Advantages and Disadvantages of Privatization - Case Study Example

PRIVATIZATION Introduction There appears to be a growing trend in as far as privatization of companies, around the globe, is concerned. This seems to be the case in many countries, particularly the rapidly developing nations, as many companies opt to buy whatever it is that has already been put in place. What exactly is this privatization? Loosely speaking, privatization is defined as the transfer of ownership of public owned enterprises or businesses to the private sector. In most instances, these private businesses aim at generating private profit (although in other instances they are transferred to private non-profit making organizations). The Barron’s Finance and Investment Dictionary defines privatization as process of converting a publicly operated enterprise into a privately owned and operated entity (2006). In general ten, privatization is the transfer of government owned assets or services to the private sector. Given that the recent global trend has shown that there are increasingly many countries that are adopting this privatization moves, this paper seeks to look into this matter. The paper aims at finding why many governments are opting to the privatization way. The paper will seek to address this matter by looking into the privatization of a water company. This is intended to shade some light in the dark areas that are not clearly understood in as far as privatization is concerned. The paper will then look at the pros and cons of privatization based on the case presented (that of a water company). The paper will also look into the privatization of an electricity company and what it entails. Water & Electricity Privatization Water privatization basically implies the provision of water and sanitation services to an urban centre by a private company. Many countries, particularly in Europe and America, have adopted this trend. African countries have slowly followed suit with this trend. Kenya, for instance has adopted a policy that in its major towns and cities, the provision of the service has been privatized. But why do urban centers opt to have the provision of water and sewerage services privatized? This may vary from country to country but the general feel is that while the government hopes to cut on the cost of provision and maintenance of the service, the private sector intends to make some profit by provision of this service. The public, on the other hand, wants some sense of accountability and checks and balances. By getting into a contract with the government, the private sector is responsible and accountable for the provision of this service. There exists a belief in many people that privatization of water services does not work for the less privileged in the society i.e. it is bad for the poor. Others belief that privatization of these services causes harm to the environment and it leads to the inequitable distribution of water. Many people think that once privatized, many of these companies will apply the general rule of economics of maximizing profits while minimizing costs and thus will be more concerned about making a profit than the welfare of the people. Statistics in many urban centers prove that the converse is true. In many countries where the government still controls the supply of water and the sanitation of the urban center, a wide majority of the people do not have access to clean running water. According to Nancy Macdonald, 1.1 billion people—one-sixth of the world’s population—do not have access to clean running water (2009). She went ahead to give the example of Canada where the massive subsidization of the systems leads to enormous waste of water and as a result, the money that could have been earned. The levels of water are ever decreasing while the population of people in the urban centers keeps on increasing, Nancy Macdonald is of the view that privatization could lead to more realistic pricing, less waste, and better distribution—even to the world’s poor (MacDonald; 2009). Privatization of water, on the other hand, has a ripple effect of the consumer and consumer costs. The costs of various commodities are set to increase given that the cost of accessing water has increased. The manufacturer, therefore, has to factor in this cost of production while setting the price of a commodity. Nancy Macdonald, however, argued that this increase in the cost of commodities will lead to conservation and better use of water. If water distribution was privatized, prices for individual consumers would likely increase with use, which would have the positive side effect of encouraging conservation (MacDonald; 2009). Across the United States, the privatization of water service delivery has not been left out. The tendency is for local governments to surrender some or all of their control over the design, construction, ownership, and operation of water services, as s result of financial constraints (Anthony and Rudolph; 2004). Many multinational companies have then opted to come in and play this role that is ideally to be played by the government. Today, approximately 15% of U.S. water delivery systems and 5% of wastewater utilities are privately owned, serving about 15% of U.S. utility consumers (Anthony and Rudolph; 2004). Privatization of Electricity Company Just like water privatization, electricity privatization is the generation and supply of electricity services to the general public by