Waste – a good case for privatization ?

Capital Waste plc was created several years ago when the capital city`s rubbish collection service.
was privatized. As public-sector enterprise , the organization was well-known for being greatly
overstaffed and inefficient. However, charges for collecting waste from both homes and businesses
were very low and because of this, the service was popular with local residents. The city subsidized
the waste services each year and this helped to keep charges down. The organization was privatized
by the sale of shares to the public and financial companies. Just after privatization, the directors
announced substantial job cuts to save on costs. At the same time, the waste collection service was.
reduced to once a week, yet charges were increased. The city government also announced that
other businesses could set up in competition if they wished to.
The business started to make big profits. The directors said that these would be used to invest in new
equipment and to pay dividends to shareholders. Last year, for the first time since privatization,
profits fell. This was due to competition from a newly formed waste disposal business. Many of the
shareholders of Capital Waste wanted the directors to be replaced. The biggest shareholders
demanded to be on the board of directors. The current chief executive decided to discuss
with the bank whether a loan could be obtained to enable him to buy out most of the shares
so that he could 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 these big shareholders and I can get away with publishing less information about the
company.
1) Analyse the likely reasons why the city government decided to privatize this organization. [ 10]
2) Evaluate the likely impact of this privatization, in the short run and the long run, on
• customers
• shareholders
• workers [ 12 ]
3) Assess the importance of changing the long-term objectives of a business that has been privatized.
[ 10]
4) Recommend to the chief executive whether he should maintain the business as a public limited
company (plc) or not. Justify your answer. [ 12]
Answer

1) Privatization is the selling of state-owned and controlled business organization to investors in

the private sector. Possible reasons the city was incentivized to convert Capital Waste into a
private business could be due to the inefficiencies that were present prior to the privatization
of the company, as stated above; “the organization was well-known for being greatly
overstaffed and inefficient” this indicates a high labor turnover or a low employment rate and
redundancies in the business which may be caused by certain quotas or restrictions placed on
Capital waste as a public-sector business as the government may enforce policies which may
prevent Capital Waste from holding a monopoly on the market, as well as pressure to work
above the business’s able capacity in order to hold popularity over the community which the
government is interested in maintaining. Besides allowing for the business to cut down on
redundancies and inefficient staff by allowing Capital Waste to be privatized the company can
focus to be profit oriented and evolve past the autocratic method of management they were
under as a public sector company. By becoming a private business Capital Waste will have
access to the private capital markets and this will lead to increased investment in the
business which will be likely as the positive public relations Capital Waste has can be
leveraged to push investors into the business.

2) Customers:
In the short-term customers will be affected with increased prices and different quality of
service, as Capital Waste has shifted its business goals and objectives to be profit oriented.
In the long-term customers will benefit from a larger variety of services at competitive prices
as with privatization of other companies in the same field arises the competition between
companies will produce reduced prices and higher quality services for consumers.

Shareholders:
In the short term shareholders stand to gain an incredible amount as they now have partial
control over the business and an increase in dividends paid to them as the business can be
profit driven, as typically public sector businesses are influenced by government agenda
therefore the government or city officials may be unwilling to invest in infrastructure
improvements which will benefit the firm in the long term because they are more concerned
about projects that give a benefit before the election. Shareholders now have substantial
decision-making powers in the company and thus can place increased pressure onto Capital
Waste to increase efficiency and profit.
In the long term, shareholders may lose substantial investment if the business loses profits
over time, due to Capital Waste being a private company multiple variable which do not
affect public sector companies now apply. Such as tax breaks and government investment
priority which now Capital Waste cannot benefit from.

Workers:
The short-term benefit for workers in a newly privatized business is that workers can now
stand to gain more such as promotions and other workplace benefits such as bonuses in
direct congruence with the success of the firm. As now the business can afford to provide
benefits to exemplary employees however, they see fit due to the firm’s autonomy from
government influence. The disadvantages is that the business will have to lay-off non-
essential or inefficient staff as there is no longer an incentive to continue maintaining
inefficiencies.
 The long-term benefit for workers is that as the business expands and continue to adhere to
its new business goal for profit and expansion more job opportunities could be created as the
demand for capable workers increases with the business.

3) The importance of changing the long-term objectives that has been privatized is paramount
as the business shift to be profit oriented in order to remain competitive in the market as well
as hold a strong market presence has become a necessity for the success of the firm.

Long term objectives of the business must now shift to place profit and efficiency to cut down
on wasted investment as much as possible in order to allow for the firm to expand.
Objectives will change into profit maximization. In a private business, profits are restricted to
the company's core set of owners, which may be just one person or a small group of
interested stakeholders who have invested in the company. Often these owners also have a
direct impact on the day-to-day management of the company, so the desire to increase
profits is even more of a concern than in many public companies, where the goals of the
management and stockholders may differ. Another objective for private companies is
transparency in financial reporting and annual reports, but the transparency is typically
restricted to the key stakeholders in the organization and may not extend to the public at
large, whereas public companies have a responsibility to reveal financial data and
performance metrics to the stock exchange and to their many shareholders, private
companies are not required by law to publish their financial statements.

4) According to the passage above, Capital Waste in order to support its new organizational
structure and privatization the company has had to make substantial job cuts as well as direct
additional funds into paying dividends to shareholders which Capital Waste did not need to
before. With that in mind in terms of municipalities shifting to a profit-oriented business
objective could prove to be a detriment to the firm as depending on the quality regulation
regarding the company’s industry, the firm may need to meet certain standards of service
and keep prices low therefore preventing the business from increasing its market share
overall. Previously Capital Waste was able to operate despite inefficiencies due to
government subsidies and supports therefore it can be presumed that the main issue
plaguing Capital Waste was not government influence or lack of investment but an improper
managerial structure as well as redundant staff, which was inorganically addressed by shifting
to be more profit oriented. However due to that shift in business objective there is an
increased pressure from stakeholders to operate at maximum inefficiency and to increase
profit which may prove to be difficult due to competition in the market, the increased
pressure incentives stakeholders to take control of the business away from the executives or
to increase layovers until profits return. The increased pressure from stakeholders has
pushed the internal management of the company to resort to taking on more liability by
taking a loan just to regain control of the busines, the increase in non-current liabilities will
prove to be detrimental to the firm as they are already operating at a lesser capacity thus
harming the firm’s positive relations by increasing prices and reducing service. Capital Waste
does not stand to benefit as a privatized company as the increase in liability and decrease in
control over the company outweigh the benefit of the short-term increase in profit and
expansion.