Finance

A summary of Difference between Privatisation and Disinvestment

A summary of Difference between Privatisation and Disinvestment

Both Privatization and disinvestment refer to the process wherein the government sells a portion of its stock to the private sector to reduce wasteful spending, control the rise of non-performing assets (NPAs), improve operational efficiency, etc. The only distinction between Privatisation and disinvestment is that, in the former, the government sells off a majority of its shares in the company—more than 51%—and transfers management control to the private sector. In contrast, in disinvestment, the government sells off a smaller percentage of its shares—either equal to or less than 49%—and retains ownership and management of the company.

What Is Meant By ‘Privatization’?

Government control over the ownership and administration of a government-owned corporation is relinquished to a privately owned company through the process of Privatisation. The government has taken this action hoping that Privatization will increase efficiency and transform the indebted, loss-making government organization into a profitable one.

When the private sector enters industries where the government formerly held a monopoly or operated a corporation, this process is known as Privatisation. Privatization of a corporation is considered to have occurred when private ownership acquires shares of publicly traded companies.

The argument made by those in favour of Privatisation is that the absence of bureaucracy, the removal of wasted spending, and the modest but effective operations in the private sector allow private actors to operate businesses more efficiently than government-run businesses.

After the historic budget of 1991, which implemented the policy of liberalization, Privatisation, and globalization for the first time, Privatisation was carried out for the first time.

Purpose of Privatisation

The goals that the government hopes to accomplish through the Privatization of government-owned businesses are as follows:

  • Improved operational effectiveness within the current administrative structure
  • To boost market competitiveness and provide organic growth
  • To generate income for the other programmes or sectors 
  • To keep the government from engaging in commercial activities better off being left to the market.

Modes of Privatisation

There are many ways to implement Privatisation. These consist of:

  • Auctions
  • Tenders
  • Shares being sold on the open market
  • Government-owned company sales
  • Private payment
  • Direct discussions
  • Transfer of responsibility for managing the activities of a government corporation to a private party
  • Selling off the government company’s assets
  • Rent with a purchase option

What Are The Benefits And Drawbacks Of Privatization?

Benefits

The Privatization of public sector organizations has the following advantages:

Efficiency Gains under Private Management: Every government activity that is privatized often does so with the understanding that the private management assuming control will boost efficiency relative to how the government undertaking previously operated. Better customer service will be provided, which will benefit both the customers and the company.

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Increased Competition: Competition will increase due to the transfer of the publicly traded company to a private corporation. Research and development will be started for greater consumer pleasure, and new, user-friendly, highly effective goods will be introduced.

Professional management and less government interference: Unlike government-backed public sector companies, where decisions are only made based on political requirements and other factors are neglected, professionally managed private teams will make judgements based on essential business practices.

Investment Attraction: Compared to publicly owned, bureaucratically managed institutions, privately held, profit-driven businesses have a better chance of attracting more significant investments from the market. The market’s investment will help to support the economy even further.

Drawbacks

Along with the benefits, Privatisation has its disadvantages as well:

Lack of Social Welfare: Social welfare takes a backseat to profit-making for the private players. Therefore, the impoverished and oppressed segments of society will be disregarded as the corporation focuses solely on the wealthy segments of society. If such government-run businesses are turned over to the private sector, the financial inclusion that public sector banks are responsible for will be lost.

Increased unemployment:Public sector organizations have been characterized by a bureaucratic structure where a disproportionate number of workers are assigned to insignificant activities. On the other hand, the private sector is renowned for swift work, innovative technologies, and resource optimization. This means eliminating unnecessary work, outsourcing or completing tasks with technology. This entails massive layoffs, particularly of low-wage, unskilled people.

What Is Meant By ‘Disinvestment’?

Disinvestment is selling a public sector undertaking’s stake to a private company by selling off its assets and giving the personal sector management authority. The control is typically granted over up to 49 percent of the government endeavour or whatever percentage the appropriate rules permit.

Disinvestment comes in three different forms:

  • Majority Disinvestment: The process by which the government transfers ownership of a government undertaking to private parties after selling the majority of its stake therein.
  • Minority Disinvestment: When the government can keep managerial control of the government enterprise after the disinvestment or when it owns more than 51% of the business, this is referred to as minority disinvestment.
  • Complete or Full Disinvestment (Privatization): This type of disinvestment involves giving the private sector all authority.

Disinvestment is a technique in which a government enterprise begins to sell its owned assets, such as buildings, machinery, and other things.

When the government wants to be relieved of the project’s financial burden or to raise money for investment in certain specialized schemes, disinvestment becomes necessary. This also aids in boosting market financial discipline and facilitates a wave of innovations and advancements in the targeted industry.

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Objectives of Disinvestment

The goals that the government hopes to accomplish through the disinvestment of government-owned firms are as follows:

  • To relieve the government of the weight of losses and bad debts.
  • To raise money for operational effectiveness and modernization.
  • To increase these businesses’ competitiveness and ownership diversity.

