PRIVATIZATION

Pre-reading:

1 What types of companies are typically owned and operated by the public sector?
2 How do you explain that?
3 Which of them could be also owned and run by the private sector?
4 What would be the advantages and disadvantages of this?

What’s wrong with the public sector?!

When discussing the role of the public sector, you will often here critics claiming that the provision of
public goods in the public sector is not fair. Many are dissatisfied with the idea that money they pay to
the government through taxes is sometimes used for public goods that they not use or do not benefit
from. For example, somebody who does not have children might find it unfair that a part of the taxes
they pay is used for schools. Others think that it is unfair that citizens and companies that do not pay
taxes also benefit from the public goods. Instead of advocating better running of the public sector,
some say that many public goods could be provided more efficiently by private companies. Others will
focus on the fact that public corporations are often less efficient, have much higher overhead and
administrative costs, do not always appoint the best managers to run them and employ far too many
people. Critics of the public sector assume that, if these goods and services were provided by
privately-owned businesses, they would have to make profit for their shareholders, compete with
other companies, respond quickly to changes in demand and would want to satisfy consumers.
Therefore, they would be more efficient and the products they provide would be cheaper and better
quality. Some even think that all the public goods should be provided by the private sector, while
others disagree and cite examples in areas where the public sector is more efficient or useful than the
private sector.

Governments are aware of the downsides of public corporations and they sometimes decide to sell
some of them to the private sector. In other words, they transfer them from public to private
ownership, a process called privatization. Its aim is not only an increase in a company’s efficiency, but
also an increase in the overall productivity of the country. In developing countries, an important
reason for privatization is to attract foreign capital. Besides, the money the government receives from
sales will increase the state revenue. Sometimes, instead of privatizing the whole public corporation,
they simply decide to outsource part of its activities to private contractors, in order to raise efficiency
and cut costs. In other words, the companies in the private sector provide these services, but they will
be paid fully or partly by the government. Some possible examples are meals in schools and some
health-care services.

Still, we need to know that, once a state-owned enterprise is sold, the state has no control over it and
stops receiving profit from its operations. Also, the money the government gets when it sells a
company is quickly spent and the company is gone forever. Besides, privatization is usually followed
by massive layoffs of workers in an attempt to restructure and rationalize its operations. Advocates of
privatization claim this is only a temporary effect as, in time, if the company grows, it will hire more
new workers. Still, its critics argue that some Before 2012, the state of Washington controlled all
public and merit goods, like schools, sales of liquor within the state, meaning that only the
healthcare, electricity or water should not be state could operate liquor stores. This policy allowed
left to market forces or depend solely on the state to regulate how and when liquor was sold,
profit. Furthermore, if run properly, public and to collect all revenue from liquor sales within the
corporations could contribute considerably state. However, in 2012, the state moved to privatize
to the state revenue. liquor sales.

How are SOEs sold?

When the government decides to sell a company, they will hire financial advisors such as investment
banks in order to define the company’s value and to find potential buyers. Companies are usually sold
through auctions, i.e. where potential investors participate in a bidding process; or a broad public
stock offering, which means shares are sold on the stock market; and through direct bargaining with a
potential buyer.
In the past, privatization was often performed somewhat differently, particularly in ex-socialist
countries. In the late 1980s and early 1990s, after the fall of the Berlin Wall, a large number of
countries moved from socialism to capitalism and had to establish democratic institutions and
privatize businesses. This was done in a number of ways. A very common method was a so called
‘mass privatization’, i.e. the workers in a company and the citizens were given vouchers, which
represent part ownership of a corporation, usually for free or at a low price. They could then exchange
them directly for shares in a privatizing company. Sometimes the shares were simply given for free
directly to workers of a company, who, in most cases, sold them later on to investment companies
which thus became the owners of the whole or large parts of these companies.

The whole transition process did not run smoothly and in some countries had serious economic
consequences. The ex-socialist countries were under international pressure to switch to the market
economic system, but they were slow at implementing the new policies. The also had no experience in
running market-oriented economies, were inefficient at establishing a proper institutional framework
and the rule of law, which resulted in widespread corruption. Besides, they were reluctant to sell
companies to foreign investors, while at the same time they did not have their own class of private
investors. In many countries transition was a good opportunity for some to use personal relationships
with state officials to become the owners of these companies. In Russia, for instance, chunks of state-
owned businesses were given to a relatively small group of capitalists of national origins.
Very often, the new owners were more interested in simply selling the company’s assets to increase
their personal wealth than to make the business efficient and successful, a process called asset
stripping. On the other hand, some countries decided not to rush and waited for an acceptable
strategic owner to appear.

Today, some thirty years later, there are big differences in the efficiency of ex-socialist economies, and
some economists think that in many of them the number of public corporations and their contribution
to GDP is still too large and the government has a role that is too big. Some of these countries are
therefore pressured to continue the privatization process, decrease the role of the governments and
increase the efficiency of their economies.

Nationalization
You will also notice that there is a process that is the opposite of privatization. It is called
nationalization: the ownership of a company is transferred from private to public hands. Although you
might think that it only occurred in socialist revolutions of the past, nationalization is carried out in
various political and economic systems. Countries resort to nationalization when they want to keep
the revenues of some industries, in particular the ones that might fall under control of foreign
interests or are strategically important. Industries that get to be nationalized often include important
and big industries such as telecommunications, railways, airlines, electric power, iron ore, media,
postal services, banks and water.

