PRIVATIZATION AND NATIONALIZATION IN MIXED ECONOMY

Senathon Ipia
+234 7052802574

 In our previous post, we discussed economic systems, which deal with ownership of business enterprises. (Remember to engage in a meaningful production of goods/services, formation of business enterprise is necessary).

We already known that in a mixed economy system, government owns business enterprises and individuals own theirs as well. The government sector is also known as public sector, and its opposite, which is private individuals' businesses, is the private sector.

Surely, there is usually transfer of ownership of business enterprises between the government and private sector. One is called privatization; the other is called nationalization.  

In recent years, in Nigeria, privatization of public enterprises had been like a new order. The maxim ‘government has no business in business’ seem to have moved the Nigerian Federal Government (central government) to divest government’s interest in a number of its enterprises.

To achieve this, the central government even set up an agency it called Bureau for Public Enterprises (BPE) to handle the selling of government businesses to private investors (Privatization). Examples of public enterprises already privatized are:

(a)        National Electric Power Authority (NEPA)

(b)        Nigerian Telecommunications Limited (NITEL)  

 Note:
1.    A business enterprise owned by the government is referred to as public enterprise or statutory corporation.

2.    More often than not, when the government wants to achieve an objective, it sets up an organization to handle it, hence the setting up of the BPE to handle privatization of public enterprises.

Privatization

Privatization is the transfer of ownership, control and management of government enterprises to private individuals and companies.

Merits/Advantages/Reasons for Privatization

(i)         To bring about efficiency in the running of the business. Businesses are better managed by private sector than the public sector.

(ii)        To generate revenue for government from the sale of the privatized enterprises and through tax, which the privatized enterprises would have to pay subsequently to the government

(iii)       To eliminate state monopoly.

Before the privatization of NEPA, state-owned electricity company in Nigeria, the federal government was the only owner of electricity infrastructure and business in Nigeria. But with the Privatization, many companies are now participating in the electricity business in Nigeria.

(iv)       Privatization promotes private participation in the economic growth and development of the country. 

(iv)       Privatization promotes economic growth, because private sector involvement will increase production of goods/services.    

Demerits/Disadvantages of Privatization

(i)         Increase in prices of goods and services. Private sector business owners and operators always focus on maximizing profit; hence they sell goods/services at high prices.

(ii)        Loss of jobs of some of the workers of the privatized enterprise, resulting in increase in unemployment.

(iii)       Uneven Distribution of wealth and income. Individuals that buy state-owned enterprises have the benefit of taking over state-owned assets and generating income and wealth at the expense of other citizens.       

Nationalization

This refers to the transfer of ownership, control and management of private enterprises from private individuals and companies to government.

Nationalized enterprises are funded by the government.

Merits/Advantages of Nationalization

(i)         Removes exploitation of the people by the capitalists (big-time businessman/women). The capitalists become richer while the poor labourers grow poorer.

(ii)        Makes for  redistribution of income and wealth, hence, inequality is reduced.

(iii)       Provision of essential goods/services at reduced cost to the citizens.

(iv)       Creation of more employment. When government own, control and manage business, they employ more citizens because reduction of employment is the duty of the government.   

(v)       Protects the economy from private sector monopoly

(vi)       To undertake highly capital intensive projects which private individuals cannot handle, especially if returns (profits) from it will NOT be attractive.

(vii)      To avoid wasteful competition. The private sector is known for competition. If such competition leads to wasting of resources, the government may decide to nationalized the private companies involved.               

Demerits/Disadvantages of Nationalization

(i)         Inefficiency in the management of nationalized businesses. Or poor management of nationalized businesses. Government is not known for efficient management of businesses, hence the advocacy for privatization.

(ii)        Low Productivity. Because state-owned enterprises are poorly managed, low productivity is usually the result.

(iii)       Discouragement of entrepreneurship. When government takes over private businesses, the former owners may be discouraged in further setting up businesses.

(iv)       Reduction in tax revenue. When private enterprise becomes nationalized the government loses the tax the enterprise used to pay. (State-owned enterprises do NOT pay company income tax).

(v)        Favouritism and nepotism in the appointment of management and staff of nationalized enterprises may result in mismanagement, because unqualified persons who are friends and relatives of people in govt are usually appointed.

Reasons for Nationalization   

(i)         To reduce or remove inequality in income and wealth distribution.

(ii)        To supply essential goods/service at cheap prices. This is meant to eliminate high pricing associated with private enterprises.

(iii)       To protect the economy from private sector monopoly

(iv)       To provide more employment to citizens. Usually, a public sector organization would employ more staff than a private sector organization of its type and size.

vi)        To undertake highly capital intensive projects which private individuals cannot handle, especially if returns (profits) from it will NOT be attractive

(vii)      For strategic purpose to a country’s economy. Government would take over ownership of a private company if the goods it produces is extremely important to it country. Example is production of military hardware.  

Commercialization

This is when government (public) enterprises are run with profit-making objectives or purpose.

Note:  

Since private enterprises are run to maximize profit, they are by nature commercial entities already. Public enterprises are NOT run to make profit – but if they are – they are said to be commercialized.