Modes of Disinvestment

The assets of government undertakings are transferred via the following methods of disinvestment:

  • Public Issue
  • Cross-holding refers to the practice of selling shares of one Public Sector Undertaking to another PSU1.
  • Strategic Disinvestment, in which the disinvestment must be made within the set limits
  • Programme for institutional placement
  • Through warehousing, in which public enterprises keep the shares of the public entity that is being divested until a private buyer arrives to purchase them.

Benefits and Drawbacks of Disinvestment

The benefits are as follows.

Relieve the government of its burden of NPAs: The primary goal of disinvesting public sector enterprises is to relieve the government of its burden of NPAs and the amount of money it must inject into these unprofitable, loss-making enterprises.

Investment in other sectors: The government makes an effort to raise money and invest it in other areas that need it. This includes incorporating the newest technology and machines into the business, carrying out development plans, or funding further social sector initiatives.

Adapt to the competition: According to the government, the new private players joining the management would adopt certain policy changes that will bring the business up to par with the other market players and eventually transform the losing entity into a profitable one.

Drawbacks

Below discussed are the drawbacks

Complete Disinvestment May Lead to Private Monopolies: There is a persistent risk that when the government begins to make complete disinvestments in public enterprises that benefited from the status of statutory monopoly, they may become private monopolies that begin exploiting the general public.

The unhealthy practice of selling public assets to balance short-term budget deficits: Selling public assets to balance short-term budget deficits might result in the sale of priceless assets that could have saved the government in unforeseen emergencies. In the near future, this practice may progressively cause the public resources that are sorely needed to run out.

Concerns about national security: Selling off industries with strategic value, such as the oil and defence industries, runs the risk of putting national security at risk at the hands of the private sector, which prioritizes profit over security.

Damage to the Public Assets: Public assets are at risk of being misused by private businesses when valuable assets are sold to them during disinvestment, which could result in a loss for the entire country.

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Differences explained in tabular column

The key differences between Privatisation and disinvestment are: –

Basis of ComparisonPrivatizationDisinvestment
PurposePrivatization refers to the transfer of ownership of a state-owned enterprise to a private entity.Disinvestment refers to the selling of a portion of the government’s ownership in a public corporation.
Ownership Privatization results in the transfer of control and ownership from the government to private persons or companies.Disinvestment may or may not result in a change in ownership, as shares can be sold to other public sector organizations or financial institutions.
TechniquesStrategic sales, IPOs, and auctions are just a few of the techniques that can be used to privatize.The term “disinvestment” refers to all divestment strategies, including Privatisation, but it can also refer to the selling of stock to other public sector organizations or financial organizations.
ImpactPrivatization may boost an organization’s productivity, creativity, and competitiveness.Disinvestment may not always lead to better performance, but it can ease the financial strain on the government.
ProfitabilityPrivatization is anticipated to increase profitability and efficiency over time.Whereas disinvestment may or may not affect the company’s profitability and efficiency.

To sum up, Privatisation is a particular kind of disinvestment that entails handing over ownership and control from the government to private people or organisations. The goal of disinvestment, on the other hand, is to raise money for the government and lighten its fiscal burden through a variety of divestment strategies, including Privatisation.

Conclusion

From the explanation above, it is clear that the advantages of the government’s decoupling from business matters outweigh the disadvantages of Privatisation and disinvestment. The government should refrain from rashly selling its shares in light of all the risks involved with Privatisation and disinvestment of public enterprises. The government should instead concentrate on reducing its involvement in the management of these undertakings and turning them into corporations with sufficient autonomy to manage their operations effectively.

FAQs

  1. Does Privatization lead to a better return on investment?

    As private businesses might have better management practices and higher incentives to increase efficiency and profitability, it could result in a better return on investment.

  2. What is the difference between disinvestment and Privatization?

    The process of transferring ownership of a public sector business to the private sector is known as Privatisation, and disinvestment is the process through which a company, government, or other entity sells or liquidates its assets.

  3. Is disinvestment part of Privatization?

    Privatization is the partial or complete sale or transfer of public ownership to the private sector. It is a procedure to lessen the influence of the government on the economy. Ownership, organizational, and operational measures are included. One of the practical steps in Privatisation is disinvestment.

  4. Is disinvestment broader than Privatisation?

    Disinvestment is used in a variety of situations to privatize assets; however, not all disinvestment results in Privatisation.

  5. What is an example of a disinvestment strategy in India?

    For instance, following the government's disinvestment, Chennai Petroleum Corporation Limited, formerly known as Madras Refineries Limited, is a group business of Indian Oil Corporation. The concept is the pooling of resources inside a business, which eventually results in operational effectiveness.

  6. What do you mean by disinvestment?

    Disinvestment refers to the sale or liquidation of assets or subsidiaries by governments or other organizations. Disinvestments may take the shape of a reduction in capital expenditures or a divestment. Disinvestment may be undertaken for several reasons, including strategic, political, or environmental ones.

Read our article:Privatisation of Banks: A Brief Overview

References

  1. https://en.wikipedia.org/wiki/Public_sector_undertakings_in_India

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