Privatizing Public Utilities - Essay Example

PRIVATISING PUBLIC UTILITIES By [Student’s Name] [Code + Course Name] [Name of Tutor] [Name of University] [City, State] [Date of Submission] Introduction A public utility refers to any organization whose purpose is to maintain the infrastructure for public service. According to the Britannica Encyclopedia, a public utility is a venture which provides particular classifications of services to the public. These services include common carrier transportation such as airlines, motor freight carriers, buses, railroads, pipelines among others. Power/ electricity in the form of light and heat, sanitation and community water facilities are also part of the services that are supplied as public utilities. In many countries, these enterprises are owned and operated by the state, and in instances where they are privately owned and operated, the government sets regulations under which they operate (Un.org). The key reason behind regulation of public utilities is that their operations in terms of production, transmission and distribution almost always create a situation of partial or complete monopoly (Hodge and Coghill 2004). The monopolistic situation arises from economies of scale in the specific industry. The vast amounts of capital required to establish the enterprise (s); inelasticity of demand amongst the consumers of services provided; and considerations of the excess capacity required to meet demand peaks are some of the factors that create the monopolistic situation. Practically, regulation ensures that the utility is in a position to provide service to all those who apply for it, and are able to pay for it; carries out its operations in an adequate and safe manner; practices equality to all in the provision of services, and that reasonable rates are charged for the services provided. Regulation mainly occurs because governments believe that if operators are left to practice on their own devices, they may operate contrary to the best interests of the communities they serve (Braithwaite, Travaglia and Corbett 2011). Privatization is that process which involves the transfer of ownership of a business enterprise, agency, charity or other form of public utility from the government/ state to the private sector. In a more comprehensive sense, the term refers to the shift of government functions to the private sector. The private sector in this case refers to privately owned businesses that operate for profits. Privatization may be done by way of selling shares, assets or contracting out business. In selling shares, the buyer, who is the private business, acquires majority shareholding. By becoming the majority owner, they typically adopt the operations of the business. Contracting out business occurs when the public organization outsources private companies to provide services to the people they serve for a fee. The service providers operate in a manner that follows the regulations set out by the government. Finally, state corporations may sell their public assets to private companies, who thereafter provide services back to the community at competitive prices. The whole ideology behind privatization is that the new provider should be in a position to provide the same services to the public at a reduced cost, and in a much reliable manner to the public (Soumu.go.jp). Upon privatization, such issues as reliability, accountability and affordability may not always be the outcome as expected. This paper seeks to discuss the impact of privatizing public utilities for issues of accountability in Australia, both positive and negative. Privatizing Public Utilities Privatization in Australia began in the 1990s with the sale of the initial tranche of the Commonwealth Bank. This came as a result of the introduction of capital adequacy guidelines for the banking industry, which required the bank to increase its capital base for it to expand its operations. This has since been followed by other successive sales of banks and insurance companies, transport and communication sectors over the years. According to the Wall Street Journal, the year 2013 saw Australia and New Zealand top the global ranks in privatizations. Privatization sprees provides the much needed cash to government/ state coffers, while at the same time, freeing them to allow for maximal focus on core government functions. By November 2013, the state had raised a total of US$9. 65 though direct sales, with more assets, including the health insurer Medibank Private (worth US$ 3.8 billion) and the state’s student-debt portfolio (worth US$ 22 billion) expected to be put up for bidding. Private business ventures often attain better returns in comparison to state managed corporations, a factor which is good for the economy of any country (Tan 2013). Accountability Accountability is the process of rendering account for something, and to someone. A state owned organization is funded by taxpayer funds, and therefore, the government is accountable to the citizens for any actions taken. In the private sector context, accountability is different and involves the provision of annual reports and accounting for profits realized in a certain period. Disclosure of such information is made to shareholders, who over time have increased their demand on the amount of information they require from the management. The demands of the capital markets also continue to increase the form and amount of information required to be disclosed by management. This information is used