What are the strategic issues arising out of privatization? Discuss any two.

What are the strategic issues arising out of privatization? Discuss any two.


PRIVATISATION: Privatisation is the process of involving the private sector in the ownership or operation of a state owned or public sector undertaking. It can take three forms: (i) Ownershijp measures; (ii) Organisational measures; and (iii) Operational measures.
(i) Ownership measures: The degree goes privatisation is judged by the extent of ownership transferred from the public enterprises to the private sector. Ownership may be transferred to an individual, co-operative or corporate sector. This can have three forms:
(a) Total denationalization implies 100 per cent transfer of ownership of a public enterprise to private sector.
(b) Joint venture implies partial transfer of a public enterprise to the private sector. It can have s3everal variants – 25% transfer to private sector in a joint venture implies that majority ownership and control remains with the public sector. 51% transfer of ownership to the private sector shifts the balance in favour to the private sector, through the public sector retains a substantial stake in the undertaking. 74% transfer of ownership to the private sector implies a dominant share being transferred to private sector. In such a situation, the private sector is in a better position to change the character of the enterprise.
(c) Liquidation implies sale of assets to a person who may use them for the same purpose or some other purpose. This solely depends on the preference of the buyer.
(d) Workers’ co-operative is a special form of dentionalisation. In this form, ownership of the enterprises is transferred to workers who may form a co-operative to run the enterprise. In such a situation, appropriate provision of bank loans is made to enable workers to buy the shares of the enterprise. The burden of running the enterprises rests on the workers in a workers’ co-operative. The workers become entitled to ownership dividend besides getting wages for their services.
(ii) Organizational measures include a variety of measures to limited state control. They include:
(a) A holding company structure may be designed in which the government limits its control to top level major decisions and leaves a sufficient degree of autonomy for the operating companies in their day-to-day operations. A big company like the Steel Authority of India (SAIL) or Bharat Heavy Electricals Limited (BHEL) may acquire a holding company status, thereby transferring a number of functions to its smaller units. In this way, a decentralised pattern of management emerges.
(b) Leasing: In this arrangement, the government agrees to transfer the use of assets of a public enterprise to a private bidder for a specified period, say of 5 years. While entering into a lease, the bidder is required to give an assurance of the quantum of profits that would be made available to the state. This is a kind of tenure ownership. The government reserves the right to review the lease to the same person or to grant the lease to another bidder depending upon the circumstances of the cases.
(c) Restructuring is of two types: financial restructuring and basic restructuring.
(1) Financial Restructuring implies the writing off of accumulated losses and rationalization of capital composition in respect of debt-equity ratio. The main purpose of this restructuring is to improve the financial health of the enterprise.
(2) Basic Restructuring is said to occur when the public enterprise decides to shed some of its activities to be taken up b ancillaries or small scale units.
(iii) