Privatization of All Government Owned Energy Companies

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Introduction

The question of the benefits and risks of privatizing all government owned energy companies is a debate going on around the world. However, the debate hinges on good management techniques regardless of which party is doing the managing. Both parties can fall into misrepresenting the citizens for their own benefit, and in both cases regulations are needed to ensure that the service is provided for all. Those who disregard this common denominator in favor of political ideology are deliberately misrepresenting/interpreting the debate most likely out of desire for personal gain. 

Global Privatization Movement

Around the world energy companies are moving from the hands of government into private ownership. This is a natural progression from the government support of the early Industrial Revolution, which aided many energy sectors growth. Now these industries have grown far beyond the ability of the government to manage them. If the governments refuse to privatize the people are faced with a monopoly in which they do not have much of a choice of service, and the inevitable degradation of service which monopolies create. The strength of the free market is that many competing private companies push to make each other better and more attractive to the consumer, while a monopoly has not motivation to support the consumer since no choice is involved (Khan).

The global privatization movement is a result of the load governments have taken on now proving too much for them. This movement began strongly in the 1980s, hit some resistance, but has recently gained momentum. This is resulting from; in the United States, the federal government built highways and dams, conducted research, increased its regulatory authority across an expanding horizon of activities, and gave money to state and local governments to support functions ranging from education to road building. In Western Europe and Latin America, governments nationalized companies, whole industries, banks, and health care systems, and in Eastern Europe, communist regimes strove to eliminate the private sector altogether. (Goodman and Loveman)

This was part of Reganomics “Trickle-Down” economic schemes, and it affected the entire global economy. For example, “By the end of the 1980s, sales of state enterprises worldwide had reached a total of over $185 billion—with no signs of a slowdown. In 1990 alone, the world’s governments sold off $25 billion in state-owned enterprises” (Goodman and Loveman). The balance point to the free market should be healthy regulatory agencies which keep private companies from extorting the consumer. When and if the regulatory agencies become corrupted the balance shifts away from benefiting the entire economy into benefit a few wealthy individuals, and the same frustrations with government run businesses are seen. What is needed most is balance. 

To this end, research consistently encourages the government to empower regulatory bodies in the support of privatization, the free market, and the support of the consumer. In this process, it has been shown that the greatest gains from privatization are achieved in the pre-privatization period as reforms are made to prepare for the transfer to private hands. As changes may include reforms such as greater transparency and accountability of management, improved internal controls, information systems better financing, those actions improve performance rather than privatization itself. (Avalos-Villarreal 1)

The balance point between extortion and benefit is the government doing what they were elected to do (safeguard public rights) and the private sector doing what they are best at (making money). When these two aspects find sustainable harmony everyone benefits. However, if regulatory bodies are compromised, the services may be corrupted by “private sector managers may have no compunction about adopting profit-making strategies or corporate practices that make essential services unaffordable or unavailable to large segments of the population” (Goodman and Loveman). So far this process has been most in evidence in developing countries with very corrupt governments and no regulatory agencies, but the shadow of it is still very present in the West as well. 

There is little doubt that privatization is a viable option for energy companies and energy needs which have grown too big, complex, and technologic for the government to manage. However, overriding the privatization debate has been a disagreement over the proper role of government in a capitalist economy. Proponents view government as an unnecessary and costly drag on an otherwise efficient system; critics view as a crucial player in a system in which efficiency can be only one of many goals. (Goodman and Loveman)

This is a challenging debate because it represents two conflicting ideologies in which the proponents do not easily agree. To balance with one is to undermine the other, and both parties often refuse to compromise. However, in the wake of the essential need for this movement, a third perspective has come to light, a middle way. Those who seek resolution to this debate emphasize that the issue, “is not simply whether ownership is private or public. Rather, the key question is under what conditions will managers be more likely to act in the public’s interest. The debate over privatization needs to be viewed in a larger context” (Goodman and Loveman). This larger context is who stands to benefit from the choices a company and is often adjudicated through mergers and acquisitions. 

