Privatization is a complex issue in the economic development of any region. When considering the stakeholders of a privatization endeavor, an observer must realize that all members of society are stakeholders in such a widely impacting change. Both private and state-run endeavors offer their own drawbacks and advantages, meaning that a case-by-case look at each specific situation provides the optimal course of action rather than does a simple rote policy. Often, government-run public endeavors operate at a loss, so the fundamental objective of conversion to a privatized service is to improve fiscal efficiency and to turn a profit where possible. Critics of the privatization of services argue that profit motive will cause a privatized entity to provide citizens with fewer services. However, it is possible through proper administration to facilitate a change to privatization while still protecting citizen interests.
Privatization and Project Funding
Privatization can offer much-needed lifeblood in the form of capital funding to what used to be a public institution. For example, a utility such as an electricity provider or a water department may need a substantial infrastructure overhaul to achieve a desirable operational effectiveness and safety standard; such a project can be costly, so much so that it may be out of reach of a government, particularly in economically troubled regions such as those with diminished tax bases, or in the developing world. Privatizing industry in either of the aforementioned situations allows citizens to enjoy a higher quality of life than they might otherwise be unable to obtain, on the premise that investors will eventually see a profitable return on their contribution to a community's well-being.
Value of the Profit Motive
Much has been said, both positive and negative, about how the profit motive is the driving force behind the Western capitalist system. However, the argument that privatization is positive in any circumstance is probably put forward most eloquently by the World Bank, which states that the chief motivation behind the privatization of government-owned institutions is to take what would normally be a burdensome drain on the economy and make the process more economically efficient for introducing the possibility of profit, which creates the driving force behind proper management and policy-making. Privatized industries can benefit an overall community in ways such as providing employment opportunities that contribute to the local economy.
Privatization Drawbacks for Stakeholders
Privatization, like virtually any form of economic policy, is open to abuse and mismanagement, which can lead to negative consequences for stakeholders. The government still has a part to play in a privatized industry through the use of regulation. Regulation prevents systemic abuses that would otherwise harm the greater good of the people. For example, turning over the public water system to a private entity would under proper regulatory circumstances be a boon to the society; but if there are no regulations in place to prevent unethical price gouging, it may come to the point where the ability to afford water is stifled and human suffering occurs. Inevitably some companies will allow profit motive to override ethical concerns, causing problems. With good corporate governance and a strong government regulatory framework, privatization does not have to be a feared transition in the public eye.
The Role of Corporate Governance in Privatization Scenarios
Private entities that take over government endeavors have a role to play themselves in the overall health of a community. Ultimately, private entities are responsible for the way the public perceives them and their ethical standards, so they should work toward a mutually beneficial coexistence with the communities in which they operate. The watch phrase of good corporate governance in a privatized formerly public institution is “net impact.” High-level management of privatized formerly government-run organizations need to ask themselves what the net impact of their operations have been on society and whether they are going to abandon ethics in the pursuit of profit at the expense of public relations and ultimately the quality of life of their customers. Working toward a goal of serving the community and maintaining a high standard of ethics may require working with the government to arrive at provisions for dealing with unique challenges presented by, for example, impoverished citizens who cannot afford to pay the competitive market rate for their services. A provision might be setting a rate that allows the gainfully employed utility users to pay a competitive market rates that ensure the utility endeavor remains profitable and provides room for allowing subsidies for the infirm, elderly and working poor. The arrangement would not only serve the greater good of society but also prevent public backlash against the transition from public to private operation.
- World Bank; Effects of Privatization and Ownership in Transition Economies; Saul Estrin, et al.
- University of Manchester School of Environment and Development; Privatization and the Role of Public and Private Institutions...; Jenifer Piese
- eCares; “Assessing the Impact of Mali's Water Privatization Across Stakeholders”; Antonio Estache et al
- WordNet Search: Privatization
- WordNet Search: Governance
- Hemera Technologies/Photos.com/Getty Images