BISINESS ENVIORNMENT 10. Privatization

Learning Objectives • The meaning, modes, motives, history, trend, implications, effects, and politics of privatization • Regulation of privatized industries • Privatization in India • Contemporary issues and challenges

What is Privatizaton? The term privatization is indeed very ambiguous. On one extreme, it may mean denationalization, and on the other, it may constitute any reform towards the marketization of any government operation. Divestment or outright sale of government companies Sale of governtment equity shares to public Corporatisation of government organisation Contracting out services to private companies Granting of licenses and franchises to private companies Private-public partnership for BOT projects for public goods (highways, bridges, etc) Leasing out to run services (e.g. hotels) Commercialisation of government companies

Choice of Modes of Privatization There are many modes of privatization including divestment or outright sales of public enterprises, joint ventures, management buying out, catering out services, private financing, leasing, franchising, and so on. In the early 1980s, when the wave of privatization occurred in the ASEAN economies, many governments became very cautious economically and politically to introduce privatization.

Choice of Modes of Privatization

Motives for Privatization

Implications and Effects of Privatization The introduction of market principles (rules of demand and supply and open competition) in privatized industries is also helpful for reducing costs, wastage, and delay. The introduction of the laws of motion of competition helps to do away with many growth retarding factors, such as procrastination, rigidities, inelasticity, and regulatory tentacles, which are responsible for economic slowdown, escalation of costs, and supply constraints.

Politics of privatization Privatization is essentially a political decision, and as such, political factors have remained overwhelmingly more decisive than other factors, such as economic, social, national, and cultural. Auto-centric personal self-interest and ulterior motive are often the pre-dominant considerations for privatization of public enterprises in the ASEAN nations as a whole. Another pressure group, which has an important direct or indirect role to play in privatization, is bureaucracy (and top managerial personnel).

Regulating privatized industries Regulation necessary as privatization can convert public monopolies into private monopolies Protection of customers is important by maintaining prices through price cap regulation. It is necessary to open the market to new entrants. The market should be made more competitive and contestable. After some time, the regulators have to fade away, and the responsibilities for anti-competitive practices would be taken up by the courts of law. There should be proper monitoring of the quality of products and services.

Privatization in India Lack of political majority has been one of the reasons for the delay in the implementation of the privatization policy. The government owns large equity shares in industries and disinvestment has been practically a difficult matter in a large country The talk about the privatization of telecom and airlines has aroused considerable interest in the private sector. Some of the public sector undertakings (PSUs) are recommended for privatization for better efficiency and some amount of profit generation.

Privatization in India Privatization in India is now being approached through two different modes. First, there is a consensus that loss-making PSUs will be gradually privatized; and Second, the government is permitting many private sector industries both from India and abroad to compete with Indian industries in bidding for privatised public sector companies New government to privatise through strategic sales and issue of shares to the public

Niti Aayog and Privatisation Identified numerous sick public sector units for closure and action on 17 such units under way Identified several functional units for strategic disinvestment

A Critical Appraisal There has been under pricing of assets involved in privatization. In many cases of disinvestment, the realized amount has been much lower than the targeted amount. The proceeds from disinvestment have been used to bridge the gap of budget deficit. The procedure of outright sale based on under-valuation of assets will raise some doubts in the minds of the people, as this may be a reflection of corruption, nepotism, and favouritism. After all, India is the third most corrupt country of the world.

Privatization: contemporary issues and challenges The unions feel that privatization, which essentially will take resort to more capital-intensive method of production, will lead to more unemployment, reduced wage level, and diminished bargaining power of the workers. Simmering discontent is being voiced in many ASEAN countries about the price effect of privatization. In a bid to maximize profit through surplus extraction, prices of privatized products and services have been escalating in many industries.

Privatization: contemporary issues and challenges The tension between government failure and market failure in some lines of business activities is perhaps the most dominant issue in the political economy of privatization in the developing world today.