Privatization is the transfer of ownership from the public sector to the private sector. The government sells state-owned companies to private buyers. It is common during the economic transition from socialism to free markets.
The term also means the buy of all outstanding shares from a public company by a private investor. The company’s shares are then no longer traded on the stock exchange.
And, in this article, I will focus on the first definition.
Sales of state-owned enterprises to the private sector
Increasing private contributions and efficiency are some of the reasons for the privatization. The government may also lack liquid funds, hence selling one of its owned-business entity.
Transfer of ownership can take two ways.
- Selling directly to private investors – The government looks for buyers and agrees on the sale price.
- Offering shares to the public through the issuance of shares on a stock exchange – It dilutes current government ownership.
Good and bad about privatization
Privatization is a pros and cons topic. Supporters argue it has several advantages, such as:
- An efficient economic resource allocation. Profit motives encourage private to be more efficient and competitive.
- Source of income. The government gets money from sales, which is useful to support other programs.
- Increasing competition. Competition in the private sector contributes to innovation, low and diverse prices of goods.
- Reducing the fiscal burden. Governments often spend money to inject capital into state-owned companies and subsidize their product prices (such as fuel and electricity).
- Economic democracy. Increased private participation in the economy means reducing the economic monopoly by the government.
- Reducing bureaucracy and political interference. Management of government-owned companies often has difficulty making independent decisions due to tremendous political pressure.
On the other hand, critics say privatization raises some concerns, including:
- Less affordable prices of goods and services. Governments often subsidize products that state-owned companies produce. An example is electricity and fuel subsidies. If the ownership switches to the private sector, there is no subsidy, which means the price is higher.
- Efficiency leads to restructuring and ends with the dismissal of workers. It creates new unemployment and is not suitable for employee morale.
- Misuse of monopolies by the private sector and the government does not have the power to direct companies.
- Loss of income to the state. The government no longer receives dividends
- Weak control and supervision by the public
- Economic inequality. Corporate profits ultimately end up in the hands of individuals. Private companies work in the interests of their owners, not to serve the public interest.
- Vital public services such as education and health, are no longer free.