Q. What is privatisation?
- The move of ownership, property or business from the public sector to the private sector is named privatization. The government stops to be the proprietor of the substance or business.
- The process in which a publicly-traded company is taken over by a few people is also called privatization. The company gives up the name 'limited' and starts using 'private limited' in its last name.
- It is considered to carry more effectiveness and objectivity to the organization, something that an government organization isn't worried about.
- It means a transfer of ownership, management, and control of public sector enterprises to the private sector.
Q. What are its objectives?
- Providing strong momentum to the inflow of FDI
- Improving the efficiency of public sector undertaking (PSU’s) as the efficiency of PSU’s was improved by giving them the autonomy to make decisions.
- Minimise the administrative cost of the Central Government
- Boost the CPSE Disinvestment programme of the central government
Thus it was done to :
- To reduce the burden on Government
- To strengthen competition
- To improve Public finances
- To fund infrastructure growth
- Accountability to shareholders
- To reduce unnecessary interference
- More disciplined and trained work force.
Q. What are some of examples of privatisation in Indian context?
- India went for privatization in the historic reforms budget of 1991, also known as 'New Economic Policy or LPG policy'.
- India’s attempt at dismantling the PSUs over the years has seen little success, with the last big-ticket privatization taking place between 1999 and 2004.
- Since then, most governments have tried to disinvest and privatize. But this has led only to incremental progress, with no big-ticket privatization taking place since then. A good example is Air India, the national carrier that the Centre has repeatedly tried to privatize. However, it has met with limited success.
- A good example of privatization and its effect on the enterprise is Hindustan Zinc. The government sold 45% of Hindustan Zinc for ₹769 crore in 2002. The 30% stake the government retained was valued at over ₹20,000 crore. The company became the world’s second-largest zinc-lead miner and one of the top 10 silver producers. Management change and privatization can thus raise shareholder wealth through improved efficiency.
Q. What are methods of privatisation?
Initial Public Offers (IPO).
IPOs are the most preferred method of privatisation in it the shares/equity holdings of the PSUs are sold to the private retail investors and institutions like Mutual Fund houses, Pension Funds and Insurance Companies etc.
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.
Strategic Sale is a method in which the government decides to sell PSU shares to a strategic partner. The management in all such cases passes to the strategic buyer.
Sale to Foreign Firms.
The method is a variant of the strategic sales method where the government decides to sell the PSUs to the foreign firms.
Management and Employees Buy outs.
In this route, management and employees come forward to but the shares and equities of the PSUs.
The method is followed in India from time to time. The method involves the sale of the Public sector equity to the private sector and the public at large.
Q. What are its some of advantages?
- State owned enterprises generally are outdone by the private enterprises competitively. When compared the latter, it shows better results in terms of profits and efficiency and productivity. Therefore, privatization can provide the necessary push to the underperforming PSUs.
- Privatization brings about fundamental structural changes providing momentum in the competitive sectors.
- Privatization leads to implementation of the global best practices along with management and motivation of the best human talent to foster sustainable competitive advantage and improvised management of resources.
- Privatization has a positive impact on the financial growth of the sector which was previously state dominated by way of decreasing the deficits and debts.
- The net transfer to the State owned Enterprises is lowered through privatization.
- It helps in escalating the performance benchmarks of the industry in general.
- It can initially have an undesirable impact on the employees but progressively in the long term, shall prove advantageous for the growth and prosperity of the employees.
- Privatized enterprises provide better and quick services to the clients and help in improving the overall infrastructure of the country.
Q. What are the Challenges?
- No Buyers for Loss-making PSEs: No one would buy PSEs with their huge debt and employee liabilities.
- Government has mostly used it for fiscal reasons rather than growth objectives.
- Over the years the policy has increasingly become a tool to raise resources to cover the fiscal deficit with little focus on market discipline or strategic objective.
- Sometimes with the emergence of private monopolies consumer welfare will be reduced.
- Mere change of ownership from public to private does not ensure higher efficiency and productivity.
- Privatisation not the first option: In India, privatisation is not a default option; rather, it is resorted to only out of extreme necessity as the hesitation to privatise some of the largest loss-making PSEs like Air India, BSNL and MTNL.
- It may lead to retrenchment of workers who will be deprived of the means of their livelihood.
- Excessive Bureaucratisation: Public sector industries in India are plagued with inefficiencies due to excessive bureaucratisation.
- Private sector governed as they are by profit motive has a tendency to use capital intensive techniques which will worsen unemployment problem in India.