PRIVATISATION

1. What is privatisation all about

• It means migration from the Public to the Private Sector through the transfer of ownership, management and control.
• In India, privatisation is aimed at improving the inflow of Foreign Direct Investment (FDI) or investment in sectors that require technological advancements, thereby directly providing a boost to the Economy.
• Govt has now announced that all PSUs in non-strategic sectors will be privatized, while in the strategic sector, there will be only one to maximum 4 PSUs fully owned by Govt.
• Rest every PSU in India will be privatized.
• Objective behind PSU Privatisation
• Minimise the administrative cost of the Central Government
• Boost the CPSE Disinvestment programme of the central government

2. The public/private efficiency argument in the context

People have been complaining about ‘red tape, idle bureaucrats and indolent ‘pen-pushers’ ever since the government was invented. In recent decades, efforts to undermine the effective, efficient and equitable public official working for the common good have advanced on seven fronts: 

• Ideological – an assertion, regardless of evidence and repeated often enough that it became accepted as a truism, that the public service is inherently incompetent, indolent and unresponsive by its very nature – rather than, if those characteristics were true, it is because political leaders allow this (contrast this with post-independence Singapore: political determination for building a highly disciplined and motivated public service has transformed the city-state). 
• Intellectual – a ‘Catch 22’ conundrum has developed: Public Choice theory posits the idea that the public service is inherently self-serving and needed to be constrained; New Public Management propagates the exact opposite view, that public service is inherently apathetic and needed to be incentivised into being effective. 
• Commercial – big profits for consultants and businesses are created by the belief that was fostered by the ideas of New Public Management, of running government more like a business, outsourcing services and promoting public-private partnerships. 
• Political – blaming the public service for failure offers a tempting scapegoat for politicians to deflect criticism of their inadequate leadership and direction. 
• Financial – pay levels in professional posts in the public service have lagged behind those of the private sector that either many high-skilled vacancies could not be filled or special pay arrangements were required. 
• Institutional – there has been enough (selected) truth in some imagery of obstructive public service unions and unhelpful ‘street-level bureaucrats to drown out the much more positive images of devotion to the public good, such as was famously demonstrated by the unstinting self-sacrifice of officers of the New York fire service on and after 9/11. 
• Organisational – both elected leaders and senior administrators benefit from creating a ‘permanent revolution’ of ceaseless reforms and reorganisation of the public service. Despite the mounting evidence over the years that many reforms achieve almost no lasting improvements but greatly demoralise staff, the temptation to appear to be shaking up supposedly lazy and incompetent bureaucrats is all too great.

3. Alternative way of managing the public sector 

• Contracting out: The state pays a non-state organisation to perform a task, set out in a formal agreement (i.e. a contract), which is enforceable by law. Lease and concession of monopolies: The private sector is given managerial and financial responsibility for a set term. In some cases the contractor covers the running costs from revenues (leases); in other cases, the contractor must cover running costs but also invest or contribute towards fixed costs through investment (concession). 
• Licensed competition between producers: Government intervention aims to ensure equitable access (e.g. even in unprofitable areas) or mitigate the effects of unrestrained competition on society. Joint ventures: Government enters into contractual relationships with the private sector both in setting up the company and in awarding the company the contract to undertake the work. 
• Co-production: Government, the private sector and the beneficiaries of public services may collaborate by making complementary but independent contributions to the production and delivery of services, often without any formal or contractual underpinning. 
• Public-private partnership: A term which is often used loosely to describe any or all of the above arrangements. A partnership may be through joint ownership and investment or through complementary investment where, for example, the public sector may facilitate private action.

4. Reasons for government-backed privatisation

• Privatisation is often, but not always, associated with improved efficiency. 
• Evidence of privatisation improving efficiency is strongest in high-income countries. 
• Evidence is limited and mixed in low- and middle-income countries. 
• Studies highlight the need for additional factors or reforms for privatisation to improve efficiency. Factors that affect efficiency, in association with privatisation, include competition, regulation, financial and legal institutional development, and enforcement of property rights. 

5. The adverse impact of privatisation

• Welfare State: The concept of a welfare state may get defeated with the Privatization of the economy. The private sector would not care about society as its main objective is to earn profits.
• Less Social Development: Government or Public sector companies also keep doing social work simultaneously. In case privatization happens, it will result in fewer funds for society because private companies have no obligation to do social work.
• Unemployment: Privatization will also result in the retrenchment of employees. In private sector enterprises, there is an emphasis on performance which indirectly results in work pressure and meeting deadlines or targets individuals who have been doing work for years without much pressure find it difficult to adjust to a new setting and many end up resigning from their service.
• Long Term Risk: The risk of short-term gains is prominent in private companies. There are decisions to start ventures which result in short-term benefits but may not be good for the long term.

6. Other challenges associated with privatisation

• Loss-making units don’t attract investment so easily.
• Government has mostly used it for financial reasons rather than growth objectives.
• Most firms are not clear with their legal land rights.
• Process is not favoured socially as it is against the interests of socially disadvantaged people.
• Over the years the policy has increasingly become a tool to raise resources to cover the fiscal deficit with little focus on market discipline or strategic objectives.
• Sometimes with the emergence of private monopolies consumer welfare will be reduced.
• Mere change of ownership from public to private does not ensure higher efficiency and productivity.
• It may lead to retrenchment of workers who will be deprived of the means of their livelihood.
• Private sector governed as they are by profit motive tends to use capital intensive techniques which will worsen the unemployment problem in India.