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Privatization
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This article needs additional citations for verification.Please help improve this articleby addingreliable references. Unsourced material may be
challengedand removed. (January 2008)
Privatization is the incidence or process of transferring ownership of abusiness,
enterprise, agency or public service from thepublic sector(the state or government) totheprivate sector(businesses that operate for a private profit) or to private non-profit
organizations. In a broader sense, privatization refers to transfer of any governmentfunction to the private sector - including governmental functions like revenue collection
and law enforcement.[1]
The term "privatization" also has been used to describe two unrelated transactions. The
first is a buyout, by the majority owner, of all shares of apublic corporation orholdingcompany's stock, privatizing a publicly traded stock, and often described asprivate
equity. The second is a demutualization of a mutual organizationorcooperativeto form a
joint stock company.[2]
Contents
[hide]
1 Origin
2 History
3 Types
4 Differing views
o 4.1 Supporting
o 4.2 Opposing
5 Intermediate views
o 5.1 Developed or minimally corrupt economies
o 5.2 Underdeveloped or highly corrupt economies
6 Outcomes
7 Alternatives
o 7.1 Public utility
o 7.2 Non-profit
o 7.3 Municipalization
o 7.4 Outsourcing or sub-contracting
o 7.5 Partial ownership
o 7.6 Publicprivate partnership
8 Notable examples
9 Negative responses
10 Reversion
11 See also
12 Notes
13 References
http://en.wikipedia.org/wiki/Wikipedia:Citing_sources#Inline_citationshttp://en.wikipedia.org/wiki/Wikipedia:Verifiabilityhttp://en.wikipedia.org/w/index.php?title=Privatization&action=edithttp://en.wikipedia.org/w/index.php?title=Privatization&action=edithttp://en.wikipedia.org/wiki/Wikipedia:Identifying_reliable_sourceshttp://en.wikipedia.org/wiki/Wikipedia:Identifying_reliable_sourceshttp://en.wikipedia.org/wiki/Template:Citation_neededhttp://en.wikipedia.org/wiki/Template:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Verifiability#Burden_of_evidencehttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Public_sectorhttp://en.wikipedia.org/wiki/Private_sectorhttp://en.wikipedia.org/wiki/Privatization#cite_note-0%23cite_note-0http://en.wikipedia.org/wiki/Privatization#cite_note-0%23cite_note-0http://en.wikipedia.org/wiki/Public_corporationhttp://en.wikipedia.org/wiki/Public_corporationhttp://en.wikipedia.org/wiki/Holding_companyhttp://en.wikipedia.org/wiki/Holding_companyhttp://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Demutualizationhttp://en.wikipedia.org/wiki/Mutual_organizationhttp://en.wikipedia.org/wiki/Mutual_organizationhttp://en.wikipedia.org/wiki/Cooperativehttp://en.wikipedia.org/wiki/Cooperativehttp://en.wikipedia.org/wiki/Joint_stock_companyhttp://en.wikipedia.org/wiki/Joint_stock_companyhttp://en.wikipedia.org/wiki/Privatization#cite_note-crisis-1%23cite_note-crisis-1http://en.wikipedia.org/wiki/Privatization#%23http://en.wikipedia.org/wiki/Privatization#Origin%23Originhttp://en.wikipedia.org/wiki/Privatization#History%23Historyhttp://en.wikipedia.org/wiki/Privatization#Types%23Typeshttp://en.wikipedia.org/wiki/Privatization#Differing_views%23Differing_viewshttp://en.wikipedia.org/wiki/Privatization#Supporting%23Supportinghttp://en.wikipedia.org/wiki/Privatization#Opposing%23Opposinghttp://en.wikipedia.org/wiki/Privatization#Intermediate_views%23Intermediate_viewshttp://en.wikipedia.org/wiki/Privatization#Developed_or_minimally_corrupt_economies%23Developed_or_minimally_corrupt_economieshttp://en.wikipedia.org/wiki/Privatization#Underdeveloped_or_highly_corrupt_economies%23Underdeveloped_or_highly_corrupt_economieshttp://en.wikipedia.org/wiki/Privatization#Outcomes%23Outcomeshttp://en.wikipedia.org/wiki/Privatization#Alternatives%23Alternativeshttp://en.wikipedia.org/wiki/Privatization#Public_utility%23Public_utilityhttp://en.wikipedia.org/wiki/Privatization#Non-profit%23Non-profithttp://en.wikipedia.org/wiki/Privatization#Municipalization%23Municipalizationhttp://en.wikipedia.org/wiki/Privatization#Outsourcing_or_sub-contracting%23Outsourcing_or_sub-contractinghttp://en.wikipedia.org/wiki/Privatization#Partial_ownership%23Partial_ownershiphttp://en.wikipedia.org/wiki/Privatization#Public.E2.80.93private_partnership%23Public.E2.80.93private_partnershiphttp://en.wikipedia.org/wiki/Privatization#Notable_examples%23Notable_exampleshttp://en.wikipedia.org/wiki/Privatization#Negative_responses%23Negative_responseshttp://en.wikipedia.org/wiki/Privatization#Reversion%23Reversionhttp://en.wikipedia.org/wiki/Privatization#See_also%23See_alsohttp://en.wikipedia.org/wiki/Privatization#Notes%23Noteshttp://en.wikipedia.org/wiki/Privatization#References%23Referenceshttp://en.wikipedia.org/wiki/File:Question_book-new.svghttp://en.wikipedia.org/wiki/Wikipedia:Citing_sources#Inline_citationshttp://en.wikipedia.org/wiki/Wikipedia:Verifiabilityhttp://en.wikipedia.org/w/index.php?title=Privatization&action=edithttp://en.wikipedia.org/wiki/Wikipedia:Identifying_reliable_sourceshttp://en.wikipedia.org/wiki/Template:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Verifiability#Burden_of_evidencehttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Public_sectorhttp://en.wikipedia.org/wiki/Private_sectorhttp://en.wikipedia.org/wiki/Privatization#cite_note-0%23cite_note-0http://en.wikipedia.org/wiki/Public_corporationhttp://en.wikipedia.org/wiki/Holding_companyhttp://en.wikipedia.org/wiki/Holding_companyhttp://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Private_equityhttp://en.wikipedia.org/wiki/Demutualizationhttp://en.wikipedia.org/wiki/Mutual_organizationhttp://en.wikipedia.org/wiki/Cooperativehttp://en.wikipedia.org/wiki/Joint_stock_companyhttp://en.wikipedia.org/wiki/Privatization#cite_note-crisis-1%23cite_note-crisis-1http://en.wikipedia.org/wiki/Privatization#%23http://en.wikipedia.org/wiki/Privatization#Origin%23Originhttp://en.wikipedia.org/wiki/Privatization#History%23Historyhttp://en.wikipedia.org/wiki/Privatization#Types%23Typeshttp://en.wikipedia.org/wiki/Privatization#Differing_views%23Differing_viewshttp://en.wikipedia.org/wiki/Privatization#Supporting%23Supportinghttp://en.wikipedia.org/wiki/Privatization#Opposing%23Opposinghttp://en.wikipedia.org/wiki/Privatization#Intermediate_views%23Intermediate_viewshttp://en.wikipedia.org/wiki/Privatization#Developed_or_minimally_corrupt_economies%23Developed_or_minimally_corrupt_economieshttp://en.wikipedia.org/wiki/Privatization#Underdeveloped_or_highly_corrupt_economies%23Underdeveloped_or_highly_corrupt_economieshttp://en.wikipedia.org/wiki/Privatization#Outcomes%23Outcomeshttp://en.wikipedia.org/wiki/Privatization#Alternatives%23Alternativeshttp://en.wikipedia.org/wiki/Privatization#Public_utility%23Public_utilityhttp://en.wikipedia.org/wiki/Privatization#Non-profit%23Non-profithttp://en.wikipedia.org/wiki/Privatization#Municipalization%23Municipalizationhttp://en.wikipedia.org/wiki/Privatization#Outsourcing_or_sub-contracting%23Outsourcing_or_sub-contractinghttp://en.wikipedia.org/wiki/Privatization#Partial_ownership%23Partial_ownershiphttp://en.wikipedia.org/wiki/Privatization#Public.E2.80.93private_partnership%23Public.E2.80.93private_partnershiphttp://en.wikipedia.org/wiki/Privatization#Notable_examples%23Notable_exampleshttp://en.wikipedia.org/wiki/Privatization#Negative_responses%23Negative_responseshttp://en.wikipedia.org/wiki/Privatization#Reversion%23Reversionhttp://en.wikipedia.org/wiki/Privatization#See_also%23See_alsohttp://en.wikipedia.org/wiki/Privatization#Notes%23Noteshttp://en.wikipedia.org/wiki/Privatization#References%23References8/8/2019 Privatization Rahul
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14 External links
[edit] Origin
Edwards states that The Economistcoined the term in the 1930s in covering Nazi German
economic policy.[3][4]
The Oxford English Dictionarynotes usage dating from 1942 inEcon. Jrnl, 52, 398.
[edit] History
This section requiresexpansion.
A long history of privatization dates from Ancient Greece, when governments contracted
out almost everything to the private sector[5]. In the Roman Republic private individualsand companies performed the majority of services including tax collection (tax farming),army supplies (military contractors), religious sacrifices and construction. However, the
Roman Empire also created state-owned enterprises for example, much of the grain
was eventually produced on estates owned by the Emperor. Some scholars suggest thatthe cost of bureaucracy was one of the reasons for the fall of the Roman Empire.[5]
In Britain, the privatization of common lands is referred to as enclosure(in Scotland as
the Lowland Clearances and the Highland Clearances). Significant privatizations of this
nature occurred from 1760 to 1820, coincident with the industrial revolution in thatcountry.
