What is Privatization?

Privatization is the process of transferring productive operations and assets from the public sector to the private sector. Broadly defined in this fashion, privatization is much more than selling an enterprise to the highest bidder, as it includes contracting out, leasing, private sector financing of infrastructure projects, liquidation, mass privatization, etc. My testimony will argue that there is no single "best" approach to privatization; the appropriate privatization path depends on the goals that the government is seeking to attain, the individual circumstances facing the enterprise and the economic and political context of the country.
It should be noted that privatization is fundamentally a political process as well as a commercial and economic process. Privatization changes the distribution of power within a society, as it diminishes control of the economy by the state and government- appointed managers. Workers often feel threatened by the potential changes inherent in privatization, although employees frequently benefit from the process. As a result, public support is a major consideration in any privatization program and many of the choices made in designing and implementing transactions reflect the need for such support. Two consequences flow from this factor. 1) choices of approaches are sometimes altered due to "political" considerations, meaning that equity must be promoted in the privatization strategy, and 2) program implementation must be objective and fair to avoid adverse publicity.

What are the goals of privatization?
Many goals are often pursued through privatization programs. These goals often fall along two principal dimensions: 1) broad social or macro economic goals, and 2) enterprise specific or macro economic goals.
Macro economic goals are numerous. Fundamentally, privatization is advocated as a means to reduce the governments role in the economy, partly as a philosophical matter (as in the UK) but principally because governments have performed badly in that role. Many countries can attribute substantial portions of their external debt to liabilities of state-owned enterprises and significant portions of government budgets are devoted to paying subsidies or otherwise assisting loss-making State-owned enterprises. Government\'s objectives in these situations are often simply to extricate themselves from these financial commitments, and focus scarce resources instead on education, infrastructure, and social welfare.
A second macro economic goal of privatization is to promote the development of the private sector by "leveling the playing field" and ending subsidized competition from state-owned enterprises. There is a danger in some countries that emerging private businesses face unfair competition from state enterprises that have access to credit and other inputs at below market rates and better access to government distribution channels. In order to give the private sector a fair opportunity to compete and thrive, state-owned enterprises are privatized.
A third goal of privatization\'s to obtain the sales proceeds and use them to finance shortfalls in the government\'s budget or retire some of the public sector debt. While it is widely recognized that focusing on sales proceeds may be shortsighted and ignore other important outcomes of privatization, it is a fact that many governments are strongly influenced by the availability of funds from privatization.
A fourth goal is to broaden share ownership so that the public has mechanisms for saving money and participating in the economies of their countries.
The macro economic goals of privatization focus mostly on the potential improvements that private sector operators will bring to an enterprise to improve this performance and increase chances of survival. These goals recognize the need to improve enterprise efficiency by introducing new technology and financing sources, improving the quality of the product, enhancing marketing-especially in the international market, providing information systems, and generally improving the management of the enterprise. Obviously successful changes of this nature, when applied to a number of individual enterprises, will have significant macro economic implications as well.
The final goals of privatization is to note that in most countries privatization is but one part of a broad program of structural reform. This is most evident former Communist country, where privatization is an element of the process of developing a market economy and its associated financial institutions. In such cases, the privatization program designed should take into account the broader economic goals that are being pursued, as well as the goals specific to the enterprise.

What types of privatization techniques can be used?
There are a variety of techniques