Logikos
JF-Expert Member
- Feb 26, 2014
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- 19,472
Everything has Pro and Cons; and before you do anything you need to weigh the Pro over the Cons..., We need to understand what we want, because what we might want, might not be solved by what we might do...
To encapsulate that, I hereby bring forward an article which might shade some light on the Pros and Cons of Privatization and if indeed its for the benefit of public at large....
For decades prior to the 1980s, governments around the world increased the scope and magnitude of their activities, taking on a variety of tasks that the private sector previously had performed. In the United States, the federal government built highways and dams, conducted research, increased its regulatory authority across an expanding horizon of activities, and gave money to state and local governments to support functions ranging from education to road building. In Western Europe and Latin America, governments nationalized companies, whole industries, banks, and health care systems, and in Eastern Europe, communist regimes strove to eliminate the private sector altogether.
Then in the 1980s, the tide of public sector expansion began to turn in many parts of the world. In the United States, the Reagan administration issued new marching orders: “Don’t just stand there, undo something.” A central tenet of the “undoing” has been the privatization of government assets and services.
According to privatization’s supporters, this shift from public to private management is so profound that it will produce a panoply of significant improvements: boosting the efficiency and quality of remaining government activities, reducing taxes, and shrinking the size of government. In the functions that are privatized, they argue, the profit-seeking behavior of new, private sector managers will undoubtedly lead to cost cutting and greater attention to customer satisfaction.
Having migrated around the world, privatization has also changed venue in the United States, from the federal government to state and local governments. Over 11 states are now making use of privately built and operated correctional facilities; others plan to privatize roadways. At the local level, communities are turning to private operators to run their vehicle fleets, manage sports and recreation facilities, and provide transit service. In the past several years, more and more state and local governments have adopted privatization as a way to balance their budgets, while maintaining at least tolerable levels of services.
This growth of privatization has not, of course, gone uncontested. Critics of widespread privatization contend that private ownership does not necessarily translate into improved efficiency. More important, they argue, private sector managers may have no compunction about adopting profit-making strategies or corporate practices that make essential services unaffordable or unavailable to large segments of the population. A profit-seeking operation may not, for example, choose to provide health care to the indigent or extend education to poor or learning-disabled children. Efforts to make such activities profitable would quite likely mean the reintroduction of government intervention—after the fact. The result may be less appealing than if the government had simply continued to provide the services in the first place.
Overriding the privatization debate has been a disagreement over the proper role of government in a capitalist economy. Proponents view government as an unnecessary and costly drag on an otherwise efficient system; critics view government as a crucial player in a system in which efficiency can be only one of many goals.
There is a third perspective: the issue is not simply whether ownership is private or public. Rather, the key question is under what conditions will managers be more likely to act in the public’s interest. The debate over privatization needs to be viewed in a larger context and recast more in terms of the recent argument that has raged in the private sector over mergers and acquisitions. Like the mergers and acquisitions issue, privatization involves the displacement of one set of managers entrusted by the shareholders—the citizens—with another set of managers who may answer to a very different set of shareholders.
The wave of mergers and acquisitions that shook the U.S. business community in the late 1980s was a stark demonstration that private ownership alone is not enough to ensure that managers will invariably act in the shareholders’ best interests. The sharp increase in shareholder value generated by most of the takeovers was the result of the market’s anticipation of improvements in efficiency, customer service, and general managerial effectiveness—gains which might, for example, come from the elimination of unnecessary staff, the cessation of unprofitable activities, and improvements in incentives for managers to maximize shareholder value. In other words, the gains from takeovers were the result of the anticipated removal of managerial practices commonly thought to characterize public sector management. The lessons from this experience are directly applicable to the debate over privatization: managerial accountability to the public’s interest is what counts most, not the form of ownership.
Refocusing the discussion to analyze the impact of privatization on managerial control moves the debate away from the ideological ground of private versus public to the more pragmatic ground of managerial behavior and accountability. Viewed in that context, the pros and cons of privatization can be measured against the standards of good management—regardless of ownership. What emerges are three conclusions:
1. Neither public nor private managers will always act in the best interests of their shareholders. Privatization will be effective only if private managers have incentives to act in the public interest, which includes, but is not limited to, efficiency.
2. Profits and the public interest overlap best when the privatized service or asset is in a competitive market. It takes competition from other companies to discipline managerial behavior.
3. When these conditions are not met, continued governmental involvement will likely be necessary. The simple transfer of ownership from public to private hands will not necessarily reduce the cost or enhance the quality of services.