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
privatization, including selling its majority stake in Volkswagen to small investors in apublic share offering in 1961[5]. In the 1970s General Pinochet implemented a significant
privatization program in Chile. However, it was in the 1980s under the leaderships of
Margaret Thatcherin theUKand Ronald Reagan in the USA, that privatization gainedworldwide momentum. In the UK this culminated in the 1993privatization of British Rail
under Thatcher's successor, John Major; British Rail having been formed by prior
nationalization of private rail companies.
Significant privatization of state owned enterprises in Eastern and Central Europe and theformer Soviet Union was undertaken in the 1990s with assistanced from the World Bank,
the U.S. Agency for International Development, the GermanTreuhand , and other
governmental and nongovernmental organizations.
A major ongoing privatization, that of Japan Post, involves the Japanese post service andthe largest bank in the world. This privatization, spearheaded by Junichiro Koizumi,
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started in 2007 following generations of debate. The privatization process is expected[by
whom?] to last until 2017.
[edit] Types
There are four main methods[citation needed] of privatization:
1. Share issue privatization (SIP) - selling shares on the stock market
2. Asset sale privatization - selling an entire organization (or part of it) to a strategic
investor, usually by auction or by using the Treuhandmodel3. Voucher privatization - distributing shares of ownership to all citizens, usually for
free or at a very low price.
4. Privatization from below - Start-up of new private businesses in formerly socialist
countries.
Choice of sale method is influenced by the capital market, political and firm-specific
factors. SIPs are more likely to be used when capital markets are less developed and thereis lowerincome inequality. Share issues can broaden and deepen domestic capitalmarkets, boosting liquidity and (potentially)economic growth, but if the capital markets
are insufficiently developed it may be difficult to find enough buyers, and transaction
costs (e.g. underpricing required) may be higher. For this reason, many governments elect
for listings in the more developed and liquid markets, for exampleEuronext, and theLondon,New Yorkand Hong Kong stock exchanges.
As a result of higher political and currency risk deterring foreign investors, asset sales
occur more commonly in developing countries.
Voucher privatization has mainly occurred in the transition economies of Central andEastern Europe, such as Russia, Poland, the Czech Republic, and Slovakia. Additionally,
Privatization from below is/has been an important type of economic growth in transition
economies.
A substantial benefit of share or asset-sale privatizations is that bidders compete to offerthe highest price, creating income for the state in addition to tax revenues. Voucher
privatizations, on the other hand, could be a genuine transfer of assets to the general
population, creating a real sense of participation and inclusion. If the transfer of vouchersis permitted, a market in vouchers could be created, with companies offering to pay
money for them.
[edit] Differing views
[edit] Supporting
Proponents[who?] of privatization believe that private market factors can more efficiently
deliver many goods or service than governments due to free marketcompetition. In
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general, it is argued that over time this will lead to lower prices, improved quality, more
choices, less corruption, less red tape, and quicker delivery. Many proponents do not
argue that everything should be privatized. According to them, market failures andnatural monopoliescould be problematic. However, some Austrian school
economists[who?] and anarcho-capitalists[who?] would prefer that every function of the state
be privatized, including defenseand dispute resolution.
The basic economic argument given for privatization states that governments have fewincentives to ensure that the enterprises they own are well run. One problem is the lack of
comparison in state monopolies. It is difficult to know if an enterprise is efficient or not
without competitors to compare against. Another is that the central governmentadministration, and the voters who elect them, have difficulty evaluating the efficiency of
numerous and very different enterprises. A private owner, often specializing and gaining
great knowledge about a certain industrial sector, can evaluate and then reward or punishthe management in much fewer enterprises much more efficiently. Also, governments
can raise money by taxation or simply printing money should revenues be insufficient,
unlike a private owner.
If private and state-owned enterprises compete against each other, then the state ownedmay borrow money more cheaply from the debt markets than private enterprises, since
the state owned enterprises are ultimately backed by the taxation and printing press
power of the state, gaining an unfair advantage.
Privatizing a non-profitable state-owned company may force the company to raise pricesin order to become profitable. However, this would remove the need for the state to
provide tax money in order to cover the losses.
Proponents of privatization
[who?]
make the following arguments:
Performance. State-run industries tend to bebureaucratic. A political governmentmay only be motivated to improve a function when its poor performance becomes
politically sensitive, and such an improvement can be reversed easily by another
regime.[citation needed]
Increased efficiency. Private companies and firms have a greater incentive toproduce more goods and services for the sake of reaching acustomer base and
hence increasing profits. A public organization would not be as productive due to
the lack of financing allocated by the entire government's budget that mustconsider other areas of the economy. (Note: However according to theSamuelson
Condition, public organizations tend to produce more of a public good or service.
Also, since private firms provide goods and services according to the marginalprivate benefit curve, private firms have an incentive to produce less.)
Specialization. A privatebusiness has the ability to focus all relevant human and
financial resources onto specific functions. A state-owned firm does not have the
necessary resources to specialize its goods and services as a result of the generalproducts provided to the greatest number of people in thepopulation.
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Improvements. Conversely, the government may put off improvements due to
political sensitivity and special interests even in cases of companies that are
run well and better serve their customers' needs.
