What are the advantages and disadvantages of the privatization of government-owned companies, such as airlines?

The advantages of transferring government-owned assets to the private sector are increased efficiency and profits, largely because competition incentivizes innovation and improvement. The disadvantages of privatization are decreased regulation and government revenue. Institutions not owned by the government do not directly deliver the government revenue, and these institutions also have more freedom to pursue their own interests, which may negatively affect consumers.

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Proponents of privatization argue that it facilitates economic growth and should be prioritized by governments. However, detractors maintain that little has been done to mitigate the negative impact of privatization.

Below, we take a look at the pros and cons of privatization through real-life examples.

Advantages:

Studies (link below) show that the privatization of government-owned companies leads to greater productivity and higher revenues. For example, a 1989 study of 500 of the largest non-US manufacturing and mining corporations showed that profits were higher than that for state-owned and mixed ownership firms.

Interestingly, the study found little difference in the profitability of mixed ownership enterprises and SOEs (state-owned enterprises).

Meanwhile, a study of sixty-one companies from eighteen countries and thirty-two industries that experienced full or partial privatization from 1961 to 1990 showed strong growth, increased operational efficiency, and rising employment opportunities.

A 1992 World Bank study also supports the idea of privatization as an advantage. This study analyzed the post-privatization performance of twelve airline and utility companies in Malaysia, Chile, Mexico, and Britain. In all, eleven out of the twelve companies realized increased gains after privatization. On average, the net gains averaged 26 percent of each firm's pre-divestiture revenues. For more information, please refer to the sources and links below.

Disadvantages:

In some cases, privatization led to greater instances of corruption, not fewer.

For example, in Greece, the privatization of state-owned companies led to instances of corruption involving the HRADF (Hellenic Republic Asset Development Fund, the main body in charge of privatization ventures in Greece). Other countries like Portugal, Spain, the UK, and Italy also experienced similar challenges.

Another disadvantage about privatization is that it often led to a negative impact on indebted governments. In the 1980s and 1990s, some EU countries were forced to sell off their state-owned enterprises to private firms. These countries needed revenues to help them meet debt obligations to the EU.

To get the revenues, countries like Greece and Spain sold their most profitable state-owned enterprises. They were sold at bargain-basement prices to enthusiastic private firms.

These countries were then left with largely unprofitable enterprises. In Greece, fourteen of the most profitable state-owned airports were sold to private firms. The state was left holding on to twenty-three of the least profitable airports, putting downward pressure on its revenue earnings.

Sources:

(1) Megginson, William L., et al. “The Financial and Operating Performance of Newly Privatized Firms: An International Empirical Analysis.” The Journal of Finance, vol. 49, no. 2, 1994, pp. 403–452. JSTOR, www.jstor.org/stable/2329158. Accessed 1 Dec. 2020.

Last Updated by eNotes Editorial on December 2, 2020
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The advantages of the privatization of government-owned companies are as follows:

  • Private companies are more responsive to consumer demand. This is because they need to compete in the market. Nationalized industries are unable to do this, as they are insulated from competition. In turn, this tends to lead to greater inefficiency.
  • Privatization allows companies to be more innovative. In a market economy, innovation tends to be a response to changes in consumer demand. As private companies have to adapt to consumer demand in order to survive, they are particularly well-placed to innovate.

The disadvantages of the privatization of government-owned companies are as follows:

  • Not everything can, or should, be operated for profit. One could argue that, for example, it's necessary for the delivery of mail to be subsidized by the government, as it's a vital service that otherwise wouldn't be provided by the private sector because there's not much profit in it. The same could be said for public transportation.
  • The privatization of government-owned companies, far from generating competition, often leads to the establishment of private monopolies. It has often been argued that private monopolies are actually worse than public monopolies because, in the latter, there is at least a certain amount of democratic control. In private monopolies, only a small group of institutional investors exercises any degree of control or influence over the operation of the company in question.
Last Updated by eNotes Editorial on November 30, 2020
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Privatization is the transfer or sale of government-owned assets/institutions to the private sector.

Advantages

Privatization is most of the time associated with improved efficiency due to the profit incentive. Private companies will ensure they improve their operational efficiency in order to reduce their costs and improve on profits.

Privatization reduces the government’s political interference. The government sometimes seems incapable of making hard decisions especially when they impact their political footing such as layoffs and pay cuts which are bound to attract negative publicity.

Privatization urges improvements in the company through competition. When a state owned entity is privatized it loses its government protection and is forced to adapt to the market by providing better services or products in order to survive and thrive.

Disadvantages

Privatization of certain state entities such as water and electricity authorities may just create single monopolies. These may eventually seek to increase prices at the detriment of the consumer with no controls.

The government loses dividends after privatization as seen with most successful companies that are developed through privatization. These dividends are instead channeled to wealthy individuals.

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There are both pros and cons of privatizing companies or businesses held by the government. 

Selling off a business gives the government access to instant capital which can be used elsewhere, as needed. It also ensures that the government will not need to worry about recurring expenses like wages, maintenance, etc. This is especially important for a business making a loss. And the government will not have to divert taxpayers' money to save such business. Privatization, however, will also mean that a profit making entity can no longer provide annual profits to the government, thus decreasing its sources of revenue. 

Privatized operations are generally more efficient than government operations, especially since there is no support from the government. These businesses are dependent on themselves to earn profits and hence are operated efficiently. They are also not burdened with the political and social pressures that governmental organizations are riddled with. Additionally they are free to run the business as they see fit (within the realm of good operating practices) and not as per the public demand. Government may sometimes use its businesses to prop its own agenda, for example providing employment to under-privileged groups, etc.

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When governments sell off companies that they previously owned, there tends to be a tradeoff.  On the positive side, the companies generally tend to be run more efficiently.  On the bad side, the government is no longer able to use the companies to pursue political or social goals.

When a company is privatized, it generally comes to be run more efficiently.  The company no longer has tax dollars backing it up.  It now has to make a profit on its own.  This is good for the economy as a whole because the taxpayers’ money is no longer being used to prop up a company that is not as profitable as it should be.

However, the government is no longer able to use that company to try to improve society.  For example, a government might have used its ownership of the airline to ensure that the airline would serve places that could not support air travel on their own.  The government might also have used the airline as a source of jobs for people from underprivileged groups.  By privatizing, the government gives up the ability to use the airline in these ways.

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