Privatization and Economic Performance

 

1. Introduction

¨  Privatization involves selling state-owned assets to the private sector. It is argued the private sector tends to run a business more efficiently because of the profit motive. However, critics argue private firms can exploit their monopoly power and ignore wider social costs.

¨  Privatization is often achieved through listing the new private company on the stock market. In the 1980s and 1990s, the UK privatized many previously state-owned industries such as BP, BT, British Airways, electricity companies, gas companies and rail network

¨  Privatization of public enterprises have been very much in the agenda of economic liberalization in contemporary world specially in developing and countries in transition.

¨  Different modalities of privatization with lofty goals such as enhancing productive efficiency, allocative efficiency and to rescue governments from budgetary burdens.

¨  Upon the evaluation of private and public undertaking in Nepal it was revealed that PE were capital intensive, better in capacity utilization, profitability and with high economic returns compared to private undertakings.

¨  For example, privatization of public enterprises aims at institutional development, increased efficiency, better services, quality products, employment opportunities, extensive private investment and other.

 

2. Impact of Privatization on Economic Performance of Public enterprises in Nepal

A report on performance of privatized enterprises (1999) spelt out following six objectives of establishing PEs:

¨  To stimulate economic activities in the country as there is absence of significant role- play by the private sector in this regard

¨  To avail goods and services to the general people at fair prices and in abundant quantity

¨  To create employment opportunities in the organized sector

¨  To substitute imports  and save foreign exchange

¨  To utilize the foreign aid

¨  To develop economic and social infrastructure.

  

¨  Capital investment

o    Sharing of ownership in the industrial and commercial activities through the private capital investment has been one of the basic motive for initiating privatization policy in Nepal.

o    Privatization can thus be seen as a tool to accumulate the fragmented capital and utilize it in the main stream of the economy.

o    It is also expected that private capital investment will provide relief to the government in course of budgetary arrangements.

¨  Production situation

o    Privatization theory entails increase in production will as a result of efficiency of the private sector.

o    Productive resources would be used and managed in a better way which contribute in production.

¨  Sales Situation

o    Sales is an important indicator to measure performance of an enterprise.

o    It has multi-lateral effects in the performance particularly on production and profits.

¨  Price Effects

o    Privatization has been perceived in a negative way in the country for a sudden price rise immediately after the privatization of public enterprises.

o    There could be a number of factors influencing in the price rise such as inflationary pressure, rise in price of inputs and subsidiaries etc.

 

 

¨  Employee/ labor Productivity

o    It is generally envisaged that the employee / labor productivity would be high in the private sector enterprises as compared with the public sector enterprises.

o    For example, Bhrikuti paper Factory and Hari siddhi Brick and Tile Factory, the employee /labor productivity was increased.

 

¨  Capacity, Technology, Market Expansion and Product Diversification 

o    Competition is the essence of privatization. It is, indeed, the basic element which provides the quality of goods and services on the one hand and competitive price on the other.

o    These benefits are virtually to be consumed by the consumers.

o    The privatized enterprises have revealed diversified picture in relation to their production, sales and profit earning capacities.

 

¨  Employment

o    It has been the preliminary expectation that the active participation of the private sector in industrial and commercial activities would increase the scope of activities which would generate employment opportunities.

o    As such employment can be seen as the other indicator to assess the performance of the privatized enterprises from the national economic perspective.

¨  Financial Subsidies

o    Public enterprises are remarked as the white elephant because they rely much on the government financial resources.

o    Government is bound to subsidize the financial losses of these enterprises mainly because of their inefficiencies.

o    Government provides subsides to public enterprises in the form of operating subsidy, transport subsidy and capital subsidy.

¨  Equity Ownership

o    Wide ownership in the enterprise is also one of the major objective of privatization. It therefore concentrated on the capital market development of the country.

o    It is believed that as much as equities are vidided, ownership of an enterprise would be shared and extended.

 

3. Conclusion

¨  Privatization, therefore, might not be beneficial unless it is accompanied by competition in the market place.

¨   Identification of problems associated with the policy and implementation procedure along with the environmental aspects and coping with suitable measure would be the ideal steps towards this end with regard to impact of privatization in developing countries.

¨  Michael Todaro (1993) rightly concluded that "it is not sufficient to claim that privatization can lead to higher profits, greater output, or even lower costs.

¨  The key issue is whether such privatization better serves the long run development interests of nation by promoting a more sustainable and equitable pattern of economic and social progress.