History of privatization
Privatization is not a twentieth century phenomenon. Ancient Greece and the Roman Empire used
private contractors to perform many services for the state. In 1492, Queen Isabella and King
Ferdinand of Spain hired a private contractor to seek an alternative route to India.
Still, it is the second half of the 20th century that is marked by many cases of privatization, not only in
the ex-communist countries, but the ones with a long tradition of having a market economy.
Historically, in Europe, state-owned corporations were present in transportation, telecommunications,
financial services and heavy industry (steel, cars, chemicals). Some 12 to 15 percent of GDP in Europe
referred to the public sector. Although occasionally some companies had been privatized earlier, such
as the steel industry in Great Britain in the 1950s, or Volkswagen in the West Germany in 1961, it was
not until the 1980s that a big wave of privatization started. This was due to the policies of Margaret
Thatcher, the famous prime minister of the UK and Ronald Reagan, the president of the USA, who
advocated liberalization of the market, deregulation, and more efficiency in economies. These policies
made a profound impact on the world economy.
In the UK, for instance, many important industries were privatized, such as British Telecom, Britoil,
British Petroleum, Rolls-Royce, Rover Group, British Steel Corporation and British Rail. While many
welcomed it, others criticized it and one politician referred to it as “selling the family silver”. All in all,
the consequence of these waves of privatization is that in Europe today only some 7-8 percent of the
GDP comes from SOEs.

We can agree that the issue of privatization is a very complex one. When considering privatization,
governments should find the right balance between the need to be more efficient and increase the
national budget and the need to serve the needs of society. In other words, their work for the
common good should not be put at risk by mere profit maximization.

I Answer the questions:

1 Why is the public sector sometimes criticized?

2 What is privatization? What is its aim?
3 What arguments for privatization are mentioned in the text?
4 What arguments against privatization are mentioned in the text?
5 How are SOEs privatized in most countries today?
6 What methods were used to privatize companies in ex-communist countries?
7 Why wasn’t privatization accomplished well in many communist countries?
8 What is nationalization, why is it carried out and in what industries?
9 When did privatization accelerate in the past and why?

II Mark the following sentences true or false. If they are false, correct them.

1 Public corporations are considered to be more efficient, although they have higher costs.
2 Privately owned companies’ aim is to make a profit for their shareholders and satisfy consumers.
3 Privatization is the transfer of a company’s ownership from private to public hands.
4 Privatization reduces the overall productivity of a country.
5 Through privatization, developing countries also attract foreign capital.
6 Public corporations can be an important source of funds for the state revenue.
7 Most ex-communist countries privatized businesses through public stock offerings.
8 Today, governments sell their companies through auctions, stock markets, or direct bargaining with
potential investors.
9 Ex-socialist countries sold most companies to foreign investors.
10 In the transition process, people with political connections became owners of businesses.
11 Countries with a long tradition of market economy are satisfied with the results of privatization in
ex-socialist countries.
12 The big wave of privatization started in the 1950s.
13 The large wave of privatization in the 1980s involved mostly telecommunications, transportation, oil
and iron ore.
14 Margaret Thatcher and Ronald Reagan advocated bigger interference of the government in the
economy.

III In the text, find English words for the following:

1
2 Dioničari, vlasnici udjela
3 Otpuštanja radnika
4 Vaučerska / kuponska privatizacija
5 Javna ponuda dionica
6 Dražba
7 Pregovaranje (oko cijene)
8 Ulagač
9 Davanje određenog posla vanjskim
dobavljačima
10 Vladavina zakona
11 Kooperant, ugovaratelj, izvođač
12 Rasprodaja imovine
IV Now use the words from the previous exercise to fill in the gaps:

1 Even laissez-faire capitalism depends on clear property rights and the ______________
which enables the market to operate according to firm rules.
2 Sometimes governments decide to sell shares in SOEs through _________________ where
the company is eventually sold to a bidder that offers the highest price.
3 Many companies hire outside __________________ in order to perform certain services for
them, which is called outsourcing.
4 In ex-socialist countries, during _________________, many people became owners of parts
of the companies they worked for.
5 In an attempt to raise fresh capital, the government has decided to sell 10 percent of the
company shares through __________________.
6 __________________ is one of the bad consequences of transition from socialist to market
economy: a new capitalist would become the owner of a company at a very low price, only
to sell its assets soon afterwards and make an enormous profit.
7 Transition from socialism to capitalism was an opportunity for many to become
_________________ of the companies they worked for and to benefit from the profit the
companies made.
8 When a company is privatized, employees usually fear massive ______________, which are a
normal part of the restructuring of the company.
9 ___________________ is a part of the privatization process in which the buyer is trying to
obtain the lowest and the seller the highest possible price.
10 Governments hire specialists to help them find the right _______________ willing to buy a
public corporation.

V Read the definitions and fill in the missing words:

1 A person who puts money into a company or some other

property in hope of making a profit
2 The process of transferring the ownership of a company from
the private to the public sector
3 the sale of equity shares or other financial instruments to the
public in order to raise capital.
4 A document that represents potential shares in any state-
owned company.
5 business costs that are related to the day-to-day running of the
business, such as rent and heating
6 The process of transferring the ownership of a company from
the public to the private sector
7 The market on which securities, such as company shares, are
traded.
8 A process of introducing changes in operational and financial
aspects of a company
9 An individual or institution that owns own or more shares in a
company.
10 A company who contracts to do work for another person
according to his or her own processes and methods