What is Privatization?
Privatization is a measure in which the ownership and management of public sector industries (i.e. those industries which are under the control of the government) is moved to the private sector and the same can be achieved either by outright sale of the assets of such enterprise or allowing the private individuals to participate in such industry or enterprise by removing restrictions from them.
Examples of Privatization
- Paribas was privatized in 1987 and was merged with PNB resulting in the formation of PNB Paribas.
- Saint-Gobain, a mirror manufacturing company, was privatized in 1986.
- Olympic Airways was privatized in the year 2012 during its debt-restructuring process.
- Municipal bus companies have been selling companies individually since 1988 in the UK.
Methods of Privatization
- Competitive Bidding – In this method, the company’s shares and assets are sold by way of tender. It may happen that an enterprise chooses to sell an undertaking instead of the whole business.
- Public Flotation of Shares – In this method, the shares of a government-held enterprise are sold to the general public by way of listing them on the stock market.
- Private Placement – Private placement refers to the transferring of ownership to the hands of a few private individuals. The government may decide to transfer the ownership of the public company to select individuals who meet their requirements and criteria.
- Dilution of Capital – In this method, instead of selling the shares of the public sector company, the capital is raised by issuing them to private investors. Hence, the stake of government in such companies become diluted.
- Management Employee Buyout – It involves the selling of the stake of the entire or a part of the enterprise to the employees.
- Mass Privatization – It is a method by which a large number of enterprises are privatized in one go. For this, a combination of various above-mentioned methods is used.
How does it work?
- By way of privatization, a particular business or industry is transferred to the private sector. This helps the government to increase efficiency in those industries and increase the quality of products and services by allowing private businesses to enter such industries.
- It is achieved by selling the assets and the stock of the government-held enterprises and by diluting their ownership and control in such enterprises.
- However, there are some sectors which government of no state tends to privatize such as education and defense are crucial for the state.
Why It is Important?
Privatization is important for any economy as it allows opportunities to private businesses and thus allows healthy competition in the economy resulting in fair pricing of goods and services. Also, when a particular sector is privatized it leads to job creation as more and more business houses enter the sector. Involving the private sectors also improves the quality of goods and services.
Privatization is done with a purpose to reduce the cost of goods and services by allowing access to the private businesses to the industry and thus creating a healthy competition between them, which compete among themselves to provide good quality of goods and services at better prices. It is also done when the government needs to lack resources and is unable to cater to demand.
Advantages of Privatization
- Efficient use of Resources – The private sector uses resources much more efficiently than the public sector.
- Healthy Competition – Giving access to the private sector creates equal opportunities for all and results in healthy competition.
- Reduced Burden on Government – The government losses on loss-making government enterprises are removed.
- Chances of Monopoly are Eliminated – Privatization removes the chances of government monopoly in a particular industry.
- Reduced Political Involvement – The political parties tend to misuse the public sector by utilizing its pressure. The same is not the case with private sectors.
- Employment Creation – With the private sector entering an industry, job opportunities are created.
Disadvantages of Privatization
- Chances of Monopoly – There are high chances of some private players taking in lead and creating a monopoly market in their favor.
- Public Interest Sectors – Privatization is not advisable in some sectors which relate to public interest such as health care, education, etc. The reason is that the service providers in such sectors need to serve with non-profit motives, which will not be possible in case of privatization.
- Short-Term Goals of Private Businesses – The private business players in order to increase their immediate profits may be reluctant to invest in long term projects.
- Industry Fragmentation – The industries which are privatized may become fragmented with no person taking responsibility in their hands.
This helps a government to create competition in the industry and increasing efficiency. However, there are certain sectors, which any government should restrain from privatizing namely, education and defense as there are two of the most important pillars of any state.
This has been a guide to What is Privatization & its Definition. Here we discuss the top 6 methods of privatization, its purpose and how it works along with examples, advantages, and disadvantages. You can learn more about from the following articles –