The term “privatization” describes a shift in the ownership of assets or the provision of services from the government or public sector to the private sector. The scope of privatization, however, varies greatly in different parts of the world. In the former Soviet bloc countries of Eastern Europe, privatization means changing the ownership and control of all major industries and utilities from the national government to the private sector.
As the privatization trend gains momentum in the new world; has come to encompass a variety of economic and political changes including the transfer of assets, services, and responsibilities from the state to the private sector; a lessening in the regulatory powers of government; and an increase in the individual’s responsibility in meeting his or her own needs. Regardless of definition, privatization is driven by both specific public policy decisions and general socioeconomic trends.
Forms of Privatization
- Contracting Out or Outsourcing is the first and probably the most prevalent which can be described as public sector choice and public sector financing, with private sector production of the selected service. Under contracting out, the citizenry makes elected officials aware of a collective needs. The government is also responsible for financing these respective services—generally through its taxing powers. Hence, the government finances the service while the private sector provides it. The government determines the service level and pays the amount specified in the contract, but leaves production decisions to the private contractor. However, if this does happens to the National Carrier; Malaysia Airlines – The government workers who previously performed the job may undergo “employee dislocation”—a polite term for layoffs, transfers to less desirable positions, etc.
- Franchising is another form of privatization similar to a monopoly privilege awarded to a private firm that provides the service but with the price of the service being regulated and determined by the state. Most utilities, such as gas, electricity, and telephone service, are provided under the franchise form of privatization. A relatively recent service, cable TV, is also generally awarded as a monopoly privilege. Another important distinction of monopoly franchising is that the consumer makes direct payments to the provider for the service.
- User Fees is a variation on franchising and contracting out fees. Under this system of privatization, the consumer pays a set fee to cover all or part of the service costs. A municipality may, for instance, charge a set fee per household for trash collection rather than pay for that service out of a general tax pool.
- Load-shedding is the last form of privatization whereby the government steps aside entirely. The consumer is responsible for deciding whether or not to make use of the service, the selection of the provider, and all payments for the service.
The effects on Privatization will lead to Employee Layoffs and Retrenchment
Arguments for Privatization – the proponents of privatization argue that government providers have no real incentive to hold down costs or to provide quality service.
Private firms, on the other hand, are motivated by a profit motive that depends on holding costs down. The lower the cost incurred by the firm in satisfying the contract, the greater the realized profit.
Private providers are also motivated by competition from other potential service providers. Competition between potential private suppliers to win a contract generally results in the lowest cost to the government and the taxpayer for the specified level of service.
It was well-argued that the “Competitive markets are rooted in private property, and there is no way to stimulate competitive conditions under conditions of government financing or government production”.
However, politically the most difficult and feared impact of privatization is employee layoffs. The fear is justified because many public enterprises are greatly overstaffed, as they are often used as instruments of job creation.
Privatization typically is associated with reduction and reorganization of the labor force, either in preparation for privatization or soon afterwards. It had been revealed that a universal concern in privatization process is the effect it has on labor.
Many observers fear that privatization will cause major job losses as new owners of privatized firms shed excess labor to improve efficiency and as divesting governments cut the workforce to prepare for privatization.
Fearing unemployment and the loss of benefits, labor unions and state enterprise workers are often among the most vocal and organized opponents of privatization, taking actions to deal or block reform. It was reported that in most Eastern European countries privatization accompanied by redundancies and the introduction of hard budget constraints on enterprises has resulted in large-scale job losses. This has created a pool of unemployed workers, which often cannot be absorbed by other privatized firms or new firms.
The expressed by quoting empirical examples, that depending on the results of the voluntary departure program, redundant staff may still need to be involuntarily laid off. Though, politically the most difficult of all restructuring options, retrenchment of workers who did not accept the voluntary program have been sometimes necessary in the last phase of the restructuring.
In Argentina railways the last 5,000-6,000 workers who did not accept voluntary retirement were declared redundant on the basis of performance and laid off. About 3,000 additional workers were sent home with 50 percent of their salaries.
