PRIVATIZATION

“The transfer of public assets, operations or activities to private

enterprise”.

MEANING

• Privatization is the process of transferring ownership of a business, enterprise, agency, public service or public property from the public sector to the private sector.

• The business that operates for a profit or non-profit organization.

WHY PRIVATIZATION?

• To reduce government involvement in commercially viable activities

• Increase efficiency in the delivery of programs and services

• Provides competition in market place which transfers the lower price and greater choice for the consumers.

Variations in privatization

1. Private sector choice for the production of a services

Entire responsibility transferred from public to private

2. Public sector choice financing with private sector operations

joint activity of public & private

3. Deregulation of private firmsGovt. reduces or eliminates the regulatory imposed on private.

Methods of privatization

Main methods:• Share issue privatization

» selling shares on the stock market.

• Asset sale privatization» selling entire organization to a strategic investor by

auction.

• Voucher privatization» distributing ownership to all for free or at lower cost.

Sub methods:• Contracting out:

» Production of service by private firm under a contract.» Under this scenario, the private sector firm is paid directly

by the government

Example:collection of disposal wasteOther things include security services, data processing

services

• Franchising:» Government awarding a rights to perform services within

a specific geographic area to a private firm» The private firm generates revenue by collecting user fees

Example:

Cable television, gas etc..

• Open competition:» many private firms are allowed to compete for customers

within a governmental jurisdiction.» It is not appropriate for some services as it most likely

would not be efficient to have multiple suppliers of electricity, gas, or water service.

Example: It typically seen telephone and internet provider

Some of the examples of privatization

• Toll roads, bridges and airport:A significant developments in public private

partnerships is the lease of toll roads, bridges, and tunnels by state and local governments to private contractors.

these kinds of deals have previously occurred in Europe and Australia

Government could not do in 50 add years, privatization did in just 4-5 years.

The result is we have a great highways and airports.

• Ports:

Mundra port in gujarat has bacame a highly eficient and well managed major port in 10 years

When compared to the kandla in mumbai working as port for more than 50 years.

Banking:

ICICI bank is the country’s largest private bank in second place after the SBI

SBI existing in more than 100 years on the other hand,

Six industries which are not reserved for private sector

CigaretteAtomic energy

Indian railways

Chemical fertilizers Arms and

ammunition Hazardous chemicals

Benefits of privatization

1. Improved efficiency2. Lack of political interference3. Short term view4. Increased competition

Improved efficiency

• Private company have a profit incentives to cut costs and be more efficient.

• government run industry, managers do not usually share in any profits, however, a private firm is interested in making profit and so it is more likely to cut costs and be efficient.

Example: British airways

Lack of political interference

• Government companies can be motivated by political pressures rather than sound economic and business sense.

Example:a state enterprise may employ surplus workers which is inefficient.

Short term view

• A government many think only in terms of next election.

• they may be unwilling to invest in infrastructure improvements which will benefit the firm in the long term because they are more concerned about projects that give a benefit before the election.

Increased competition

• policies to allow more firms to enter the industry and increase the competitiveness of the market.

• increase in competition that can be the greatest spur to improvements in efficiency

• For example, there is now more competition in telecoms and distribution of gas and electricity.

Disadvantages of privatization

• Investment in industries of comfort and luxurious products instead of necessary products and problem of optimum use of capacity

Disadvantages of privatization

• Aims at making profit which adversely affect the interest of the community

Disadvantages of privatization

• The private companies don’t like to have their branches in ruler cities.

• Their services remain confined to cities where sufficient clients are available.

• Problem of unemployment

THANK YOU

BYHARIPRIYA.D

MBA