Objective

Methodology

Introduction

What Is Privatization

Privatization is defined as the process of transferring ownership of a

business, enterprise, agency or public service from the public sector i.e.
government to the private sector i.e. business. In a wider sense,
privatization refers to transfer of any government function to the private
sector including governmental functions like revenue collection and law
enforcement.

In Sri Lanka people call it as ‘pauperisation’ and in china people call it as

“Strategic adjustment of the layout of the state sector” .in India we call it as
“disinvestments”.

We can also explain privatization in two terms as:

• First is a buyout, by the majority owner, of all shares of a public

corporation or holding company's stock, privatizing a publicly traded
stock?
• The second is a demutualization of a mutual organization or
cooperative to form a joint stock company.

Types of privatization
Privatization is of three types as given below:

 Share issue privatization (SIP): in SIP, the concept of selling shares

on the stock market is used. This is most common type of
privatization.it boost liquidity and potential economic growth. But in
 this capital market insufficiently developed .it may be difficult to find
enough buyers and transaction cost could be higher.
 Asset sale privatization : in asset sale privatization, selling the entire
firms or part of it to a strategic investor, usually by auction or using
Treuhand model
 Voucher privatization: in voucher privatization, shares of ownership
are distributed to all citizens, usually for free or at a very low price. It
is used in transition economies .

privatization in India
Privatization in India goes by name of disinvestment or divestment of
equity. This is because privatization has thus for not meant transfer of
control or even of controlling interest from government to anybody
else. The govt. has sold stakes ranging from one % to 40% PSUs, but in
no company has its stake fallen below the magic figure of 51% which
is seen as conferring controlling interest.

Privatization in India is very controversial and debatable issue. It is being

criticized for “selling the family silver to the cronies of the rolling
party”.the sale proceeds of public undertakings are being utilized for
meeting administrative expenses or curtailing the budgetary defict
instead of creating health and educational facilities to generate public
and for development of infrastructure for trade and industry.

The process of privatization is very new to country. It is part of an ambitious

process of economic reforms occur in 1991 covering industry, trade,
the financial sector and agriculture and also involving a program of
macro-economic stabilization focused on the federal budget. It is taken
as necessary step of deregulation of industry reserved for public sector
from 17 in 1956 to 8 in 1991.this is reduced to 6 in 1991. Then this list
 is reduced to 4: defense, atomic energy, specified minerals and railway
transport. Privatizations also occur due to degrade of performance of
public sector units. The manufacturing sector of PSUs witnessed a
decline in efficiency rates as compared to its peers in the private sector
during the financial years between 1990-91 to 2001-02. The aggregate
cost of production of PSUs as a percentage of sales increased to an
extent of 80% during this period. The various inefficiencies in raw
material usage, high wages and salaries component, and higher debt
component made the PSUs non-cost effective in comparison with its
peers in the private sector. The aggregate expense due to wages and
salaries, interest costs, power costs of the PSUs is around 60% of the
companies have a lesser burden of all the three counts, which adds up
to just over 16% aggregate turnover of the manufacturing PSU
companies. The wages, salaries and other benefits from the higher cost
component (23.3%) for PSUs. Whereas the same component forms
6.5% of the turnover in the private sector. The higher non cost effective
levels have affected the net profit margins (NPM) of the PSUs
negatively over a period between 1990-91 and 2001-01.

The NPMs of PSUs have consistently being negative as compared to an

average of 6% outflow to the government. Due to rising inefficiency of
PSUs privatization came into existence.

In the last decade, privatization has become an international phenomenon,

from Canada to India, govt. has voted for privatization as a means of
increasing productivity efficiency and for growth in economy while
offering opportunities for citizens to invest.

Objectives of government to privatize public sector units

Government resorts to privatization with multiple objectives, the major
objectives are as follows:

The reduction of political interference in management of enterprise, leading

to improved efficiency and productivity, that is the functional managers
get a free hand in managing the organization the way they want to
The govt. also views privatization as a means of providing adequate
competition to the state run enterprise. Privatization could take place in
terms of granting permission to the private sector to set up units in an
otherwise govt.-controlled area.
It is used as term of cash generation to fund the ever increasing expenses.
Certain developing nations can look upon privatization as a means of broad
basing ownership of economic assets thereby reducing the problem of
concentration of economic power.

PRIVATIZATION AS BOON
Privatization comes with many benefits; it shows many positive changes in
Indian economy as follows:

1. Increased efficiency: in private organization work efficiency is high.

They have a greater incentive to produce more goods and services for
the sake of reaching a customer base and hence increasing profits. A
state-owned firm would not be as productive due to the lack of
financing allocated by the entire government's budget that must
consider other areas of the economy.
2. Specialization: A private business has the ability to concentrate all
relevant human and financial resources onto specific functions which
is not possible in state run organizations.
3. Corruption: A monopolized function is prone to corruption where
decisions are made mainly for political reasons and personal gain of
the decision-maker rather than economic ones. This thing is not
present in privatizes sectors.
4. Accountability: in privatized sectors, Managers are accountable to
their owners/shareholders and to the consumer and can only exist and
thrive where needs are met while Managers of publicly owned
companies are required to be more accountable to the broader
community and to political "stakeholders". This can degrade their
ability to directly and specifically serve the needs of their customers,
and can bias investment decisions away from otherwise profitable
areas.
5. Goals: in PSU, a political government tends to run an industry or
company for political goals rather than economic ones which is not
present in privatized sectors.
Development would be faster as due to competition with the other private
parties.
Innovative solutions (due to again competition with the other private parties)
Effective & time bound results
Cost cuttings
Improves quality in work
In turn more services to public are possible
Increase the productivity
Significant Growth in the business
Controlled monitoring of public property gives public in turn good services