To be Continued: The Privatization Debate
To encapsulate that, I hereby bring forward an article which might shade some light on the Pros and Cons of Privatization and if indeed its for the benefit of public at large....
Does Privatization Serve the Public Interest?
by John B. Goodman; Gary W. Loveman (written in 1991)For decades prior to the 1980s, governments around the world increased the scope and magnitude of their activities, taking on a variety of tasks that the private sector previously had performed. In the United States, the federal government built highways and dams, conducted research, increased its regulatory authority across an expanding horizon of activities, and gave money to state and local governments to support functions ranging from education to road building. In Western Europe and Latin America, governments nationalized companies, whole industries, banks, and health care systems, and in Eastern Europe, communist regimes strove to eliminate the private sector altogether.
Then in the 1980s, the tide of public sector expansion began to turn in many parts of the world. In the United States, the Reagan administration issued new marching orders: “Don’t just stand there, undo something.” A central tenet of the “undoing” has been the privatization of government assets and services.
According to privatization’s supporters, this shift from public to private management is so profound that it will produce a panoply of significant improvements: boosting the efficiency and quality of remaining government activities, reducing taxes, and shrinking the size of government. In the functions that are privatized, they argue, the profit-seeking behavior of new, private sector managers will undoubtedly lead to cost cutting and greater attention to customer satisfaction.
Having migrated around the world, privatization has also changed venue in the United States, from the federal government to state and local governments. Over 11 states are now making use of privately built and operated correctional facilities; others plan to privatize roadways. At the local level, communities are turning to private operators to run their vehicle fleets, manage sports and recreation facilities, and provide transit service. In the past several years, more and more state and local governments have adopted privatization as a way to balance their budgets, while maintaining at least tolerable levels of services.
This growth of privatization has not, of course, gone uncontested. Critics of widespread privatization contend that private ownership does not necessarily translate into improved efficiency. More important, they argue, private sector managers may have no compunction about adopting profit-making strategies or corporate practices that make essential services unaffordable or unavailable to large segments of the population. A profit-seeking operation may not, for example, choose to provide health care to the indigent or extend education to poor or learning-disabled children. Efforts to make such activities profitable would quite likely mean the reintroduction of government intervention—after the fact. The result may be less appealing than if the government had simply continued to provide the services in the first place.
Overriding the privatization debate has been a disagreement over the proper role of government in a capitalist economy. Proponents view government as an unnecessary and costly drag on an otherwise efficient system; critics view government as a crucial player in a system in which efficiency can be only one of many goals.
There is a third perspective: the issue is not simply whether ownership is private or public. Rather, the key question is under what conditions will managers be more likely to act in the public’s interest. The debate over privatization needs to be viewed in a larger context and recast more in terms of the recent argument that has raged in the private sector over mergers and acquisitions. Like the mergers and acquisitions issue, privatization involves the displacement of one set of managers entrusted by the shareholders—the citizens—with another set of managers who may answer to a very different set of shareholders.
The wave of mergers and acquisitions that shook the U.S. business community in the late 1980s was a stark demonstration that private ownership alone is not enough to ensure that managers will invariably act in the shareholders’ best interests. The sharp increase in shareholder value generated by most of the takeovers was the result of the market’s anticipation of improvements in efficiency, customer service, and general managerial effectiveness—gains which might, for example, come from the elimination of unnecessary staff, the cessation of unprofitable activities, and improvements in incentives for managers to maximize shareholder value. In other words, the gains from takeovers were the result of the anticipated removal of managerial practices commonly thought to characterize public sector management. The lessons from this experience are directly applicable to the debate over privatization: managerial accountability to the public’s interest is what counts most, not the form of ownership.
Refocusing the discussion to analyze the impact of privatization on managerial control moves the debate away from the ideological ground of private versus public to the more pragmatic ground of managerial behavior and accountability. Viewed in that context, the pros and cons of privatization can be measured against the standards of good management—regardless of ownership. What emerges are three conclusions:
1. Neither public nor private managers will always act in the best interests of their shareholders. Privatization will be effective only if private managers have incentives to act in the public interest, which includes, but is not limited to, efficiency.
2. Profits and the public interest overlap best when the privatized service or asset is in a competitive market. It takes competition from other companies to discipline managerial behavior.
3. When these conditions are not met, continued governmental involvement will likely be necessary. The simple transfer of ownership from public to private hands will not necessarily reduce the cost or enhance the quality of services.
To be Continued: The Privatization Debate