Meaning of Privatisation

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What is Privatization?

The transfer of ownership, property, or business from the hands of the government to the private sector is known as privatization. After the privatization of a company, the government is removed from being the owner of the entity or business.

Privatization can occur in another manner too. In this process, a publicly-traded company is taken over by a select few people. The stock of the company stops trading in the stock market. In this way, the general public is barred from holding a stake in such a company. The company gives up 'limited' and starts putting 'private limited' in its last name.

Privatization is usually done to bring more efficiency and transparency to the company, which are some qualities a government company is not concerned about. Privatization occurred firstly in India during the historic reforms budget of 1991. This process of privatization is also known as the 'New Economic Policy or LPG policy'.

Various Features of Privatization

The different characteristics of privatization are −

  • Transfer of Ownership − As mentioned above, in privatization, the ownership of a company, property, or undertaking is transferred to the private sector.
  • Lack of Government Intervention − Privatization partly or completely remove the government intervention in the activities of a company.
  • Economic Equitability − Privatization removes state monopoly and allows private parties to participate in various economic activities more equitably.

Objectives of Privatization

As private companies pay more attention to customer service and better management, private sector companies fill the market with more benefits and offers for consumers.

Following are the objectives of privatization −

Improved Economic Efficiency

It has been observed that state-run companies are influenced by political intentions more than their economic well-being. It stops the public sector companies from being competent and prevents growth. Privatization removes government intervention and aids economic growth. As private bodies do not come with a political agenda, they can focus on spurring growth and efficiency within an organization which may increase the revenues.

Increased Competition

The government statutes help the state-run companies enjoy a monopoly. They remain out of competition in the market which makes them less innovative and less consumer friendly. Privatization is often accompanied by deregulation of the market which allows the private sector to get involved more actively in encouraging competition. This competition accelerates overall industrial and economic growth and protects the market against monopolistic superimposition.

Promoting Market Dynamics

Privatization removes state control. With the absence of government regulations, the market starts to operate organically. Therefore, without government interference, the market starts to act more dynamically and follows traditional economic values of demand and supply. Consumers respond to a more dynamic and organic market more favorably and it helps in the generation of higher revenues.

Revenue Generation from the Sale of a Company

The government gets a substantial one-time revenue from the privatization of public sector companies. So, privatization can be used as a measure to counter the fiscal deficit of the government.

Advantages of Privatization

Privatization can heal a government’s credit crunch by providing funds from private parties. Moreover, companies become more innovative and competitive due to privatization.

Let us see some of the major advantages of privatization as mentioned below.

Improved Performance

Private companies are more profit-oriented than politically motivated. Privatization, therefore, removes the barriers of bureaucracy & red tape that stop organizations reach their full potential. Moreover, private companies are operated based on performance. They adequately incentivize the better performers. This helps in increasing the overall performance of an organization.

Better Customer Service

Private companies are focused on efficient customer service because they are competitive in nature. State-run companies do not face competition and are therefore not operationally motivated. Additionally, customer service helps private companies by eliminating unnecessary bureaucratic hassles.

Improved Management

Privatization enhances the management of a company. Managers in privately-owned organizations are more accountable to the company’s owners. So, it becomes their responsibility to ensure efficiency in the overall management of the firm. Accountability results in better and more efficient operations that may ultimately benefit the economy.

Disadvantage of Privatization

Even though we have seen above the multiple advantages of privatisation, there are a few disadvantages as well.

They are as follows −

Issues of Regulating Monopolies

Sometimes, the private sector companies manipulate their monopoly and neglect the social costs attached to them. Privatization of some state industries such as water supply and electricity regulators may create single monopolies.

Public Interest

The profit motive should not override the primary objective for some public services, e.g. education, health care, and public transport. For example, the private sector in India does not face any major regulation; Therefore, the transportation fees may be too high which may obstruct public transportation services for the general public.

Accountability

The public cannot control or administer private companies. Privatization may have ill effects on accountability because Investors have full authority and they can run the organizations without ethical motives and habits.

Unassured Success

Privatization is not assured in terms of the success rates of any individual unit, which may lead to huge losses for private companies in the long run.

Methods of Privatization

There are five common methods to privatize a company are as stated below −

Public Auction − Public auctions are held to get the highest amount for a government-owned property. Shares of a public company or long-term assets are auctioned in public auctions.

Sale of Shares − Equity shares of a public company or undertaking are sold through stock exchanges with a motive to initiate privatization. The state transfers complete ownership of economic activities through a public sale of shares.

Direct Negotiations − When the government deals with specific private bodies for the privatization of state-owned property, it is called ‘direct negotiation’. Direct negotiations are of more benefit for participating bodies as both the seller and buyer agree on necessary and advantageous points of the deal.

Public Tender − Public tender refers to a contract issued to receive offers from interested purchasers. A tender is similar to an auction where the bidder with the most lucrative offer gets the ownership. The process of public tender is similar to direct negotiations.

However, in direct negotiations, selected purchasers are already available who can participate in the dealing. In the case of a public auction, there is no such availability.

Lease with a Right to Purchase − In this method, a private company only assumes usage and possession of a government-run company or undertaking by following certain criteria. At a later stage, the company can choose to convert the lease of a property to ownership by paying the required sum and meeting the given stipulations.

Conclusion

Government sell the financially suffering public sector companies at good rates to private players. This gives the government an opportunity to earn good one-time revenues. As the government can use the proceedings in other additional activities, privatization opens the doors to better opportunities for the government and economies.

Privatization also offers an economy the impetus to grow by making it more dynamic and accessible. The citizens of the economy get an upper hand in a more competitive market which is ushered in general by privatization. That is why privatization is a major tool for the progress and improvement of an economy.

FAQs

Qns 1. When was privatization introduced first in India?

Ans. Privatization was first introduced in India in 1991.

Qns 2. Give two examples of public sector companies that were privatized in India.

Ans. Two examples of privatization in India are −

  • Privatization of Bharat Aluminum Company in 2005
  • Privatization of Delhi and Mumbai airports in 2006.

Qns 3. Are liberalization and privatization the same thing?

Ans. Liberalization and privatization are different concepts. Liberalization refers to the upliftment of restrictions in an economy while privatization refers to the sale of public companies to private parties.

raja
Updated on 13-Oct-2022 11:19:47

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