Concept of Privatisation

In this post, you will learn the concept of privatisation. Privatisation is the process of including the private sector in the ownership or operation of a state-owned or public sector undertaking. In a wider sense, it connotes private ownership or (even without change of ownership) the stimulation of private control and management in the PSUs. Barbara Lee and John Nellis (1990) describe it therefore as follows:

“Privatisation is the process of involving the private sector in the ownership of operation of a state-owned enterprise. Thus, the term refers to private purchase of all or part of a company. It covers the contracting out and privatisation of management—through management contract, leases or franchise arrangement.”



It is important to note that privatisation can take three forms:

1. Ownership Measures: The degree of privatisation is evaluated by the extent of ownership assigned from the public enterprise to the private sector. It can take the following forms:

(a) Total Denationalisation: It is a widespread transfer of a public enterprise to the private sector. For example, BALCO, which was acquired by Sterlite industries. Modern Foods was acquired by Hindustan Lever.

(b) Joint Venture: This indicates partial introduction of private ownership. The range of private ownership can vary; it can be as low as 25 per cent and even as high as 75 per cent or more. As in the case of Maruti Suzuki where earlier, the majority shares were with Maruti but after liberalisation, Suzuki raised its stake and became the majority stake holder.

(c) Liquidation: The assets are sold to someone who may utilise those assets for the same purpose or for any other purpose.

(d) Workers Co-operative: Here ownership of the enterprise is transferred to workers who may form a co-operative to run the enterprise.

2. Organisational Measures: It is important to note that a number of organisational measures are conceived to limit state control. They involve:

(a) A Holding Company Structure: Here, the organisation is decentralised and sufficient autonomy of decision-making is given at the operative level but the government still controls decisions made at the apex level. In this way, a decentralised pattern of management emerges.

(b) Leasing: The government transfers the use of assets to private bidders for a particular period. In the leasing agreement, the bidder is needed to be assured in relation to profit sharing between the State and bidder. This is a kind of tenure ownership.

(c) Restructuring: Restructuring is of two kinds: financial and basic restructuring. Financial restructuring means the writing off of accumulated losses and rationalisation of capital composition with respect of debt-equity ratio. The main objective of rationalisation is to enhance the financial health of the enterprise and basic restructuring is said to occur when the public enterprise decides to shed some of its activities to be undertaken by ancillaries or small-scale units.

3. Operational Measures: The goal of operational measures is to enhance efficiency of the organisation. Operational measures involve the following measures:

(a) Grant of autonomy to public enterprise in decision making.

(b) Provision of incentives for workers and executives consistent with increase in efficiency and productivity.

(c) Freedom to acquire specific inputs from the market.

(d) Development of proper criteria for investment planning.

(e) Permission to public enterprises to raise resources from the capital market to execute plans of diversification and expansion.

Divestiture is one of the important ways of privatisation; it is a privatisation of ownership through the sale of equity. It entails selling stock to the public.

Notes: In India, various public sector banks such as State Bank of India, Vijaya Bank, etc., sold their stock to the public through IPOs.

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