Corruption. A state-monopolized function is prone tocorruption; decisions are
made primarily for political reasons, personal gain of the decision-maker (i.e.
"graft"), rather than economic ones. Corruption (orprincipal-agent issues) in astate-run corporation affects the ongoing asset stream and company performance,
whereas any corruption that may occur during the privatization process is a one-
time event and does not affect ongoing cash flow or performance of the company.
Accountability. Managers of privately owned companies are accountable to their
owners/shareholders and to the consumer, and can only exist and thrive where
needs are met. Managers of publicly owned companies are required to be more
accountable to the broader community and to political "stakeholders". This canreduce their ability to directly and specifically serve the needs of their customers,
and can bias investment decisions away from otherwise profitable areas.
Civil-liberty concerns. A company controlled by the state may have access to
information or assets which may be used against dissidents or any individualswho disagree with their policies.
Goals. A political government tends to run an industry or company forpoliticalgoals rather than economic ones.
Capital. Privately held companies can sometimes more easily raise investment
capital in the financial markets when such local markets exist and are suitably
liquid. While interest rates for private companies are often higher than forgovernment debt, this can serve as a useful constraint to promote efficient
investments by private companies, instead of cross-subsidizing them with the
overall credit-risk of the country. Investment decisions are then governed bymarket interest rates. State-owned industries have to compete with demands from
other government departments and special interests. In either case, for smaller
markets,political riskmay add substantially to the cost of capital.
Security. Governments have had the tendency to "bail out" poorly run businesses,
often due to the sensitivity of job losses, when economically, it may be better to
let the business fold.
Lack of market discipline. Poorly managed state companies are insulated from the
same discipline as private companies, which could go bankrupt, have their
management removed, or be taken over by competitors. Private companies are
also able to take greater risks and then seek bankruptcy protection againstcreditors if those risks turn sour.
Natural monopolies. The existence ofnatural monopolies does not mean that
these sectors must be state owned. Governments can enact or are armed with anti-trust legislationand bodies to deal with anti-competitive behavior of all
companies public or private.
Concentration of wealth. Ownership of and profits from successful enterprisestend to be dispersed and diversified -particularly in voucher privatization. The
availability of more investment vehicles stimulates capital markets and promotes
liquidity and job creation.
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Political influence. Nationalized industries are prone to interference from
politicians forpoliticalorpopulist reasons. Examples include making an industry
buy supplies from local producers (when that may be more expensive than buyingfrom abroad), forcing an industry to freeze its prices/fares to satisfy the electorate
or control inflation, increasing its staffing to reduce unemployment, or moving its
operations to marginal constituencies. Profits. Corporations exist to generate profits for their shareholders. Private
companies make a profit by enticing consumersto buy their products in
preference to their competitors' (or by increasingprimary demand for theirproducts, or by reducing costs). Private corporations typically profit more if they
serve the needs of their clients well. Corporations of different sizes may target
different market niches in order to focus on marginal groups and satisfy their
demand. A company with good corporate governance will therefore beincentivized to meet the needs of its customers efficiently.
Job gains. As the economy becomes more efficient, more profits are obtained and
no government subsidies and less taxes are needed, there will be more private
money available for investments and consumption and more profitable and better-paid jobs will be created than in the case of a more regulated economy.[6][unreliablesource?]
[edit] Opposing
Opponents of privatization[who?] dispute the claims concerning the alleged lack ofincentive for governments to ensure that their public services are well run, on the basis of
the idea that governments are proxy owners answerable to the people. It is argued[by whom?]
that a government which runs nationalized enterprises poorly will lose public support and
votes, while a government which runs those enterprises well will gain public support and
votes. Thus, democratic governments do have an incentive to maximize efficiency innationalized companies, due to the pressure of future elections.
Opponents of certain privatizations believe that certainpublic goods and services shouldremain primarily in the hands of government in order to ensure that everyone in society
has access to them (such as law enforcement, basic health care, and basic education).
Likewise,private goods and services should remain in the hands of the private sector.
There is apositive externality when the government provides public goods and servicesto society at large, such as defense and disease control. As fornatural monopoliesthey
are by their nature not subject to fair competition and better administrated by the state.
The controlling ethical issue in the anti-privatization perspective is the need forresponsible stewardship of social-support missions. Market interactions are all guided byself-interest, and successful actors in a healthy market must be committed to charging the
maximum price that the market will bear. Privatization opponents believe that this model
is not compatible with government missions for social support, whose primary aim isdelivering affordability and quality of service to society.
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Many privatization opponents[who?] also warn against the practice's inherent tendency
toward corruption. As many areas which the government could provide are essentially
profitless, the only way private companies could, to any degree, operate them would bethrough contracts or block payments. In these cases, the private firm's performance in a
particular project would be removed from their performance, and embezzlement and
dangerous cost-cutting measures might be taken to maximize profits.
Furthermore, large corporations may paypublic-relationsprofessionals to convincedecision-makers that privatization is a sensible idea. Corporations typically have far more
resources for expert testimony, advertisements, conferences and otherpropaganda efforts
than anti-privatization advocates.
