Privatization involves the transfer of ownership from the public sector to the private sector. Realistically, privatization takes many forms and the term is sometimes used broadly, to describe any policy changes that enlarges the scope for private enterprises to compete with state-owned enterprises (SOEs) or even ones that might cause SOEs to behave more like private firms.
Essentially, the primary goal of privatization is to reduce the role of government in otherwise economic activities and in favour of widening the scope for the private sector to successfully operate.
Privatization originated as a result of several developments that forced a rethink of earlier held views on the role of the state in fostering economic development.
Reasons for privatization in Nigeria
1. Improved efficiency
The main argument in favour of privatization in Nigeria is that private companies have a profit motive to cut expenses and be more effective. Therefore, if you work for a government-run industry, managers do not usually share in profits.
On the other hand, private firms are interested in profits, and therefore, are more likely to reduce costs and become efficient. Since privatization, companies such as British Airways have shown degrees of improved efficiency and recorded higher profitability.
2. Lack of political interference
It is argued in some quarters that governments are poor managers. They are often motivated by political pressures rather than business or economics. For example, it isn’t surprising to find state-owned enterprises employ surplus workers; which is financially and economically inefficient. The government might be reluctant to lay off workers because of the negative publicity it would attract.
Most times, governments think only in terms of the next/forthcoming election. Therefore, they are reluctant to invest in infrastructure improvements which would benefit the firm and country in the long-term. Instead, governments are rather concerned with projects that will give their popularity a boost before the elections.
4. Increased Competition
Often, privatization of state-owned enterprises occurs alongside deregulation-i.e., the policy revolved around allowing more firms to enter the industry and increase the competitiveness of the market. The increase in competitiveness, therefore, boosts efficiency.
For example, there is an increased competition in telecommunications, distribution of gas, and electricity. However, privatization doesn’t necessarily increase competition; it is solely determined by the nature of the market. For example, there is no competition in tap water because it is a natural monopoly. There is also very little competition in the rail industry.
5. Government generates more revenue from sale
Selling state-owned monopolies /assets generated significant sums of money for the UK government in the 1980s. The case is no different in Nigeria. However, there is s counter-benefit to this. When governments sell state-owned assets, it also means the country loses out on future dividends from the profits of public companies.
It is argued that private firms have more pressure from shareholders to perform efficiently than state-owned enterprises. If the firm is deemed inefficient, the firm could be subject to a takeover. A state-owned firm doesn’t have this type of pressure on its back; and therefore, it is easier for them to be inefficient.