Assignment on Privatization

Assignment on Privatization


Privatizing (“to make private”) takes jobs that were in the public sector and gives them to the private sector. The idea is that there are some things that government or non-profit public agencies do best, and some things that are better done by private or for-profit agencies.
In its pure form, the public sector gives over complete responsibility.  Most of the time, though, the public sector retains some control, and then “privatization” is just another word for “outsourcing.”, where the job is still being done, but it just isn’t being done by public employee.

Background of privatization:

The privatization of public services is the most significant threat to the job security of public employees. The State’s increasing use of private contractors to perform public services puts our jobs in jeopardy and limits promotional opportunities for our members. The privatization of public services undermines organized labor and can result in jobs without health, pension and other benefits.

The privatization of public services is a phenomenon that has confronted public employees in all jurisdictions and at all levels of government for decades. Beginning with the tax revolts of the late 1970’s and the subsequent election of Ronald Reagan as President in 1980, public opinion became more anti-government and anti-public employee. Federal support for public programs declined, and state and local governments found themselves with significant responsibilities, but fewer dollars to pay for them. At the same time federal support for public services was being severely curtailed out of Washington D.C., anti-government advocates used the deteriorating fiscal condition in many jurisdictions to push their agenda for privatization.

In the last two decades, public employers have expanded their use of the private sector to deliver public services, as well as to finance, operate and manage various public responsibilities. And, the political and economic circumstances at all levels of government have improved the climate for privatization efforts and worsened the long-term outlook for the public sector.

Private firms have made in-roads in delivering services once viewed without question as the sole responsibility of the public sector. Criminal justice services (including the operation and management of prisons and jails), police protection and health care services to mentally disabled citizens are services now being provided throughout the country by private vendors. Even public education has come under fire as conservatives promote voucher systems and unrestricted “choice” schemes in order to create new incentives for expanded private involvement in elementary and secondary education. The lure of lucrative contracts and high profits continue to attract private industry to compete for our jobs at every level of government.

The trend of increasing the privatization of public services can be seen at all levels of government. Privatization initiatives by the federal government have included the sale of Conrail and the National Consumer Cooperative Bank. Local municipalities have increasingly privatized refuse collection, vehicle towing and storage, street maintenance, transportation and health care. State agencies involved with health services, mental health, corrections, higher education and Medicaid are increasingly privatizing the provision of their services.

A recent study by the Council on State Governments (CSG) revealed that 91.7 % of respondents from state legislative service agencies believe that privatization activities will increase in the next five years.

Unfortunately, our members are not exempt from this trend. To the contrary, Governor Pataki, on his very first day in office, issued an executive order mandating a hiring freeze upon all state agencies. The intention is not necessarily to cut services but to transfer the provision of services to the private sector. To further this goal, in a later executive order, Governor Pataki established a commission to study the feasibility of the privatization of government assets and services. The administration explicitly stated its position that “it is imperative that this State reduce the size of its government” and rely on the private sector to both decrease the cost of the services delivered by government and improve the quality of those services.

Expected Cost Savings from Privatization:

While decreased costs are used to justify the privatization of public work, the reality is that decisions are often made to privatize government services without analyzing the comparative costs of performing the service in-house. The CSG study determined that overall; states initiate privatization projects without standard decision-making, monitoring or evaluation processes.

Here in New York, State Comptroller Carl McCall recently issued a report criticizing the Department of Transportation (DOT) for failing to demonstrate that its widespread use of consultant engineers had provided services in a cost effective manner. Comptroller McCall concluded that DOT had not justified its decision to privatize certain projects rather than perform the projects with in-house staff.

When contracts are evaluated for their cost savings, often times costs associated with supervising and auditing the contract are not included in the analysis. In addition, cost overruns are often not considered. For this reason, a public sector union in New Jersey has criticized the Whitman administration for misleading taxpayers on the cost-saving merits of privatization. Because private contractors underbid projects and tack on costs later, the union is demanding that the state provide information revealing what projects had been bid for initially, and what they actually cost later with overruns.

