Privatization & Disinvestment's

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Privatisation and Disinvestment

Trimester I

200 9


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Privatization means the transfer of ownership and/or management of an

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enterprise from the public sector to the private sector. It also means thewithdrawal of the State from an industry or sector, partially or fully. Anotherdimension of privatization is opening up of an industry that has been

reserved for the public sector to the private sector.

According to the World Bank, privatization is the transfer of ownership of Stateowned Enterprises (SOEs) to the private sector by sale (full or partial) ofgoing concerns or by sale of assets following their liquidation.

Rationale for Disinvestment: Releasing of large amount of public resources locked up in non strategic

PSUs for redeployment in areas such as basic health, family welfare etc. Reducing public debt. Economic inefficiency in the production activities of the public sector, with

high production costs, inability to innovate and costly delays in delivery ofgoods produced.

Ineffectiveness in the provision of goods and services, such as failure tomeet objectives, political interference etc and transferring of commercialrisk, to which taxpayers money locked up in public sector is exposed.

Rapid expansion of bureaucracy.


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ThePrivati sati on ReactionThere are different ways of achieving privatization.: Divestiture:

Privatization of ownership through the sale of equity ie. Selling stock to thepublic. This has largely been undertaken in industrial countries.

Contracting: Government contracts out services planned and specified toother organizations that produce and deliver them. Common in public worksand defence etc. but there is scope of corruption in this as long termcontracts tend to encourage monopolistic behavior by the private supplier.

Strategic sale by auction method: There is a transfer of a block of shares bygovernment to the strategic partner. Companies that have witnessed strategicsale in India in the recent past include Modern Foods, BALCO, VSNL, ITDChotels etc. In India this method has been preferred to that of sale of equityshares to the public.

Withdrawing from the provision of certain goods and services leaving themwholly or partly to the private sector

Privatization of management using leases and management contracts. Liquidation involves the closure of an enterprise and sale of its assets. Informal

liq u id atio n is whe n th e fir m r e tain s its leg a l s ta tu s e v e n th oug h its

o p er atio n s


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have been suspended.


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Obstacles to Pri vat iza tion in

eGvoveelronmpeinntgu

sCuoally wttrainet

sto sell the less profitable

organizations, which the private sector is not willing to

buy at prices offered by the government.

Divestiture tends to arouse political opposition from

employees who may lose their jobs, politicians fearshort

term unemployment, bureaucrats who tend to lose

patronage and those who fear that the national assets

would be owned and controlled by the rich. Undeveloped capital markets make it difficult for the

Government to float shares and for individual buyers to

finance large purchases.


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Conditionsfor Succes s ofP

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al leeadership is

mandatory. Any alternative institutional arrangement chosen should not stifle competition among

suppliers. There should be a multiplicity of suppliers in the industry and governmentmonopoly should not be replaced by private monopoly. Overregulation of industrydiscourages private initiative.

There should be freedom of entry to provide goods and services. Long term contractsand franchises limit competition and consumers choice. In capital intensive industries,freedom of entry is difficult to achieve.

Public services to be provided by the private sector must be specific or have ameasurable outcome. Lack of specificity makes it difficult to control and quantify.

Consumers should be able to link the benefits they receive from a service to the costthey pay for it. It is extremely important to educate the consumers.

Privately provided services should be less susceptible to fraud if they are to beeffective.

Equity is an important consideration in the delivery of public services. The benefits of


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privatization can accrue to the capital owner, to the consumer who receives a moreefficient service and to the public at large.


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Benefits of Privatization Reduces the fiscal burden of the State Enables the Government to collect funds. Helps the State trim the size of the administrative

machinery. Enables the Government to concentrate on the essential

state functions. Helps accelerate the pace of economic development. May result in better management of the Enterprises. May encourage entrepreneurship. May increase the number of shareholders and thereby

distribution of wealth. In areas such as telecom and insurance, it would bring

an end to the monopoly and thereby result in widerchoices for consumers.


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Privatization ofprofit making publicenterpriseswouldmeanforegoing futuresources of income.

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Disadva ntages of

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on of economic

power.

Privatization should not result in substitution of governmentmonopoly by private monopoly.

Could result in foreign firms acquiring national firms.

Privatization of strategic and vital sectors is against nationalinterests Capital markets of developing countries are not adequately

developed for carrying out privatization. Privatization at times is a half heated measure and thus is not

properly executed.


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Private sector is driven more by a profit motive than the publicsector, which sees its aim as more of a social guardian providingemployment and security to all.


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Privatisation in India

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Disinvestment Policy: The Industrial Policy Statement 1991 stated that the Government would divest

part of its holdings in selected PSEs, but did not place any cap on the extent of

disinvestment. Objective of the policy was to improve management, enhance availability of

resources for these PSEs, yield resources for the exchequer, encourage widerpublic participation and promote greater accountability. The objective was toprovide further market discipline to the performance of the public enterprises.

However, the Budget 1991-92 reinstated the cap of 20% for disinvestment. In 1993 the GOI set up a Committee in Disinvestment under the chairmanship of

C. Rangarajan.

Rangarajan Committee: The recommendations of this report emphasized the need for substantial

disinvestment. The committee suggested that the percentage of equity to bedivested could be upto 49% for industries explicitly reserved for the public sector

and over 74% in other industries. Holding of 51% or more equity was recommended only for the 6 industries: coaland lignite, mineral oils, arms and ammunition, atomic energy, radioactiveminerals and railway transport.

Best method of disinvestment is by offering shares to the general public at afixed price.


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Privatisation in IndiaRangarajan Committee (contd..) Instead of year wise targets of disinvestment a clear cut action plan should be made. Disinvestment to be in stages and sales shall be staggered to get the best possible

prices. Scheme of preferential shares to workers and employees to be devised. 10% of the proceeds to be set apart for lending to the public enterprises on

concessional terms.

The Common Minimum Programme, 1996 sought to carefully examine the Publicsector non strategic areas and to set up a Disinvestment Commission for advising ondisinvestment related matters: Draw up a long term program of disinvestment. To determine the extent of disinvestment in each of the PSUs. To prioritize the PSUs referred to it by the Core Group in terms of the overall

disinvestment programme.

To decide on instrument, pricing and time. To supervise the overall sales process and take decisions on pricing, timing etc.


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To select the financial advisors for the specified PSUs to facilitate the disinvestment

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process To monitor the progress of disinvestment process and take necessary measures To ensure that appropriate measures are taken to protect the interests of the

employees.

The Commission was disbanded in 1999 and was thereafter handled by a separate

department for Disinvestment created in Dec 1999 which later became a full fledgedMinistry.

National Investment Fund:

On Nov 30, 2005, the Government set up the National Investment Fund into whichproceeds from the sale of PSUs will be credited. The major objectives of the fund are:

to invest the proceeds in social sectors like education, health and employmentgeneration.

To finance the capital projects in potentially profitable PSUs. Owing to administrative hurdles, privatization has been kept on hold since July 2006. Public Private Partnership (PPP):

Of late, the thinking of the Government is to involve private sector in ownership andmanagement of projects, instead of privatizing public sector undertakings. This

arrangement is largely felt in infrastructure and service sectors.

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Privatization & Disinvestment's