3 EFFECTS OF PRIVATIZATION

3.1 EFFECTS ON GOVERNMENT REVENUE AND COSTS

One of the objectives of privatization would be to raise revenues for the government. This strategy would be important when the government encounters financial crises (Aktan n.d.). Therefore many governments have seen privatization as a source of fiscal revenue and have initiated privatization programs with this as an important objective. This is particularly true of governments that must reduce fiscal deficits as part of structural adjustment programs.

Nalingigwa (n.d.) is of the view that through privatization, governments can cut their budget cost and can use proceeds from privatization to fund other pressing domestic needs and still ensure that more efficient not fewer services are provided to their citizens. Similarly Pamacheche and Koma (2007) reported that reducing government debt a number of governments have been able to raise huge sums of money from privatization transactions. These financial resources have enabled the governments to sustain macroeconomic stability and repay huge portions of government debts. As a result of privatization, many governments have also reduced the need for huge subsidies to public enterprises that can be redirected to other development initiatives with the consequent impact of strengthening their fiscal positions.

Pamacheche and Koma also found out that during the period 2000-2005, Sub-Saharan Africa raised US$

11 billion in privatization proceeds, representing 3% of the global total for developing countries. A total of 960 transactions were conducted in 37 countries of the region, and this represents the third highest number of transactions, behind Europe and Central Asia and Latin America.

But Nancy and Nellis (2003) by analyzing many research reports gave an alternate view that privatization’seconomy-wide effects on the government budget growth, employment and investment are less established. The IMF reviewing 18 privatizing countries, reported that substantial gross receipts from privatization, accounting for nearly 2% of annual GDP. Governments have generally ended up with about half that amount reflecting the high costs of financial clean-ups, labor downsizing and sales assistance.

Even 1% of GDP is substantial, but the long-run effects on government revenue generally come not from

subsequent increased tax revenues from more profitable and productive private enterprises. Governments asdiverseasMexico,Coted’Ivoireand Mozambiquereceived,in thefirstfew yearsfollowing sales, more from privatized firmsin taxesthan from directproceedsofsales.A ‘‘flow offunds’’analysisin Bolivia shows, in the first four years following sales, a positive financial return to government of US$

429 million––and this in a case where government received not a penny of the sales proceeds. The IMF concluded that markets and investors regard privatization as a healthy signal of the political likelihood that government will stick with its overall reform program, implying somewhat higher investment rates in the economy overall. Nalingigwa (n.d.) also pointed out that in Tanzania the objective of raising money directly by selling has not been met since the contribution of money from sales averagely per year was below 5% in domestic revenue. On the other hand the objective of generating additional tax revenue has been met since most privatized enterprises have increased production capacity with corresponding high profit, hence contributed high revenue by tax.

3.2 EFFECTS ON GENERAL PUBLIC 3.2.1 Effects On Public Welfare

How much welfare to the citizens is brought by privatization is embedded in following reports.

Nalingigwa (n.d.) is of the view that privatized goods and services are often more competitive and more innovative as in Tanzania after privatization the quality of goods and services improved and some of them have been awarded international quality certification.

Pamacheche and Koma (2007) concluded that privatization in Africa brought about numerous benefits, and empowered the private sector. The benefits that accrued to the nation include efficiency gains, stable and reduced prices, reduced government subsidies that can be redirected to other development initiatives, at times, payment of dividends to government and increase in employment, to mention a few. Pamacheche and Koma further argue that the majority of cases studied show that consumers are benefited from privatization. This is as a result of lower prices emanating from the efficiency improvements following privatization. For example, privatized energy firms were able to reduce prices sharply as a result of their ability to limit the amount of stolen or unbilled electricity. Also, because investment constraints were removed, privatized firms were in a better position to avail their products to the public. Evidence suggests that privatized firms seek more aggressively to improve quality and introduce new products to satisfy the consumer.

Khalid (2006) quoted Clarke et al (2003) who using a combination of country case studies and cross-country analyses concluded that privatization of banks improves performance as compared to continued state ownership.