The nuances of how the free market supports the citizens, and the benefits of privatization of energy companies hinges on where and for whom the real benefits lay (Edwards). As such, “Like the mergers and acquisitions issue, privatization involves the displacement of one set of managers entrusted by the shareholders—the citizens—with another set of managers who may answer to a very different set of shareholders” (Goodman and Loveman). This was seen as a new challenge in the 1980s, when newly privatized companies restructured themselves so quickly as to change the face of their service. This period emphasized that privatization alone was not enough to guarantee improvements, and the citizens must remain a chief focus of value for the company;

The sharp increase in shareholder value generated by most of the takeovers was the result of the market’s anticipation of improvements in efficiency, customer service, and general managerial effectiveness—gains which might, for example, come from the elimination of unnecessary staff, the cessation of unprofitable activities, and improvements in incentives for managers to maximize shareholder value. (Goodman and Loveman)

This period emphasized that managerial accountability via regulations ensuring the public interest is what motivates profit seeking is the balance point on which successful privatization hinges (Vine et al. 406). A huge benefit of this shift in focus is that “Refocusing the discussion to analyze the impact of privatization on managerial control moves the debate away from the ideological ground of private versus public to the more pragmatic ground of managerial behavior and accountability” (Goodman and Loveman). In this context management principles apply to both government owned and private owned enterprises, and this common ground enables regulations to reflect consistent practices (Laffont). Thus, three main points emerge from the balance point of this debate:

1. Neither public nor private managers will always act in the best interests of their shareholders. Privatization will be effective only if private managers have incentives to act in the public interest, which includes, but is not limited to, efficiency.

2. Profits and the public interest overlap best when the privatized service or asset is in a competitive market. It takes competition from other companies to discipline managerial behavior.

3. When these conditions are not met, continued governmental involvement will likely be necessary. The simple transfer of ownership from public to private hands will not necessarily reduce the cost or enhance the quality of services. (Goodman and Loveman)

As such, each one of the benefits and risks or privatization can be measured by these three elements. Regulations must be enforced by the government to keep privatized energy companies from forming natural monopolies, forgetting the public interest, contributing to the fragmentation of industries (and over-specialization), and running the energy business with an eyes only for the short term gains (Pettinger). It was faulty regulations implementation of the energy company British Petroleum (BP) which led to the massive oil spill in the Gulf in 2010 (Pettinger).

BP had received 95% of all safety warnings and fines in the oil industry, but since they make so much money the paid the fines without changing their practices. In this instance the regulatory bodies should have changed their tactics, making the punishments punitive enough to create a change of behavior. However, here also the consumer has a role in representing their own interests. If consumers desired to punish the private company for cutting corners for their own profit all they had to do was stop buying gas from them. 

Conclusion

The privatization of all government owned energy companies is underway, and may provide a key outlet for economic growth and productivity. The risks and rewards of privatization are very similar to how the service would fair in the free market. However, this can only be done when the needs of the citizens come before the needs of profit, and this balance point is the reason for regulations. Neither side of the polarized debate has it right, and consistent managerial principles are the way towards consistent sustainability of energy services, or any other services for that matter.

Works Cited

Avalos-Villarreal, E. “Regulation and Privatization.” Isss.org, 2016. Retrieved from: http://journals.isss.org/index.php/proceedings51st/article/viewFile/567/310

Edwards, Chris. “Privatization.” Downsizing the Federal Government, 12 Jul. 2016. Retrieved from: http://www.downsizinggovernment.org/privatization

Goodman, John B., and Gary W. Loveman. “Does Privatization Serve the Public Interest?” Harvard Business Review, Nov.-Dec. 1991. Retrieved from: https://hbr.org/1991/11/does-privatization-serve-the-public-interest

Khan, Shahryar. “Importance of Privatization of Government owned Companies for Pakistan.” LinkedIn, 30 Dec. 2015. Retrieved from: https://www.linkedin.com/pulse/importance-privatization-government-owned-companies-pakistan-khan

Laffont, Jean-Jacques. “Privatization and incentives.” Journal of Law, Economics, and Organization special issue (1991): 84-105. Retrieved from: http://down.cenet.org.cn/upfile/45/20051221234821146.pdf

Pettinger, Tejvan. “Advantages and problems of privatization.” Economics Help, 12 May 2011. Retrieved from: http://www.economicshelp.org/blog/501/economics/advantages-of-privatisation/

Vine, Edward, et al. “Public policy analysis of energy efficiency and load management in changing electricity businesses.” Energy policy 31.5 (2003): 405-430.