Privatisation

What is Privatisation?

The word ‘Privatisation’ may refer to different economic functions based on the context involved. 

It can mean transference of control and execution of services and activities previously administered by the state to the private sector. Instances of this can include privatisation of airports and railways. 

Rarely, the term is used to define the deregulation of a company that was previously heavily regulated. And in some cases, the meaning of privatisation is when a public limited company turns private, thus barring the general public from holding equity in that company.

It predominantly means transference of ownership of a state-funded organisation or property to a private sector player.

Feature of Privatisation

  • 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

  • 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 organisation for greater generation of revenues.

  • Increased ompetition

State-run companies enjoy a monopoly and remain unperturbed 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 insulate the market against monopolistic sluggishness. 

  • 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. 

  • 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 privatise a company. These are – 

  • 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. 

  • Sale of Shares

Equity shares of a public sector company or undertaking can be sold through stock exchanges for privatisation. The state relinquishes complete authority of an organisation’s economic activities through a public sale of shares. 

  • 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. 

  • 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 select purchasers who can participate in the dealing. In a public auction, there are no such provisions. 

  • 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-incentivised rather than politically motivated. Privatisation, therefore, allows companies to turn more efficient by eliminating unnecessary elements within an organisation like overwhelming bureaucracy & red tape. 

Moreover, private companies assess their employees based on their performance and adequately incentivise better performance. This factor spurs overall performance in an organisation. 

  • 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 privatisation due to elimination of unnecessary bureaucratic hassle. 

  • Improved Management

Privatisation fosters improved management of a company. As managers of a privately-owned organisation 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.

  • Rid of Political Intervention

One of the primary benefits of privatisation 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 decisions. 

  • Attraction of Investments

Privately-owned companies attract higher investments from stock exchanges due to their economically and financially sound infrastructure that gains investor confidence. A higher inflow of investments, both local and foreign, bolsters the economy. 

Examples of Privatisation in India

  • Privatisation of Bharat Aluminium Company in 2005

  • Privatisation of Delhi and Mumbai airports in 2006

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FAQ (Frequently Asked Questions)

1. What do you Mean by Privatisation?

Privatisation is the process of transferring ownership of any property or migrating administration of any state-run service from the public sector to the private sector. It can also mean deregulation of a heavily regulated company. It also refers to the process of conversion of a public limited company into a private limited company. 

2. What is the Difference Between Privatisation and Disinvestment?

 

Parameters 

Privatisation 

Disinvestment

Meaning

Refers to privatising a previously state-held asset or company or sector.

Refers to the liquidation of a state-owned asset or company. 

Scope

Transference of ownership from the public sector to the private sector.

Involves the sale of equity shares of PSUs to private sector companies.

Objective


  • Increase efficiency and competitiveness of a company

  • Better management

  • Improved performance

  • Rapid industrial and economic growth of the market

  • To attract higher inflow of FDI


  • Reduce the financial burden on the government

  • To promote market discipline

  • To facilitate company growth through private management


3. What are the Types of Privatisation?

The types of privatisation – 

  • Transference of ownership of a state-funded company or state-owned property to the private sector. 

  • Liberating sectors from government control.

  • Conversion of publicly-owned companies into privately-owned. 

  • Deregulating a heavily regulated private sector company.