to evaluate the degree to which the management has been able to deliver shareholder value (Braithwaite, Travaglia and Corbett 2011). In the context of public utilities, accountability is not measured by the profitability of the organization, but instead assumes a wide range of measures. These include the adequacy of internal control systems such as processes; legality and probity; performance in accordance with laid down standards and performance in accordance with laid down objectives. However, the government is involved in numerous and complex projects. These projects also bear many objectives. This makes the process of accountability complicated because of conflicts that may arise amongst the many projects/ policies, or even within a single project/ policy. The party to whom accountability is made also bears its own degree of complexity, owing to the fact that there exist a large number of parties. They include the taxpayers, who are also the users of services provided, parliament and the government itself. In a nutshell, the concept of accountability in the context of public expenditure requires that all citizens or their representatives (trade unions, the media, academics, etc.), are able to see how the resources of the society have been spent. In addition, none of the members of that society should be deemed to have a sanctioned unfair advantage over other members in relation to the use of the public resources/ utilities (Un.org). Accountability of Government Sector vs. Private Sector Positive Impacts of Privatization The fact that governments possess minimal incentive to motivate concentration on efficient operations of state-owned facilities cannot be overemphasized. This is despite the increased levels of competition in the business world in the provision of services such as airport services. Typically, airports are viewed as public utilities fully operated and owned by the government with the chief objective of facilitating the efficient movement of passengers as a means of serving the public good, as opposed to doing it for commercial purposes of generating profits. This was the case in Australia until 1996 when the initial phase of airport privatization took place, with the sale of Brisbane, Melbourne and Perth airports. Australia was the third country in the world to undertake airport privatization, a process which was triggered by the growth of the country’s potential as a tourist destination. Sydney was later privatized in 2002 (Un.org). The initial and most direct consequence resulting from these privatizations was the increased revenues, increased share prices and the expansion of other non-aeronautical activities. Private investors direct their focus towards the profitability of their business venture, and in a bid to achieve this they must woo customers by offering excellent good services. As a result, privatization may lead to improved efficacy in the production of public sector goods and services (Johnson 2008). Most of the ongoing debate regarding privatization is largely based on rhetoric, as opposed to research. The parties in favor of privatization argue that the private managers tend to be more effective than public managers owing to their profitability motive. On the other hand, opponents of the privatization provision are of the opinion that private managers lack social incentives in practice, and therefore, are not suited to provide public services (King and Pitchford 2008). Efficiency is one positive impact of privatization, whereby private firms have been said to be more efficient in delivery of services as compared to their public sector counterparts. This is due to the fact that private firms are geared towards maximizing profitability and shareholder value, and therefore, strives to attract more consumers by offering better and efficient services. In studies carried out to evaluate the efficiency of privatized utilities, financial measures such as “sales margin” and “return on assets” were used, with firms showing higher digits being referred to as efficient. However, efficiency should also be measured in relation to the objectives that the particular firm is striving to achieve (Soumu.go.jp). Privatized firms also benefit from the fact that there is reduced or entire elimination of government interference. In Australia, public firms operate under the direct watch of the minister regulating the industry under which the firm operates. For non-privatized organizations in the past, this largely interfered with operations and decision making, which had to be ratified by the minister. This caused substantial delays in government processes and further interfered with the efficient provision of services. With privatization, only the management of the firms is involved in decision making, and therefore, service provision is faster, smoother and more efficient (Andrew 2006). In contrast with private organizations, it is argued that public firms do not face the rigors of a competitive market, a factor which leads to inefficiency. However, this argument misses the point because a lot of the publicly owned organizations are specifically in areas of business which would not have a natural competitive market structure even if they were private. For instance, the privatization of Perth, Melbourne, Brisbane and other Australian airports did not suddenly create bigger competition. In reality, they are currently privately owned, regulated monopolies as opposed to being publicly owned monopolies. Even in instances where