Privatisation
“Privatisation” is the term used to describe the sale or transfer of public sector services or assets to the private sector.
Privatisation can be total (ie sell off the whole company) or partial (sell off part, but retain some shareholding – often retaining enough to ensure majority control)
Since the 1980’s many European economies have embarked upon a policy of reducing state involvement in companies which previously had been publically owned, and transferring this ownership to private individuals and non-government institutions.
Since 1991, many major Irish “semi-state” bodies have been privatised. The sale of these companies raised revenues for the Irish government and, in most cases, was reasonably successful.
Arguments in Favour of Privatisation
1. Revenue for the Government
By selling off semi-state companies, the government can raise much needed revenue.
In the current financial crisis, this strategy is being carefully considered as a means of reducing the Irish General Government Deficit.
For example: The sale of Telecom Eireann (now Eircom) raised €5Bn for the government.
2. Reduced Costs for the Government
If the government can manage to sell off loss-making firms, they can shed activities they previously had to pay for.
These savings could result in reduced borrowing, reduced taxation or increased spending other areas.
For example: Iarnrod Eireann regularly makes large losses. If this was sold, the government wouldn’t have to pay for these.
3. Price and Quality Improvements for Consumers
With the need to maintain a competitive edge, privatised firms are often forced to implement improvements in their product in terms of price, speed of service, quality, etc.
For example: If ESB was privatised they would have to improve their services to succeed in the market.
4. Increased Efficiency for the Company
Privatisation forces firms to become more efficient or they will fail. Entrepreneurial thinking is encouraged and management can make decisions (especially risky or unpopular ones) far more quickly, without the bureaucratic red tape associated with government organisations.
For example: Irish Sugar was an unprofitable strike-ridden firm in the 1970s and 1980s. It was privatised, renamed itself Greencore, and is now very efficient and profitable.
5. Incentives improve Productivity for the Company
Efficiency is also encouraged by bonuses for diligent or innovative workers, or increased profits if the firm operates at maximum efficiency.
The issue of job security is also important – a state-paid employee needn’t push herself, because come what may she can’t lose her job. A private sector employee, on the other hand, is much more likely to be made redundant if the firm goes bankrupt, or get the sack if they don’t perform.
For example: One reason why Irish Sugar had loads of strikes was that workers didn’t care as they couldn’t lose their jobs by bankrupting the company.
6. Capital may be more available for the Company
In the current economic climate of government cutbacks and restricted spending, private firms may now be best placed to raise the capital necessary for expansion or renovation of an industry.
The Irish government has already had to pull the plug on a range of public sector projects and are showing a preference for “Public Private Partnerships” – such as toll roads, etc.
For example: Aer Lingus requires a large capital injection from time to time to replace its fleet, but the government aren’t in a position to provide this at the current time.
It can also be pointed out that:
· Some industries simply don’t need government involvement – eg: why should it be the government who run the airline, surely it should be an airline company?
· Selling off a business doesn’t mean the government loses all control – it can still regulate how the business operates through legislation
Arguments Against Privatisation
1. Loss of Services
Socially desirable, but unfortunately uneconomic services might be discontinued if privatised.
Given that the private company’s over-riding objective is profit, it will simply stop providing the aspects of a service that are not profitable
For example: An Post services would be abandoned in many rural areas if the company’s only objective was to make a profit.
2. Loss of Revenue to the Government
While the sale of profitable firms yields a large once-off sum for the government, it also means that they are forgoing all future revenue that would result from the annual profits of these firms.
The government need to weigh up very carefully whether the short-term gain is worth losing out on these profits from now on.
For example: Selling off Irish Life (now part of Irish Life & Permanent Bank) was very profitable for the government, but it subsequently lost out on years of profits
3. The Government may be left with only Unprofitable Services
Nobody is going to buy a firm that is unprofitable. Therefore the government must continue to provide it, if it is considered worthwhile.
However, if the government sells off all the profitable companies, it will have nothing to “cross-subsidise” the loss-making firms and must bear all the costs itself.
For example: There is little interest in the sale of Iarnrod Eireann as it’s seen as unprofitable.
4. Unemployment
Transitional unemployment is likely to occur as newly-privatised firms strive to become more efficient by laying off unnecessary labour.
This increases demands on government finances (paying the costs of unemployment benefit, and losing the income tax previously paid to them) and the taxpayer loses out so that the business can make more profit.
For example: If Bus Eireann were sold a lot of redundancies would occur to make it more efficient so it could compete as a private company.
5. Sale Arrangements may be Difficult
It may be difficult to get the best price at which to sell shares in the company. The need to attract investors may mean that the company is sold off too cheaply (especially in the current market climate), and speculators gain at the expense of the nation’s wealth. There may also be expensive costs involved in preparing/advertising the privatisation.
For example: When Telecom Eireann was sold, it did raise a lot of money for the government. But it cost €73m to arrange the sale, and the public were extremely dissatisfied with its share performance afterwards.
6. Loss of Government Control
When a firm is sold, it moves out of direct government control and into the hands of investors, whose major priority is not the welfare of the country, but their own profitability. These investors will, naturally, put the need for a speedy return on their outlay ahead of a balanced use of the company’s resources.
This is particularly the case if Irish firms are nowadays more and more open to being bought by overseas investors.
For example: ICC Bank was sold to the Royal Bank of Scotland and went out of Irish control. This year, the Royal Bank of Scotland ceased its Irish operation altogether and the banks were shut.