Divestment and Privatisation

7/29/2019 Divestment and Privatisation

1/16

Privatisation and Disinvestment


2/16

Privatisation means the transfer of ownershipand/or management of an enterprise from thepublic sector to the private sector. It also meansthe withdrawal of the State from an industry orsector, partially or fully. Another dimension ofprivatization is opening up of an industry thathas been reserved for the public sector to the

private sector.

According to the World Bank, privatisation is thetransfer of ownership of State owned Enterprises

(SOEs) to the private sector by sale (full orpartial) of going concerns or by sale of assetsfollowing their liquidation.


3/16

Rationale for Disinvestment:

Releasing of large amount of public resources

locked up in non strategic PSUs for redeploymentin areas such as basic health, family welfare etc.

Reducing public debt.

Economic inefficiency in the production activities of

the public sector, with high production costs,inability to innovate and costly delays in delivery ofgoods produced.

Ineffectiveness in the provision of goods andservices, such as failure to meet objectives,

political interference etc and transferring ofcommercial risk, to which taxpayers money lockedup in public sector is exposed.

Rapid expansion of bureaucracy.


4/16

The Privatisation ReactionThere are different ways of achieving privatization:

Divestiture: Privatisation of ownership through thesale of equity ie. Selling stock to the public. Thishas largely been undertaken in industrial countries.

Contracting: Government contracts out servicesplanned and specified to other organizations thatproduce and deliver them. Common in public worksand defence etc. but there is scope of corruption in

this as long term contracts tend to encouragemonopolistic behaviour by the private supplier.


5/16

The Privatisation ReactionThere are different ways of achieving privatization:

Strategic sale by auction method: There is a transfer of ablock of shares by government to the strategic partner.Companies that have witnessed strategic sale in India in therecent past include Modern Foods, BALCO, VSNL, ITDChotels etc. In India this method has been preferred to that of

sale of equity shares to the public. Withdrawing from the provision of certain goods and

services leaving them wholly or partly to the private sector

Privatisationof management using leases andmanagement contracts.

Liquidation involves the closure of an enterprise and sale ofits assets. Informal liquidation is when the firm retains itslegal status even though its operations have beensuspended.


6/16

Obstacles to Privatization in Developing Countries

Government usually want to sell the less profitable

organizations, which the private sector is notwilling to buy at prices offered by the government.

Divestiture tends to arouse political opposition

from employees who may lose their jobs,

politicians fear short term unemployment,

bureaucrats who tend to lose patronage and those

who fear that the national assets would be owned

and controlled by the rich.

Undeveloped capital markets make it difficult for

the Government to float shares and for individual

buyers to finance large purchases.


7/16

Conditions for Success of Privatisation Commitment from the Political leadership is

mandatory. Any alternative institutional arrangements chosen

should not stifle competition among suppliers.There should be a multiplicity of suppliers in theindustry and government monopoly should not bereplaced by private monopoly. Overregulation ofindustry discourages private initiative.

There should be freedom of entry to provide goodsand services. Long term contracts and franchises

limit competition and consumers choice. In capitalintensive industries, freedom of entry is difficult toachieve.


8/16

Conditions for Success of Privatisation Public services to be provided by the private sector

must be specific or have a measurable outcome.Lack of specificity makes it difficult to control andquantify.

Consumers should be able to link the benefits theyreceive from a service to the cost they pay for it. Itis extremely important to educate the consumers.

Privately provided services should be lesssusceptible to fraud if they are to be effective.

Equity is an important consideration in the delivery

of public services. The benefits of privatization canaccrue to the capital owner, to the consumer whoreceives a more efficient service and to the publicat large.


9/16

Benefits of Privatisation

Reduces the fiscal burden of the State

Enables the Government to collect funds.

Helps the State trim the size of the administrativemachinery.

Enables the Government to concentrate on the essentialstate functions.

Helps accelerate the pace of economic development. May result in better management of the Enterprises.

May encourage entrepreneurship.

May increase the number of shareholders and thereby

distribution of wealth. In areas such as telecom and insurance, it would bring

an end to the monopoly and thereby result in widerchoices for consumers.


10/16

Disadvantages of Privatisation Will encourage concentration of economic power.

Privatization should not result in substitution of governmentmonopoly by private monopoly.

Could result in foreign firms acquiring national firms.

Privatisation of profit making public enterprises would meanforegoing future sources of income.

Privatisation of strategic and vital sectors is against nationalinterests

Capital markets of developing countries are not adequatelydeveloped for carrying out privatization.

Privatisation at times is a half hearted measure and thus is not

properly executed. Private sector is driven more by a profit motive than the public

sector, which sees its aim as more of a social guardian providingemployment and security to all.


11/16

Privatisation in India

Disinvestment Policy:

The Industrial Policy Statement 1991 stated that theGovernment would divest part of its holdings in selectedPSEs, but did not place any cap on the extent ofdisinvestment.

Objective of the policy was to improve management,enhance availability of resources for these PSEs, yieldresources for the exchequer, encourage wider publicparticipation and promote greater accountability. Theobjective was to provide further market discipline to theperformance of the public enterprises.

However, the Budget 1991-92 reinstated the cap of 20% fordisinvestment.

In 1993 the GOI set up a Committee in Disinvestment underthe chairmanship of C. Rangarajan.


12/16

Privatisation in India

Rangarajan Committee:

The recommendations of this report emphasizedthe need for substantial disinvestment. Thecommittee suggested that the percentage ofequity to be divested could be upto 49% forindustries explicitly reserved for the public sector

and over 74% in other industries. Holding of 51% or more equity was

recommended only for the 6 industries: coal andlignite, mineral oils, arms and ammunition,atomic energy, radioactive minerals and railwaytransport.

Best method of disinvestment is by offeringshares to the general public at a fixed price.


13/16

Privatisation in IndiaRangarajan Committee (contd..)

Instead of year wise targets of disinvestment aclear cut action plan should be made.

Disinvestment to be in stages and sales shall be

staggered to get the best possible prices.

Scheme of preferential shares to workers and

employees to be devised.

10% of the proceeds to be set apart for lending

to the public enterprises on concessional terms.


14/16

Privatisation in IndiaRangarajan Committee (contd..)

The Common Minimum Programme, 1996 sought tocarefully examine the Public sector non strategic areasand to set up a Disinvestment Commission for advisingon disinvestment related matters:

Draw up a long term program of disinvestment.

To determine the extent of disinvestment in each ofthe PSUs.

To prioritise the PSUs referred to it by the Core Groupin terms of the overall disinvestment programme.

To decide on instrument, pricing and time. To supervise the overall sales process and take

decisions on pricing, timing etc.


15/16

Rangarajan Committee (contd..)

To select the financial advisors for the specified

PSUs to facilitate the disinvestment process To monitor the progress of disinvestment

process and take necessary measures

To ensure that appropriate measures are taken

to protect the interests of the employees.The Commission was disbanded in 1999 andwas thereafter handled by a separatedepartment for Disinvestment created in Dec1999 which later became a full fledged Ministryand is now existing as the Department ofDisinvestment.


16/16

National Investment Fund:On Nov 30, 2005, the Government set up the National

Investment Fund into which proceeds from the sale ofPSUs will be credited. The major objectives of the fundare:

to invest the proceeds in social sectors like education,health and employment generation.

To finance the capital projects in potentially profitablePSUs.

Public Private Partnership (PPP):

Of late, the thinking of the Government is to involveprivate sector in ownership and management ofprojects, instead of privatising public sectorundertakings. This arrangement is largely felt ininfrastructure and service sectors.

Divestment and Privatisation

Documents

Transcript of Divestment and Privatisation