a private company. According to Sharon Beder, the privatization of electricity does not work well for the public. She puts the blame of blackouts experienced in East USA in 2003 on the privatization of electricity. The public, generally, does not seem to fancy the idea of electricity privatization too. Beder, goes further to assert that there have been many uprisings and protests against the privatization of electricity in various countries across the globe. In Canada, electricity privatization is not a new thing. The demand for electricity is ever increasing in the country. For this reason, Canada requires a massive supply of electricity. It is thought that the introduction of a company to generate and supply electricity privately will assist in the purchase and repair of aging equipment. Many governments opt to quit the electricity business given that the production of it is more expensive than the returns expected from it. What then are the pros and cons of privatization? Based on the above case, one of privatization of water and sanitation services, it is safe to conclude that privatization of a company has its pros and cons. One advantage of privatization of a company is that it tends to promote efficiency. Given that the public has paid for a particular service, they will require that it be delivered without fail. As mentioned earlier, the private companies get into a contract with the public that they will provide a particular service, failure to provide this service to the satisfaction of the public might lead to fallout between the two parties (Anthony and Rudolph; 2004). Creation of employment is another advantage of privatization of companies. Some groups, however, argue that with privatization of companies many people end up losing their jobs. In many countries, the government tends to absorb those who have lost their jobs, though. Once the company has been established, it will require personnel to work in it. For this reason, the companies are forced to go out there and employ people who will work in the company. Privatization of companies brings about a sense of competition between companies and thus service delivery is considered to be top notch. Private owners have a strong incentive to operate efficiently, they argue, while this incentive is lacking under public ownership (Lieberman; 1993). Privatization of companies lifts the weight off the government’s shoulders by taking on some responsibilities that ideally are to be played by the government. This allows the government to focus on other matters and hence create efficiency also from the government side. One main disadvantage of privatization, contrary to Nancy MacDonald’s article is that with privatization, accountability is not possible (Morris; 1996). The public does not have any control or oversight of private companies and hence the companies are not accountable to them. This might result in poor service provision. The goal of private companies is to maximize profits while they minimize the costs. In the event that one requires a service offered by a private company and cannot pay for it, the private company will not look into this need (Morris; 1996). Since private companies are also interested in minimizing costs, downsizing is also one of the techniques they apply. If cutting the number of employees will see to it that they maximize the profits, the private company will do so. Finally, privatization is highly likely to lead to the creation of a monopoly. The introduction of a single company that will control a certain sector will definitely lead to the establishment of a monopoly. In Europe, particular companies control the supply of water in certain cities. This is the case of monopoly where other companies are not allowed to throw in their weight in the participation of this supply. Conclusion In my view, privatization of companies is a double edged sword. In as much as it is beneficial to the people of a country, it also has its own limitations. The privatization of water in urban centers results to mixed results and reactions. In some instances, people will argue that the privatization of the service has created efficiency while in other instances one will complain of the lack of accountability. Perhaps governments should consider owning part of the company (say half of it) (Elam; 1997). By doing so, the public still has access to the company accounts and therefore accountability is possible. The efficiency on the private companies will also be adhered to through this. It is, therefore, a win/win situation for all. References Arnold, Craig Anthony and E. George Rudolph. “Privatization of Public Water Services: The States’ Role in Ensuring Public Accountability.” Madison, Wisconsin: State Environmental Resource Center, 2004 Elam, L.B. "Reinventing Government Privatization Style—Avoiding the Legal Pitfalls of Replacing Civil Servants with Contract Providers." Public Personnel Management. (1997). Kodrzycki, Yolanda. "Privatization of Local Government Services: Lessons for New England." New England Economic Review. (May/June, 1994). Lieberman, Ira W. "Privatization: The Theme of the 1990s—An Overview." Columbia Journal of World Business. (1993). MacDonald, Nancy. “Is Privatization the Right thing to do?” Maclean.CA. (2009). Morris, David. "The Downside of Privatization." Journal of Commerce and Commercial. (February 9, 1996). Sharon Beder, 'Thieves in the Night', Arena Magazine 67, (October 2003). Read More