PRIVATISATION &

DISINVESTMENT

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• Privatisation means the change of ownership
and/or management of an enterprise from
public sector to private sector.
• Withdrawal of the state- fully or partially-
from an industry or sector.
• Opening up of an industry that has been
reserved for the public sector to the private
sector.

prince dudhatra-9724949948
• Public sector and its defects:
• The performance of State Owned Enterprises
(SOEs) was far from satisfactory in many countries.
• They were proving to be a burden on the public
budgets.
• The heavy burden they were putting on the budget
coupled with their inefficiency and indifferent and
arrogant attitude resulted into discontent against
them.

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• The expansion of public sector has led to :
• - Economic inefficiency in production activities.
• - Ineffectiveness in provision of goods and
services .
• - Rapid expansion of the bureaucracy severely
straining the public budget.
• These factors prompted many governments to
turn towards privatisation.

prince dudhatra-9724949948
 Ways of Privatisation
• Giving priority in buying shares to the staff of
the company being privatised.
• ESOPs.: Employees’ Share Ownership Plan
provides for forming special fund which takes
bank credit to buy a company’s shares and
distribute them among the employees. The
credit taken from the bank is then repaid from
the profits of the company.

prince dudhatra-9724949948
• Divestiture: this is privatisation of ownership
through sale of shares.
• Denationalisation: or reprivatisation. That is
privatising again a company which had been
nationalised.
• Contracting: Governments may contract out
services they have planned and specified to
other organizations that produce and deliver
them.
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• Franchising: authorising the delivery of certain services
in designated geographical areas .
• Withdrawal: the government withdraws from provision
of certain goods or services leaving them wholly or
partially to private sector.
• Management Contracts: Management of the company
may be handed over to a private party.
• Liquidation: it may be formal – closure of the enterprise
– or informal – firm retains its legal status even though
some or all of its operations are suspended.

prince dudhatra-9724949948
 Obstacles to Privatisation
• 1. Governments usually want to sell those enterprises
which are least profitable.
• 2. Opposition from employees because of fear of losing
jobs.
• 3. Opposition from bureaucrats who fear loss of patronage.
• 4 Opposition from that section of public who feel that
privatisation would mean handing over national assets to
foreigners, elite rich or such groups.
• Sometimes there are relatively less developed capital
markets.

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 Conditions for success of privatisation
• 1. Privatisation cannot be sustained in the absence
of political will and commitment. Considerable
dissatisfaction with the public enterprise must also
have been built up as regards the efficiency of the
public enterprise.
• 2. Any alternative arrangement chosen should not
stifle competition among the suppliers. Suppose the
govt. wants to contract out a service, and if there
are only a few qualified entities, the fruits of
competition may not be received.
prince dudhatra-9724949948
• 3. There must be freedom of entry to provide
goods and services so that there is competition
and the customers get the benefit of competition.
• 4. Public service to be provided by the private
party must be specific and must have measurable
outcome.
• 5. The public must be able to link the benefits
they receive to the cost of services they receive.

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• 6. Privately provided services should be less
susceptible to fraud than government
eservices if they are to be effective.
• 7. The delivery of public service must be
equitable and available to all at large. If the
service so privatised is accessible only to a
select few, then resistance to reform is likely
to grow.

prince dudhatra-9724949948
prince dudhatra-9724949948