There are three logical arguments that have been given regarding support for privatization: smaller government, operating efficiency and response to clients, and cash (Mikesell, 2011). People in favor of smaller government and those opposed to the meddling or involvement of bureaucrats usually side with the concept of privatization. Privatization increases efficiency and lowers production costs; private companies respond to customer demands faster than the government; and private companies are known for improved responsiveness to customers. When the
sold Conrail, it allowed
citizens to buy shares and make more efforts to increase productivity, make
significant gains financially, and encourage competition. When the former Prime
Minister Margaret Thatcher privatized British Airways (BA), there have been
public outcries mainly because people were not familiar with the concept of
privatization or lacked general knowledge on the significance of private
enterprises. According to Eckel, Eckel, and Singal (1997), U.S. stocks
fell by 17% after BA was privatized. Airlines that were within the European rim
and who were in competition with BA for air superiority, experienced drastic
drops in their stocks than airlines based in far away lands (Eckel, Eckel,
& Singal, 1997). U.S.
British Airways was born after the passing of the Civil Aviation Act of 1971. It was privatized in 1987. Despite the sluggish financial growth and poor performances at its initial privatization endeavor, the airline came to be a symbol of growth, changes, and subsidies. Leaving business to people espousing higher degree of knowledge in business operations and experience coupled with freedom to make decisions without government interference, allows for increased financial growth and worker productivity. The main reason the British government privatized BA was to generate additional sources of revenue for the government and also make the firm more efficient (Eckel, Eckel, & Singal, 1997). In the same case, the
Conrail, the French its Banks, and the British its telephone services to
generate more revenue and ensure the existence of well organized private
enterprises that would deliver efficient services to the public. U.S.
The believe that private companies outperform governments has been refuted by Mikesell (2011) who bases his reasoning on the difficulties faced by the Internal Revenue Service (IRS) when collecting taxes from contractors that have been created by Congress. Governments advertise the sale of companies knowing there will always be a buyer. When governments sell companies, they are assured that the operating costs they incurred will disappear and be taken over by the buyer. There have been cases of revenue loss in the former
Soviet Union after states that
separated from it tried to move to the market economy system. Initially, state
enterprises in the former
had high production costs even with private ownerships. With the exception of
the energy sector such as oil and gas whose values skyrocketed, many privately
owned Soviet companies could not be sold at the national and international
markets as prices were too insufficient to cover the costs of operations. Private
companies, without regulatory measures, imposed on them, can send bad
precedents and can be dangerous to many business operation procedures. USSR
Privatizing companies that are short of experienced personnel may not be a good idea as doing so could slow down flexibility of operations and productivity, retard implementation programs, and hold back innovation. On the part of production/provision of services, there is the belief that governments should not continue operating companies that collapse as a result of government failures. If the government fails to deliver products and services, it is logical to use private companies to do the job and continue providing services. According to Megginson and Netter (2001), privatization started with the rise of Margaret Thatcher in the 80s. In its initial rise, privatization received strong skepticism from the public and even from economists. However, despite the cynicisms, privatization has grown roots everywhere and has been adapted by over 100 countries worldwide (Meggison & Netter, 2001). Those who continue to be skeptical of privatization cite selection bias as the major reason for their opposition. There are three forms of privatization: delegation, divestment and displacement (Savas, 2001). Delegation, also called partial privatization, implies continuous government involvement. Divestment is the shedding of an enterprise, asset, or function and requires a one-time government involvement. Displacement, a form of privatization that appears as stealth or by attrition, is a commonplace privatization and is usually seen when government delivery of public goods is seen inefficient by the public such that private enterprises take over the unmet services.
Eckel, C., Eckel, D., & Singal, V. (1997). Privatization and efficiency: Industry effects of the sale of British Airways. Journal of Financial Economics, 43, 275-298.
Megginson, W.L. & Netter, J.M. (2001). From State to market: A Survey of empirical studies on privatization. Journal of Economic Literature, Vol. XXXIX, 321–389.
Mikesell, J.L. (2011). Fiscal administration: Analysis and applications for the public sector (8th ed.).
: South-Western, Cengage
Savas, E.S. (2001). Privatization and public-private partnerships.
Chatham House, NJ: House. Retrieved
from http://www.cesmadrid.es/documentos/sem200601_md02_in.pdf Chatham