However privatization caste negative impacts on public as revealed by some research studies.

criticism is a perception that privatization is fundamentally unfair in both concept and implementation: it is seen as harming the poor, the disenfranchised, the workers, and even the middle class; throwing people out of good jobs and into poor ones or unemployment; raising prices for essential services; giving away national treasures––and all this to the benefit of the local elite, agile or corrupt politicians, and foreign corporations and investors. Nancy and Nellis concluded that the complaint is that, privatization has a negative effect on the distribution of wealth, income and political power.

Prizzia, (2005) in a paper titled “An International Perspective of Privatization and Women Workers”asserted negative impacts. According to his example, a privatized hospital in the USA, gave rise to “prestigemedicine” fortherich and “no carezones”fortheuninsured working poor,chronically illand disabled. The privatization of a water system in Bolivia and an energy system in Thailand increased unemployment and decreased consumer welfare in both countries, resulting in the sudden rise of prices that culminated in a series of mass protests.

About Japan Cato (2008) expressed that the studies on mixed oligopolies revealed that in an industry that is sufficiently competitive (i.e., the number of firms in the market is sufficiently large), privatization improves welfare. Cato also opined that the sectors that are structurally complex, such as the energy industry and the water industry, are beginning to be privatized. One of the features of such industriesisthatthefirm’sproduction activity often leadsto environmentaldamage.In otherwords,the degree of negative externality is high, and emission or pollution make the environment harmful for the residents of the surrounding areas. While Wang et al (2009) opined that privatization unambiguously reduces the pollution levels of firms. Namely, privatization does improve the environment. Moreover, by implementing partial-privatization policy, social welfare can be enhanced.

3.2.2 Effects on Prices

In the view of Megginson and Netter (2001) it is unrealistic to expect that the effects of privatization on prices will be the same in every industry. However market structureofan industry,aswellasfirms’ productivity will affect consumer prices. Studies that examine the effect of privatization on allocative efficiency are rare.

According to Pamacheche and Koma (2007) the majority of cases studied show that consumers benefit from privatization. This is as a result of lower prices emanating from the efficiency improvements following privatization. For example, privatized energy firms were able to reduce prices sharply as a result of their ability to limit the amount of stolen or unbilled electricity.

Prices by privatization decrease, because cost become low as reported by Lindqvist (2007) that being residual claimants, private owners have stronger incentives to cut costs than public employees.

La Porta and Lopez-De-Silanes (1999) & Nancy and Nellis (2003) analyzed Mexican firms from a variety of industries and found that consumer prices increase after privatization. In their

that output prices increased, and furthermore, total price performance indices revealed that increase in output prices have outstripped increase in input costs. Prizzia (2005) reported that the privatization of a water system in Bolivia and an energy system in Thailand increased unemployment and decreased consumer welfare in both countries, resulting in the sudden rise of prices.

4.2.3 Effects on Quality of Goods and Services

Nalingigwa(n.d.)in hispaper“ImpactofPrivatization on PublicEnterprisesCaseofTanzania” asserted that quality of goods and services improved and some of them have been awarded international quality certificates, for example The Mbeya Cement Company (MCC) which recently became the East Africa’sfirstcementcompany to earn ‘InternationalISO 9002 Award’forquality standard in theyear 2000, Tanga Cement Company and Tanzania Cigarette Company, Tanzania Breweries Limited, Mtibwa Sugar Company, Kilombero Sugar Company, Tanzania Tea Packers and Canvas Mills. Nalingigwa also stated that improving the quality of goods has led them to compete to the international markets, for example products from Blanket & Textiles Manufacturing Ltd, products from Handcrafts Marketing Company. Tanzania Cigarette Company and Tanzania Breweries Limited are among top 20 competitive companies in Africa. Now Cement from Tanzania is marketable to neighborhood countries such as Malawi, Zambia, Rwanda and Burundi. Beers from TBL are sold to Kenya, Uganda and other neighborhood countries. Canvases from Canvas Mills are sold to Army of NATO.

Pamacheche and Koma (2007) reported that the implementation of the Nigerian privatization program led to positive results in many areas. A number of firms recorded improvements in output in the post privatization years. Majority of cases studied show that consumers benefited from privatization.

Evidence suggests that privatized firms seek more aggressively to improve quality and introduce new products to satisfy the consumer.