Privatisation: Definition, Reasons, Merits & Demerits

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PRIVATISATION | Definition, Reasons, Merits and Demerits


Privatisation is a policy of the government created to afford individuals, corporate bodies, the opportunity to take over ownership and control of government enterprises, companies, etc.

Reasons for Privatisation

  • To introduce efficient management: Individuals and other bodies are efficient in the management of enterprises than the government.
  • Individual participation: The forum is created for individual participation and ownership of industries or enterprises in the countly’s economic system.
  • Revenue for the government: More revenue now accrues to the government through individual or collective participation.
  • Unproductive industries: The system accommodates competition and so unproductive industries or enterprises may not survive the day.
  • Industrial autonomy: Because the industries or companies are privatized and commercialized, provision of autonomy is made possible in the system.
  • Consumer’s choice: To create an opportunity for consumers’ to buy produced goods based on choice.

Advantages Of Privatisation

  • Efficiency in management: Privatisation promotes efficiency in the management of most enterprises or industries.
  • Increase in revenue: More revenue will be generated for the government through privatisation.
  • Innovations: Innovations are injected into the production and rendering of high quality products and efiicient services to the people.
  • Competition: The system is open to individual and collective participation resulting to competition among emerging investors.
  • Consumers’ choice: Consumers have enough choice to make in the purchase of goods and services.

Disadvantages Of Privatisation

  • Profit maximization: This policy will lead to high cost of produced goods and services aimed essentially at profit maximization on the part of the producers.
  • The masses: Will experience low or poor standard of living and this is because most of the enterprises or companies would want to maximize their profits.
  • Reduction in labour force: Privatisation may bring about reduction in the work force or labour force of most companies, thereby increasing the already saturated labour market
  • Income not evenly distributed: Income is usually not evenly distributed as a result of this policy and this is because a few individuals (producers) are now in control of the means of production of goods and services.
  • Neglect in consumer’s welfare scheme: With privatization, people’s welfare scheme are not adequately catered for or implemented.
  • Strike or demonstration: Privatisation usually produces conflict between the employer (producer) and the workers especially in the area of workers total emolument. When dialogue between them fails strike becomes the inevitable tool for workers. Strike is the refusal to work.

Aims and Objectives of Privatization

The objectives of privatization include the following.

1. Improvement in Economic Performance

A major objective of privatization is to improve economic performance. That is, privatization aims at increasing the efficiency of public corporations. It leads to better utilization of human and material resources with the aim of making profits.

2. Generation of Revenue

Another objective of privatization is to raise revenue. By selling these enterprises, the government makes a lot of money. In fact, a major reason for the privatization of public corporations is to generate revenue. Consideration of revenue often leads to hasty privatization or deregulation.

3. Resolution of Management Problems

Governments sometimes sell public corporations in order to resolve persistent problems of management and control. One major problem of state-owned companies is weak management and this problem can be overcome by selling the corporation. But this is like throwing away the baby with the bath water.

And there is not much empirical evidence to show that the private sector, especially in Nigeria, is superior to the public sector in terms of management.

4. Discipline of Trade Unions

Government sometimes privatize public corporations in order to deal with trade. unions especially, if it is perceived that the unions are becoming too powerful. Governments generally do not like trade unions, which dictate to them. In other words, an unstated objective of privatization is to reduce the power of trade.

5. Promotion of Consumer Sovereinty

In a free market economy, the consumer is the king, but in the public sector consumers are not seen in the same way. There is poor service delivery and consumers have little or no choice. The purpose of privatization is to provide goods and services for public consumption and to re-establish the sovereignty of consumers.

6. Promotion of Popular Capitalism

A major objective of privatization is to promote popular capitalism. Capitalism is an economic system in which goods and services are produced mainly by private individuals and companies. The establishment of public corporations puts, resources in the hands of public officials but this negates the principles of capitalism.

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