Privitization - Explained
What is Privatization of a Company?
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Table of ContentsWhat is Privatization?How Does Privatization Work? Economic Theory and PrivatizationAcademic Research on Privatization
What is Privatization?
Privatization explains the transfer of ownership of a property, assets, or company from government ownership to private ownership. This means, a property formerly possessed by the government has been transferred to private individuals. When we talk of corporate privatization, it occurs as a result of transfer of a company formerly owned by the government to private owners.
There are quite a number of meanings attached to privatization, aside from being the transfer of ownership of a company or an entity from public sector to private sector, it could also mean the transfer of just a part of a company.
Privatization could also mean deregulation in certain discussions, this happens when a company under heavy regulations becomes less regulated. Also, when a company is privatized, it drops the name limited company and takes up the name private limited company.
Privatization has contributed immensely to an improved economy and efficiency of service. A historic act is that of privatization in India in 1991 as budget reforms.
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How Does Privatization Work?
There are two major sectors of the economy in any country of the world, these are public (government) sector and private sector. At certain periods, the government relinquishes ownership of some of its operations to the private sector for effective control of resources and the economy.
In many countries such as the united states, public sector runs operations public schools and universities, public electricity companies, healthcare, postal service, water corporations, and many others. However, it is vital to know that the private sector can still have operations similar to those of the government. The government can, however, decide to transfer public operations to private sector for profit.
The private sector is profit motivated, it is gain-oriented. Private owners create business and services to cater for peoples needs in exchange for money. Although, government-owned establishments are not profit-oriented, their bureaucratic nature may impede their efficiency, this is why the government privatize some of its operations to improve efficiency and reduce cost. However, there is opposition against this privatization as some people argue that basic necessities like education, water, electricity should not be left in the hands of private sector. Also, some states such as the state of Washington, have control of liquor stores in order to regulate how liquor is being sold.
The transitioning of a company from being a public-owned to a private-owned is corporate privatization. In this setting, a company can decide to reshuffle its operations or make structural changes in its system without consulting the shareholders. For instance, if the structural changes to be made would affect shareholders, their opinions would not be considered.
Nevertheless, for a company to be fully private-owned, none of its funds or finance should come from public trading. The company must also pay off all debts to shareholders before it can be regarded as privately-held.
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Economic Theory and Privatization
This paper presents an economic theory on the potential benefits of privatizing public-owned companies. It also considers the simplicity or complexity of contractual arrangements that occur in privatization. In a complete contract situation, institutional structure has less importance in the contractual arrangement unlike in incomplete contracts where institutions are highly significant.
In a 1997 model by Hart, Shleifer and Vishny, in the context in incomplete contracts, a manager make certain decisions about investments and this depends on the situation of the desirability of private or public ownership. The Hart-Shleifer-Vishny model also incorporated endogenic assignments of the investment tasks to aid development for mixed public-private ownership.
This is an evaluation of privatization and a highlight of its potential benefits as well as downsides. The evaluation of privatization was carried out based on the type of industry and how the industry is regulated. The underlying benefits of privatization are;
- Reduction in level political inference.
- Efficient delivery of services.
- Creation of short-termed entities.
- Well-incorporated shareholders.
- An increased profit margin for both the government and private sector.
Below are the downside of privatization;
- Loss of dividends by the government.
- Difficulty in regulating private monopolies.
- Fragmentation of industries.
- Lack of public interest.