In Brazil more than 14,500 of the 18,000 redundant railway employees were terminated by December 1996 with a large number opting for early retirement benefits. Private operators of three recently introduced systems have further deepened the staff retrenchment program initiated by the railways company, cutting as much as half the labor force they received with the concession.
In Brazil railways, redundant staff was given the choice of voluntary separation. On average, the scheme, however, are laid off with legal entitlements plus a separation package equivalent to 80 percent of the incentive offered under the voluntary program. The railway also agreed to pay an involuntary separation grant to remaining redundant staff that was not hired by the concessionaire, up to a maximum number of staff specified in the bidding documents.
Compensation packages for layoffs beyond the specified number were the concessionaire’s responsibility. As a result of this approach most of the 16,000 or so redundant workers took up the incentives and left through the voluntary program.
In Bangladesh more than 22,000 workers in the state’s jute corporation were retrenched between 1990 and 1993 as part of the restructuring and privatization program; further reductions are required for the privatization or closure of the remaining mills.
In Mexico a recent study of 218 privatized firms across a range of sectors found that the firms had reduced the number of white- and blue-collar employees by nearly half in the four years before sale. In some companies the reductions were significantly higher.
Many asserted that commonly accepted trade-offs that occur throughout the privatization process typically create an imbalance of accrued benefits to various segments of the workforce and members of the community in general.
There is concern that privatization negatively impacts the most vulnerable segments of the workforce. As illustrated; the privatization of a water system in Bolivia and an energy system in Thailand increased unemployment and decreased consumer welfare in both countries.
Therefore it was asserted that the greatest opposition to privatizing a firm usually comes from the firm’s own employees, who are fearful of wage cuts and job losses.
The other argument – Private firms may also be more innovative, using different approaches to providing a service. Government, by contrast, tends to stick with known approaches since changes often create problems, especially with an entrenched bureaucracy or a strident municipal bond.
Private firms may also use earnings to finance research or to purchase capital equipment relating directly to the service, while governments may not be able or willing to allocate revenue in the same manner given the many competing demands for tax dollars.
Another contributing factor to this cost disparity is the general overall efficiency of the private sector. The private sector has a strong incentive to operate efficiently.
Private firms that spending more money and employing more people to do the same amount of work will have lower profit margins and decreased profits. In the long run they will no longer be able to compete in a market economy.
The disciplining effect of competition, however, does not affect the public sector. Government agencies generally operate in a non-competitive environment and therefore can charge more for their services and be less concerned with consumer satisfaction.
Government services that are provided in a non-competitive market also deny the consumer comparability. The consumer or taxpayer has no real way of evaluating the price of a government service. This tends to make government less responsive to consumer needs.
The private sector generally offers the consumer a higher quality of service while keeping costs under control.
Malaysiaairlinesfamilies commented the above privatization argument does not prove the trend of privatization will guarantee an increase in efficiency and productivity as the case proven by AirAsia – the first private-owned airlines in Malaysia by Tony Fernandez.
In fact, Tony Fernandez proves that privatization on airlines business is provided with more rooms for exploiting the labor force. It is well-known that AirAsia; a private-owned airlines is forever struggling to uphold its safety performance and barely surviving from the market competition.
Malaysia Airlines; however is state-government owned airlines has established a proven record of its safety performance as compared to a private-owned airlines – AirAsia.
Simply put; privatization is politically a game-changer and it has been advancing by the political party to restructure a monopoly system for a new regime to rule over. Ultimately, privatization is a political process.
Because the burden of privatization will fall most heavily on the public workforce and their jobs and income are at risk. Public employees and their unions are strongly opposing privatization.
It is because the government almost always operates as a monopoly provider, the decision to privatize usually means de-monopolization, even if not always robust, free-market competition.
Regardless of the mode of privatization, the government could have improvised the common motivation for engaging in all four types of privatization to substitute more efficient business operations for what are seen as less efficient, bureaucratic and often politicized operations in the public sector. Such way, the fear of massive job losses could be lessening and monitored.
The key difference of Privatization is the substitution of COMPETITION for MONOPOLY.
To be continued – next episode 3 will cover “The Effect on Employment”.