Finance

A summary of Difference between Privatisation and Disinvestment

Both privatisation and disinvestment have similar connotation where the government divests a portion of its shareholding to the private sector to decrease wasteful expenditure, contain rising Non Performing Assets (NPAs), increasing efficiency in operations etc. The only point of difference between privatisation and disinvestment is that in privatisation the government divests its shareholding in the company to the tune of more than 51 per cent wherein the management control is transferred to the private sector whereas in the case of disinvestment the portion of shareholding that the government divests is equal to or less than 49 per cent so that the ownership and control over the company remains in the hands of the government.

What is meant by ‘Privatisation’?

Privatisation is a process where the government ceases to keep control over the ownership and management in the government owned company and transfers the same to a privately owned company. Such a step is taken by the government thinking that privatisation will bring in more efficiency and turn the debt ridden loss making government entity into a profit making one.

Privatisation occurs when the private sector enters those domains of business over which government had the monopoly or where the government is involved in a business. When the shareholding of the government owned companies is transferred to the private hands, then privatisation of the company is said to have taken place.

The proponents of privatisation argue that private players can run a business more efficiently compared to government run companies because of absence of bureaucracy, elimination of wasteful expenditure, small but effective operations in the private sector.

The first time privatisation was done after the historic budget of 1991 which introduced for the first time the policy of liberalisation, privatisation and globalisation.

Purpose of Privatisation

Following are the objectives which the government aims to achieve by undertaking privatisation of the government companies:

1. Increased operational efficiency in the existing bureaucratic scheme of things
2. To increase competition and offer organic growth in the market
3. To raise revenue for the other sectors or schemes 
4. To distance the government from operating and carrying business activities which should ideally be left to the market.

Modes of Privatisation

There can be numerous modes of undertaking privatisation. These include:

1. auctions
2. tenders
3. sale of shares in the open market
4. sale of government companies
5. private payment
6. direct negotiations
7. handover of the management of the government company’s affairs to that of private hands
8. sale of assets of the government company
9. Lease with the option to purchase

What are the benefits and drawbacks of privatisation?

BENEFITS

Following benefits are associated with the privatisation of the public sector undertakings:

Increased Efficiency with private management: Generally, every government undertaking that is privatised is done keeping in mind that the private management taking over the control will increase efficiency compared to how the government undertaking functioned previously. There will be better customer service which will in turn be beneficial for the customers and the business.

Increased competition: The handing over of the public company to the private company will allow the market to grow organically. Research and Development will be initiated and newer customer friendly highly efficient products will be launched for better customer satisfaction.

Professional management and reduced government interference: The professionally managed private team will take decisions on sound business practices unlike government backed public sector undertakings where decisions are made only on the basis of political requirements and other factors are ignored.

Attracts Investment: There are better chances for the privately owned, profit-driven, professionally managed entities to attract greater investments from the market compared to the publically owned bureaucratically managed entities. The investment garnered from the market will further help to bolster the economy. 

DRAWBACKS

Along with the benefits some drawbacks are also associated with privatisation:

Social welfare takes backseat: The private players are driven by profit making. So, the focus of the business will entirely be concentrated on the affluent sections of the society and the poor and downtrodden sections of the society will be ignored. Financial inclusion which is taken care of in the case of public sector banks will go down the drain if such undertakings of the government are handed over to the private sector.

Increased Unemployment: Public sector undertakings have been marked with bureaucratic scheme of things where too much of labour force is assigned with unimportant tasks. On the other hand private sector is known for speedy work, use of high end technology and optimization of resources. This entails weeding out unimportant tasks and outsourcing the same or using technology to complete them. This involves massive layoffs especially of low income unskilled workers.

What is meant by ‘disinvestment’?

Disinvestment is a process of selling the stake of public sector undertaking to a private entity by liquidating its assets and transferring the control in the management to the private sector. Generally, the control is given upto 49 percent of the government undertaking or such percentage as the competent authority allows.

There are three kinds of disinvestment.

1. Majority Disinvestment: when the government post disinvestment sells majority of stake in the government undertaking and the same is transferred to the private hands.
2. Minority Disinvestment: when the government is able to retain management control of the government undertaking after the disinvestment i.e. more than 51 percent in the undertaking.
3. Full Disinvestment (Privatization): It is a form of disinvestment wherein complete control is handed over to the private hands.

Disinvestment is a strategy wherein the government undertaking starts selling its owned assets such as plant machinery, units etc.

The need for disinvestment arises when the government wants to be relieved from the fiscal burden of the undertaking or with a view to raise capital for investment in certain specific schemes. This further helps in improving financial discipline in the market and opens the floodgates of innovations and improvements in the given sector.

Objectives of Disinvestment

Following are the objectives which the government aims to achieve by undertaking Disinvestment of the government companies:

1. To unburden the government from bad debts, losses etc.
2. To generate funds for modernization, operational efficiency.
3. To make these companies competitive and diversify ownership.

Modes of Disinvestment

Following modes of disinvestment is used to transfer the assets of government undertakings:

1. Public Issue
2. Cross holding where the shares of one public sector undertaking is sold off to the other PSU^[1]
3. Strategic Disinvestment where the disinvestment shall be made as per the prescribed limit
4. Institutional placement programme
5. By means of Warehousing where public undertakings hold the shares of the public entity which is being disinvested till the time a private buyer comes to buy them.

Benefits and Drawbacks of Disinvestment

BENEFITS

Unburden the government from NPAs: The major reason for privatising the public sector undertakings is to unburden the government from the bad debts and the amount of liquidity that the government has to infuse in these unprofitable loss making undertakings.

Investment in other sectors: The government tries to raise capital and invest the same into other sectors which require investment. This includes adding latest machinery, technology for the company or carrying expansion plans for the firm or investing in other social sector schemes.

Cope up with the competitors: The government believes that the new private players getting in the management shall introduce such policy decisions which will bring the company at par with the existing market players in the market and eventually turn the loss making entity into a profitable one.

DRAWBACKS

Complete Disinvestment may result in Private Monopolies: When the government starts making complete disinvestments in public undertakings which enjoyed the status of statutory monopoly, there is a lingering risk of them turning into a private monopoly which may start exploitation of the public.

Unhealthy practice of selling public assets to meet short term fiscal deficit: The practice of selling public assets to meet the short term goals of balancing fiscal deficit may lead to selling of precious assets which could have acted as a saviour for the government in the unexpected emergencies. This practice may gradually lead to drying up of the much required public resources in the near future.

National Security concerns: Selling off the sectors of strategic importance like Oil and defense and other has the potential to compromise the national security interests at the hands of the private sector for whom profit making is more important than national security.

Damage to the public assets by the private entities: The valuable assets sold during disinvestment to the private entities may end up getting abused by the private sector which could pose to be loss of the whole nation.

Conclusion

From the above discussion it can be seen that the benefits of the decoupling of the government in the areas of business outweigh the drawbacks associated with privatisation and disinvestment. Keeping in mind all the risks associated with privatisation and disinvestment of public undertakings, the government should not indulge in blindly selling of the government’s equity. Instead, the government should focus on decoupling of the government interference in the management of these undertakings and converting them into corporations with enough autonomy to run the affairs in an efficient manner.

Read our article:Privatisation of Banks: A Brief Overview