UNIT II CHAPTER 2

PRIVATISATION

Introduction
Privatisation is one of the ways of improving efficiency of
Public Sector Units.
India has begun privatisation at a rapid pace with upto
20% of stake in PSUs being sold initially to mutual
funds and financial institutions and later to the
investing public.
The move towards privatisation has been quite
encouraging, but it is advisable to go slow in this
process.
The history of privatisation is very short just about 10 to
15 years.

Nature and Objectives

Privatisation is a process whereby activities that were
once performed by the Government are now
performed by private business or individuals, often
with better results in cost and quality of service.
This is done by replacing government monopolies with
competitive pressures.
Privatisation encourages efficiency, quality and
innovation in delivery of goods and services.

Nature contd..
There takes place either a full or partial sale of ongoing
PSUs or by sale of their assets.
The other techniques of privatisation are contracts,
leases and concessions.
In the above mentioned techniques, only the
management is privatised not the ownership.
The objectives of privatisation are to improve
performance, increase dynamism of private sector, to
generate revenue for the state, to reduce
administrative burden and to transform the economy.

Privatisation Routes
Sale to outsiders: this method involves sale of the
state enterprise as a going concern to outsiders. This
is the best known model and is often called
disinvestment of shares. This route has been favoured
since it fetches revenue and makes the firm the real
owners. Such firms normally possess the expertise to
govern the company efficiently.
However, this route is costly, slow and difficult to
implement. Lack of adequate capital, resistance from
employees and difficulty in negotiating deals makes
this route difficult.

Privatisation Routes contd..

Management-Employee Buy-out: this is a widely
used alternative to sale. This route is fast and easy
to implement. There is better corporate governance
since insiders have reach to information needed to
monitor managers.
A major demerit of this route is the uneven distribution
of benefits among employees of good firms on one
hand and poor firms on the other. Further, insiders
bring in no new skills or capital.

Privatisation Routes contd..

Equal access Voucher privatisation: This route seeks to
distribute vouchers across the population in an attempt to
allocate assets evenly among voucher holders. It is fast
and involves fairness.
The demerit of this route of privatisation is that it raises no
revenue for the government and their impact on corporate
governance is quite vague.
Spontaneous privatisation: This route to privatisation is
relatively easy, obstacle-free with no revenue generation
for the government and unclear impact on corporate
governance. It is usually small firms that resort to this
route.

Arguments against Privatisation

Privatization, in order to be successful, must fulfill
certain prerequisites.
The way the disinvestment must be done should be
planned well in advance.
Further, privatisation must never become an obsession
with the people. It must only seek to disinvest a few
PSUs and not entirely dismantle the public sector.
Thus, it speaks of a need to exercise care and caution
during privatisation since a hasty move may result in
irreversible negative consequences.

Arguments.. Contd..
It is assumed that once the PSUs are handed over
to the private sector they will be more efficient and
show better performance. However, this assumption
does not hold good for several reasons;
Enterprises and their efficiency is dependent on the
people comprising it. It is people that matter and not
the sector.
Some PSUs are born with defects which are incurable
and a mere change in management would not help
in improving performance.
1.

Arguments.. Contd..
External reasons, on some occasions, killed PSUs
in their infancy itself. Many factories were set up
just because equipment was offered on easy
terms by other countries.
Ironically, many of the sick PSUs today were sick
private sector units earlier which got
nationalised.
Nationalised banks claim that several crores of
Rupees are locked up in non performing assets
perhaps on default of loans taken by private
sector companies.

Arguments.. Contd..
2. It is argued that PSUs are responsible for fiscal
imbalance in the recent years. However, the
problem of such imbalance is not due to declining
savings rate of PSUs but due to administrative
departments.
3. Privatisation presupposes the existence of well
planned
macro-economic
policy
framework.
Favourable reforms help attract private investors
and makes privatisation feasible. Only then will the
process ensure competition and efficiency.

Arguments .. Contd..
4. Privatization needs to be slow because it requires
adequate capital markets for absorbing new securities
and availability of financial expertise to evaluate PSUs
assets.
5. Further, poorly planned privatisation is more harmful than
good for the economy.
6. Revenue maximisation should never be the primary
objective of PSU disinvestment. The aim must be to
improve the working efficiency. More often than not
revenue is the chief objective.

Arguments.. Contd..
7. Privatisation should ensure greater competition,
and not concentration of assets. But the process
of disinvestment never ascertained dispersal of
assets.
8. Successful privatisation requires support from
the labour force and this is usually not
forthcoming either due to resistance, reduction
in work force or change in technology.
9. Another requirement of privatisation is
transparency in all sale transactions. However
lack of it creates a perception of unfair dealings.

Arguments.. Contd..
10. Yet another important reason for slowing down the
process of privatisation is the sheer size of the public
sector. It would be difficult to absorb employees when
they get displaced due to privatisation.
11. Only privatisation of enterprises in the competitive
sectors will be successful and improve efficiency. If
non-competitive or monopoly sectors are privatised,
they find it difficult to function and are less likely to
yield economic benefits.

Arguments contd..
12. In order to be successful, privatisation needs a
strong will on the part of the government and
consensus among political parties, but the minority
character of the ruling party makes it vulnerable.
13. The private sector should have enough funds to
invest in divested shares. But they are forced to
borrow from banks.
14. The public sector has been suffering incessant
losses, and privatisation could change the scenario,
but it is doubtful if the private sector is ready to accept
the challenge.

7 sins of
privatisation
a)

b)

c)

For the wrong reason: many privatisation strategies

have aimed at maximising short term revenue rather
than building competitive markets for the long term.
In the wrong environment: privatisation makes sense
only if firms are in an environment which allows them
to become efficient.
With non-transparent procedures: the entire process
of transferring ownership should be kept open to
external scrutiny but is often faced with allegations of
corruption.

7 sins.. Contd..
d)
e)

f)

g)

Only to finance budget deficits: finance ministers often

sell off assets to make up budgetary deficits.
With a poor financial strategy: the financial strategy
followed by the governments made the privatisation
process worse.
With unrealistic labour strategies: guarantees from
private firms that they will not lay off labour and
offering them amounts larger than asset value proved
very costly.
With no political consensus: privatisation was taken
up as a hasty process through executive orders and
no unanimity in thought of political parties.