Privatization Study Essay
Privatisation can be defined as ‘the partial or total transfer of property of responsibility from the public sector (government) to the private sector (business) or private persons. Privatization can include the transfer of responsibilities and not solely change of ownership. Privatisation consists of simply ‘the transfer of all or any of three kinds of property rights from the state to the private sector; ownership rights, operating rights and development rights since these constitute the most common type of privatisation. In general privatisation has been undertaken as one of the reform measures to reduce government role in the economy and broaden the role of the private sector. Privatization can also be said to be a process of asset divesture. It is seldom asked, what does privatization seeks to accomplish in the Caribbean? It must be understood that privatization is seen as an instrument working towards supply side improvement by the promotion and allocation of more efficient resources and short term stabilization through expenditure reduction. Privatization initiatives are now a current occurrence in most Caribbean countries such as Belize, Jamaica, and Trinidad & Guyana to name a few. It has shown that most privatization activities took place in Latin America & the Caribbean; between the period 1988 and 1993 this region accounted for more than half the total privatizations in the Third World. Most privatization initiatives take place in the utility companies of the Caribbean. In case of Belize (electricity, water, port authority and the sugar cane factory). Government in many of these Lesser Developed Countries embraces privatization as an attachment to the World Bank and the International Monetary Fund. These institutions stress and maintain that privatization is the main driving force towards economic liberalization and self-sustained growth.
The objectives of Privatisation can happen either directly or indirectly. The main objective of privatization is placing emphasis on improving the efficiency of government owned/ semi-owned establishments, whether retained or divested. Some objectives are to Improve the operational efficiency of enterprises that are currently owned or semi owned by government, and their contribution to the national economy in terms of reliability of delivery, quality and price; introduce competition in areas under monopoly; Reduce the burden of semi/owned government enterprises on the Government budget (direct) an example is stated in the re- privatization of Air Jamaica by the Government. (The Government of Jamaica initiated re-privatization process due to the airline’s increasing financial losses and the restructuring needed to face the challenges of new market conditions. The privatization of the airline was a top priority and engaged the International Finance Corporation as its Lead Advisor)(The KED Group Research); raise revenue opposing to increase taxes on citizens (direct);Expand the private sector’s role in the economy, permitting the Government to concentrate more on its public resources and roles; Encourage wider public population in the ownership and management of business; encourage industrial growth; attract foreign investments Some other objectives can be classifies as secondary objectives such as creating a more market-oriented economy; to gain access to the foreign markets and technology while promoting the development of the capital market; and preserving self-reliance.
There are said to be three major areas which privatization is expected to impact. Firstly there’s Efficiency, secondly there’s reduction of financial burden of the government and thirdly the ability to enhance private sector growth and activity to promote economic democracy through the participation of national assets ownership. In the Caribbean, privatization is expected to have a positive impact on productive efficiency. This is a result of the in-efficiencies that have plagued the public enterprises. It is said that as a result of non-competitiveness these enterprises misuse production inputs, they enjoy privileges of subsidiary capital and some social welfare. Shareholders do not scrutinize management performance so there is no incentives to maximize profit and minimize cost. Some problems that leads to privatization of government enterprises being in-efficient are over- staffing, management incompetence and low employee productivity. These are made into undesirable situation due to the intervening of government’s non-economic ends such as non-competitive pricing and employment maximization. When privatized efficiency is expected to yield better management operations. In order to meet the other area of maximizing revenue and reducing the financial burden on government enterprises; Privatization is considered one of the most directive and effective ways whereas government sells public enterprises.
Not all asset sales is indeed a reduction in budget deficit, it is a short term measure of correction. It was in the early 1980’s in the Caribbean that revealed most countries found it difficult to provide counterpart funding for projects. Due to governments commitment to provide funding for these projects resulted in the economy to fluctuate and cause a burden on government resources. The growth of the expenditure exceeded the growth of revenue resulting in some countries to privatize. Privatization stimulates private sector growth. It seems to be beneficial as the private sector is constantly evolving. Privatization also sparks development of entrepreneurship by promoting economic democracy by participation of ownership of national assets. This can be seen in Belize with the telecommunication provider BTL. This company was bought and shares were sold to the public, giving them some ownership in the company. In the Caribbean, public enterprises were established because the private sector fell short to supply and demand because they weren’t willing to take the risk of high investment. Privatization of these public assets took place to attract foreign investment, government had to remove the restrictions of market access and the protection of state owned enterprises so that private investors would have been encourage to invest and avoid monopoly. This increased the foreign investment in the Caribbean. In Belize a similar situation of taking a risk and some monopoly to an extent can be seen in the privatization of the water company. CASCAL the foreign investor had problems when government had already invested in the utility company but was said to have not express the overvaluing of the company which yielded a more long term debt. Nevertheless CASCAL invested over $70 million USD into the company.
