Tuesday, January 22, 2013

Privatization and Government Sale of Big Corporations

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 U.S. 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).

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 U.S. privatized 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.

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 USSR 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.

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.). Boston, MA: South-Western, Cengage Learning.

Savas, E.S. (2001). Privatization and public-private partnerships. Chatham House, NJ: Chatham House. Retrieved from http://www.cesmadrid.es/documentos/sem200601_md02_in.pdf

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