The reasons for divestment

Feb 15, 2024 Peeping Tom

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Kaieteur News – There are many reasons why governments opt to privatize public enterprises or divest themselves of certain interests in either commercial or manufacturing enterprises.
One reason may be ideological. The government may decide to embrace a liberal approach towards economic activity and this invariably involves divesting itself of involvement in economic activities which can be profitably undertaken by the private sector.

Consistent with an approach towards a more open economy, the government therefore decides that it is obligated to get out of business and leave the certain activities to the private sector which it is felt can more profitably undertake the management of businesses previously undertaken by the government.

The second reason may have to do with the failures of public enterprises. Many public enterprises have failed while in government hands and these eventually become a drain on the resources of the State. As such a decision is taken to sell- off these companies so as to reduce the financial burden that they represent.

A third reason may have to do with the need to inject foreign capital and forge strategic alliances.
There may be a need for government to inject capital into a business in order for it to develop, but sometimes the government is cash-strapped for funds or may be constrained from using Budget resources to capitalize public corporations. In these instances, it may be forced to privatize the enterprise as an option to allow that enterprise to raise capital from private sources.

Another related scenario is where the government may need to have a strategic partner in order to develop its business. For example the government enterprise may need to forge links with an international firm in order to have certain technologies transferred, technologies that are important if the business is to survive.
A fourth reason for privatization has to do with the inability of the government to manage an entity or the need for it to contract out its management as a precondition of foreign investment or simply a need for it to source certain services in order to establish a relationship with the firms that it is sourcing these service, relationships that can be helpful in other respects to the public enterprise.

A fifth reason for privatization may have to do with the need for financing both at the level of the government and at the level of the enterprise.
In the case of the latter, the firm may find itself cash –strapped and in urgent need of revenues to cover losses. In this instance, the firm may decide to unbundle some of its assets and put these up for sale so as to tidy it over a difficult period.

In other cases, it is the government that faces a financing deficit and as such takes a conscious decision to dispose of certain publicly owned assets in order to bridge its financing gap. In both cases, the divestment is used to cover a shortfall in resources.
But by far the most controversial reason for divestment is in order to help out cronies and friends. It is not outside the realm of the possible for government to divest itself of assets owned by the public simply in order to enrich its friends and allow its cronies to make monies. In many countries, there have been charges of sweet heart deals that have taken place and many examples of certain individuals benefiting from the privatization process.

As such every decision to divest must be analyzed in the context of why such a move is being undertaken but in terms of who benefits. Is it the people that benefit or a rich elite
Years ago, in countries such as Venezuela, Bolivia and Argentina, there was a process of nationalization taking place. This may have to do with the ideology of the then governments but it also has to do with the socio- economic structures of those countries and the failures of the private sector to redistribute wealth in a way that benefits everyone.
The main sectors that were privatized concerned the natural resources of these countries and the decision of the state to take over certain sectors formerly run by foreign capital is causing great consternation in foreign capitals.

But interestingly, in those countries where nationalization took place, there was widespread popular support for these moves. But that support soon turned sour.
The difficulty arises when these nationalized enterprises do not succeed, are mismanaged or fail to redistribute income in the way that is expected. In these instances, it is not just the decision to nationalize that will be called into question but also the very governments and their ideologies that pursued nationalization

 

 

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