Privatisation

Privatisation refers to the transfer of government service or assets to the private sector. The assets owned by the government may be sold to the private sector or statutory restrictions on competition between publicly and privately owned enterprises may be lifted. In Privatisation, the services formerly formed by the government may be privatized. The reasoning for this is usually that privately-owned enterprises are subject to the rules of the market and therefore they will be more efficient. In other words, the term Privatisation states that organizations that are privately owned are highly valued and maintained in a better way. Both reasons support the view that it enhances public benefits and welfare.

What is Privatisation?

Privatisation refers to the process of transferring ownership or control of the government assets, firms, and operations to the private investors. This process of transfer takes the form of issue and sale or outright distribution of shares to the general public. The term Privatisation broadly includes all other policies such as “outsourced” which is the process by which activities while publically organized or financed can be carried out by private sector companies. For example, garbage collection, street planning, housing, education, etc.

In the United Kingdom, the Privatisation policy has been largely and since adopted in several countries all around the world. 

What is Bank Privatisation?

Measures of Privatisation

• Disinvestment of Public Sector Units (PSUs): Selling government-owned shares in public sector enterprises to private entities or the public.

• Outsourcing Services: Contracting private firms to manage specific public services like waste management or transport.

• Public-Private Partnerships (PPP): Collaborating with private entities to fund, build, and operate infrastructure projects.

• Deregulation: Reducing government control and allowing private players to enter previously restricted sectors.

• Asset Monetisation: Leasing public assets like highways, railways, or airports to private players for a specific period.

• Complete Privatisation: Full transfer of ownership and management of a public entity to private hands.

What are the Different Characteristics of Privatisation?

The different characteristics of Privatisation are:

• Transfer of Ownership – In Privatisation, ownership of a company, undertaking or property is transferred to the private sector. 

• Lack of Government Interference – Privatisation reduces indulgence and interference of the state in the activities of a company. 

• Economic Democracy – Privatisation dilutes state monopoly and allows private companies to participate in economic activities more democratically.

Objectives of Privatisation

1. Improved Efficiency: State-run companies are predominantly influenced by political intentions rather than economic well-being. It hinders the efficiency of public sector companies and prevents growth. Privatisation deters government influence and aids economic growth. As private bodies do not have a political agenda, they focus more on spurring growth and efficiency within an organization for a greater generation of revenues.

2. Increased Competition: State-run companies enjoy a monopoly and remain  undisturbed by competition in the market. Privatisation, accompanied by deregulation of the market, allows the private sector to engage more actively and encourages competition. The competition will, in turn, accelerate overall industrial and economic growth and protect the market against monopolistic sluggishness.

3. Promotes Market Dynamism: Privatisation liberates the economy from state control. Without government regulations dictating market progression, the market operates organically. Due to a lack of government interference, the market becomes more dynamic and follows integral economic values of demand and supply. Consumer response to a more dynamic and organically run market is greater and generates higher revenues.

4. Revenue from the Sale of a Company: A primary objective of Privatisation is a one-time revenue generation for the government. Several governments have previously resorted to Privatisation when facing a fiscal crisis.

Methods of Privatisation

There are mainly five methods to privatize a company. These are – 

1. Public Auction: Public auctions are held with the motive of raising the highest amount for a government-owned property. Shares of a public company or long-term assets can be auctioned through this route. 

2. Sale of Shares: Equity shares of a public sector company or undertaking can be sold through stock exchanges for Privatisation. The state hands over complete authority of an organization’s economic activities through a public sale of shares. 

3. Direct Negotiations: When the government enters into dealings with specific private bodies for carrying out the Privatisation of state-owned property, it is called ‘direct negotiation’. Direct negotiations are potentially more beneficial for participating bodies as both the seller and purchaser are present and agree on necessary and advantageous stipulations. 

4. Public Tender: It refers to a contract issued to attract offers from interested procurers. A tender is essentially like an auction where the bidder with the most lucrative offer procures it. The process that follows public tender for the Privatisation of government property is similar to direct negotiations. Except in direct negotiations, there are already selected purchasers who can participate in the dealing. In a public auction, there are no such provisions. 

5. Lease with a Right to Purchase: Under this method, a private company only assumes possession and usage of a state-run company or undertaking by meeting certain criteria. The private company can later choose to exercise the option to convert the lease of a property to ownership by paying the necessary sum and following certain stipulations.

