Privatization and Disinvestment - Meaning, Objectives, Advantages and Disadvantages

The transfer of ownership, property or business from the Government to the Private sector is termed Privatization. The government ceases to be the owner of the entity or business.�
The process in which a publicly-traded company is taken over by a few people is also called Privatization.

1. PRIVATIZATION AND DISINVESTMENT BUSINESS ENVIRONMENT Dr. Kavithamani R Assistant Professor Department o f Commerce Sri Ramakrishna College of Arts & Science Coimbatore - 641 006 Tamil Nadu, India

2. Definition:  The transfer of ownership, property or business from the Government to the Private sector is termed Privatization. The government ceases to be the owner of the entity or business. The process in which a publicly-traded company is taken over by a few people is also called Privatization. The stock of the company is no longer traded in the stock market and the general public is streak from holding stake in such a company. The company gives up the name 'limited' and starts using 'private limited' in its last name. PRIVATIZATION Sri Ramakrishna College of Arts and Science

3. Sri Ramakrishna College of Arts and Science Privatisation involves selling state-owned assets to the private sector. It is argued the private sector tends to run a business more efficiently because of the profit motive. However, critics argue private firms can exploit their monopoly power and ignore wider social costs. Privatisation is often achieved through listing the new private company on the stock market. 

4. Objectives of Privatization To generate income for other industries or programs. Improved production effectiveness within the current administrative framework. To keep the government out of corporate operations and processes that should preferably be left to the marketplace. To boost the competitive environment and provide sustainable growth.

5. Modes of Privatization There are a variety of ways to privatize a business. These are some of them: Transfer of control of an Indian government’s corporation’s operations to private ownership. On the open market, assets are sold. Government firms are being sold. Holdings of the state corporation are being sold. With the right to purchase, you can rent with the ability to buy. A payment that is private Auctions Direct negotiations Tenders

6. In 1991, India made some major policy changes in their economic ideologies. There were stagnation and slow growth in the economy. And to tackle these problems the then, Prime Minister Dr. Manmohan Singh introduced some major economic reforms Now , we call it the  Liberalization  of the Indian Economy and the LPG reformed. Privatization has a very broad meaning in economics. Everything that ranges from the introduction of private capital to selling  Government owned assets to transitioning to a private economy. Sri Ramakrishna College of Arts and Science PRIVATIZATION IN INDIA

7. 1] Delegation: Here via a contract or franchise or lease or grant etc. the government keeps the ownership and the responsibility of an enterprise. But the  private company will handle the daily activities and deliver the product or service. The state will remain an active participant in this process. 2] Divestment: The government will sell a majority stake of the enterprise to one or more private companies. It may keep some ownership but will be a minority stakeholder in the enterprise. 3] Displacement: The first step here will be deregulation. This will allow private players to enter the market. Slowly and gradually the private company will displace the public enterprise. Here the private sector will compete with public companies and ultimately outperform them, causing the public enterprise to be displaced. 4] Disinvestment: Directly selling a portion or whole of a public enterprise to private parties. CONCEPTUALIZATION OF PRIVATIZATION IN INDIA Sri Ramakrishna College of Arts and Science

8. The three main features of privatization are: Ownership Measures: The ownership of all public enterprises ultimately shifts to private owners. The denationalization can be complete or partial. Organizational Measures: This is where we limit the control of the state in public companies. Some methods include holding company  structuring, leasing. restructuring of the enterprises etc. Operational Measures: Public organizations and companies were running into huge losses. So the efficiency of these companies was to be increased. Sri Ramakrishna College of Arts and Science FEATURES OF PRIVATIZATION

9. 1. Improved efficiency The main argument for Privatization is that private companies have a profit incentive to cut costs and be more efficient. If you work for a government run industry managers do not usually share in any profits. However, a private firm is interested in making a profit, and so it is more likely to cut costs and be efficient. Since Privatization, companies like British Airways have shown degrees of improved efficiency and higher profitability. 2. Lack of political interference It is argued Governments make poor economic Managers. They are motivated by political pressures rather than sound economic and business sense. For example, a state enterprise may employ surplus workers which is inefficient. The government may be reluctant to get rid of the workers because of the negative publicity involved in job losses. Therefore, State-owned enterprises often employ too many workers increasing inefficiency. ADVANTAGES / BENEFITS OF PRIVATISATION Sri Ramakrishna College of Arts and Science

