Pros and cons of placing public firms in private hands

A judge has temporarily suspended plans by an auctioneer to seize office items belonging to Consolidated Bank of Kenya. FILE PHOTO | NMG

Privatisation, defined as the transfer of ownership, management or control of State-owned enterprises (SOEs) to private hands, has been a hot potato in Kenya for decades.

Since the 1980s, successive governments have embarked on the road aimed at cutting the role of the State in the economy, improving the efficiency and productivity of SOEs, and increasing revenue.

However, the effectiveness of privatisation in achieving these goals remains a subject of controversy, with supporters and critics alike citing various pros and cons.

Proponents of the move say private companies are generally more efficient and productive than public enterprises.

This is because private companies are profit-driven and therefore have a strong incentive to maximise efficiency, cut costs, and increase productivity.

They can also attract the best talent and adopt best practices in their operations, leading to improved efficiency and productivity.

Privatisation can also result in increased revenue for the government. When State-owned enterprises are sold to private investors, the government can receive a significant amount of money in the form of sale proceeds.

The State can then use this money to fund other important projects such as infrastructure development or social programmes.

State firms' sales can also help reduce government debt. State-owned enterprises are often a burden on the government's finances, requiring subsidies and bailouts to remain afloat.

Privatising these enterprises can relieve the government of this burden, reduce the need for subsidies and bailouts, and ultimately help reduce government debt.

Privatisation can also lead to innovation and technology transfer. Private companies are often more innovative than State-owned enterprises and can bring new technologies and ideas to the market.

This can have a positive impact on the economy, leading to increased competitiveness, improved quality of products and services, and job creation.

One of the major criticisms of privatisation is that it can lead to job losses. Private companies are often more focused on profits than social responsibility and may prioritize cost-cutting measures such as downsizing and outsourcing to improve profitability.

This can result in job losses, especially for lower-level employees who may not have the necessary skills or experience to find new employment.

Another criticism of privatisation is that it can lead to an inequitable distribution of benefits.

When State-owned enterprises are privatised, the benefits of increased efficiency, productivity, and revenue may not be shared equally among all stakeholders.

Privatisation also leads to reduced access to essential services. State-owned enterprises often provide essential services such as healthcare, education, and water supply to marginalised and underserved populations.

Finally, privatisation can lead to a loss of strategic assets. State-owned enterprises often control strategic assets such as natural resources, infrastructure, and key industries.

Winnie Njore is a tax senior at EY. The views expressed herein are not necessarily those of EY.

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