Advantages of Privatisation

• Improved Performance: Private companies are profit-incentivized rather than politically motivated. Privatisation, therefore, allows companies to become more efficient by eliminating unnecessary elements within an organization like overwhelming bureaucracy & red tape. Moreover, private companies assess their employees based on their performance and adequately incentivize better performance. This factor spurs overall performance in an organization. 

• Better Customer Service: As private companies are profit-driven and function in a competitive market, their primary focus rests on efficient customer service. State-run companies lack this feature as they face no competition and are not financially motivated.  Furthermore, customer service is enhanced in Privatisation due to the elimination of unnecessary bureaucratic hassle. 

• Improved Management: Privatisation enhances management of a company. As managers of a privately-owned organization are accountable to the company’s owners, it becomes their responsibility to ensure efficient management. This factor of accountability is less intense in public sector companies which results in poor and inefficient operations that may ultimately harm the economy.

Disadvantage of Privatisation

• Issues of Regulating Monopolies: The private sector can manipulate their monopoly and neglect social costs. Privatisation of certain state industries such as water and electricity regulators may create only single monopolies.

• Public Interest: The profit motive should not be the primary objective for the industry which performs an important public service, e.g. health care, education, and public transport. For example, According to the researchers, the private sector in India has grown independently without any major regulation; In the hands of Private health sector, some private practitioners are not even registered doctors and are referred to as quacks.

• Accountability: The public does not have any control or administration of private companies. Privatisation has a bad effect on accountability because Investors retain full authority to do anything.

• Unassured Success:  Privatisation is unassured in terms of the success rates of any individual unit, due to which many private sector companies suffer huge losses.

Important Concepts of Privatisation in India

Some important concepts related to Privatisation in India are discussed below: 

1. Delegation: Delegation is the process by which the government delegates its responsibilities through lease, franchise, contract, or grant to a private sector company. In delegation, the government retains the ownership and responsibility, but the private company manages all the daily activities; and plays a significant role in delivering the end product or service to the customers. However, the government of a country in this process remains an active participant in the entire process.

2. Displacement: The displacement process initiates with certain deregulations. These processes enable the private companies to enter into a sector that was previously controlled and managed only by the government. As the private enterprises begin to compete with the public enterprise , the public enterprises slowly and steadily are expelled from that sector.

3. Disinvestment: Disinvestment refers to immediate or direct sale or liquidation of assets of publicly owned enterprises to the private sector. The government adopts the disinvestment process primarily  to minimize the financial burden, or to raise money for specific needs. Although in some cases, disinvestment is done to privatize the assets, not all disinvestment involves complete Privatisation. Following are the few advantages of  disinvestment process: 

• It enables the company or government to minimize the fiscal burden on the depository.

• It enhances the long-term growth of the company.

• It encourages private ownership of the company.

• The process of disinvestment  and promoting competition in the market.

Examples of Privatisation in India

• Privatisation of Bharat Aluminum Company in 2005

• Privatisation of Delhi and Mumbai airports in 2006

Difference Between Liberalisation and Privatisation

What is Bank Privatisation?

Bank privatisation refers to the process of transferring ownership and control of a government-owned bank to private individuals or entities. This typically involves selling government stakes in the bank to private investors, either through a public offering or a direct sale. The goal of bank privatisation is to improve the bank's efficiency, profitability, and management by introducing competition, reducing government interference, and encouraging market-driven operations.

Key Aspects of Bank Privatisation:

• Ownership Transfer: Government-owned shares are sold to private investors or entities, shifting the control of the bank.

• Improved Efficiency: Private ownership is expected to bring in better management practices, innovation, and customer service.

• Reduced Government Role: The government's influence in the bank’s operations is minimized, and it operates under market conditions.

• Potential for Growth: With less regulatory oversight, privatised banks may have more flexibility to expand and invest in new ventures.

Conclusion

Privatisation in India is an important step towards strong growth of a country and good governance. With the pandemic, more responsibility is retained with the government for taking the Privatisation process in the right direction and also captivating good outcomes. The Privatisation process also enhances economic status. Although public sector units ha;ve contributed to the development of the country, they have a lot of shortcomings. The process of Privatisation has both pros and cons. Government should adopt complete and partial Privatisation, to enhance efficiency. But at the same time, social justice is equally important and must not be ignored while introducing reforms.