10. 3. Short term view A government may think only in terms of the next election. Therefore, they 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. It is easier to cut public sector investment than frontline services like healthcare. 4. Shareholders It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover. A state-owned firm doesn’t have this pressure and so it is easier for them to be inefficient. Sri Ramakrishna College of Arts and Science

11. 5. Increased competition Often privatisation of state-owned monopolies occurs alongside deregulation – i.e. policies to allow more firms to enter the industry and increase the competitiveness of the market. It is this increase in competition that can be the greatest spur to improvements in efficiency. For example, there is now more competition in telecoms and distribution of gas and electricity. However, privatisation doesn’t necessarily increase competition; it depends on the nature of the market. E.g. There is a very little competition within the rail industry. Sri Ramakrishna College of Arts and Science

12. 6. Government will raise revenue from the sale: Selling State-owned assets to the private sector raised significant sums for the Government in the 1980s. However, this is a one-off benefit. It also means we lose out on future dividends from the profits of public companies. Sri Ramakrishna College of Arts and Science

13. Natural monopoly: A natural monopoly occurs when the most efficient number of firms in an industry is one. For example, tap water has very significant fixed costs. Therefore there is no scope for having competition amongst several firms. Therefore, in this case, privatisation would just create a private monopoly which might seek to set higher prices which exploit consumers. Therefore it is better to have a public monopoly rather than a private monopoly which can exploit the consumer. Sri Ramakrishna College of Arts and Science DISADVANTAGES OF PRIVATISATION

14. 2. Public interest There are many industries which perform an important public service, e.g., health care, education and public transport. In these industries, the profit motive shouldn’t be the primary objective of firms and the industry. For example, in the case of health care, it is feared privatising health care would mean a greater priority is given to profit rather than patient care. Also , in an industry like health care, arguably we don’t need a profit motive to improve standards. When doctors treat patients, they are unlikely to try harder if they get a bonus. 3. Government loses out on potential dividends . Many of the privatised companies are quite profitable. This means the government misses out on their dividends, instead going to wealthy shareholders. Sri Ramakrishna College of Arts and Science

15. 4. Problem of regulating private monopolies . Privatisation creates private monopolies, such as the water companies and rail companies. These need regulating to prevent abuse of monopoly power. Therefore, there is still need for government regulation, similar to under state ownership. 5. Fragmentation of industries Privatisation led to breaking up the companies into infrastructure and operating companies. This led to areas where it was unclear who had responsibility. For example , in UK, because of privatization in Railways, the Hatfield rail crash was blamed on no one taking responsibility for safety. Different rail companies has increased the complexity of rail tickets. Sri Ramakrishna College of Arts and Science

16. 6. Short-termism of firms As well as the government being motivated by short term pressures, this is something private firms may do as well. To please shareholders they may seek to increase short term profits and avoid investing in long term projects. For example, the UK is suffering from a lack of investment in new energy sources; the privatised companies are trying to make use of existing plants rather than invest in new ones. Sri Ramakrishna College of Arts and Science

17. Disinvestment  is just the opposite of investment, i.e. it means pulling out the money invested in the company by selling the stake, either partially or fully. It is driven by the effective use of the resources, to earn the highest returns out of the money invested . Privatisation of the public sector undertakings by selling off part of the equity of PSUs to the private sector is known as disinvestment. The purpose of the sale is mainly to improve financial discipline and facilitate modernization. DISINVESTMENT - Meaning Sri Ramakrishna College of Arts and Science

18. The government undertakes disinvestment to reduce the fiscal burden on the exchequer, or to raise money for meeting specific needs, such as to bridge the revenue shortfall from other regular sources. In some cases, disinvestment may be done to privatise assets. However, not all disinvestment is privatisation . Sri Ramakrishna College of Arts and Science

19. Some of the benefits of Disinvestment are : that it can be helpful in the long-term growth of the country; it allows the government and even the company to reduce debt. Disinvestment allows a larger share of PSU ownership in the open market, which in turn allows for the development of a strong capital market in India. BENEFITS OF DISINVESTMENT Sri Ramakrishna College of Arts and Science

20. Main objectives of Disinvestment in India: Reducing the fiscal burden on the exchequer Improving public finances Encouraging private ownership Funding growth and development programmes Maintaining and promoting competition in the market OBJECTIVES OF DISINVESTMENT Sri Ramakrishna College of Arts and Science