Studies reveal that expected cost savings from privatization are generally not realized. According to a recent Gartner Group poll, the benefits of outsourcing have consistently failed to meet the expectations of the government and private sector officials, and significant cost reduction was seen by less than a quarter of those surveyed.

Decisions to Privatize are often based on Politics, not Careful Analysis:

Decisions to privatize are often based on politics and rhetoric, not a careful analysis of whether moving the service to the private sector will result in a real benefit. The increased support of the political leadership was given as the second most important reason for the increase in privatization in the CGS poll of state officials.

Because the support of the political leadership is a crucial factor in the increase in privatization, our successful fight against privatization will require that we arm ourselves with facts to show that assumptions about cost savings are not accurate and that we use our political strength to influence decision makers at the highest levels.

Micro and macroeconomic objective of privatization:

The objective which privatization program are meant to achieve are broad based and involved as a fundamental component, the improvement of macroeconomic efficiency, the program has four explicit objectives:

  • To provide higher allocative and productive efficiency, leading to faster economic growth and development.
  • To strengthen the role of the private sector o the economy through job creation and economic development.
  • To improve the public sector financial health..
  • To free resource allocation in other important sector activity such education health, housing, transportation and other infrastructure development initiatives.

The essential role of the government in making privatization:

The government must devise sectoral policies that introduce competition and promote private development.

  • It must established and maintain a sound regulatory framework for the remaining monopolies, public and private.
  • It must maintain transparency in transaction and convince investors that their investments are secure.
  • The government must negotiate monitors and enforce contract with private suppliers of management and finance.
  • It must ensure that resources form privatization sales are put to productive uses.
  • Importantly, it must mange the inevitable political and social tension that arise and ensures that enterprise reforms are implemented, with special attention to the issues of foreign ownership and labor layoff.

Basic benefits of privatization:

The case for privatization is clear evidence that public enterprises have contributed to our economic stagnation and poor national image. Public enterprises have:

  • Created economic inefficiency.
  • Consistently incurred financial loses.
  • Absorbed disproportionate share of credit.
  • Contributed to fiscal deficit and imbalances.
  • Facilitate and entrenched parasitism and corruption.

Privatization not an ends in itself but it is a key tool for improving the efficient allocation of resources for mobilizing investment and for stimulating private sector development. It is expected to bring about the following benefits:

  • Reduce corruption and parasitic mentality.
  • Infuse capital and modernized technology in our industries.
  • Strengthen capital market.
  • Dismantle monopolies and remove arrogant nature of services.
  • Promote efficiency, transparency and better management.
  • Reduce debt burden and fiscal deficit.
  • Boren ownership base and create popular capitalism.
  • Generate funds for investment for social sector.
  • Attract foreign investment and positive image profile.
  • Allowed the government to focus on deprived social sector like education, health, water sanction and rural infrastructure.
  • Create more employment opportunities as a result of expansion.

Long term benefits of privatization:

The sale of public sector enterprises would reduce the aggregate level of employment in the short-run, because of the elimination of redundant labor. Unemployment, however, is expected to decrease in the medium and long run as the rate of growth of the economy increases following the efficiency gains at the micro level, and the increasing stability at the macro level. If firms go from deficit to surplus in their operations, the government will not only eliminate subsidies, but also starts collecting taxes from them. The actual change in the financial position of the government is determined by the difference between foregone dividends and taxes collected from the government.

The implications of privatization from macro perspective can be stated as follows:

  • Improves public sector’s financial health, lower deficits and lower debt.
  • Reduces net transfer to public enterprises in the aggregate. These transfers become positive if the government actually starts collecting taxes from privatized firms.
  • Has a positive impact on the development of the financial sector.
  • Has a negative impact on employment in the short-run, but a positive effect in the medium and long run.

Overall Growth in the Economy:

Privatization can be an important instrument for increasing the workforce in the long term. If a privatized management functions on an efficiency and profitable basis, it should be expected that its business would increase over time as a result of higher productivity and lower product cost. Prices of products, increased demand for goods and services and job opportunities and wages will also increase. The growth of the privatized enterprises will have forward and backward linkage effects on other sectors of the economy, such as services that might not otherwise have been available. Privatization of pubic sector enterprises, together with sound macro economic policies, will not only help to grow private sector to compete globally, but also help to attain the goal of full-employment, without excessive inflation.

