This essay is embarked at discussing the advantages and disadvantages of privatization and nationalization of industries or firms. The essay will conclude by suggesting which of the two would be viable for future policy consideration in Zambia.
The term privatization is often loosely used to mean a number of related activities, including any expansion of the scope of private sector activity in an economy and the adoption by the public sector of efficiency enhancing techniques commonly employed by the private sector. The term privatization may be taken to mean a financial transaction-the sale of a publicly owned asset to the private sector or the transfer of the authority to make resource allocation decisions from the government to the market place (Gabel, 1987). While acknowledging that no definition of privatization is water tight, for the purpose of this essay, privatization will be defined as the transfer of productive asset ownership and control from the public to the private sector (Ibid).
In Africa, many governments have embraced the idea of privatization, brought to the fore mainly as a part of the adjustment and stabilization programs of the mid-eighties and the nineties. Privatization now frequently features in government policy statements and in conditionalities from donors. The past decade has also seen the World Bank and other donors get increasingly involved in lending operations towards parastatal sector reforms that included privatization components (Landis, 2000). Privatization is therefore a capitalist principle among others.
On the other hand, nationalization occupies a central place in the socialist policy. The bedrock principle of socialism is that industry should be directed by the state in the public interest and not by private groups pursuing the objective of private profit (Ramamurti and Raymond, 1991). Most government enterprises aim at earning a profit on their activities—although experience shows that public enterprise have rarely been successful in this respect (Millward, 1990). The state-owned enterprise, just as the privately-owned, generally seeks to make at least sufficient revenue to cover its costs, and, where necessary, to pay interest on its capital.
Proponents of privatization believe that private market actors can more efficiently deliver many goods or service than government due to free market competition (World Bank, 1995). In general, over time this will lead to lower prices, improved quality, more choices, less corruption, less red tape, and quicker delivery. Many proponents do not argue that everything should be privatized; the existence of problems such as market failures and natural monopolies may limit this and thus, a small minority even thinks that everything can be privatized, including the state itself (Ibid).
The basic economic argument given for privatization is that governments have few incentives to ensure that the enterprises they own are well run (Millward, 1990). One problem is the lack of comparison in state monopolies. It is difficult to know if an enterprise is efficient or not without competitors to compare against. Another is that the central government administration, and the voters who elect them, have difficulty evaluating the efficiency of numerous and very different enterprises (Ibid). A private owner, often specializing and gaining great knowledge about a certain industrial sector, can evaluate and then reward or punish the management in much fewer enterprises much more efficiently (Landis, 2000). Also, governments can raise money by taxation or simply printing money should revenues be insufficient, unlike a private owner.
Proponents of privatization state that private firms may be more likely to experiment with different and creative approaches to service provision, whereas government tends to stick with the current approach since changes often create political difficulties for elected officials (Ramamurti and Raymond, 1991). In addition, private firms may use retained earnings to finance research or to purchase new capital equipment that lowers unit production costs. On the other hand, government may not be able or willing to allocate tax revenues to these purposes as easily, given the many competing demands on the government's budget (Ibid).
Supporters of privatization often cite the competitive environment that is nourished by the practice as a key to its success. Private owners have a strong incentive to operate efficiently, they argue, while this incentive is lacking under public ownership (Landis, 2000). If private firms spend more money and employ more people to do the same amount of work, competition will lead to lower margins, lost customers, and decreased profits. The disciplining effect of competition does not occur in the public sector. Still, even advocates of privatization agree that private ownership produces the public benefits of lower costs and high quality only in the presence of a competitive environment (Millward, 1990).
Proponents of privatization also argue that whereas government producers have no incentive to hold down production costs, private producers who contract with the government to provide the service have more at stake, thus encouraging them to perform at a higher level for lower cost (World Bank, 1995). The lower the cost incurred by the firm in satisfying the contract, the greater profit it makes. On the other hand, the absence of competition and profit incentives in the public sector is not likely to result in cost minimization. Of course, small- and mid-sized companies also need to make sure that they do not sacrifice an acceptable profit margin in their zeal to secure a contract (Millward, 1990).
