Privatisation

Privatisation is the selling of nationalised or state-owned industries to private investors, moving the organisation from the public to the private sector.

It is claimed that privatisation:

• Reduces costs - the profit motive, and competitive pressures will drive costs down. Often a state regulator ensures that private firms do not exploit their monopoly position in the market.
• Increases choice
• Increases quality
• Encourages innovation and invention
• Brings market forces into play in a positive manner for the consumer
• Saves the government money - the costs of the nationalised industries would be replaced by income from business taxes
• Widens share ownership in the population

Privatisation also has some possible problems:

• Monopolies will be in private hands e.g. transport
• Loss of equity - the general public loses a valuable resource
• Externalities - the private firm may not be so careful about creating pollution and other external costs, as they are only responsible for paying private costs (in other words the rewards for the four factors of production).

Privatisation in many countries has been accompanied by the introduction of deregulation, but also the appointment of regulators to reduce the opportunity for exploitation. These regulators are expected to act as 'watchdogs' to protect consumers and other stakeholders.

Deregulation

Deregulation is the removal of government rules, controls and restrictions on production and trade.

Some industries have in the past been government monopolies to protect them from competition. Deregulation is the removal of these government controls from an industry. Regulators control or regulate privatised monopoly industries.

3. Incorporated organisations Companies/corporations

Incorporated organisations

Companies are essentially organisations owned by their shareholders. The business and its owners are separate legal entities and there is a separation of control and ownership with the owners appointing managers to run the business on their behalf.

Incorporated firms are legal bodies in their own right. Companies may be known as joint-stock companies or corporations in North America.

Be careful not to confuse public limited companies or corporations which are in the private sector and owned by private individuals with Public Corporations which are owned by the government.

Companies have legal continuity as they continue to exist even if the owners change (i.e. shares are sold on stock markets). Shares are just a slice of the business and signify what proportion, in monetary value, of the business is owned by each individual shareholder. In some countries, shares are called stocks. However, in other countries stocks and shares have different meanings.

Firms pay corporation tax. This is usually a flat rate, and stays the same proportionately, even if profits increase.

The owners of the companies have limited liability; they are only responsible for their investment in the firm through their share capital. The maximum they can lose, on a liquidation, therefore, is the value of their shareholding - personal assets cannot be seized to pay for the debts of the business. This can be a major advantage over being the owner of an unincorporated firm. The owners of the business are its shareholders.

There are two types of company: private limited and public limited

Private limited company (Ltd)

1 Most companies start as private limited companies. They can be set up quickly and cheaply, and firms of lawyers are set up which specialise in this. Many private limited companies are family businesses as there is less risk of a takeover. Shareholders in private companies can put restrictions on the sale of shares.

2 To become a limited company, its owners have to prepare legal documents, including the Memorandum and Articles of association and be registered with the national government. The Articles lay out the internal rules of the business, such as the calling of meetings, the types of shares and the power of the directors. The Memorandum details any relationship between the business and its external environment. It shows the objectives of the business, the address of its head office and its maximum share capital. These documents can sometimes be bought 'off the shelf' by firms that sell 'shell' companies as their product.

3 Limited companies have to prepare and publish each year a set of legal accounts, which have to be checked and approved (audited) by independent accountants.

4 The owners also have to prepare and publish each year a set of legal accounts and should send these to the appropriate government organisation each year.

5 There has to be at least one director, but other requirements are few. Shares can be sold, privately, but not on the national stock market. There is no minimum capital requirement, however. Shareholders have limited liability. That means they can only lose their share capital; creditors cannot claim any other assets. Private companies are hard to take over without the agreement of the existing shareholders. Equally, they may be hard to sell.

6 Many private limited companies are family businesses as there is less risk of a takeover. With private companies, any owner wishing to sell their shares must offer them to existing shareholders first. This protects the original owners from losing their control of the business.

Advantages of Private Limited Companies

• The company has limited liability, so the most the shareholders can lose is what they invested in the business.
• Private Limited Companies have certain tax advantages.
• It can be easier to raise finance compared to a sole trader.
• Ownership is spread among shareholders thereby reducing risk.

Disadvantages of Private Limited Companies

• There is a cost in setting them up i.e. solicitor’s fees, registration etc.
• A number of legal formalities have to be complied with such as filing returns.
• Private Companies are unable to raise funds on the Stock Market.
• Problems can arise if there are disputes between the shareholders.

In incorporated companies, plc's or limited companies, the decision makers (the Executive Directors) are often not the owners; it is the shareholders who are. This separation (often called 'divorce') between ownership and control can cause major problems, as has been seen with firms like Enron and WorldCom, where Directors do not always act in the interest of the shareholders.

Typically a new business will start as a sole trader, and then become a private limited company as soon as possible. It will then 'go public' (float shares), when it thinks it is appropriate.

It is possible to set up as a private limited company quite easily and cheaply these days as shell companies are available to buy, i.e. companies where all the legal requirements have been completed, but the purpose is left very general. A good advisor can select the right one providing instant limited liability.

Task 3: Footie Ltd to stay private after ruling out float

Footie Ltd, the shoemaker and retailer, is to remain a private limited company. The directors received over- whelming advice against converting it to a plc. The company has no need of further capital to fund further expansion, and is now one of the world’s largest private limited companies. In 2004, after a decade of declining fortunes, it came within five votes of opting for a take- over by Shoeworks plc. But in April this year, it announced annual profits up from $42.7 million to $50.8 million on sales of $825 million. That was its third year of record profits, reflecting its strategy of reducing its reliance on own manufacture and investing in its brands and shops.

Footie Ltd is now more of a retailer and wholesaler than manufacturer, owning or franchising 650 shops and importing shoes from abroad. Five years ago, 75% of its shoes were manufactured in Footie’s European factories. Now it is just 25%, with 40% of the business based in Asia. Jim Parker, chief executive, has claimed that Footie is the largest conventional shoe brand in the world, having sold 48 million pairs last year. He said the business was expanding rapidly in nearly all markets and this growth strategy requires a lot of capital. ‘We can continue to build the business with benefits of moving to lower-cost countries and with investment in our brand and retailing operations.’

Despite ruling out a float for now, the company said it would continue to examine ‘the most appropriate legal structure to meet shareholders’ interests on the basis of its strategy for future growth and the conditions in the footwear market’.

Questions

1. Explain two differences between a private limited company and a public limited company. [4]
2. Is Footie Ltd in the private sector or public sector? Explain your answer. [3]
3. Which industrial sector(s) does Footie Ltd operate in? Explain your answer. [5]
4. Examine possible reasons for the directors deciding to keep Footie Ltd a private limited company. [6]

5 Analyse the main benefits to the business and to existing shareholders if the company did ‘go public’. [8]

Source: Business & Management for the IB Diploma

Task 5: Read the articles below on Huawei and Transsion Holdings. Does it make sense for Transsion Holdings to become a PLC, and Huawei Technologies to remain a private company?

Task 6: Answer the following questions:

1: In plcs, ownership and control are totally divorced.

(a) Why does this happen?

(b) How does this affect the involvement of shareholders in the company?

2: Read the article on Microsoft below and determine what are the factors that allowed Microsoft to become the world's most valuable company (by market capitalisation)

https://www.scmp.com/tech/big-tech/article/2175338/microsoft-becomes-worlds-most-valuable-company-after-apple-rout

3: Read the article on Tencent’s stake in Tesla below and discuss how this investment could be mutually beneficial

Tencent’s Tesla stake could help the US carmaker expand in China, analysts say

http://www.scmp.com/tech/enterprises/article/2083199/tencents-tesla-stake-could-help-us-carmaker-expand-china-analysts

Public Sector Corporations

These organisations are established and created by special Acts passed by the State or Central Legislature. The powers, duties and responsibilities of the Corporations are clearly laid down in the special Act formed for the purpose of the operation of the organisations. These are organisations which have the power of the Government combined with public ownership and public accountability.

Characteristic features:

The following are the distinguishing features of Public Corporations:

1. Incorporation: These organisations are created by means of special statute passed in the Parliament or State Legislature.

2. Separate legal entity: These units have separate legal existence. The wrong acts of the members of the organisations would not affect the existence of the organisations.

