Saudi Airlines and the Privatisation Issues - Dissertation Example

However, technically, the granting of a long-term franchise or concession to the private sector investors, where they would build, manage and operate a major project also falls under the umbrella of privatization. Furthermore, in the third type of privatization, a government entity retains control of the strategic direction of the public service but allows a private entity to deliver a public service. This form of privatization is commonly known as outsourcing or contracting (Bortolotti, et al., 2004, pp. 330).
As argued by Megginson & Netter (2001) that the government usually justifies privatization for three reasons. First, privatization generates revenue which could be used to reduce the fiscal deficits and pay off debts. Throughout history, in times of dire need, huge debts, and fiscal deficits, policymakers have resorted to privatization of the SOEs s that they reduce fiscal deficits and pay off the public debt (Bos, 2011, p. 41). Consider the ongoing example of the European Sovereign Debt Crisis, where countries such as Spain, Greece, Portugal, Cyprus, Iceland, and others are facing a difficult time in meeting their debt obligation. Many of the European countries have sold off several public entities to generate much-needed revenue. In fact, many countries that have acquired bailouts from International Monetary Fund (IMF) and European Central Bank (ECB) have had to sign agreements promising the privatization of several underperforming public sector institutions. Therefore, in these countries, privatization is an attempt at bailing out the government and the SOEs.
Second, policymakers might also undertake privatization to reverse the effects of “crowding out” within markets and encourage private enterprises to take the lead. As apparent from the theory of crowding out, when governments, while following an expansionary fiscal policy, increase the size of the public sector, it drives out the private sector from the market (Cashore, 2002, p. 505). More importantly, in several cases, even a moderate increase in the public sector might drive out several private entities. Therefore, when public sector entities leave the competitive arena, with their monopoly, concessions, subsidies, unlimited funds, and several other advantages, it encourages the private sector to enter the market (Vickers & Yarrow, 1988, p. 52). When the government no longer is there to distort the market, the market forces ensure effective and efficient resource allocation, which not only generates employment and contributes to the national output but at the same time, ensures a multiplier effect of an upward spiral of growth (O'Sullivan, et al., 2012, pp. 428).
Lastly, the governments opt for a privatization policy because they want to spur economic growth and the development of the financial and capital markets within the country. There is a plethora of empirical and theoretical evidence, which suggests that the development of financial markets proceeds economic growth.