Public ownership provides fewer incentives to monitor manager’s behavior, which allows managers to pursue personal agendas. (Vikkers and Yarrow, 1991). Government owned firms are unable to commit to incentive scheme, which is considered as the source of inefficiencies. This will lead to two main problems: The first one is the Ratchet effect; where managers avoid overfilling their production plans in order to avoid any future increase in the production’s target. The other problem related to government’s commitment is soft budgeting; a major reason for inefficiencies in public owned firm is that they can always rely on the state for financial support, as it is rarely for any government to leave a public enterprise goes bankrupted. (Roland, 2008)
Government of politicians might use government intervention to follow some private agendas (Ramamurti and Raymond, 1991). Such an intervention will be probably a source of inefficiency. Even though sometime, the state’s intervention can be necessary to prevent monopolies of price, new regulations can lead private firms to more loss-making and thus the negative effects will be greater on the social welfare as a whole. (Roland, 2008)
Assuming the efficiency of the market when stock market delivers true information on firms’ performance, this will carry information about the quality of managerial investments and will lead to more incentives for managers to maximize profit (Landis, 2000). High government stakes in firms will tend to reduce market liquidity which will lead to less incentive to acquire information by the stock market participants. (Ibid)
In a government owned firm, managers cannot always be rewarded for critical cost reductions or profit maximizing decisions due the fact that government can use such an investment for alternative use than cost reduction or profit improvement (World Bank, 1995). This will lead to strong incentive for managers to favor private firms, and that is why in the United States for example, the incentives schemes are controlled by shareholders and not by the government in the case of public utilities (Ibid). The shareholders cannot agree on contract with government on all the details of managerial themes, and it is important for shareholders to use the innovation of their managers for such profit maximizing decisions. This superiority of private ownership will be stronger when the government cannot reach to its goal of maximizing social welfare; a non-benevolent or corrupted government will most likely end up with a reduction of social welfare (Millward, 1990). The threat of takeover or bankruptcy improve the managerial discipline at private firms, since takeover of public utilities are quite rare (Vikkers and Yarrow, 1991)
To support nationalisation, the proponents advance a wide variety of arguments. They claim in the first place that the things produced should be decided not by the profit that can be made on them, but by the needs of the people which are capable of commonsense determination by some central authority (Ramamurti and Raymond, 1991). They state that private competition is wasteful and very often leads to over-production and over-capitalisation in different fields of industry, thus resulting in an inefficient and uneconomic use of resources of capital and labour. Proponents also point out that private enterprise has not achieved a satisfactory relationship between management and labour, and that in fact good industrial relations are impossible while the worker has little or no stake in the ownership of industry, and while he feels that industry is directed not primarily for his benefit but for the benefit of private shareholders (Landis, 2000).
To these contentions the supporters of nationalisation adds further arguments, they claim that over large sections of industry where large-scale mass production predominates true competition no longer exists, and that industry has come to be increasingly organised by monopolistic groups who combine to fix prices and restrict production in the interest of maximum profits (World Bank, 1995). Another argument for nationalisation, which has great current popularity, is that if economic depressions are to be eliminated and the economy maintained in a more or less stable condition of full employment, a large measure of nationalization is imperative. This argument is derived from the theory that instability and fluctuations in economic activity are mainly caused by the wide variations of the capital expenditures of industry (Ibid). To reduce or eliminate these fluctuations it is therefore necessary for the total outlay on capital to be stabilised at a high level and this is virtually impossible while the great part of industry remains under the control of private groups.
In the case of contingencies or incomplete contracts, the public ownership will be more useful because it will be able to impose socially desirable adjustments to the firms. A major point of difference between the government and private ownership is corruption. There have been many examples of corruptions scandals in transition economies when it comes to privatization, like in Russia, Czech Republic and Argentina (Kortba and Svejnar, 1993). Even though public ownership cannot eradicate corruption but there has been a reduction in bribery when transitions has accrued from private to public ownership in most of the American cities. According to Landis (2000) corruption can take a form of underpricing of inputs bought from government, overpricing of outputs sold to government and subsidies used to internalize externalities (Roland, 2008).
