Privatization: Meaning, Benefits, and Challenges

Privatization 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 Privatization, the services formerly formed by the government may be privatized. The reasoning for this privatization 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 privatization states that organizations that are privately owned are highly valued and maintained in a better way. Both reasons support the view that privatization enhances public benefits and welfare.

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What is Privatization?

Privatization 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 privatization 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 privatization policy has been largely and since adopted in several countries all around the world. 

What are the Different Characteristics of Privatization?

The different characteristics of privatization are:

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

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

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

Objectives of Privatization

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. Privatization 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.

Increased Competition: State-run companies enjoy a monopoly and remain  undisturbed by competition in the market. Privatization, 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. 

Promotes Market Dynamism: Privatization 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 privatization is a one-time revenue generation for the government. Several governments have previously resorted to privatization when facing a fiscal crisis. 

Methods of Privatization

There are mainly five methods to privatize 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 privatization. The state hands over complete authority of an organization’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 privatization 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 privatization 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. 

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 Privatization

Improved Performance: Private companies are profit-incentivized rather than politically motivated. Privatization, 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 privatization due to the elimination of unnecessary bureaucratic hassle. 

Improved Management: Privatization  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 Privatization

Issues of Regulating Monopolies: The private sector can manipulate their monopoly and neglect social costs. Privatization 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. Privatization has a bad effect on accountability because Investors retain full authority to do anything.

Unassured Success:  Privatization 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 Privatization in India

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

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.

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.

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 privatization. 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 Privatization in India

• Privatization of Bharat Aluminum Company in 2005

• Privatization of Delhi and Mumbai airports in 2006

Conclusion

Privatization 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 privatization process in the right direction and also captivating good outcomes. The privatization 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 privatization has both pros and cons. Government should adopt complete and partial privatization, to enhance efficiency. But at the same time, social justice is equally important and must not be ignored while introducing reforms.