In the text we considered various objectives of privatisation. They were mainly concerned with achieving different types of ‘efficiency’. These were
Technical efficiency.
Productive efficiency.
Economic efficiency.
Technical efficiency is producing the maximum quantity of output with given inputs. Productive efficiency is producing a given output at lowest cost. An operation can be technically efficient without being productively efficient. One hundred per cent productive efficiency on the other hand would imply perfect technical efficiency. Economic efficiency requires prices which represent the extra costs incurred by people (both internal and external) in the production of more output.
These types of efficiency are not the only objectives which governments may have been pursuing. In addition, privatisation has been used in the following ways:
To raise revenue for the government.
To increase the number of small shareholders for political and social reasons.
To encourage employees to hold shares in the companies for which they work in the interests of industrial harmony and the convergence of objectives between managers and the workforce.
In what ways do objectives (i) to (vi) conflict with one another? Give examples from recent privatisations.
The government has created a number of electricity generating companies independent of the distribution parts of the electricity industry. It has privatised the generation and distribution companies separately. Government policy has therefore produced a vertically disintegrated structure for the electricity supply industry. What contractual difficulties will this structure cause generators and distributors?
Contracting out of services is designed to give incentives for greater productive efficiency. As an example of the problems encountered in assessing whether gains have been achieved, consider the following case.
A local service is provided ‘in-house’. There are two inputs – labour and capital. Employment is 100 and the wage is 100 per unit time. The cost of capital over the same time period (interest plus depreciation) is 1000.
Now suppose the service is contracted out. It is observed that employment falls to 60, the wage level is unchanged but capital costs per time period rise to 4000. This rise in capital costs is not the result of higher interest rates being faced by a private company but of extra investment in capital equipment. Output is unchanged.
Has productive efficiency increased and is it possible to tell if technical efficiency has improved?
Suppose that the results of contracting out were different. Employment falls to 60 and capital costs increase to 4000 but the wage rate falls to 75. Output is still unchanged.
Has productive efficiency increased as a result of contracting out?