Some[who?] would also point out that privatizing certain functions of government mighthamper coordination, and charge firms with specialized and limited capabilities to
perform functions which they are not suited for. In rebuilding a war torn nation's
infrastructure, for example, a private firm would, in order to provide security, either have
to hire security, which would be both necessarily limited and complicate their functions,or coordinate with government, which, due to a lack of command structure shared
between firm and government, might be difficult. A government agency, on the otherhand, would have the entire military of a nation to draw upon for security, whose chain of
command is clearly defined. Opponents would say that this is a false assertion: numerous
books refer to poor organization between government departments (for example theHurricane Katrina incident).
Although private companies will provide a similar good or service alongside the
government, opponents of privatization are careful about completely transferring the
provision of public goods, services and assets into private hands for the following
reasons:
Performance. A democratically elected government is accountable to the people
through a legislature, Congress orParliament, and is motivated to safeguarding
the assets of the nation. The profit motive may be subordinated to socialobjectives.
Increased Market Efficiency forPublic Goods and Services. A public
organization tends to produce more of a public good or service according to theSamuelson condition andMarginal Social Benefit curve. This results in a better
positive externalityfor society. On the other hand, a private firm does not provide
sufficient public goods and services, because it provides them on themarginal
private benefit curve or private demand curve. A private firm provides less inorder to make more profit. Therefore the public goods and services are provided
more efficiently for society as a whole by a public organization. (Any market is
more efficient for society when marginal social benefits equals marginal socialcosts, MSB=MSC.)
Improvements. the government is motivated to performance improvements as
well run businesses contribute to the State's revenues.
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Corruption. Government ministers and civil servants are bound to uphold the
highest ethical standards, and standards of probity are guaranteed through codes
of conduct and declarations of interest. However, the selling process could lacktransparency, allowing the purchaser and civil servants controlling the sale to gain
personally.
Accountability. The public does not have any control or oversight of privatecompanies.
Civil-liberty concerns. A democratically elected government is accountable to the
people through aparliament, and can intervene when civil liberties are threatened.
Goals. The government may seek to use state companies as instruments to further
social goals for the benefit of the nation as a whole.
Capital. Governments can raise money in the financial markets most cheaply to
re-lend to state-owned enterprises. Strategic and Sensitive areas. Governments have chosen to keep certain
companies/industries under public control because of their strategic importance or
sensitive nature.
Cuts in essential services. If a government-owned company providing an essentialservice (such as the water supply) to all citizens is privatized, its new owner(s)
could lead to the abandoning of the social obligation to those who are less able topay, or to regions where this service is unprofitable.
Natural monopolies. Privatization will not result in true competition if a natural
monopoly exists.
Concentration of wealth. Profits from successful enterprises end up in private,often foreign, hands instead of being available for the common good.
Political influence. Governments may more easily exert pressure on state-owned
firms to help implementing government policy.
Downsizing. Private companies often face a conflict between profitability and
service levels, and could over-react to short-term events. A state-owned company
might have a longer-term view, and thus be less likely to cut back on maintenanceor staff costs, training etc., to stem short term losses. Many private companies
have downsized while making record profits.
Profit. Private companies do not have any goal other than to maximize profits. Aprivate company will serve the needs of those who are most willing (and able) to
pay, as opposed to the needs of the majority, and are thus anti-democratic. The
more necessary a good is, the lower theprice elasticity of demand, as people will
attempt to buy it no matter the price. In the case of price elasticity of demand iszero (perfectly inelastic good), demand part of supply and demand theories does
not work.
Privatization and Poverty. It is acknowledged by many studies that there arewinners and losers with privatization. The number of losers which may add up
to the size and severity of povertycan be unexpectedly large if the method and
process of privatization and how it is implemented are seriously flawed (e.g. lackof transparency leading to state-owned assets being appropriated at minuscule
amounts by those with political connections, absence of regulatory institutions
leading to transfer of monopoly rents from public to private sector, improper
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design and inadequate control of the privatization process leading toasset
stripping.[7]
Job Loss. Due to the additional financial burden placed on privatized companiesto succeed without any government help, unlike the public companies, jobs could
be lost to keep more money in the company.
[edit] Intermediate views
Others don't dispute that well-run for-profit entities with sound corporate governancemay be considerably more efficient than an inefficient governmentalbureaucracy or
NGO, however many implementations of privatization can - in practice - lead to the fire
sale of public assets, and/or to inefficient or corrupt - for profit management.
[edit] Developed or minimally corrupt economies
A top executive can readily reduce the perceived value of an asset due to information
asymmetry. The executive can accelerate accounting of expected expenses, delayaccounting of expected revenue, engage inoff balance sheet transactions to make the
company's profitability appear temporarily poorer, or simply promote and report severelyconservative (e.g. pessimistic) estimates of future earnings. Such seemingly adverse
earnings news will be likely to (at least temporarily) reduce sale price. (This is again due
to information asymmetries since it is more common for top executives to do everything
they can to window dress their earnings forecasts). There are typically very few legalrisks to being 'too conservative' in one's accounting and earnings estimates.
