The Next Big Thing in Privatization

Privatization Meaning

The ISM Glossary 6th edition defines privatization as the partial or complete transfer or control over government-owned assets to a private sector organization. It is also the act of transferring responsibility for selected government functions and services to the private sector.

Following ae some benefits of privatization

Benefits of privatization


Proponents of privatization believe that private market sectors can more efficiently deliver any goods or services than the can government due to market competition. In general, over time this is expected to lead to lower prices, improved quality, more choices, less corruption, less bureaucracy, and quicker delivery. Many privatization proponents do not argue that everything should be privatized; the existence of problems such as market failures and natural monopolies may limit this. However, a small minority thinks that everything can be privatized, including the state itself.
The basic economic argument given for privatization is that governments have few incentives 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 without competitors to compare it against. Another is that the central government administration and the voters who elect it have difficulty evaluating the efficiency of numerous and very different enterprises. A private owner, often specializing in and gaining in-depth knowledge of a certain industrial sector, can evaluate and then reward or punish the management in much fewer enterprises much more efficiently.

Political considerations

Governments may more easily exert pressure on state-owned organizations to help implement government policy. In many public organizations, outsourcing to businesses in the community can often be a factor, though not the controlling one. If a task can be accomplished on a less costly basis with equal or better benefits, then outsourcing or privatization may be an option. Many public/governmental functions, such as public transportation, incarceration facilities and utilities, can be viable candidates for outsourcing or privatization. The prime factors are total life-cycle cost to the taxpayers and the level of service or product received. Some functions of the public sector, such as police protection and the courts, must remain in governmental control. On the public side, the desire of taxpayers for less government involvement may play a more dominant role than economics in the decision process.

Types of privatization

In certain markets, establishing a presence requires forming a joint venture (a business venture or investment undertaken by two or more organizations) with a local organization via a shared ownership stake. One of the reasons for a public/private partnership is to help support the growth of local businesses. In markets like China, such organizations may be owned by the government. It also may be the only way in which an organization can profitably participate in a market, as many governments restrict equity participation in local operations by foreigners. Such a partnership could provide a wealth of benefits in the form of local expertise and contacts. Likewise, such a shared risk/shared reward environment aligns both sides fully to the success of the venture.
Despite these advantages, such a deal is fraught with potential hazards and requires greater diligence and more care on the supply management professional’s part. If things do not go as planned, such an arrangement is much more difficult to exit or dissolve. There may be issues in communication, strategy, management style, accounting and control, marketing policies and strategies, research and development, and/or how profits should be divided. Likewise, decisions and changes can take much more time if they must be approved by all the partners. Finally, a country’s motivations in this outsourced relationship should be clearly understood, as the risk of repatriation increases with an ownership claim on the government’s part.

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