privatisation

Question 1

define privatisation

Answer 1

the sale of state owned companies to the pruvate sector, usually through a stock market listing

Question 2

what are the different forms in which privatisation may occur

Answer 2

• contracting out - contracting out to a private firm, e.g., prisons, construction of NHS hospitals
• franchising - awarding of exclusive rights to perform services within a specific area, e.g., TOCs
• privatisation of operations - delegating managerial responsibilities, but not ownership

Question 3

what are the benefits of privatisation

Answer 3

• increased competition - new firm entering the private sector. often occurs alongside deregulation. increases competitiveness of the market because you now have a greater number of firms competing for the same number of consumers, so will also improve efficiency
• pressure from shareholders - shareholders are motivated by profit - they receive money based on the amount of profit the firm is making, and they can put pressure on the managers of their companies to focus more on profit
• improved efficiency - private companies are incentivised by profits, while state-run companies see profits as less of an incentive, since managers’ salaries is not related to the profits of the firms. In contrast, shareholders are invested in the profits being made because this directly influences how much money they are making. Therefore, this creates an incentive to be efficient, so that they can cut costs. E.g., BT and BA have shown degrees of improved efficiency since they were privatised
• govt revenue from the sale - sale from revenue can be used to fund welfare programs, or helping to pay for the provision of public healthcare
• lack of political intereference - govts are motivated by political pressures rather than what is in the best interest of the company. They also are afraid of receiving negative publicity, so may continue to employ too many workers, increasing inefficiency
• short term - govts only think in terms of their next election, therefore they might be unwilling to make long term investments as the rewards won’t be seen immediately, and so it won’t help them stay in government. Each time there is a new govt, the management and objectives of the state run industry might change

Question 4

what are the potential disadvantages of privatisation

Answer 4

• natural monopoly - if the govt sells a natural monopoly, then there is no scope for competition between firms, and now that the natural monopoly has been privatised, it can set higher prices and exploit consumers
• govt loses steady income (potential dividends) - govt misses out on their dividends - better for money to be going to the govt than wealthy shareholders
• public interest - in some industries, the objective shouldn’t be profit maximisation - e.g, healthcare, education
• problem of regulating private monopolies - monopolies can abuse power
• short termism of firms - firms may concentrate efforts on short term profits to please shareholders rather, than thinking about long term goals
• fragmentation of industries - if the company is split and then sold, then this may prevent the private sector from benefitting from economies of scale, and cause disorganisation

Question 5

how does privatisation increase competition

Answer 5

• increased competition - new firm entering the private sector. often occurs alongside deregulation. increases competitiveness of the market because you now have a greater number of firms competing for the same number of consumers, so will also improve efficiency

Question 6

how can privatisation be evaluated?

Answer 6

• depends on industry
• depends on ability to regulate
• depends on contestability of the market that the privatised firm is entering
• depends on the political stability