Creation of New Jobs:

Funds derived from the elimination of subsidies and the sale of divested public sectors may be applied to development projects thus producing new, high paying jobs. On a transition basis, the government may have to establish temporary job training or retraining programs to prepare workers no longer required by privatized industries for reemployment. The short-term unemployment is likely to increase during this transition period, and that may be the price that has to be paid for long-term growth of the economy.

Impact of privatization:

The impacts of privatization on employment are undoubtedly the most widely recognized concerns in almost all countries. When a public enterprise has surplus labor, its privatization aimed at raising efficiency is likely to lead to some retrenchment. Privatization also stimulates the new owners to inject new capital and production technologies involving capital-deepening technologies. Normally, the average cost per unit of output declines, but the wage component and employment would also decline, at least in the short-run. However, if the lower average cost leads to lower product price, output expansion is possible, followed by higher demand for labour under the new technology. The most common motive of profit maximization on the part of a privatized firm, given the limits of competition and the goal of long-term prosperity, induces some restrictions in the outputs, resulting in downward effect on employment. In a sector where entry and exit is easy, and capital intensity is low, the producers might grow into such a large number as to create conditions of price competition. Road transport, hotels and restaurants, retail shops are examples of enterprises where owner-workers thrive in many cases.

It is expected that, to improve efficiency, managers of privatized enterprises would seek to reduce costs, including labor costs. So, it is not surprising therefore that available data indicate that privatization in Africa has resulted in some job losses. However, in Nigeria, there has been no involuntary separation of workers in the 12 enterprises that were privatized in Phase I. Indeed, with new investments in the privatized enterprises, better resource allocation; operational efficiencies, and better corporate governance are likely to pave the way for expansion and new job creation. These dynamics will bring about better working conditions, higher pay and more sustainable employment in the long run.

Strengthening of the privatization commission:

The project’s main objective is institutional strengthening of the Privatization commission of Bangladesh. It is expected that by improving the operational effectiveness of the PC a significant contribution can be made to the development of the Bangladesh capital market.

The organizational and operational structure of the PC needed improvement, in view of the lack of autonomy and the fact that the PC’s staff lack security of tenure and legal protection in the performance of their tasks. Furthermore, there is a lack of expertise in enterprise valuation and the evaluation of privatization bids, which is exacerbated by the shortage of staff. The project addressed these and other matters.

 Reason of privatization:

Government recognizes the high burden of owning and operating enterprises and hence has been shifting its ownership and managerial responsibilities to the private sector. There is a clear understanding that enterprises, not only in the consumer sector, but also those producing public goods, can be properly managed and run by the private sector. Privatization is important mechanisms in transferring ownership and management from

Because of divergent views on the merits of privatization and its political and social impact, many countries have pursued privatization only to a limited extent. Others have been quick to grasp the opportunity and, by building an appropriate investment climate and legal systems, have carried out successful transactions. Successful privatization of state assets requires a well-formulated strategy that lays out the options available, the establishment and implementation of an effective privatization programmer, the design and operation of a regulatory framework and a transparent and best practice based method for carrying out individual transactions.

Privatization does not mean that the State must divest all its assets. It can be done by contracting out enterprise operations, wholly or partly, to the private sector (management contracts, asset leasing, concessions, etc.). While it is agreed by all that companies cannot continue to operate as loss-making, management and employees often merely require support and external assistance to guide them through a period of change by defining a restructuring plan which could lead the company to profitability and sustained growth.

How to implement privatization :

Privatization is the transfer of assets and obligations from the hands of the state to the hands of the private sector, where through competition they are expected to be managed more effectively and so produce greater returns to the country. However, policymakers around the world face a dilemma. They are often convinced of the merits of privatization, but do not know how to implement it. The enormous outpouring of literature on privatization, the dramatic success of privatization in a large number of countries, and the economic realities of the excessive burden of overstretched public sectors in their own countries, have convinced them to try privatization. Yet to most policymakers the process of implementing privatization is shrouded in mystery. This fear of the unknown often discourages them from taking the first step. The main purpose of this workshop is to demystify this process and share with participants’ international experience on privatization implementation. It will provide practical overview of the steps required to successfully implement a privatization policy.

