business env.. privatization

8/9/2019 Business Env.. Privatization

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Objective

Methodology

Introduction

What Is Privatization

Privatization is defined as the process of transferring ownership of abusiness, enterprise, agency or public service from the public sector i.e.government to the private sector i.e. business.In a wider sense,

privatization refers to transfer of any government function to the privatesector including governmental functions like revenue collection and lawenforcement.

In Sri Lanka people call it as pauperisation and in china people call it asStrategic adjustment of the layout of the state sector .in India we call it asdisinvestments.

We can also explain privatization in two terms as:

First is a buyout, by the majority owner, of all shares of a publiccorporation or holding company's stock, privatizing a publicly tradedstock?

The second is a demutualization of a mutual organization orcooperative to form a joint stock company.

Types of privatization

Privatization is of three types as given below:

Share issue privatization (SIP): in SIP, the concept of selling shareson the stock market is used. This is most common type of

privatization.it boost liquidity and potential economic growth. But in


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this capital market insufficiently developed .it may be difficult to findenough buyers and transaction cost could be higher.

Asset sale privatization : in asset sale privatization, selling the entirefirms or part of it to a strategic investor, usually by auction or usingTreuhand model

Voucher privatization: in voucher privatization, shares of ownershipare distributed to all citizens, usually for free or at a very low price. Itis used in transition economies .

privatization in India

Privatization in India goes by name of disinvestment or divestment ofequity. This is because privatization has thus for not meant transfer ofcontrol or even of controlling interest from government to anybody

else. The govt. has sold stakes ranging from one % to 40% PSUs, but inno company has its stake fallen below the magic figure of 51% whichis seen as conferring controlling interest.

Privatization in India is very controversial and debatable issue. It is beingcriticized for selling the family silver to the cronies of the rolling

party.the sale proceeds of public undertakings are being utilized formeeting administrative expenses or curtailing the budgetary defictinstead of creating health and educational facilities to generate publicand for development of infrastructure for trade and industry.

The process of privatization is very new to country. It is part of an ambitiousprocess of economic reforms occur in 1991 covering industry, trade,the financial sector and agriculture and also involving a program ofmacro-economic stabilization focused on the federal budget. It is takenas necessary step of deregulation of industry reserved for public sectorfrom 17 in 1956 to 8 in 1991.this is reduced to 6 in 1991. Then this list


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is reduced to 4: defense, atomic energy, specified minerals and railwaytransport. Privatizations also occur due to degrade of performance of

public sector units. The manufacturing sector of PSUs witnessed adecline in efficiency rates as compared to its peers in the private sectorduring the financial years between 1990-91 to 2001-02. The aggregatecost of production of PSUs as a percentage of sales increased to anextent of 80% during this period. The various inefficiencies in rawmaterial usage, high wages and salaries component, and higher debtcomponent made the PSUs non-cost effective in comparison with its

peers in the private sector. The aggregate expense due to wages andsalaries, interest costs, power costs of the PSUs is around 60% of thecompanies have a lesser burden of all the three counts, which adds upto just over 16% aggregate turnover of the manufacturing PSUcompanies. The wages, salaries and other benefits from the higher cost

component (23.3%) for PSUs. Whereas the same component forms6.5% of the turnover in the private sector. The higher non cost effectivelevels have affected the net profit margins (NPM) of the PSUsnegatively over a period between 1990-91 and 2001-01.

The NPMs of PSUs have consistently being negative as compared to anaverage of 6% outflow to the government. Due to rising inefficiency ofPSUs privatization came into existence.

In the last decade, privatization has become an international phenomenon,

from Canada to India, govt. has voted for privatization as a means ofincreasing productivity efficiency and for growth in economy whileoffering opportunities for citizens to invest.

Objectives of government to privatize public sector units

Government resorts to privatization with multiple objectives, the majorobjectives are as follows:

The reduction of political interference in management of enterprise, leadingto improved efficiency and productivity, that is the functional managersget a free hand in managing the organization the way they want to

The govt. also views privatization as a means of providing adequatecompetition to the state run enterprise. Privatization could take place interms of granting permission to the private sector to set up units in anotherwise govt.-controlled area.


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It is used as term of cash generation to fund the ever increasing expenses.Certain developing nations can look upon privatization as a means of broad

basing ownership of economic assets thereby reducing the problem ofconcentration of economic power.

PRIVATIZATION AS BOON

Privatization comes with many benefits; it shows many positive changes inIndian economy as follows:

1. Increased efficiency: in private organization work efficiency is high.They have a greater incentive to produce more goods and services for

the sake of reaching a customer base and hence increasing profits. Astate-owned firm would not be as productive due to the lack offinancing allocated by the entire government's budget that mustconsider other areas of the economy.

2. Specialization: A private business has the ability to concentrate allrelevant human and financial resources onto specific functions whichis not possible in state run organizations.

3. Corruption: A monopolized function is prone to corruption wheredecisions are made mainly for political reasons and personal gain ofthe decision-maker rather than economic ones. This thing is not

present in privatizes sectors.4. Accountability: in privatized sectors, Managers are accountable to

their owners/shareholders and to the consumer and can only exist andthrive where needs are met while Managers of publicly ownedcompanies are required to be more accountable to the broadercommunity and to political "stakeholders". This can degrade theirability to directly and specifically serve the needs of their customers,and can bias investment decisions away from otherwise profitableareas.