When the entity gets taken private - at a dramatically lower price - the new private owner
gains a windfall from the former top executive's actions to (surreptitiously) reduce the
sales price. This can represent 10s of billions of dollars (questionably) transferred fromprevious owners (the public) to the takeover artist. The former top executive is then
rewarded with a golden handshake for presiding over the fire sale that can sometimes be
in the 10s or 100s of millions of dollars for one or two years of work. (This isnevertheless an excellent bargain for the takeover artist, who will tend to benefit from
developing a reputationof being very generous to parting top executives).
When a publicly held asset, mutual ornon-profit organizationundergoes privatization,
top executives often reap tremendous monetary benefits. The executives can facilitate theprocess by making the entity appear to be in financial crisis - this reduces the sale price
(to the profit of the purchaser), and makes non-profits and governments more likely to
sell.
Ironically, it can also contribute to a public perception that private entities are more
efficiently run reinforcing the political will to sell of public assets. Again, due to
asymmetric information, policy makers and the general public see a government owned
firm that was a financial 'disaster' - miraculously turned around by the private sector (andtypically resold) within a few years.
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[edit] Underdeveloped or highly corrupt economies
In a society with substantial corruption, privatization allows the government currently in
power and its backers to siphon a large portion of the entire net present value of state
assets away from the public and into the accounts of their favored power brokers.
Without privatization, corrupt officials would have to slowly harvest their corruptearnings over time. As such, efficient privatization depends on their being a very low of
current corruption among the current government officials since it allows for far more
'efficient' extraction of corrupt rents.
Of course, corrupt governments can also extract corrupt rents quite efficiently in other
ways - particularly by borrowing extensively to engage in spending on overly favorable
contracts with their backers (or on tax shelters, subsidies or other giveaways).Generations of subsequent taxpayers are then left with paying back the debt incurred for
corrupt transfers made decades previously. Naturally, this may lead to the sale of public
assets....
In the end, the public is left with a government that taxes them heavily, and gives themnothing in return. Debt repayment is enforced by international agreements and agencies
such as the IMF. Infrastructure and upkeep is sacrificed - leading to a further decay in the
economic efficiency of the country over time.
[edit] Outcomes
This article has multiple issues. Please helpimprove it or discuss these issueson the talk page.
Itsneutralityis disputed. Tagged since March 2008.
Its factual accuracy is disputed. Tagged since March 2008.
Literature reviews [8][9] find that in competitive industries with well-informed consumers,
privatization consistently improves efficiency. Such efficiency gains mean a one-offincrease in GDP, but through improved incentives to innovate and reduce costs also tend
to raise the rate ofeconomic growth. The type of industries to which this generally
applies include manufacturingand retailing. Although typically there are social costsassociated with these efficiency gains[10], many economists argue that these can be dealt
with by appropriate government support through redistributionand perhaps retraining.
In sectors that are natural monopoliesorpublic services (such as, say, passenger rail in
the United States), the results of privatization are much more mixed, as a privatemonopoly behaves much the same as a public one in liberal economic theory. The
government is actually seen as a more natural provider of public goods and services.
However, the efficiency of an existing public sector operation can be put into questionrequiring changes to be made. Changes may include,inter alia, the imposition of related
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reforms such as greater transparency and accountability of management, an improved
cost-benefit analysis, improved internal controls,regulatory systems, and better
financing, rather than privatization itself.
Regardingpolitical corruption, it is a controversial issue whether the size of the public
sector per se results in corruption. TheNordic countries have low corruption but largepublic sectors. However, these countries score high on the Ease of Doing Business Index,
due to good and often simple regulations, and forpolitical rights and civil liberties,showing high government accountabilityand transparency. One should also notice the
successful, corruption-free privatizations and restructuring of government enterprises in
the Nordic countries. For example, dismantling telecommunications monopolies hasresulted in several new players entering the market and intense competition with price
and service.
Also regarding corruption, the sales themselves give a large opportunity for grand
corruption. Privatizations in Russia and Latin America were accompanied by large-scale
corruption during the sale of the state-owned companies. Those with political connectionsunfairly gained large wealth, which has discredited privatization in these regions. While
media have reported widely the grand corruption that accompanied the sales, studies haveargued that in addition to increased operating efficiency, daily petty corruption is, or
would be, larger without privatization, and that corruption is more prevalent in non-
privatized sectors. Furthermore, there is evidence to suggest that extralegal and unofficialactivities are more prevalent in countries that privatized less.[11]
[edit] Alternatives
This article may contain original research. Pleaseimprove it by verifyingthe
claims made and adding references. Statements consisting only of originalresearch may be removed. More details may be available on the talk page.(January 2010)
[edit] Public utility
The enterprise can remain as a public utility.
[edit] Non-profit
A private non-profit organization could manage the enterprise.
