What is Privatisation: Objectives and Methods

What is Privatisation: Objectives and Methods

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Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on Jul 1, 2024 17:59 IST

Privatization is the process of transferring ownership and control of public assets and services from the government to the private sector. It aims to promote competition, efficiency, and innovation by allowing private companies to operate in sectors that were traditionally under state control, such as telecommunications, transportation, and utilities. Let’s understand more about Privatisation.

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You must have heard that Air India, the publicly owned airline company of India, is being sold to Tata group. Do you know what it was? This concept refers to Privatisation, wherein the public sector company is transforming into a private sector company. 

Amongst various Privatisation examples, we have discussed just one. There are numerous benefits of Privatization. Let’s take a closer look at each. But, before that, first, understand what is Privatisation?

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Table of Content

What is Privatisation?

Privatisation involves transferring a public or government agency’s ownership, management, and control to a non-public or private company. The procedure is used to ensure the publicly traded company or organization becomes more efficient and disciplined in light of expectations from the market. We can accomplish Privatization in several ways.

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Objectives of Privatisation

The objectives of privatization include:

Promoting Efficiency and Competition

Privatization aims to introduce market forces and competition into industries that were previously monopolized by the government. By allowing private companies to operate, they are believed to be driven to improve efficiency, innovate, and provide better quality services to consumers.

Enhancing Economic Growth and Investment

Privatization seeks to attract private investment and stimulate economic growth. It is believed that private companies, with their access to capital and expertise, can bring in new investments, technologies, and management practices, leading to increased productivity and economic development.

Reducing Government Intervention and Fiscal Burden

Privatization aims to reduce the government's role in running and financing public enterprises. By transferring ownership to the private sector, governments can reduce their financial burden, free up resources for other priority areas, and focus on core functions, such as regulation and policy-making.

Improving Service Quality and Customer Satisfaction

Privatization is expected to enhance service quality by introducing competition and market-driven incentives for companies to meet customer demands. Proponents argue that private companies, driven by profit motives, are more responsive to customer needs and can deliver services more efficiently.

Increasing Accountability and Transparency

Privatization aims to increase accountability by subjecting previously state-owned enterprises to market discipline and shareholder scrutiny. It is believed that private ownership can lead to greater transparency, better corporate governance practices, and improved management practices.

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Methods of Privatisation

Governments begin looking for the best ways to privatise businesses as soon as they decide to do so. There are numerous ways to implement Privatisation successfully.

1. Asset Disposition

Asset divestiture comes first on the list. The government or public sector organizations can raise money by selling the companies to individual investors. There is no sale of shares in this case. As a result, the economy has more individual shareholders and investors.

2. Public Bidding

Second, businesses sell their shares to the person who makes the highest offer during a public tender. Government or public sector companies may or may not sell the entire company in this situation. They can instead decide to sell only a portion of it.

3. Infrastructure Collaboration

Infrastructure partnerships make up the third privatisation strategy. As the name suggests, this alliance of public and private businesses results in massive financial investments in infrastructure development projects. Additionally, it aids in risk sharing, ensuring that no taxpayer is ever overwhelmed.

4. Public Auction

The next option is a public auction. Governments or public bodies hold auctions to sell off businesses at the highest price to raise as much money as feasible. The public-sector businesses offered shares and long-term assets for sale during the process.

5. Lease with Buying Rights

The government occasionally makes properties available for usage by private owners. Privatizing a property using a lease with buy-back options is possible here. While using the public asset, the latter must adhere to norms and restrictions. The private owner, however, can purchase the property if she so chooses after paying the required sum.

6. Outsourcing

This approach of privatising businesses involves having one business operate and offer products and services while the other business creates or manufactures them. Governmental organizations may contract with private businesses to perform tasks. One of the most economical ways to give private companies authority over the business is through outsourcing.

For instance, the government might manage building maintenance. However, it would be up to the private company that received the obligations to decide whether to buy or build it.

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Advantages of Privatisation

1. Increased Productivity

Private Sector Privatization Since private businesses prioritize profits above the government, they can boost efficiency. An organization that is privately owned and operated has more profit-focused management. British Airways and British Telecom (BT) are the two best instances of increased productivity following Privatisation.

2. No Political Intrusion

Privatizing government subsidiaries eliminates political interference, boosts productivity, and turns losses into gains. Political pressure forces managers in a government-run business to make decisions that prevent them from thinking profitably. Under political pressure, state-run businesses frequently hire more people than necessary, eventually hurting their bottom line.

3. Far-Sighted Commitment

When a government-run business is transferred to private ownership, the management is allowed more latitude and can commit to long-term gains. The government sector, which focuses on near-term electoral wins, needs a long-term outlook.

4. Competitive Environment

Privatisation improves competition by enabling more private companies to enter the market. Increased competition among private businesses inevitably increases efficiency and places limitations on quality. To be the best, they become more quality- and service-focused.

5. Revenue Generation

Privatisation may be a quick way to generate cash if the government needs money to spend on a project or social program. However, when considering the long-term benefits, leasing or selling roads or bridges to private companies often results in a loss for the government, if only sometimes.

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Disadvantages of Privatisation

1. Natural Monopoly

In some industries with little competition, Privatisation may result in the monopoly of a single private company. Due to its monopoly over a given industry, a company can lower its quality standards, set higher prices, etc., to generate significant profits. On the other hand, a government-run organization would have put the public’s needs above personal gain.

2. Decline in Public Interest

Private businesses that primarily operate in areas of public benefit like health, education, and others are more profit-driven than welfare-driven. The average citizen pays a heavy price for this through excessive taxes, higher costs, and inferior goods and services.

3. Lack of Regulations

Privatisation transfers the government’s control over financial and managerial choices to the private sector. This implies that the government has little or no influence on the company’s decisions and can also not impose significant regulations on how it operates or formulates its policies.

Conclusion

It depends on the industry whether privatizing it will be advantageous over time. Let’s examine the transportation and education sectors, for instance. The money raised in the transportation sector can be put toward making it even better. Nevertheless, there is a need to control fare prices because they could jeopardize the public good by being excessive. When we shift to the education sector, the goal of making a profit is less important. Therefore, it would be difficult for any private company to labour for nothing or very little profit. Even if it does, there is a higher likelihood that public interests will be jeopardized somehow.

FAQs

What is privatisation?

Privatisation is the transfer of government-owned assets or services to the private sector, aiming to promote efficiency, competition, and economic growth.

Why is privatisation done?

Privatisation is pursued to enhance service quality, attract private investment, reduce government intervention, and improve accountability and transparency in the management of public assets.

What sectors are commonly privatised?

Sectors commonly privatised include telecommunications, transportation, utilities (such as water and electricity), healthcare, education, and financial services.

What are the benefits of privatisation?

Privatisation can lead to increased efficiency, innovation, economic growth, better service quality, enhanced customer satisfaction, reduced fiscal burden, and improved accountability.

Does privatisation always lead to better outcomes?

The outcomes of privatisation vary depending on factors such as the specific context, industry, regulatory framework, and effective competition. Success can be influenced by appropriate policies and regulations.

About the Author
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Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio