvantages like natural monopolies and loss of dividends. The success of privatization depends on factors like industry, regulation, and competition.

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Privatization
INTRODUCTIONNTRODUCTIONNTRODUCTIONNTRODUCTION
"PRIVATIZATION is much in the news today—and well it should be. a The
acceleration of interest in privatization evident in the last two to three years
is striking. Governments of very different political and ideological streams
are bent on privatizing, and governments that are already privatizing are
moving from selling small retail outlets and industries to selling larger
mining and infrastructure enterprises. The World Bank’s interest in
privatization stems from its fundamental goals—to help its borrowers
achieve efficient growth with equity, while reducing poverty and protecting
the environment. Privatization can be an important means to these ends.
Three questions about privatization should be addressed. The first question
is twofold: what is privatization and what is happening in privatization?
The second important question with respect to privatization is, why should
you privatize? Finally, the question of how to privatize must be addressed.
What Is Privatization?
Privatization is the process of transferring an enterprise or industry from the public sector to
the private sector. The public sector is the part of the economic system that is run by
government agencies.
All types of privatization have the potential to increase so-called static
efficiency—what economists like to call X-efficiency—which means pushing
enterprises to operate cost effectively on their production frontier. Only by
privatizing property rights, however, can you bring dynamic efficiency—in other
words, new investment, or innovation. Leases and con¬ tracts do not stimulate
dynamic efficiency, because they do not create stakeholders with a clear interest
in putting their own funds at risk.
OBJECTIVESOBJECTIVESOBJECTIVESOBJECTIVES
Why we Privatize?
Reasons Why Governments Should Privatize:
A. Privatization Improves the Use of Public Resources
B. Privatization Improves Operating Efficiency
C. Privatization Improves Dynamic Efficiency
How to Privatize?
a. Governments Must Create a Conducive Environment
b. Governments Must Streamline the Privatization Process
c. Governments Must Prepare the Enterprise for Privatization
Potential benefits of privatisation
1. Improved efficiency

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The main argument for privatization is that private companies have a profit incentive to cut
costs and be more efficient. If you work for a government run industry, managers do not
usually share in any profits. However, a private firm is interested in making profit and so it is
more likely to cut costs and be efficient. Since privatization, companies such as BT, and
British Airways have shown degrees of improved efficiency and higher profitability.
2. Lack of political interference
It is argued governments make poor economic managers. They are motivated by political
pressures rather than sound economic and business sense. For example a state enterprise may
employ surplus workers which are inefficient. The government may be reluctant to get rid of
the workers because of the negative publicity involved in job losses. Therefore, state owned
enterprises often employ too many workers increasing inefficiency.
3. Short Term view
A government many think only in terms of the next election. Therefore, they may be
unwilling to invest in infrastructure improvements which will benefit the firm in the long
term because they are more concerned about projects that give a benefit before the election.
4. Shareholders
It is argued that a private firm has pressure from shareholders to perform efficiently. If the
firm is inefficient then the firm could be subject to a takeover. A state owned firm doesn’t
have this pressure and so it is easier for them to be inefficient.
5. Increased competition
Often privatization of state owned monopolies occurs alongside deregulation – i.e. policies to
allow more firms to enter the industry and increase the competitiveness of the market. It is
this increase in competition that can be the greatest spur to improvements in efficiency. For
example, there is now more competition in telecoms and distribution of gas and electricity.
However, privatization doesn’t necessarily increase competition; it depends on the nature of
the market. E.g. there is no competition in tap water because it is a natural monopoly. There
is also very little competition within the rail industry.
6. Government will raise revenue from the sale
Selling state owned assets to the private sector raised significant sums for the UK
government in the 1980s. However, this is a one off benefit. It also means we lose out on
future dividends from the profits of public companies.

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REPORTREPORTREPORTREPORT
Table 1-1 Distinction between the Public and Private Sectors
Public sector Private sector
Management
Agent-principal
relationship:
Orientation:
Style:
Constraint:
Blurred
Inward and production focus
Reactive
Politically constrained
Clear
Consumer and marketing focus
Proactive
Stakeholders interests but less
constrained
Goals
Goal clarity:
Focus:
Multiple and sometimes
vague and conflicting (public
interests)
On inputs
One-dimensional (profit)
On outputs and outcomes
Organizational structure
Hierarchy:
Type of structure:
Hierarchical pyramid and
centralised
Functional
Decentralized and diversified
Business based on profit centres
Labour
Union strength:
Payment:
Security:
High unionization and
centralised bargaining
Salary grading
High security of employment
Lower unionization and decentralised
bargaining
Employment based on performance
Low security of employment
Responsiveness to cost control
Cost Control Less cost control due to tax
financing
High cost control to become
competitive
Nature and location of the business
Nature:
Development:
Politically and
geographically
constrained
Limited business
Commercially determined
Diversification, investment and
divestment, mergers and overseas
Source: [Pirie, 1988; and Martin and Parker, 1997]
Disadvantages of privatization

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1. Natural monopoly
A natural monopoly occurs when the most efficient number of firms in an industry is one.
For example tap water has very significant fixed costs, therefore there is no scope for having
competition amongst several firms. Therefore, in this case, privatisation would just create a
private monopoly which might seek to set higher prices which exploit consumers. Therefore
it is better to have a public monopoly rather than a private monopoly which can exploit the
consumer.
2. Public interest
There are many industries which perform an important public service, e.g health care,
education and public transport. In these industries, the profit motive shouldn’t be the primary
objective of firms and the industry. For example, in the case of health care, it is feared
privatising health care would mean a greater priority is given to profit rather than patient
care. Also, in an industry like health care, arguably we don’t need a profit motive to improve
standards. When doctors treat patients they are unlikely to try harder if they get a bonus.
3. Government loses out on potential dividends.
Many of the privatized companies in the UK are quite profitable. This means the government
misses out on their dividends, instead going to wealthy shareholders.
4. Problem of regulating private monopolies.
Privatization creates private monopolies, such as the water companies and rail companies.
These need regulating to prevent abuse of monopoly power. Therefore, there is still need for
government regulation, similar to under state ownership.

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5. Fragmentation of industries
In the UK, rail privatization led to breaking up the rail network into infrastructure and train
operating companies. This led to areas where it was unclear who had responsibility. For
example, the Hatfield rail crash was blamed on no one taking responsibility for safety. A
different rail company has increased the complexity of rail tickets.
6. Short-termism of firms.
As well as the government being motivated by short term pressures, this is something private
firms may do as well. To please shareholders they may seek to increase short term profits
and avoid investing in long term projects. For example, the UK is suffering from a lack of
investment in new energy sources; the privatized companies are trying to make use of
existing plants rather than invest in new ones.
Evaluation of Privatization
• It depends on the industry in question. An industry like telecoms is a typical industry where
the incentive of profit can help increase efficiency. However, if you apply it to industries like
health care or public transport the profit motive is less important.
• It depends on the quality of regulation. Do regulators make the privatised firms meet certain
standards of service and keep prices low?
• Is the market contestable and competitive? Creating a private monopoly may harm consumer
interests, but if the market is highly competitive, there is greater scope for efficiency savings.
CONCLUTION
The quest for economic growth in Third World countries has received an enormous
amount of attention over the past 50 years. The poverty problem that plagues numerous
countries around the world is a monumental challenge for which we have yet to find the
solution.
Easterly powerfully captures the significance of economic growth as he states, “Poverty is not
just low GDP; it is dying babies, starving children, and oppression of women and the
downtrodden. The well-being of the next generation in poor countries depends on whether our
quest to make poor countries rich is successful.” (Easterly, 2001). Theoretical analysis of
privatization suggests that incentives play a significant role in the potential success of
privatization as a factor of economic growth. In fact, privatization, accompanied by appropriate
structural reforms, creates incentives to improve economic efficiency, increase investment, and
adopt new technologies. Furthermore, the methods of implementing privatization play an
important role in creating the right incentives and leading the way for the appropriate economic
restructuring. It is essential to note that the success of privatization largely depends on the
government commitment to legal and regulatory reforms. Cook and Uchida’s study suggests

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that the lack of appropriate governmental reforms might be the cause for a negative relationship
between privatization and economic growth. Further research is necessary in order to
conclusively determine the benefits and the potential role of privatization in the construction of
the future economic policies. Although privatization is a fairly recent economic policy aimed at
promoting economic growth, it is safe to conclude that privatization alone will not be the
magical solution to the elusive quest for growth.
REFFERENCE
Hailemariam, Stifanos in university of Groningen
Adnan filipioc In furman university
www.economichelp.com
www.quora.com
www.economictimes.indiatimes.com