[edit] Municipalization
Transferring control to municipal government
[edit] Outsourcing or sub-contracting
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National services may sub-contract or out-source functions to private enterprises. A
notable example of this is in the United Kingdom, where many municipalitieshave
contracted out their garbage collection or administration of parking fines to privatecompanies. In addition, the British government has involved the private sector more in
the workings of theNational Health Serviceprincipally through outsourcing the
construction and operation of new hospitals to private companies. There are also movesto refer patients to private surgeries to ease the load on existing NHS human resources,
and covering the cost of this.
See also:private finance initiative
[edit] Partial ownership
An enterprise may be privatized, but with the state retaining a number of shares in the
resultant company. This is a particularly notable phenomenon in France, where the stateoften retains a "blocking stake" in private industries. In Germany, the state privatized
Deutsche Telekomin small tranches, and still retains about a third of the company. As of2005, the state ofNorth Rhine-Westphaliais also planning to buy shares in the energycompany E.ON in what is claimed to be an attempt to control spiraling costs.
Whilst partial privatization could be an alternative, it is more often a stepping stone to
full privatization. It can offer the business a smoother transition period during which it
can gradually adjust to market competition. Some state-owned companies are so largethat there is the risk of sucking liquidity from the rest of the market, even in the most
liquid marketplaces: this may favor gradual privatization. The first tranche of a multi-
step privatization would also in the first instance establish a valuation for the enterprise tomitigate complaints of under-pricing.
In some instances of partial privatization of contracted services, some portion(s) of the
state-owned service are provided by private-sector contractors, but the government
retains the capacity to self-operate at contract intervals, if it so chooses. An example ofpartial privatization would be some forms ofschool bus service contracting, such as
arrangements where equipment and other resources purchased with government capital
funds and/o those already owned by a governmental entity are used by the contractor for
a period of time in providing services, but ownership is retained by the governmentalunit. This form of partial privatization eases concerns that once an operation is
contracted, the government may be unable to obtain sufficient competitive bids, and be
subjected to terms less desirable than the prior operation under state-ownership. Under
that scenario, a reverse privatization would be more feasible for the government. (seesection below)
[edit] Publicprivate partnership
Main article: Public-private partnership
[edit] Notable examples
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See also: List of privatizations
The largest privatization in history involved Japan Post. It was the nation's largest
employer and one third of all Japanese government employees worked for Japan Post.Japan Post was often said to be the largest holder of personal savings in the world.
The Prime MinisterJunichiro Koizumi wanted to privatize it because it was thought[by
whom?] to be an inefficient and a source for corruption. In September 2003, Koizumi's
cabinet proposed splitting Japan Post into four separate companies: a bank, an insurancecompany, a postal service company, and a fourth company to handle the post offices as
retail storefronts of the other three.
After the Upper House rejected privatization, Koizumi scheduled nationwide elections
for September 11, 2005. He declared the election to be a referendum on postalprivatization. Koizumi subsequently won this election, gaining the necessary
supermajority and a mandate for reform, and in October 2005, the bill was passed to
privatize Japan Post in 2007.
[12]
Nippon Telegraph and Telephone's privatization in 1987 involved the largest share-offering in financial historyat the time.[13] 15 of the world's 20 largest public share
offerings have been privatizations of telecoms.[13]
The United Kingdom's largest public-share offerings were privatizations ofBritish
Telecom andBritish Gas. The largest public-share offering in France was FranceTelecom.
[edit] Negative responses
Privatization proposals in keypublic service sectors such as waterand electricity in many
cases meet with strong resistance from opposition political parties and from civil societygroups, many of which regard them as natural monopolies. Campaigns typically involve
demonstrations and democratic political activities; sometimes the authorities attempt to
suppress opposition using violence (e.g. Cochabamba protests of 2000 in Bolivia andprotests in Arequipa, Peru, in June 2002). Opposition is often strongly supported by trade
unions. Opposition is usually strongest to water privatization as well as Cochabamba,
recent examples include Haiti, GhanaandUruguay (2004). In the latter case a civil-society-initiated referendum banning water privatization was passed in October 2004.