Examples:

The private sector has done more than expected. India's software industry is
world class industry. It is having second largest growth rate after china.
Indian manufacturing has finally become competitive; exports have
grown by over 30% annually for three years. Indian companies are
making foreign acquisitions galore and becoming MNCs - Tata Steel,
Bharat Forge, Tata Motors and Ranbaxy are a few examples
The need of second green revolution is being energized by the private
sector, not the public sector. Reliance has led the charge into rural
areas in Punjab with a farm-to-fork operation - managing the chain
from seeds and crops to processing and hypermarket sales. ITC is
rapidly expanding its e-choupals, computerized kiosks for farm
information and for buying produce. The Mahindras, Tatas and
Shrirams are setting up rural supermarkets.
The government developed the idea of deficiency payments for roads,
with the contract going to the bidder requiring the lowest toll subsidy.
But now some bidders are willing to pay a fee rather than demand
subsidies

Privatization as curse as comparison to PSUs

• Performance: social objectives are underestimated in private sectors
as a democratically elected government is responsible to the people
through a legislature like Parliament, and is motivated to safeguarding
the assets of the nation. The profit motive may be subordinated to
social objectives.
• Improvements: in PSUs the government is motivated to performance
improvements as well run businesses contribute to the State's revenues
which is not present in private sectors.
• Un Accountability: in private companies the public does not have
any control while in PSUs public have full control on govt. actions.
 • Civil-liberty concerns: in PSUs, a democratically elected
government is responsible to the people through a parliament, and it
can intervene when civil liberties are threatened.
• Goals: The government may seek to use state companies as
instruments to further social goals for the benefit of the nation as a
whole.
• Capital: in PSUs, Governments can raise money in the financial
markets on most economic rate to re-lend to state-owned enterprises.
• Lack of market discipline: Governments have chosen to keep certain
industries under public ownership because of their or sensitive
nature.
• Cuts in essential services: in PSUs, If a government-owned company
providing an essential service such as the water supplyb to all citizens
is privatized then its new owner could lead to the abandoning of the
social obligation to those who are less able to pay, or to regions where
this service is unprofitable.
• Natural monopolies: Privatization will not result in true competition
if a natural monopoly exists.
• Concentration of wealth: Profits from successful enterprises end up
in private, often foreign, hands instead of being available for the
common good.
• Political influence: in private sectors govt. can’t pressure them as
they are not under their control so in PSUs governments may more
easily exert pressure on state-owned firms to help implementing
government policy.
Downsizing: Private companies often face a conflict in between
profitability and service levels, and could over-react to short-term
events while a state-owned company might have a longer-term view
and thus be less likely to cut back on maintenance or staff costs,
training etc, to stem short term losses. Many private companies have
downsized while making record profits. In privatized organizations,
they always to extract work from minimum resources.
• Profit: the main goal of Private companies is to make profit rather
than any other significant social goal. The more necessary a good is,
the lower the price elasticity of demand, as people will attempt to buy
it no matter the price. In the case of price elasticity of demand is zero
(perfectly inelastic good), demand part of supply and demand theories
does not work.
 • Unaffordable: In privatization, they are charging higher price to earn
profits, we can take the example of educational institutes which are
charging higher fees for the education so a poor student can’t afford
that institute.
• Job Loss: as there are additional financial burden placed on privatized
companies to succeed without any government aid, unlike the public
companies, so jobs could be lost to keep more money in the company.

Sectors which are privatized

Airports:

The Government aims to attract private investment in aviation infrastructure.

India has been witnessing a very strong phase of development in the past
few months. Many domestic as well as international players are showing
interest in the growth and development of the aviation sector with immense
focus on the development of the airports. Indian private airlines – Jet,
Sahara, Kingfisher, Deccan, Spice jet - account for around 60% of the
domestic passenger traffic. Some have now started international flights. For
the next years to come India is poised with strong focus on the development
of its airport to meet the international standards. The government is planning
modernization of the airports to establish a standard. The newly developed
airports will help releasing pressure on the existing airport in the country.
A projected investment of USD 8.5 billion has been planned for the
development of Indian airports during the 11th plan. Mumbai and Delhi
airports have already been privatized. These two airports are being upgraded
at an estimated investment of US$ 4 billion for the period 2006-16.
Development of airport infrastructure is a focus area for the Government.
There has been a significant uptrend in domestic and international air travel.
AAI has planned a heavy investment of USD 3.07 billion over the next five
years. Out of it 43 per cent will be for the three metro airports in Kolkata,
Chennai and Trivandrum. The rest will be invested in upgrading other non-
metro airports and in the modernization of the existing aeronautical
facilities.

Privatization of education
In India privatization of education sector is best example of privatized
sectors. According to current estimated data, 80% of all schools are
government schools making the government the major provider of
education. However, because of poor quality of public education, 27% of
Indian children are privately educated.

People prefer private sectors because they want quality education. Even the
poorest often go to private schools despite the fact that government schools
are free. A study found that 65% of schoolchildren in Hyderabad's slums
attend private schools and private schools provide superior results than govt.
schools. Pupil-teacher ration is much better in private schools than in govt.
schools. But main disadvantages of privatized govt. schools are that they are
very expensive and everybody can’t afford them. And the second main con
is that by determining the education priorities, not according to our national
needs but to those of a minuscule minority of blood-suckers.

Sectors which are going to be privatized

How far we need privatization

Conclusion

References