What is Privatization & Its Advantages And Disadvantages

Privatization is the process of involving the private sector in the ownership or operation of a state-owned enterprise. The word Privatisation may refer to different economic functions based on the context involved.

It can mean the transference of control and execution of services and activities previously administered by the state to the private sector.

Example: Privatization of Bharat Aluminum company in 2005,Public tender, etc.

It implies gradual withdrawal of government ownership/management from the public sector enterprises. It may happen in two ways:

  1. Outright sale of the government enterprises to the private entrepreneurs.
  2. withdrawal of the government ownership and management from the mixed enterprises .

Need for Privatization

Need for Privatization was felt mainly because of poor performance of PSUs. Note the following in this regard:

  1. The process of industrialization was initiated during second five year plan assigning a key role to PSUs.
  2. The industrial policy resolution 1956 clearly stated the significance of PSUs in the process of growth and development.
  3. Gradually, most public sector enterprises turned into as social dead-weight (social liability). Mounting losses of PSUs became unsustainable.
  4. Leakage, inefficiency and the corruption has become so rampant in PSUs that their privatisation was considered as the only remedy.
  5. Accordingly in 1991, the government decided to phase out  public enterprises by selling its equity to the private entrepreneurs. Privatization was to replace public ownership  of a large number of enterprises.

Features of privatization

  1. New concept
  2. universal concept
  3. wide concept
  4. Economy Democracy
  5. Process
  6. Assumption
  1. New concept: Privatization is a new concept that has emerged in the last two decades.
  2. Universal concept: The concept of privatization has emerged not only in India but it has developed all over the world. Countries like USA, UK, Japan, India , etc. has adopted this ideology.
  3. wide concept: It is a wide idea. It involves not only the  transfer of the public to private hand but it limits government involvement  in the economic activities and protects the private sector.
  4. Economy Democracy: It is a means of establishing economic democracy. It provides  the chance to the private sector to operate in economic activities freely.
  5. Process: Privatization if a process which goes on continuously. It cannot be completed in a certain period. It is a process that takes its shape slowly.
  6. Assumption: The privatization is based on the assumption that the private sector is more efficient in the management and control of an enterprise than the public sector.

Objectives of Privatization

  1. Efficiency Improvement: Nowadays, the concentration of certain ruling parties is political intentional. They do not see the side of the economy of the state and the well-being of the people. It stops or puts a barricade when it comes to the growth of public sector companies. So, privatization reduces the political influence and concentrates on aiding the public well-being and economic growth.
  2. Increase in Competition: While state-run companies do not have competition they enjoy in Monopoly and tend to forget the cause of their work. They either take time to finish a particular project or do not involve in quality work and output. But when privatized, people work better keeping in mind the competitions they have. This also accelerates the overall growth industries and the economy.
  3. Diversifying Market options: Privatization advances the market progression which makes the market work organically. Also because there is no influence from the political side, market dynamism is promoted and people keep track of the demand and supply and work accordingly. This also produces higher revenues.
  4. For Revenue: This is one of the major objective of privatization. This one time revenue from the sale of the sector or company helps a lot when there is a financial crisis.

Methods of Privatization

  1. Sale of Shares
  2. Public Auction
  3. Public tender
  4. Lease with a right to purchase
  5. Direct Negotiations
  1. Sale of Shares: The shares of a public sector company can be sold through stock exchanges in order to privatise. Through this the state hands over the complete power and authority of the sectors economic activities.
  2. Public Auction: Public Auctions main motive is to raise the highest funds for government property. Auctioning includes the share and long-term Assets of a public company.
  3. Public Tender: A public tender is in contract that is to attract the offers that are provided by the procurers. The tender is given to the person whose offer is the most profitable. It is almost similar to the previous methods except the bidder is selected from the options provided where indirectly quotations are already selected.
  4. Lease with a right to purchase:Here, only the possession and usage of government- run entities are assumed by private company by meeting certain criteria.An option is available later on to private company for converting the property lease to ownership by paying a specific sum and meeting certain speculations.
  5. Direct Negotiations:When the government enters into dealings with specific private bodies for carrying out the Privatisation of state – owned property 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.

Advantages of Privatization

  1. Improved Performance: Private companies are profit incentivized rather than politically motivated. Privatization, therefore allows companies to turn more efficient by eliminating unnecessary elements within an organization like overwhelming bureaucracy and red tape.
  2. Improved Management: Privatizations fosters improved 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.
  3. Better Customer Service: Since 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 Privatization due to elimination of unnecessary bureaucratic hassle.
  4. Rid of Political Intervention: One of the primary benefits of privatization is lack of government influence. Public sector undertakings are mostly driven by political agenda, and its decisions rely on which courses are more politically convenient. Private sector companies are absent of any political motives and driven by profitable.

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. 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.
  3. 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. Barring a small of proportion of companies that are efficient and show a good profitability ratio,  many are insufficient.
  4. widespread Sickness : The private sector industries such as Textiles, Engineering, Chemicals, iron and steel and people are suffering from the problems of industrial sickness.

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