Privatisation

PRIVATISATION
Meaning
Objectives
Ways of Privatisation
Advantage & Disadvantage
Examples
Privatisation in India

Meaning of Privatisation
 It means a transfer of ownership, management, and
control of public sector enterprises to the private sector.
 Privatization occurs when a government-owned
business, operation, or property becomes owned by a
private, non-government party. Note that privatization
also describes the transition of a company from
being publicly traded to becoming privately held. This is
referred to as corporate privatization.
 The purchase of all outstanding shares of a publicly
traded company by private investors, or the sale of
a state-owned enterprise or municipally owned
corporation to private investors. In the case of a for-
profit company, the shares are then no longer traded at
a stock exchange, as the company became private
through private equity
2Jyoti Rastogi (Assistant Professor)

Forms of Privatisation

Objectives of Privatisation:
Providing strong momentum to the inflow of FDI
 Privatisation aims at providing a strong base to the
inflow of FDI.
 Increased inflow of FDI improves the financial strength
of the economy.
Improving the efficiency of public sector undertaking
(PSU’s)
 The efficiency of PSU’s was improved by giving them
the autonomy to make decisions.
 Some companies were given a special category of
Navratna and Mini-Ratna.
 To achieve higher allocative and productive efficiency,
leading to faster economic growth and development;

Objectives of Privatisation:
To strengthen the role of the private sector in the
economy through job creation and economic
development.
To improve the public sector’s financial health by
reducing the burden incurred by having to
subsidize public enterprises.
To free resources for use in sectors important to all
Nigerians, such as education, health, housing,
transportation, and other infrastructure
development initiatives.

Ways of Privatisation:
Transfer of Ownership
 Government companies can be converted into private
companies in two ways :
 By withdrawal of the government from ownership and
management of public sector companies.
 By outright sale of public sector companies.
Disinvestment
 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.

Six methods of Privatisation
PRIVATISATION
The public
sale of
shares
Public
auction
Public
tender
Direct
negotiations
Transfer of
control of
State
Lease with a
right to
purchase

Advantages of Privatization
1. Save taxpayers' money
2. Increase flexibility
3. Improve service quality
4. Increase efficiency and innovation
5. Allow policymakers to steer, rather than row
6. Streamline and downsize government
7. Improve maintenance

Disadvantages of
Privatization
1. Problem of Price
 The government usually want to sell the least profitable
Enterprises, those that the private sector is not willing to buy at a
price acceptable to the government.
2. Opposition from Employees
 Disinvestment tends to arise political opposition from employees
who may lose their jobs, from politicians who fear short-term
unemployment consequence of liquidation of cost reduction by
private owners, from bureaucrats who stand to lose patronage
and from those sections of the public who fear that national
assets are being concerned by foreigners, the rich or a particular
ethnic group.
3. Problem of Finance
 In the developing countries under the developed capital market
sometimes makes it difficult for the government to float shares
and for individual buyers to finance the large purchase. 9Jyoti Rastogi (Assistant Professor)

Disadvantages of
Privatization
4. Independence on Government
 There has been an excessive Regulation and control of the
private sector by the government.
 The private sector has also become too much dependent on
the government for meeting its imports requirement, output
sale, finances, etc.
 This has sniffled the capacity of the private sector to stand on
their own.
5. High-Cost Economy
 Another problem with the private sector is that its cost, in
general, are large and the price of products are unduly high.
 The two other factors of higher costs are the high costs of raw
materials and components and the higher rate of indirect taxes

Disadvantages of
Privatization
6. Concentration of Economic Power
 The dominance of some business groups in terms of capital and
assets is an economic and social problem.
 The private sector operates on the principle of maximization of
the Monopoly profits. It is harmful to consumers and society as a
whole.
7. Bad Industrial Relations
 An unfortunate aspect of the private sector is the recurrence of
industrial disputes which hamper the smooth progress of the
industries.
8. Ambulance Development
 Private sector units are influenced in those areas which are
most suitable for-profit purpose.

Example of Privatisation
 Before 2012, In the state of Washington, before 2012, the liquor
sales were controlled and operated by the government. The
state-regulated when and how the liquor was sold and collected
the revenue. But, in 2012, the government privatized liquor
sales. After privatization, private businesses could sell liquor to
the general public.
 Dell Inc. is an example of a company that transitioned from
being publicly traded to privately held. In 2013, with approval
from its shareholders, Dell offered shareholders a fixed amount
per share, plus a specified dividend as a way to buy back its
stock and delist. Once the company paid off its existing
shareholders, it ceased any public trading and removed its
shares from the NASDAQ Stock Exchange, completing the
transition to being privately held.

Privatisation in India
 In 1991 India made some major policy changes in their
economic ideologies. There were stagnation and slow
growth in the economy.
 To tackle these problems the, then Finance Minister Dr.
Manmohan Singh introduced some major economic
reforms. Now, we call it the liberalization of the Indian
Economy and the LPG reforms.
 Privatisation 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.

Conceptualization of Privatisation
in India
 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.
 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.
 Displacement: The first step here will be deregulation. This will allow
private players to enter the market. And 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.
 Disinvestment: Directly selling a portion or whole of a public enterprise
to private parties.

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Privatisation

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