A prime lesson of privatization experience is that implementation should not be divorced from policy. In country after country, top policymakers have concentrated on announcing a privatization policy, securing the agreement of important political allies, and committing funds. They have often considered the subsequent steps of actually implementing the privatization program to be technical issues that resolve themselves following successful resolution of initial policy issues. However, years of experience with privatization programs worldwide have shown that the seemingly routine implementation issues were the rocks on which many privatization programs eventually foundered. Thus, challenges of implementation should be part of the initial formulation of the privatization program. Policymakers must not consider implementation to be a process that takes place after, and independently of, the design of the privatization policy and program. That is, they should bring means and ends closer by making each depend partially on the other.

As one example, consider the question of the impact of privatization on income distribution. Many countries have initiated privatization programs only to have them die after a relatively small number of transactions.  This is typically due to failure to adequately address the distributional consequences. Internationally, there is a perception that privatization harms the poor at the expense of the rich and foreigners.   There is considerable evidence that this perception is often misguided so the a key element of implementation is an information campaign to ensure that the true consequences are known, especially the importance of access effects (for example, more poor families get clean water) over pricing effects (the relatively well-off pay more).  In other cases implementation must be modified to ensure positive distributional effects, especially through careful attention to the post-privatization regulation regime.

On going process of privatization of Rupali bank:

The government has finally come up with a preliminary information memorandum (PIM) for privatization of Rupali Bank, five months behind the schedule due to a protracted wrangling with International Monetary Fund over the mode of privatization.

The Privatization Commission at a meeting today will discuss and finalize the PIM. The meeting will also decide a timeframe for the privatization of the bank including “when the government will publish advertisements seeking investors,” said a source.

The finance ministry, which designed the PIM, in a proposal also laid down the prerequisites for private sector investors, besides opening the doors for foreign investment, in the bank.

The proposal suggests amendments to the Bank Company Act to attract and facilitate foreign investment in the bank by lifting certain restrictions like the limit on expatriate management staff.

The ministry also recommends a radical change in the human resources policy of the nationalized commercial bank that employs some 5,300 people and runs 491 branches across the country.

According to the PIM, 79 percent staff of Rupali Bank is aged over 40, 19.4 percent from 31 to 40 and only 1.3 percent below 30. In 2004, the bank earned the bank earned a Tk 1.68 billion operating income and a Tk 200 million profit before tax.

As per a condition of the IMF against its $80-million fourth tranche of the Poverty Reduction Growth Facility (PRGF), the PIM was scheduled to be finalized in December last. But the government could not do that as it had differences of opinion with the IMF over how the bank should be privatized. Consequently, the IMF has kept the PRGF loan suspended since January.

The new privatization drive would help Bangladesh get the PRGF again.

According to the PIM, Rupali Bank needs to get back the huge amount of loans defaulted by state-owned enterprises. To repay these loans, the government will issue bonds and raise money from the public.

The PIM requires the strategic investor to inject new capital proportionate to its shareholding to push up Rupali Bank’s capital adequacy ratio under the Bangladesh Bank guidelines to 9 percent. The government will participate in this capital injection in proportion to its remaining shares.

The investor may be a banking, non-banking or bank investment company. It should have at least five years of business record and, in case of a foreign investor; it should have no objections for the investment from its home banking regulatory authorities.

The investor will also be required to provide information on the sources of funding for the acquisition along with a clear indication of the level of capital investment over the next five years.   


This was not at all an easy project to complete. Gathering information was also a difficult task. What ever the limitations were, me made my best effort to overcome them and anchor safe.

No matter how good I do in designing the project but it’s the knowledge that we gather that remains us till the end and satisfies us.

At last, we hope that our attempt behind this project is a successful one and will surely bear the expected fruit.

Assignment on Privatization