[edit] Reversion
A reversion from contracted ownership of an enterprise or services to governmental
ownership and/or provision is called reverse privatization ornationalization. Such asituation most often occurs when a privatization contractor fails financially and/or the
governmental unit has failed to purchase satisfactory service at prices it regards as less
than with state-ownership or self-operation of services. Another circumstance may occur
http://en.wikipedia.org/wiki/List_of_privatizationshttp://en.wikipedia.org/wiki/Japan_Posthttp://en.wikipedia.org/wiki/Junichiro_Koizumihttp://en.wikipedia.org/wiki/Wikipedia:Avoid_weasel_wordshttp://en.wikipedia.org/wiki/Wikipedia:Avoid_weasel_wordshttp://en.wikipedia.org/wiki/Wikipedia:Avoid_weasel_wordshttp://en.wikipedia.org/wiki/Japan_general_election,_2005http://en.wikipedia.org/wiki/Supermajorityhttp://en.wikipedia.org/wiki/Privatization#cite_note-11%23cite_note-11http://en.wikipedia.org/wiki/Nippon_Telegraph_and_Telephonehttp://en.wikipedia.org/wiki/Nippon_Telegraph_and_Telephonehttp://en.wikipedia.org/w/index.php?title=Financial_history&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Financial_history&action=edit&redlink=1http://en.wikipedia.org/wiki/Privatization#cite_note-megginson205-12%23cite_note-megginson205-12http://en.wikipedia.org/wiki/Privatization#cite_note-megginson205-12%23cite_note-megginson205-12http://en.wikipedia.org/wiki/Privatization#cite_note-megginson205-12%23cite_note-megginson205-12http://en.wikipedia.org/wiki/British_Telecomhttp://en.wikipedia.org/wiki/British_Telecomhttp://en.wikipedia.org/wiki/British_Gas_plchttp://en.wikipedia.org/wiki/British_Gas_plchttp://en.wikipedia.org/wiki/France_Telecomhttp://en.wikipedia.org/wiki/France_Telecomhttp://en.wikipedia.org/w/index.php?title=Privatization&action=edit§ion=19http://en.wikipedia.org/wiki/Public_serviceshttp://en.wikipedia.org/wiki/Waterhttp://en.wikipedia.org/wiki/Electricityhttp://en.wikipedia.org/wiki/Civil_societyhttp://en.wikipedia.org/wiki/Natural_monopolyhttp://en.wikipedia.org/wiki/Cochabamba_protests_of_2000http://en.wikipedia.org/wiki/Boliviahttp://en.wikipedia.org/wiki/Arequipahttp://en.wikipedia.org/wiki/Arequipahttp://en.wikipedia.org/wiki/Trade_unionhttp://en.wikipedia.org/wiki/Trade_unionhttp://en.wikipedia.org/wiki/Water_privatizationhttp://en.wikipedia.org/wiki/Haitihttp://en.wikipedia.org/wiki/Ghanahttp://en.wikipedia.org/wiki/Ghanahttp://en.wikipedia.org/wiki/Uruguayhttp://en.wikipedia.org/wiki/Uruguayhttp://en.wikipedia.org/wiki/Referendumhttp://en.wikipedia.org/w/index.php?title=Privatization&action=edit§ion=20http://en.wikipedia.org/wiki/Nationalizationhttp://en.wikipedia.org/wiki/List_of_privatizationshttp://en.wikipedia.org/wiki/Japan_Posthttp://en.wikipedia.org/wiki/Junichiro_Koizumihttp://en.wikipedia.org/wiki/Wikipedia:Avoid_weasel_wordshttp://en.wikipedia.org/wiki/Wikipedia:Avoid_weasel_wordshttp://en.wikipedia.org/wiki/Japan_general_election,_2005http://en.wikipedia.org/wiki/Supermajorityhttp://en.wikipedia.org/wiki/Privatization#cite_note-11%23cite_note-11http://en.wikipedia.org/wiki/Nippon_Telegraph_and_Telephonehttp://en.wikipedia.org/w/index.php?title=Financial_history&action=edit&redlink=1http://en.wikipedia.org/wiki/Privatization#cite_note-megginson205-12%23cite_note-megginson205-12http://en.wikipedia.org/wiki/Privatization#cite_note-megginson205-12%23cite_note-megginson205-12http://en.wikipedia.org/wiki/British_Telecomhttp://en.wikipedia.org/wiki/British_Telecomhttp://en.wikipedia.org/wiki/British_Gas_plchttp://en.wikipedia.org/wiki/France_Telecomhttp://en.wikipedia.org/wiki/France_Telecomhttp://en.wikipedia.org/w/index.php?title=Privatization&action=edit§ion=19http://en.wikipedia.org/wiki/Public_serviceshttp://en.wikipedia.org/wiki/Waterhttp://en.wikipedia.org/wiki/Electricityhttp://en.wikipedia.org/wiki/Civil_societyhttp://en.wikipedia.org/wiki/Natural_monopolyhttp://en.wikipedia.org/wiki/Cochabamba_protests_of_2000http://en.wikipedia.org/wiki/Boliviahttp://en.wikipedia.org/wiki/Arequipahttp://en.wikipedia.org/wiki/Trade_unionhttp://en.wikipedia.org/wiki/Trade_unionhttp://en.wikipedia.org/wiki/Water_privatizationhttp://en.wikipedia.org/wiki/Haitihttp://en.wikipedia.org/wiki/Ghanahttp://en.wikipedia.org/wiki/Uruguayhttp://en.wikipedia.org/wiki/Referendumhttp://en.wikipedia.org/w/index.php?title=Privatization&action=edit§ion=20http://en.wikipedia.org/wiki/Nationalization8/8/2019 Privatization Rahul
17/20
when greater control than viable under privatization is determined to be in the
governmental unit's best interest.
National-security concerns may be the source of reverse privatization actions when themost likely providers are non-domestic or international corporations or entities. For
example, in 2001, in response to the September 11th attacks, the then-private airportsecurity industry in the United States was nationalized[citation needed] and put under the