publicly owned organizations operate in industries that could be more competitive, this fact does not form the basis of an argument for shifting ownership from the public sector to the private sector. Instead, it only suggests that any existing barriers to healthy competition should be done away with. Before they were privatized, many of the public enterprises in Australia were in competition with private firms. They included the Commonwealth Bank, Australian Airlines, and the NSW Government Insurance Office. However, it remains unclear whether at that time; these firms were not as efficient as their privately owned competitors (Unisa.edu.au). Financial markets tend to respond positively to privatizations because governments use the funds raised from privatizations in retiring or containing a rise in debts of the country. On one hand, government debt and its borrowing needs are reduced due to the influx of funds; while on the other hand, it leads to an increase in the levels of private borrowing as well as the supply of equity. The high growth of funds under management, as well as the presence of an increasing share market has consistently assisted the capital markets to increase their ability to manage the process. This has come alongside the globalization of financial markets because a lot of foreign investors have continually been attracted to the Australian public floats, with foreign banks participating in syndicate loans in order to finance trade sales of PTEs (Durkin 2014). The sale of Telstra, whose proceeds were received by the government in installments (between 1997- 1999) had been earmarked to retire debt and eventually lead to upgraded credit rating. This saw the stock of Commonwealth Government securities stabilize in the period to figures of about $110␣ billion in 1997. By 1998, the figure dropped to $105␣ billion and to $85␣ billion by 2000/2001. These changes were partly as a result of receipts from privatizations, while partly they were caused by the projected run of underlying budget surpluses (Oecd.org). Negative Impacts of Privatizion Privatization of public utilities shifts contractual obligations and control rights from the government to the private providers. In matters of accountability, studies have shown and proven that privatization tends to demotivate the government from carrying out investigations or making any responses to the demands of the public because it allows the provider mandate to hold up the service adaptations of the government. It also demotivates the public from initiating any form of pressure on the government for service adaptations by way of indirect holdup (for instance, when the public funds decrease because the government paid inflated prices for an adaptation). The degree to which the state is involved in service provision is reduced by privatization, thereby shifting the attribution of responsibility for results from the state onto the provider. In many countries, privatization gives room for politicians to escape responsibility for the quality of public services provided. This is because the citizens tend to lay blame on the private providers for problems arising from poor provision of services. Governments also tend to take up privatizations as strategic ploys to deflect responsibility for some unpopular changes such as massive layoffs, evasion of safety regulations and even quality reduction. They employ this strategy to escape blame. However, well informed voters should see the rationale behind such actions and blame the government for privatizing at the time they did, whereas they could fix the problem beforehand. For accountability, the government must be in a position to investigate the demands of the public that they serve, and decipher ways of satisfying these demands. To complement this, the citizens must be able to discover and identify their preferences, communicate and sensitize these preferences to their politicians (government), and finally mobilize pressure for the provision and improvement of such services. In this way, they are able to identify any gaps that exist in the actual services provided compared to their preferences. This is done by appraising the services provided, and holding the government accountable for any deviations (King and Pitchford 2008). Conclusion Judging from the research, it would be in order to conclude that while privatization has improved the level of managerial accountability in the provision of public utilities, political accountability was not achieved at all. Also, a lot of citizens are not happy with privatization because it does not fulfill the social aspect of the provision. The legal process of privatization led to the creation of an accountability vacuum which came about as a result of stripping away many of the wider accountability mechanisms of the public sector. As such, it is important to strengthen government accountability mechanisms so as to protect the citizens from the private sector abuses, as well as administrative neglect, which may arise as a result of privatization. In Asia, for instance, this causes major problems because most of the citizens lack the resources needed to invoke the intervention of courts in redressing their complaints, more so those regarding public services (Hodge and Coghill 2004). Reference List Andrew J 2006, Prisons, the profit motive and other challenges to accountability, Faculty of Business-Accounting and Finance, University of Wollongong. 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