3. State control: Though these organisations have separate legal entities and are created by law, they are completely owned by State and are under Government control.

4. Nominated directors: The Directors of these organisations are nominated by the Government and are not elected by the members.

5. Service motive: The primary objective of the corporations is to render essential and distinguished service to the public at large.

6. Employment conditions: The employees of the corporations are not Government servants. Their service conditions are fixed by the corporations.

Advantages

• Essential services are provided.
• Everyone shares in the profit from public ownership.
• Wasteful duplication of services is eliminated.
• Planning can be co-ordinated through central control.

Disadvantages

• Inefficiency results due to the size of the organisation.
• There is a lack of incentive for employees to perform if there is no share in the profit or there is an absence of other motivators such as productivity bonuses - accelerated promotion; (this factor can also apply in the private sector if the employee is not given any incentive to perform).
• Losses must be met by the taxpayer.
• Political interference can occur.
• They interfere with the free market forces.
• There may be difficulties in finding someone to deal with complaints, though this factor is applicable to any large organisation.

Public-Private Partnerships

In some situations, governments may not be in a position to provide a good or service for financial or policy reasons, even though this may be a government service. In this case they may create what is termed a 'public-private partnership' (often referred to as PPPs). This is where the government enters into a partnership with a private firm to build/develop the good or service and then perhaps to go on to provide or operate it on behalf of the government.

Examples of public-private partnerships include:

• International AIDS Vaccine Initiative (IAVI), which is a global non-profit making NGO promoting the development of development of vaccines to prevent HIV infection and AIDS. IAVI collaborates with the public and private sectors in both industrialised and developing countries.
• The Canada Line is a rapid transit line in the Metro Vancouver region of British Columbia, Canada. Opened in August 2009 it was built as a public-private partnership. Funding was provided by both government agencies and private partners.

Public contributions came from the following sources:

● Government of Canada: $450 million

● Government of British Columbia: $435 million

● Vancouver Airport Authority: $300 million

● TransLink: $334 million

● City of Vancouver: $29 million

Advantages and disadvantages

PPPs have been welcomed by many governments, but have also had their fair share of criticism. So what are their costs and benefits?

Benefits

• PPPs may enable to government to develop public assets faster and at lower cost to the country's taxpayers than by conventional public procurement.
• They may reduce the borrowing burden for government as the money can be raised by private firms
• PPPs allow for private sector management skills to be brought to bear on the development, management and operation of the good or service
• PPPs may reduce the cost per unit of providing the good/service as private firms may be able to develop and operate the project more efficiently

Costs

• PPPs must include a fair return for shareholders and so the overall cost may not eventually be as low as was first was thought
• Firms will not be required, unless the contracts are very specific, to take account of social needs and social objectives in their provision of the good or service
• PPPs often have very high costs associated with their provision for legal and contractual reasons. The contracts developed can be very complex and may take significant time and cost to draw up.

Source: https://phis.rchk.edu.hk/pluginfile.php/43096/mod_resource/content/2/B_M_T1/Business_organisation_student/page_26.htm

Task 7: Waste – a good case for public–private partnership?

Capital Waste Disposal plc was created 5 years ago when the capital city’s rubbish collection service was privatised. As

a public sector enterprise, the organisation had been over- staffed and inefficient, but charges for collecting waste were low and the service was popular with local residents. The city government subsidised the waste services and this helped to keep charges down. Shortly after privatisation, the directors announced substantial job cuts to save on costs. The waste collection service was reduced to once a week, yet charges were increased. The city government also announced that the city’s rubbish collection services would be opened up to competition.

The business started to make big profits. It invested in new equipment and paid dividends to its shareholders. Last year, for the first time since privatisation, profits fell. This was due to competition from a newly formed waste disposal business. Many of Capital Waste’s shareholders wanted the directors to be replaced. The biggest shareholders demanded to be on the board of directors. The chief executive discussed with the bank whether a loan could be obtained to enable him to buy out most of the shares to convert the business into a private limited company. He told the bank manager, ‘If I turn the business into a private company, I can run it without any interference from big shareholders and publish less data about the company.’