Privatization of an enterprise or government own entity can be done in many ways. Some organizations use not only one method both sometimes several means for privatization. These methods of privatization are adopted based on the objectives of the enterprise such as financial position or the structure of the market. Some forms or methods of privatization can be stated as Sale of Equity, Sale of Assets, Concession/ Lease Agreement, Management Contracts, Franchising. In Belize the most common form is Sales of Equity and Sale of Assets. Sale of Equity refers to the transfer of equity usually done by the selling of shares. The government usually decides on what percentage to keep and what to sell. Once government decides on the issue, the form of public offering or private placement of these shares can take place. Usually in large financially sound enterprises the public offering method is more attractive to government. The Belize Telecommunication privation is a great example of how government took the public offering method and offered the Belizean public to buy shares into the company. Belize Telecommunication Ltd was the first privatization in Belize 1989 when British Telecom bought 25% of the shares. In 2001 Carlisle Holdings committed and increase BTL shareholdings to 52% with a $50 million investment. In 2004 Carlisle Holdings sold its shares back to the Government, which then resulted in the government to sell its shares plus the shares acquired from Carlisle to Innovative Communication Cooperation. Innovative communication Cooperation couldn’t pay for its share in 2005 which caused the government to take back 52% majority shares and sold it to private entities. In 2007 all rights and assets were transferred to Belize Telemedia Limited and the Government became the owner of majority of shares, the remaining shares were offered to the public which builds up 908 small shareholders.
This is one company that basically use the sale of equity method. When using method of sales of assets, the basic concept is the direct sale of a public enterprise’s assets to a private investor or a group of investors. This would occur in a very competitive manner where government would try to receive the best price through an auction or tender process. Belize’s only sugar cane processing facility Belize Sugar Industries Limited was under negotiations for privatization due to BSI running into financial problems following allegations of mismanagement and bad investments in an allied electrical generation project BELCOGEN Ltd. The government first attempted to promote the sale of BSI to Honduras’ Banco Atlántida but this failed. A purchase offer was made by the Belize cane farmers, who is the major suppliers of the factory’s sugar cane, was not entertained with much interest by the government. The sale was offered to the U.S. Company American Sugar Refinery. This privatization was solely the sale of asset; no shares were offered to public and the factory is solely managed by a foreign company but still retains the employees being Belizeans. American Sugar Refinery, assuming the entire debt of BSI, will become the beneficiary of additional shares issued by BSI so that at the end of the day there will be something like 78 to 22 per cent ownership. ASR will in fact hold the majority shares and the other 22% representing the actual workers of BSI. This act of privatization in Belize was a direct result, as BSI was in debt of 30 million and couldn’t repay.
The government was forced to privatize at the same time act in best interest for the 90% of cane farmers that is the driving force for the sugar industry in Belize. There are other methods such as contracting/ franchising. This mostly happens when the government cannot take on the responsibility in services such as road construction and maintenance, machinery repair garbage collection (Belize Waste Control) and health services (such as Belize Dry Cleaners contract to heat wash all hospitals bedding etc.) this relinquishes all duties and services from the public sector to the private sector. This was also evident in The Jamaican privatisation programme which began in the early 1980s with the divestment of public services; which were burdening on fiscal resources of the government. These services were garbage collection services, parks and markets, and public cleansing. There is also the management contract method which solely involves hiring private sector to manage government enterprises for a special fee. This method entails the management responsibility only and does not involve the transfer of personnel. The final method is concessions and lease agreement; this method is used when government does not want to transfer complete ownership of an entity. Privatization of enterprises would be mostly natural resources or infrastructural. While government retains ownership, the private operator is responsible for desired improvement and management. Private investors may have an option to purchase the company after the agreements end. Privatization in the Caribbean countries was said to be influenced by the deteriorating financial state of the countries except for Jamaica and Trinidad and Tobago which privatized their enterprises to undergo a structural adjustment program with the International lending Institutions.
As in example with Grenada and Dominica which privatized for their own structural reform to reverse the deteriorating financial state. In Grenada their reform was organized by the Caribbean Development bank and aim was to privatised state owned enterprises to reduce the arrears of debts and contributions and focus on fiscal reform. In Dominica privatization was through the public sector enterprise reform that was based on the privatization of the Dominica electricity Services. In Jamaica privatization came into act in the 1980’s when the government at that time, wanted to reduce their role in the economy. On board with privatization efforts were the International Monetary Fund and The World bank which disbursed several loans to the government of Jamaica divestment agenda. Some divestments included cleaning public facilities, operations of public markets which was done through the lease agreement and management contract method which gave private entities control. Privatization took flight in 1985 when shares offering was done by the National Commercial Bank acquiring 51 percent of the government’s equity. Privatization in a whole is said to have both positive and negative impacts depending on the way it is carried out and for the purpose the governments seems deemed. Advantages or potential benefits of Privatisation are that it improves efficiency. Private companies have a profit incentive to cut costs and be more efficient.
