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BA LLB 2nd semester economics notes pdf: What is the meaning and scope of privatization

BA LLB 2nd semester economics notes pdf: What is the meaning and scope of privatization

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(a) Ownership measures: The sets of measures that transfer ownership to public enterprises, fully or partially, lead to privatization. The higher the proportion of transfer of ownership to the individual, co-operative or corporate sector, the greater is the degree of privatization. This can take three forms:(i) Total denationalization implies a complete transfer of ownership of a public enterprise to private hands.
(ii) Joint venture implies the partial introduction of private ownership. The range of private ownership can vary from 25 to 50 percent or even more, depending upon the nature of the enterprise and state policy in this regard.
(iii) Liquidation implies a sale of assets to someone who may use them for the same purpose or some other purpose depending upon the preference of the buyer.
(iv) Management buy-out is a special version of denationalization. It implies the sale of assets to the employees. For this purpose, appropriate provision of loans from banks is also made to enable employees to take over ownership. The employees may form a co-operative to run the enterprise. In this case, employees become entitled besides wages to ownership dividend.

(b) Organizational Measures. A number of organizational measures are conceived to limit state control. They include:
(i) A holding company structure may be so designed that the government limits its control interventions to apex level decisions and leaves the operating companies within the arrangement to a sufficient degree of autonomy in decision-making within the framework of the market forces. Sometimes, a very big monolithic organization is split into smaller units without loss of economies of scale. Although the smaller units comprise a family, they become independent in certain product lines or regional operations.
(ii) Leasing: A public enterprise while retaining ownership may lease out to a private bidder for a specific period for use. The Chinese government adopted the Asset Responsibility System (ARS) in which a tenderer becomes the general executive of an enterprise for a specified period of say 5 years. But before the appointment of the bidder is finalized, the tenderers have to give an undertaking of the profits they would pass over to the state and also give a convincing set of measures that they propose to undertake in this regard. The government enjoys the right of obtaining profits as per the agreement, on the other hand, tenure ownership is expected to lead to improved efficiency or lower costs of operation. In case, a particular bidder fails to come up to the expectations of the government, the latter reserves the right to replace him with a more promising bidder.
(iii)Restructuring: To bring public sector enterprises under market discipline, it would be desirable, to go in for two forms of restructuring:
(a) Financial restructuring can be effected in the sense that accumulated losses are written off and capital composition is rationalized in respect of debt-equity ratio.                                                            (b) The basic restructuring may be effected by redefining the set of commercial activities which the enterprise will undertake henceforth. It may shed off some activities to be taken up by ancillaries or small-scale units.

(c) Operational measures are intended to improve the efficiency of the organization, Even when full denationalization has not been undertaken. They, in fact, inject the spirit of commercialization into public enterprises. The measures include a grant of autonomy to PEs in decision making, provision of incentives to blue-collar as well as white-collar employees consistent with an increase in efficiency or productivity, freedom to acquire certain inputs from the market by a system of “contracting” instead of producing them within the enterprise, development of proper investment criteria, permitting PEs to go to the capital markets to raise funds, etc. The basic purpose of these measures of operational privatization is to bring about a drastic reform to reduce government control over the enterprise.


The upshot of the list of measures enunciated above is that while privatization is more often equated with the transfer of ownership, the critical manifestation of privatization is the transfer of managerial control to private hands, individual or co-operative. Sometimes, even ‘token privatization’ in the sense of ‘disinvestiture’ has also been mentioned as a measure of privatization.

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