1273648, Shubhra Sharma, F2, Q 37 Should the public sector be privatized?

Should the public sector be privatized?

Public sector

The public sector refers to the part of the economy concerned with providing basic government services. It refers to the part of the state that deals with the construction, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local. Production decisions are determined by government and the delivering organization normally has no definite requirement to meet commercial accomplishment criteria. The part of the economy concerned with providing basic government services.

Privatization

The transfer of ownership of property or businesses from a government to a privately owned entity. The transition from a publicly traded and owned company to a company which is privately owned and no longer trades publicly on a stock exchange. When a publicly traded company becomes private, investors can no longer purchase a stake in that company.

Advantages:

 Improved Efficiency.

The main argument for privatisation is that private companies have a profit incentive to cut costs and be more efficient. If you work for a government run industry, managers do not usually share in any profits. However, a private firm is interested in making profit and so it is more likely to cut costs and be efficient. Since privatisation, companies such as BT, and British Airways have shown degrees of improved efficiency and higher profitability.

2. Lack of Political Interference.

It is argued governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense. For example a state enterprise may employ surplus workers which is inefficient. The government may be reluctant to get rid of the workers because of the negative publicity involved in job losses. Therefore, state owned enterprises often employ too many workers increasing inefficiency.

3. Short Term view.

A government many think only in terms of next election. Therefore, they may be unwilling to invest in infrastructure improvements which will benefit the firm in the long term because they are more concerned about projects that give a benefit before the election.

4. Shareholders

It is seen that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover. A state owned firm doesn’t have this pressure and so it is easier for them to be inefficient.

5. Increased Competition.

 Policies to allow more firms to enter the industry and increase the competitiveness of the market. It is this increase in competition that can be the greatest spur to improvements in efficiency. For example, there is now more competition in telecoms and distribution of gas and electricity.

However, privatisation doesn’t necessarily increase competition, it depends on the nature of the market. E.g. there is no competition in tap water. There is very little competition within the rail industry.

6. Government will raise revenue from the sale

Selling state owned assets to the private sector raised significant sums for the UK government in the 1980s. However, this is a one off benefit. It also means we lose out on future dividends from the profits of public companies.

Disadvantages:

1. Monopoly: A natural monopoly occurs when the most efficient number of firms in an industry is one. For example tap water has very significant fixed costs; therefore there is no scope for having competition amongst several firms. Therefore, in this case, privatisation would just create a private monopoly which might seek to set higher prices which exploit consumers. Therefore it is better to have a public monopoly rather than a private monopoly which can exploit the consumer.

2. Public Interest

There are many industries which perform an important public service, e.g health care, education and public transport. In these industries, the profit motive shouldn’t be the primary objective of firms and the industry. For example, in the case of health care, it is feared privatising health care would mean a greater priority is given to profit rather than patient care. Also, in an industry like health care, arguably we don’t need a profit motive to improve standards. When doctors treat patients they are unlikely to try harder if they get a bonus.

3. Government loses out on potential dividends.

Many of the privatised companies are quite profitable. This means the government misses out on their dividends, instead going to wealthy shareholders.

4. Problem of regulating private monopolies.

Privatisation creates private monopolies, such as the water companies and rail companies. These need regulating to prevent abuse of monopoly power. Therefore, there is still need for government regulation, similar to under state ownership.

 5. Short-Termism of Firms.

As well as the government being motivated by short term pressures, this is something private firms may do as well. To please shareholders they may seek to increase short term profits and avoid investing in long term projects. For example, the UK is suffering from a lack of investment in new energy sources; the privatised companies are trying to make use of existing plants rather than invest in new ones.

Conclusion:

From the above context it can be concluded that there is a need of public sector in the economy, so that it can work efficiently and do not become a economy of earning profits only. It is seen and observed that private sector gives more preference to earn profits and concentrates less towards the welfare of the people. Moreover if the economy will fully be privatised then there is a great possibility that whole of the economy works on the monopoly concept and the people will be burdened with high prices and can be cheated in some cases. But it is also true that private sector generates a lot of revenue for the economy and through this sector economy experiences a high and fast growth.

So, here in my point of view public sector should not be fully privatised. Some important areas should be controlled by the government. Both should be given consideration.