5. Goals: in PSU, a political government tends to run an industry orcompany forpolitical goals rather than economic ones which is not

present in privatized sectors.Development would be faster as due to competition with the other private

parties.Innovative solutions (due to again competition with the other private parties)Effective & time bound results


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Cost cuttingsImproves quality in workIn turn more services to public are possibleIncrease the productivitySignificant Growth in the businessControlled monitoring of public property gives public in turn good services

Examples:

The private sector has done more than expected. India's software industry isworld class industry. It is having second largest growth rate after china.Indian manufacturing has finally become competitive; exports havegrown by over 30% annually for three years. Indian companies aremaking foreign acquisitions galore and becoming MNCs - Tata Steel,

Bharat Forge, Tata Motors and Ranbaxy are a few examplesThe need of second green revolution is being energized by the private

sector, not the public sector. Reliance has led the charge into ruralareas in Punjab with a farm-to-fork operation - managing the chainfrom seeds and crops to processing and hypermarket sales. ITC israpidly expanding its e-choupals, computerized kiosks for farminformation and for buying produce. The Mahindras, Tatas andShrirams are setting up rural supermarkets.

The government developed the idea of deficiency payments for roads,with the contract going to the bidder requiring the lowest toll subsidy.

But now some bidders are willing to pay a fee rather than demandsubsidies

Privatization as curse as comparison to PSUs

Performance: social objectives are underestimated in private sectorsas a democratically elected government is responsible to the peoplethrough a legislature like Parliament, and is motivated to safeguardingthe assets of the nation. The profit motive may be subordinated to

social objectives. Improvements: in PSUs the government is motivated to performance

improvements as well run businesses contribute to the State's revenueswhich is not present in private sectors.

Un Accountability: in private companies the public does not haveany control while in PSUs public have full control on govt. actions.


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Civil-liberty concerns: in PSUs, a democratically electedgovernment is responsible to the people through a parliament, and itcan intervene when civil liberties are threatened.

Goals: The government may seek to use state companies asinstruments to furthersocial goals for the benefit of the nation as awhole.

Capital: in PSUs, Governments can raise money in the financialmarkets on most economic rate to re-lend to state-owned enterprises.

Lack of market discipline: Governments have chosen to keep certainindustries underpublic ownership because of their or sensitivenature.

Cuts in essential services: in PSUs, If a government-owned companyproviding an essential service such as the water supplyb to all citizensis privatized then its new owner could lead to the abandoning of the

social obligation to those who are less able to pay, or to regions wherethis service is unprofitable.

Natural monopolies: Privatization will not result in true competitionif a natural monopoly exists.

Concentration of wealth: Profits from successful enterprises end upin private, often foreign, hands instead of being available for thecommon good.

Political influence: in private sectors govt. cant pressure them asthey are not under their control so in PSUs governments may moreeasily exert pressure on state-owned firms to help implementinggovernment policy.

Downsizing: Private companies often face a conflict in betweenprofitability and service levels, and could over-react to short-termevents while a state-owned company might have a longer-term viewand thus be less likely to cut back on maintenance or staff costs,training etc, to stem short term losses. Many private companies havedownsized while making record profits. In privatized organizations,they always to extract work from minimum resources.

Profit: the main goal of Private companies is to make profit ratherthan any other significant social goal. The more necessary a good is,the lower the price elasticity of demand, as people will attempt to buyit no matter the price. In the case of price elasticity of demand is zero(perfectly inelastic good), demand part of supply and demand theoriesdoes not work.


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Unaffordable: In privatization, they are charging higher price to earnprofits, we can take the example of educational institutes which arecharging higher fees for the education so a poor student cant affordthat institute.

Job Loss: as there are additional financial burden placed on privatizedcompanies to succeed without any government aid, unlike the publiccompanies, so jobs could be lost to keep more money in the company.

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Sectors which are privatized

Airports:

The Government aims to attract private investment in aviation infrastructure.India has been witnessing a very strong phase of development in the pastfew months. Many domestic as well as international players are showinginterest in the growth and development of the aviation sector with immensefocus on the development of the airports. Indian private airlines Jet,Sahara, Kingfisher, Deccan, Spice jet - account for around 60% of thedomestic passenger traffic. Some have now started international flights. Forthe next years to come India is poised with strong focus on the developmentof its airport to meet the international standards. The government is planning

modernization of the airports to establish a standard. The newly developedairports will help releasing pressure on the existing airport in the country.A projected investment of USD 8.5 billion has been planned for thedevelopment of Indian airports during the 11th plan. Mumbai and Delhiairports have already been privatized. These two airports are being upgradedat an estimated investment of US$ 4 billion for the period 2006-16.Development of airport infrastructure is a focus area for the Government.There has been a significant uptrend in domestic and international air travel.AAI has planned a heavy investment of USD 3.07 billion over the next five

years. Out of it 43 per cent will be for the three metro airports in Kolkata,Chennai and Trivandrum. The rest will be invested in upgrading other non-metro airports and in the modernization of the existing aeronauticalfacilities.

Privatization of education


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In India privatization of education sector is best example of privatizedsectors. According to current estimated data, 80% of all schools aregovernment schools making the government the major provider ofeducation. However, because of poor quality of public education, 27% ofIndian children are privately educated.

People prefer private sectors because they want quality education. Even thepoorest often go to private schools despite the fact that government schoolsare free. A study found that 65% of schoolchildren in Hyderabad's slumsattend private schools and private schools provide superior results than govt.schools. Pupil-teacher ration is much better in private schools than in govt.schools. But main disadvantages of privatized govt. schools are that they arevery expensive and everybody cant afford them. And the second main conis that by determining the education priorities, not according to our national

needs but to those of a minuscule minority of blood-suckers.

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Sectors which are going to be privatized

How far we need privatization

Conclusion

References

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