The government still owns and manages the old and inefficient waste recycling plant in the city. It now wants to involve Capital Waste in a public–private partnership to build a new, environmentally friendly waste recycling plant. The business would be asked to invest capital in the new facility and to use its private sector managers to help manage the new plant. A PPP would help to make sure that it was built quickly. However, some local residents are worried that private sector managers would try to cut costs, and that difficult to recycle waste would simply be dumped in the local river.

Questions

1: Explain the terms:

a public sector

b public–private partnership

c public limited company

d private limited company. [8]

2: Explain two likely reasons why the city government decided to privatise this organisation. [4]

3: Examine the likely impact of this privatisation, in the short run and the long run, on:

a customers

b shareholders

c workers. [6]

4: Examine the advantages and disadvantages of the proposed public–private partnership for the building and operation of a new waste recycling plant. [8]

Source: Business and Management for the IB Diploma

The main features of types of for-profit social enterprises

1. Co-Operatives

There is a long tradition in Ireland of this type of business activity particularly in agribusiness. It involves a group of individuals coming together, sharing their ideas and capital for business purpose. The members are generally workers, customers or suppliers of the co-operative.

Types of cooperative

• ‘‘primary co-operative’’ which is a co-operative formed by a minimum of five natural persons whose object is to provide employment or services to its members and to facilitate community development;
• ‘‘secondary co-operative’’ which is a co-operative formed by two or more primary co-operatives to provide sectoral services to its members, and may include juristic persons;
• ‘‘tertiary co-operative’’ which is a co-operative whose members are secondary co-operatives and whose object is to advocate and engage organs of state, the private sector and stakeholders on behalf of its members, and may also be referred to as a co-operative apex;
• ‘‘Agricultural Co-operative’’ - a co-operative that produces, processes or markets agricultural products and supplies agricultural inputs and services to its members;
• ‘‘Consumer Co-operative’’ - a co-operative that procures and distributes goods or commodities to its members and non-members and provides services to its members;
• ‘‘Social Co-operative’’ is a non-profit co-operative which engages in the provision of social services to its members, such as care for the elderly, children and the sick;
• ‘‘Worker Co-operative’’ means a primary co-operative whose main objectives are to provide employment to its members, or a secondary co-operative providing services to primary worker co-operatives
• ‘‘Services Co-operative’’ means a co-operative that engages in housing, health care, child care, transportation, communication and other services;
• ‘‘Marketing and Supply Co-operative’’ means a co-operative that engages in the supply of production inputs to members and markets or processes their products, and also includes an agricultural marketing and supply co-operative;
• ‘‘Housing Co-operative’’ means a primary co-operative which provides housing to its members, or a secondary co-operative that provides technical sectoral services to primary housing co-operatives;
• ‘‘Co-operative Burial Society’’, means a co-operative that provides funeral benefits, including funeral insurance and other services to its members and their dependents;
• ‘‘Financial Services Co-operative’’ means a primary co-operative whose main objective is to provide financial services to its members or a secondary co-operative that provides financial services to a primary co-operative

Source: https://www.cofisa.co.za/forms-of-co-operatives.html

Characteristics of Co-Operatives

● They can be formed by a group of eight or more people (number is dependent on country)

● Annual accounts must be sent to the Registrar of Friendly Societies.

● Members have limited liability.

● Each shareholder has only one vote regardless of the amount of shares held.

Advantages of Co-Operatives

● Members have the benefit of limited liability.

● They can encourage enterprise in local communities.

● Each individual has an equal opportunity regardless of wealth

Disadvantages of Co-Operatives

● Not practical business units today as there are limitations to expansion.

● They often suffer from lack of capital.

● They may not always be able to afford the best management.

Definition of Microfinance loans

Micro financing loans are small loans granted to the basic sectors, on the basis of the borrower’s cash flow and other loans granted to the poor and low-income households for their micro enterprises and small businesses to enable them to raise their income levels and improve their living standards. These loans are typically unsecured but may also be secured in some cases.

Interest on Microfinance Loans

Interest on such micro financing loans shall be reasonable but shall not be lower than the prevailing market rates. This is to enable the lending institution not only to recover the financial and operational costs incidental to this type of microfinance lending but also to realize some bottom line gains.

