Privatization in the public sector, why is it necessary?

The global phenomenon of privatization was embraced around the world during the 1990s by all forms of government with disparate political aims, with Australia “setting the pace for privatization around the world” (Mead and Withers, 2002, p. 7). Privatization can defined as the “full or partial transfer of ownership of public assets to the private sector” (Reserve Bank of Australia Bulletin, 1997, p. 1). As shown in Figure 1, Australia has had one of the most extensive periods of privatization among OECD countries from 1990-1997. The two fundamental justifications for privatization over the last two decades have been: the generation of revenue, crucial to government investment and the containment of public debt, and the improvement of the performance of the firm or business, crucial to a prosperity of the firm and the satisfaction of consumers.

One major beneficial outcome that drives privatization is the belief that a private enterprise will operate more efficiently, at the benefit of consumers. Private enterprises have more incentive to operate efficiently, as firms strive to achieve the major goals of a business of profit maximization, meeting shareholder expectations, increasing market share, maximizing growth, participating in satisfying behavior and minimizing costs. The privatization of Victoria’s public transport system, first implemented in 1999 under the Kennett-Liberal government, corroborates with this theory of self-interested private enterprise efficiency. After the incumbent system was found to be “deficient”, private ownership was seen as a “better way to provide the service” (Kennett, 2007). This particular policy of privatization precipitated many economic and social benefits, such as a strong increase in patronage, with train patronage rising by 37.6 percent and tram patronage rising 25.5 percent respectively according to a 2007 report titled Victoria’s Public Transport: Assessing the results of privatization. Other economic and social benefits include improvements in reliability and punctuality of the public transport service, increase in the amount of services provided, and an increase in the amount of vehicles in the system.

Privatization is also seen as a major source of government revenue. Government revenue from privatization, such as the generation of approximately $55 billion worth of government revenue received during the period of 1988-2007, has proved to be vital to the reduction of forever-accumulating public debt and the investment in infrastructure. The main reason for privatizing Telstra, other than for the deregulation of the Australian telecommunications industry to provide more competition in the market, was to raise funds to pay for the abundance of public debt in Victoria. The privatization of Telstra raised $14.3 billion. The ability to readily pay off public debt will lead to an increase in economic activity as governments are able to inject more money into the economy, as governments will have more money to allocate to expenditure and investment.

Major issues involving privatization include privatizing a natural monopoly, reduction of scope for public input, and the potential for corruption. The privatization of a government owned monopoly can only result in a privately owned, ungovernable monopoly – this is detrimental to the overall rationale of privatization as competition is the main contributing factor to an efficient service. Furthermore, the privatization of a government owned business equates to the minimization of scope for public influence, as the public can’t influence the actions of a business through parliamentary election or through government representatives- which was formerly possible in the case of a government owned business. The epitome of the issues associated with privatization was the privatization of the government owned Australian Wheat Board (AWB) in 1999, which saw the creation of the privately owned Australia Wheat Board (International) Limited (AWBI). The AWBI secured a “statutory monopoly”, additionally becoming “corrupt and incompetent” through the payment of kickbacks to the oppressive regime of Iraqi dictator Saddam Hussein (Kohler, 2007). These issues inevitably raise damaging consequences on the economy, such as the obvious abuse of market power, leading to an insufficient allocation of resources across the economy.

Australia’s extensive period of privatization over the past two decades is primarily accredited to two main economic schools of thought. Firstly, the fact that privatization will create extensive amounts revenue, which will be typically be allocated to the containment of public debt. Secondly, the belief that a private enterprise will operate more efficiently than a government owned enterprise.

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