IMPACT OF PRIVATIZATION ON THE FINANCIAL PERFORMANCE OF ORGANIZATIONS IN KENYA By Benson Murigi, Ken Mwaforo, Paul Mugi
Table of Contents
1.1 Background information
Organizations are the backbone of any country’s economy. A leadership dialogue that took place in the year 2007 explained that business activities could create jobs and entrepreneurial opportunities, cultivate inter-firm linkages, enable technology transfer, build human capital and physical infrastructure, and generate public revenue for government and organizations as well as offering a variety of products and services to consumer and other businesses. This will have a multiplier effect on social and economic development in the country. It clearly showed that private companies could boost the overall development of a country when implemented. Any given economy needs to have public enterprises as well, state owned enterprises remain important in emerging and transition markets despite an upsurge in privatizations. Traditionally these organizations mainly dealt with transport, communication, national security among other critical areas in the economy. These organizations however need to be transparent, accountable, and equitable and have sustainable management in order to play their role in economic development effectively. There have been recent programs to reform this sector. One of these reforms is privatization of the organizations. 1.1.1 Privatization
Privatization entails shifting of production and provision of goods and services from the government to the private sector.Through privatization, public enterprises may be transformed to private firms. Oxford Dictionary defines it as “the process of changing a business, industry or service from public to private control or ownership”. Therefore it involves selling the government stake in government organizations to private investors whether individual or companies. This way the involved institution is exposed to market forces hence a need for efficiency in order to survive into the competitive market. It is mostly done through sale of shares of the organizations through an Initial public offer (IPO). According to oxford dictionary, IPO is the act of offering the stocks of a company on a public stock exchange for the first time. Guriev&Megginson (2005) refer to this as Share issue privatization. Kosar (2006) identifies other methods of privatization such as contracting for goods, public floatation, strategic sale, concession, outsourcing, and quasi-governmental entities among others. For over two decades privatization has been advocated as the predominant way to solve the problems facing ailing public enterprises in developing countries (Shirley and Walsh, 2001). It is seen as a way of bringing competition hence creating a free market economy which saves the government from being drained off its resources. The workers incentives in the public sector are also not market based hence lowering their morale. Muindi, S. explains, “the process of privatization is not viewed as an end in itself but as an integral and visible element of the Government's overall public enterprise reform program and a progressive effort to promote productive efficiency, to strengthen competitive forces in the economy and to support entrepreneurial development” The reverse is nationalization which aims at transforming private organizations into public enterprises. Most developing countries have over the last few decades embarked on privatization of public organizations. In India, according to Ocampo, Stiglitz and Spiegel (2008), nearly every government’s annual budget has declared that the privatization goal is to reduce government ownership to 26% of equity, the minimum equity holding necessary for certain voting powers, in all state- owned firms not in the defense, atomic energy, and railway sectors. However, until 2000 the government sold only minority equity stakes, sometimes as little as...
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