Segments of Demand for Micro-credit

(1) The landless who are engaged in agricultural work on a seasonal basis and manual labourers in forestry, mining, household industries, construction and transport; requires credit for consumption needs and also for acquiring small productive assets, such as livestock.

(2) Small and marginal farmers, rural artisans, weavers and those self employed in the urban informal sector as hawkers, vendors and workers in household micro-enterprises: requires credit for working capital, including a small part for consumption needs. This segment largely comprises the poor but not the poorest.

(3) Medium farmers/small entrepreneurs who have gone in for commercial crops and others engaged in dairy, poultry. Among non-farm activities, this segment includes those in villages and slums engaged in processing or manufacturing activity.

Who are the unbanked? Part 2

Non-Governmental Organizations (NGOs)

Most businesses that we will be looking at during the course operate in the private sector of the economy. That is, they are privately owned by individuals or shareholders and we assume that their main aim is to maximise profits.

However, there are many other types of business organisation that you may also come across during your course. One of these is a non-profit or not for profit organisation. In a way the name speaks for itself, but this doesn't mean that they don't make a profit; just that it is called a surplus. They may have a surplus of income over expenditure, but this will be ploughed back in for the benefit of the members or beneficiaries. Non-profit organisations may be clubs, charities (NGOs), pressure groups or other similar organisations that have some of the same aims as a private business, but profit isn't one of them!

Non-governmental organisations

Non-governmental organisations (NGO's for short) are organisations that may take part in business activity (as we have described it) and operate in the private sector, but their interests are more likely to be the development of the community and run for the benefit of others.

NGO's are non-profit organisations, which are independent from government. In the US they may be more commonly known as PVO's - private voluntary organisations.

Source: https://phis.rchk.edu.hk/pluginfile.php/43096/mod_resource/content/2/B_M_T1/Business_organisation_student/page_24.htm

Advantages

• They have the ability to experiment freely with innovative approaches and, if necessary, to take risks.
• They are flexible in adapting to local situations and responding to local needs and therefore able to develop integrated projects, as well as sectoral projects.
• They enjoy good rapport with people and can render micro-assistance to very poor people as they can identify those who are most in need and tailor assistance to their needs.
• They have the ability to communicate at all levels, from the neighbourhood to the top levels of government.
• They are able to recruit both experts and highly motivated staff with fewer restrictions than the government.

Disadvantages

• Paternalistic attitudes restrict the degree of participation in programme/project design.
• Restricted/constrained ways of approach to a problem or area.
• Reduced replicability of an idea, due to non-representativeness of the project or selected area, relatively small project coverage, dependence on outside financial resources, etc.
• "Territorial possessiveness" of an area or project reduces cooperation between agencies, seen as threatening or competitive.

Source: Abstracted from - Cousins William, "Non-Governmental Initiatives" in ADB, The Urban Poor and Basic Infrastructure Services in Asia and the Pacific". Asian Development Bank, Manila, 1991

Charities

There are rules that all charities have to follow:

• A charity’s aims have to fall into categories that the law says are charitable. These are things like preventing or relieving poverty, or advancing the arts, culture, heritage or science.
• It has to be established exclusively for what is known as public benefit (see below). That means its only purpose must be charitable.
• Charities can’t make profits. All the money they raise has to go towards achieving their aims. A charity can’t have owners or shareholders who benefit from it.
• Charities have to state what their charitable objectives are in order to be registered with the Charity Commission, and then explain how they are meeting them in their annual reports, which are publicly available. You can read more about how charities make themselves accountable in the accountability and transparency section.
• Public benefit
• To be a charity, an organisation has to:
  • Be of benefit
  • It has to do positive things, and if there are negative side-effects or consequences, these must be outweighed by its positive work.
  • Benefit the public
  • This doesn’t have to mean all of the public. It could mean everyone in a geographic area, or everyone with a specific characteristic, such as people with cancer, or who work in teaching.
• It’s up to the Charity Commission to decide whether an organisation passes the public benefit test. It does this on the basis of its guidance, and by looking at case law.
• Read more: The Charity Commission: Public benefit: an overview

Source: https://howcharitieswork.com/about-charities/what-is-a-charity/

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