When working for an industry that is managed or run by government, managers do not usually share profits. However, a private firm is interested in making profit and so it is more likely to cut costs and be efficient. A simple example of this is the British Airways have shown degrees of improved efficiency and higher profitability. Privatization also allows for the lack of political interference. It is said that most governments are motivated by political pressures rather than sound economic and business sense. They may employ too many workers which is inefficient and might be government may be reluctant to get rid of the workers because of the negative publicity involved in job losses. Therefore, state owned enterprises often employ too many workers increasing inefficiency. There may be instances when it’s beneficial for government when there just thinking in terms of until the next election. This is called the short term view. Government may be unwilling to invest in infrastructure improvements which will benefit the firm in the long term because they are more concerned about projects that give a benefit before the election. Shareholders apply pressure to private entities if they are inefficient. These companies could be threatened by a takeover. Another beneficial aspect is increased competition; privatisation of state owned monopolies allow more firms to enter the industry and increase the competitiveness of the market. One of the major competitions in the Caribbean would be telecommunication. In Belize, the Belize Telecommunication Limited was under monopoly which gave rise to a new competitor namely Speednet (SMART).
However, privatisation doesn’t necessarily increase competition, it depends on the nature of the market. The last advantage is that government will raise revenue from the sale. This could be seen in the water and sewerage authority in Trinidad & Tobago, the flour mills, the steel company and assets of PETROTRIN which raised over $542.4 million USD for the Trinidadian Government in 1999. Also in Trinidad the British West Indian Airline under privatization had a profit of 2.04 million USD as compared to the previous loss of 25.6 million USD. In Jamaica about 50% of public enterprises has gained overall benefits of privatization. According to the National Investment Bank of Jamaica from since the privatization process from 1981, the government proceeds have been over $300 million USD. Privatization also increased the employment in the agricultural field, hotels which have increased by 85% due to aggressive market strategies and telecommunications as a result job losses were lessened. Also public cleaning and garbage collection has improved. (Stone 1992). This also shown that by 150% employment was increased. In Guyana, the privatization of the Telephone & Telegraph Company Ltd. Has increased the number of subscribers from 21,000 to 53,600 and have improved services and quality. (Tyndall 1995) Privatization may also have its disadvantages which can mostly occur when there is a monopoly in an industrial firm. It is better to have a public monopoly rather than a private monopoly which can exploit the consumer. Some disadvantages are when privatization happens for public interest.
Many industries which perform an important public service such as health care, education and public transport is not profit driven. In these industries, the profit motive shouldn’t be the primary objective of firms and the industry. In the case of health care, it is feared privatising health care would mean a greater priority is given to profit rather than patient care. The Problem of regulating private monopolies, such as the water companies and rail companies (as in Jamaica) is another disadvantage of privatization. Regulation is needed to prevent abuse of monopoly power. Therefore, the government still need to have regulatory power or state ownership. As in the advantage of short term view when government is looking only towards the next election and trying to minimize public investment; the private entity can swing this around and do the same. This would be called short termism of firms which would be also a disadvantage. Private owned entities would or may seek to increase short term profits to shareholders and avoid long term investment. In privatization of a company it’s not always in the best favour of the public citizens. In some case privatization of a utility company have caused price increase in the service they provide. It is always hard for government to reacquire these companies after privatization. A typical example in Belize of a privatization went wrong was under the PUP government. They privatized the Port of Belize to a so call crony of the party. This was clearly not in best interest of the people or country. Under government ownership the port was serving Belize as well as Southern Mexico.
Today not even Belizeans are fund of using the port due to the lower prices and services offered by neighbouring ports as Honduras and Guatemala. Privatization was been around in the Caribbean from the early 1980’s and has gain over ten years solid experience and now evolving as the learning process continues. What is clear is that government has been more interested in the economy rather than letting the private sector take over. Is has shown that through studies in Jamaica and proper consultation, privatization has caused a very beneficial change in the country. A consensus must be must be initiated with the society at large for any privatization program to be successful or beneficial. Privatization has its pros and cons and any government in the Caribbean should consider if privatization is the best option, not just for political gain; but for the benefit of its people. Although sometimes some countries are driven or force into privatization to help the rescue them from their financial burdens, there must be a privatization structure and team in place so as to have the government not selling out and causing its people to suffer. With the proper assessment and consulting privatization can be a way forward for developing Caribbean countries.