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The pros and cons of privatization

Privatization has long been considered as a strategy for continuous economic growth and improvement. At different points of history, countries turned to privatization to raise funds and encourage citizens and foreign investors to support local and national enterprises. Today’s economic philosophy is more about the effectiveness of private ownership than about keeping large companies and strategic enterprises in the hands of governments. After all, private owners and investors have their interest in maintaining the effectiveness and profitability of their enterprises. Ethiopia is presently going through a new wave of privatization: several state corporations will be sold (partially or fully) to private owners. Privatization will definitely increase the intensity of market competition, creating a more favorable economic climate; however, it will also create barriers to regulating and monitoring private monopolies, whereas employees may face new conditions of employment as owners struggle to increase their profits and revenues.

Privatization is often used in the context of economic policymaking and change. Hargrave (2019) defines the concept as “the process by which a piece of property or business goes from being government owned to being privately owned.” Putting it simply, privatization is when governments sell state corporations and enterprises to private players. It is a complex process that involves numerous variables. It can also take different forms and pursue different patterns. Nevertheless, in almost every case, privatization is for a state enterprise to become a private, for-profit company that will be effectively managed and sustained to benefit the owners. When governments are no longer in a position to keep state enterprises running, they can opt for privatization to save companies and jobs. For some countries, privatization is a measure of last resort as they seek to restore their economic and market positions and achieve sustainable growth in the long run.

Ethiopia is a perfect target for privatization discussions, as this has been one of the key instruments used by the government to stabilize markets and foster economic growth. Since the beginning of the 2000s, Ethiopia has made critical steps to revitalize and redesign its economy according to global standards. Privatization was claimed as one of the primary dimensions of macroeconomic change in Ethiopia. Calls for privatization became much louder under the new Prime Minister, Dr. Abiy Ahmed. Since his first days in office, Dr. Ahmed and other officials have worked with global agencies to outline a comprehensive plan for effective privatization (Lee, 2019). At the beginning of 2019, it was announced that domestic and foreign investors would be able to purchase the shares of four major state corporations – Ethiopian Airlines, Ethio Telecom, Maritime Transport and Logistics Corporation, and Ethiopian Power (Anyanzwa, 2019). However, the government would retain its ownership of these companies, but it will also allow others to participate. These are the initial steps taken by government to liberalize Ethiopian economy. However, public officials should be aware of the pros and cons of the privatization strategy and anticipate its positive and negative implications for the country’s economy.

A good thing about privatization is that it increases the inflow of currency to the economy. This is particularly relevant for Ethiopia, which experiences a shortage of foreign currency and, for this reason, may fail to fulfill its corporate and political obligations. Also, by selling state corporations and putting them into the hands of private investors, governments create better conditions for achieving sustainable efficiency and profits. Apparently, private owners want their companies to bring profits and increased revenues. Therefore, they are interested in improving the quality and efficiency of management decisions and systems. Private owners who purchase state corporations may have a better strategic perspective, compared with governments. The downside is that the commercial interests of investors may coincide with the priorities and expectations held by governments. Tensions can become more obvious if governments retain part of their ownership in privatized companies. Organizational restructuring, business model redesign, employee layoffs, and relocation are just some of the potential actions that can be taken by new owners to boost profitability and efficiency. Therefore, government should not expect privatization to go smoothly, as new owners may choose a different way of doing business.

Privatization does not always mean a single owner; quite often, state corporations become private through initial public offering. If that is the case, the company will have many shareholders, major and minor, who will pressure managers and executives to keep it efficient, productive, and profitable (Pettinger, 2017). However, in this situation, the company may deviate from its initial purpose or intent. Many government-owned enterprises fulfill a social or public purpose, such as providing health care, and public transport. Once these enterprises become privately owned, shareholders may no longer be interested in serving the public good. Consequently, Ethiopian authorities should outline the conditions or criteria for privatization or achieve a consensus with future owners regarding the role and purpose strategically important enterprises will play in the country’s economy after they are privatized.

All in all, privatization has its pros and cons. On the one hand, it attracts private investors, boosts corporate efficiency, and improves the economic climate. On the other hand, it does not allow state authorities to control and regulate corporate decisions. Strategies used by new owners to keep companies running may deviate from governments’ priorities and expectations. Therefore, it is in the best interests of the government to articulate its privatization criteria to future investors, so that strategically important enterprises keep serving the public good after they are privatized.

Ed.’s Note: Samuel Alemu, Esq is a partner at ILBSG, LLP. He is a graduate of Harvard Law School, University of Wisconsin-Madison Law School, and Addis Ababa University. Samuel has been admitted to the bar associations of New York State, United States Tax Court, and the United States Court of International Trade. He can be reached at [email protected] You can follow Samuel on twitter @salemu.

Contributed by Samuel Alemu