SS2: GOVERNMENT – 1ST TERM Commercialization, Privatization and Deregulation of Public Corporations | Week 11 Theory Questions – Commercialization, Privatization, and Deregulation of Public Corporations

Lesson 11, Topic 4

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Theory Questions – Commercialization, Privatization, and Deregulation of Public Corporations

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Theory Questions – Commercialization, Privatization, and Deregulation of Public Corporations

Evaluation Questions – Commercialization, Privatization, and Deregulation of Public Corporations

1. Explain the following concepts: (a) Commercialization (b) Privatization (c) Deregulation of Public enterprises

2. What are the reasons for Commercialization of Public enterprises?

3. What are the merit of Commercialization?

4. State Merits and Demerits of Privatization.

5. What are the objectives of Privatization?

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Responses

Evaluation Questions – Commercialization, Privatization and Deregulation of Public Corporations

1. Explain the following concepts:

(a) Commercialization

Answer: Commercialization is the process of running a previously publicly owned and managed enterprise in such a way as to make it operate as a profit-making venture and more efficient. In commercialization, the ownership or government shareholding is not transferred to private ownership rather the enterprise is re-organized in such a manner that will improve its efficiency, and effectiveness and maximize profit.

(b) Privatization

Answer: Privatization is the transfer of government ownership rights of a public enterprise to private investors. This transfer may be wholly or partially. The shares are transferred either through any of these strategies: Sales of Shares, Control or Management of State-owned Assets, encouragement of the private sector, involvement in public activities, shifting of decision-making or enterprise operation in accordance with market conditions, etc.

(c) Deregulation of Public enterprises

Answer: Deregulation is the process of reduction or elimination of government power or restrictions on a particular industry to improve business operations and increase competition. It entails the process of removing or reducing state regulations in the economy to enable the industry to compete globally.

2. What are the reasons for the Commercialization of Public enterprises?

Answer:

The need to pull the economy out of economic recession necessitates the commercialization of public corporations.
Efficiency: Commercialization will create a more conducive market environment. For effective, efficient, and profit-making public enterprise.
To reduce undue red-tapism that delays the speed of actions and services among public enterprises.
To remove political interference that stifles management initiatives which result in poor performance.
To restructure and reorganize the economy, reduce wastages, improve efficiency, high quality of goods and services, and increase profit margin.
To reduce government annual grants to public corporations. Such funds will be put to better use in diversifying the economy.

3. What are the merits of Commercialization?

Answer:

Commercialization reduces government expenditure: When a public enterprise is commercialized, the expectation is that it should operate as a purely commercial enterprise without receiving subventions from the Federal government.
It removes unproductivity and inefficiency: Through commercialization, unproductive and inefficient public enterprises are identified and shut down.
It enables the government to generate more revenue because commercialized enterprises are profit-oriented, they make more money for the government.
It promotes innovations and new ideas because the public enterprise is commercialized, and the management will be able to think and come up with new and creative ideas for profit-making.
It reduces the political control of public enterprises.
It ensures stable economic growth and development.

4. State Merits and Demerits of Privatization.

Answer:

Merits of Privatization

Privatization reduces the government’s financial burden of running public enterprises.
The government gains more through an increase in tax and profit generated.
It attracts foreign investors which will integrate the country into the globalization process.
It promotes competition, choice, and high quality of goods and services.
It brings about innovation, and creativity and decreases the burden on the government.

Demerits of Privatization

The government will fail in one of its fundamental duties to promote and ensure social equality by providing for the less privileged in society.
It leads to an uneven distribution of income. There will be a wide gap between the poor and the rich.
It leads to consumer exploitation.
It fuels inflation and can lead to the loss of jobs and a reduction in employment levels.
No committed leadership and corruption can jeopardize privatization.

5. What are the objectives of Privatization?

Answer:

A profit-oriented venture based on the forces of mechanism.
A partially state-owned enterprise. Its operations are free from the direct control of the government.
Enterprise is owned and controlled mainly by private individuals and corporations.
Independent sources of finance. It can raise money from the capital market and other financial institutions.
Possession of a legal personality. It can sue and be sued.
Employees are not civil servants. Condition of service is purely determined by the Board of Directors of the enterprises.
Limited liability of members or shareholders.
Membership of an enterprise is made up of subscribers/shareholders.
Equities are shared among strategic investors, government, and private individuals.

6. Discuss the Merits and Demerits of Deregulation.

Answer:

Merits of Deregulation

(i) It stimulates economic activity because it eliminates restrictions for new businesses to enter the market, which increases competition.

(ii) Since there is more competition in the market, it improves innovation and increases market growth as businesses compete with each other. When more businesses compete with each other, prices go down for consumers.

(iii) Companies no longer need to utilize resources and capital to meet restrictions and comply with regulations. In turn, they can use the resources to invest in research and development.

(iv) Businesses can operate without worrying about restrictions and regulations to govern them. They are allowed to develop new products, set their own prices, venture into foreign countries, purchase new assets, and interact with consumers without restrictions to hold them back.

Demerits of Deregulation

(i) Loss of investment by Ordinary Investors: It tends to lead to an unfair and unpoliced market where ordinary investors may not be able to have profitable returns on their investments, thus allowing asset bubbles to build and burst, leading to crisis and recession.

(ii) Loss of Confidence in Investors: Financial market operators may no longer have confidence in investors due to failure to honour repayment of loan facilities.

(iii) Monopoly of Business: Deregulation may create a private firm with monopolistic tendencies. Certain sectors of the economy may be under the tight grip of rich investors to the detriment of the consumers, which may lead to high prices of goods and services.

(iv) Poor Service Delivery: It could lead to a compromise of public services with poorer quality products.

(v) Unfair Competition: It may be difficult to create effective competition in a particular industry due to high barriers to entry.

(vi) Social Concerns are Lost: Businesses will ignore the damage done to the environment since they do not pay the costs.

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