Privatization
Ques.No.1: What do you mean by privatization? What are its objectives?
Ans: The word privatization has been receiving much Attention in business, government and
academic circles on a global platform. The history of privatization is very short just 1 to 15 years
old to be precise.
Meaning of Privatization
Privatization, also spelled privatisation, may have several meanings. Primarily, it is the process
of transferring ownership of a business, enterprise, agency, public service, or public property
from the public sector (a government) to the private sector, either to a business that operates for a
profit or to a nonprofit organization. It may also mean government outsourcing of services or
functions to private firms, e.g. revenue collection, law enforcement, and prison management.
In other words, privatization may be understood as the process whereby activities or enterprises
that were owned performed or operated by the government and it employees are now performed,
managed or owned by private business and individuals, often with much better results in term of
cost and quality of service.
Privatization has also been used to describe two unrelated transactions. The first is the buying of
all outstanding shares of a publicly traded company by a single entity, making the company
privately owned. This is often described as private equity. The second is a demutualization of a
mutual organization or cooperative to form a joint-stock company.
Objectives of Privatization
Privatization seeks to create an economic advantage through business ownership and
competition.
Privatization refers to the transfer of services traditionally performed by a public entity to
privately-owned businesses. A public entity might be the federal government, a public school
district or a publicly-owned utility company. Services these entities provide include social
security retirement and disability benefits, bus transportation and the conversion of natural
resources for energy use. By transferring the responsibility for these services to the economy's
private sector, privatization seeks to create economic efficiency, fully develop the service being
provided, make improvements in the public entity's budget, redistribute income and gain political
influence.
Macroeconomic Efficiency
One of the main goals of privatization is to create higher levels of efficiency throughout the
economy. It seeks to either establish or support what is referred to as a "market economy." This
type of economy is driven by the notion of free enterprise. Individuals and businesses exchange
goods and services voluntarily, largely without any type of government or political intervention.
Prices for goods and services are determined by supply and demand and competition among
suppliers is encouraged. The United States is an example of a market economy.
Service Development and Efficiency
A second aim of privatization is to improve the economic efficiency and development of the
service in question. For example, some states allow for the deregulation of utilities. By allowing
more than one utility company to provide electricity or gas, customers are able to possibly reap
the benefits of lower prices through competition. It is thought that privately-owned companies
operate more efficiently than government entities. Efficiency is higher in the private sector due to
a stronger connection between the business owners and its executive operators.
Budget Improvement
When services are provided by the private sector, a public entity such as a federal government is
no longer financially responsible. Transferring the responsibility allows a public entity to gain
income from the sale of the business or service in question and reduce its financial burden. The
additional income gained from transfer of ownership might be used to reduce citizen tax rates,
pay down debts or go toward other expenses.
Income Distribution and Political Influence
Privatization seeks to return the ownership of the economy to its citizens. Rather than placing
full responsibility with a centralized government, businesses owned and operated by private
members of society help contribute to their own well-being. Entrepreneurship is thought to be
encouraged and able to flourish under privatization. In addition, political parties and lead figures
use privatization to gain influence in political campaigns and push certain political agendas. An
example would be the U.S. Republican Party's push to privatize Social Security benefits,
particularly during the 2004 re-election of former President George W. Bush. Criticism of the
U.S. government's handling of the program and worries over the availability of adequate funds
for future generations prompted a debate over whether privately owned investment firms might
not be better suited to administer the program's benefits.
There also another objectives of privatization, they are given below:
to create a more market-oriented economy;
to secure enhanced assess to foreign markets, to capital and to technology;
to promote the development of the capital market; and
to preserve the goal of self-reliance
The other objectives aim at increasing the dynamism of private sector distributing ownership
more widely in the population at large, encouraging and facilitating private sector
investment, from both domestic and foreign sources, generating revenue for the state;
reducing the administrative burden on the state.
Ques. No. 2: Justify the need for the slow pace of Privatization?
Ans: Privatization, To be successful, requires certain pre-requisites. This explain the reason
why the Government failed to mop up the targeted amount of resources. Besides privatization
has become an obsession with several people. In short, there is the need for exercising caution
and restraint while privatizing. These are give bellow
1. The primary reason of privatization must be to improve the efficiency of
PSUs(public sector undertaking).It is believed that once the units are handed over to
the private sector , they will be developed, will have professional management and
will improve performance in all respects. Whether this claim holds any water can be
seen if one were to dig for reasons which contributed to the sickness in the public
sector in the first place
2. As is well known, one of the arguments toted for privatization is that the PSUs are
mainly responsible of fiscal imbalances in the recent years. This study reveals that
the problem of growing fiscal imbalance is not on account of the declining savings
rate of PSUs but due to administrative departments.
3. Privatization Presupposes the prevalence of country conditions a composite factors
that takes into account the extent to which macro-economic policy framework is or
is not market friendly.
4. Yet another reason in support of the need for going slow stems from the fact that
privatization requires adequacy of
capital market to absorb new securities,
availability of financial expertise, possibility of undertaking financial and
organizational restricting to make PSUs attractive to private investors.
5. It may be stated that poorly planned privatization will do more harm than any good.
6. One of the principles of Privatization is that revenue maximization is not the main
objectives of disinvestment of PSU equity. The objective , instead should be
improve efficiency of this units.
7. Further , privatization must not result in greater concentration of asset. Rather the
process of disinvestment should ensure greater competition through more dispersed
ownership.
8. Successful privatization requires the cooperation of labor force which may not
come forward for obvious reasons. Privatization may involve the reduction of work
force, retaining , change of technology or a combination of work which will not be
acceptable to the employee of PSUs.
9. Another principle of privatization is that every transaction of sale must be
transparent. Transparency can be ensured through clear and simple selection criteria
for evaluating bids, clearly defined competitive bidding procedures, disclosure of
purchase price and buyer. Lack of transparency can lead to political backlog and is
often associated with poorly and very costly sales.
10. Privatization to be successful need strong on the part of the government and
consensus across political parties. To be fair to the government , there is strong
commitment to privatize PSUs.
So we can say that, slower pace of privatization may results in implementation of more
efficient corporate control structures, immediately after ownership change. At the same
time, however slower privatization may be blocked by political decisions before its
completion.