According to Millward (1990) public ownership provide better information about firms for governments, which makes it not possible to a private firm to receive higher than necessary compensation to cover its cost or to receive the informational rent. However, this may differ depending on how to view the government function. For example in a public owned firm the government is well acknowledged about the cost structure of the firm and will be always providing support for these costs in order to implement ex post efficient production levels. Which will lead to less incentives for managers to cut cost and thus to be more efficient, while on a private firm the case will be always to maximize profit by cutting more cost, and this in return can hurt the society in general, so nationalization may be less efficient but may reduce allocative inefficiency also (Ramamurti and Raymond, 1991). The conflict of interest that sometime happens between shareholders and regulators in private firms may produce less incentive for managers (Ibid).
Government ministers and civil servants are bound to uphold the highest ethical standards, and standards of probity are guaranteed through codes of conduct and declarations of interest (Kaunga, 1994). However, the selling process could lack transparency, allowing the purchaser and civil servants controlling the sale to gain personally. The public does not have any control or oversight of private companies. A democratically elected government is accountable to the people through a parliament, and can intervene when civil liberties are threatened (Landis, 2000).
The government may more easily exert pressure on state-owned firms to help implementing government policy. They may seek to use state companies as instruments to further social goals for the benefit of the nation as a whole. Governments can also raise money in the financial markets most cheaply to re-lend to state-owned enterprises. Further governments have chosen to keep certain companies/industries under public ownership because of their strategic importance or sensitive nature (World Bank, 1995).
There are cuts in essential services. If a government-owned company providing an essential service (such as the water supply) to all citizens is privatized, its new owner(s) could lead to the abandoning of the social obligation to those who are less able to pay, or to regions where this service is unprofitable (Ramamurti and Raymond, 1991).
Private companies often face a conflict between profitability and service levels, and could over-react to short-term events while a state-owned company might have a longer-term view, and thus be less likely to cut back on maintenance or staff costs, training, to stem short term losses (Landis, 2000). Many private companies have downsized while making record profits.
Having looked it the pertinent features of both privatization and nationalisation and highlighting some of the pros and cons of each of the forgoing as espoused by supporters and those against each of the two, this essay is in support of both for Zambia’s future policy considerations. This is so because the shortcomings of privatization are perfectly catered for by nationalisation and vice versa. However, it must be quick to be mentioned that the degree or level of which entities are privatised or nationalised matters. A developing country like Zambia may need not to rush into having most of its firms or companies industrialized as it did during the Kaunda era (Kaunga, 1994). A balance needs to be struck on which industry and companies ought to be under the private sector and also those to be under the public sector. This will ensure that a right mix is arrived at thereby enhancing efficiency and effectiveness in the productivity and operations of the entities (Ibid).
Competition between the public and private entities would ensure quality and quantity service delivery which would in turn lead to demand and supply being proportional thereby further leading to economies of scale in industries or firm. Innovations would also ensue from firms or industries as competition would compel them to find means of quick product production while maintaining quantity and quality. Thus industries would strive to gain competitive advantage and shortages in commodities would be cut.
Furthermore, public-private partnerships (PPP) would also be possible when privatisation and nationalisation exist simultaneously. This would entail that while the private industry will face challenges arising from a wide range of lack resources, the sector may be able to find assistance from the government public owned industries and the same applies to the public firms. Therefore, the whole point here is that there will be a symbiotic relationship between the private sector industries and the public ones. This will lead to economic development overall as industries or firms from the private sector and the public sector will contribute effectively.
In conclusion, this discussion has laboured to highlight what privatization and nationalization are while detailing their pros and cons as cited by supporters of each. And the essay took the position of adopting both for any future considerations in Zambia largely because of the strengths that can be derived from the two. It became clear that when implementing the privatization and nationalization policies together, the level or percentage of industries or firms to be either privatized or nationalised must critically be calculated with other concerns and factors being incorporated. Strategic industries may need to be nationalised but not at the detriment of any other firms whether nationalised or privatized. Finally, also it has been revealed in the discussion that PPPs are a possibility when the two policies are integrated together. This can lead to gains to the participating firms.

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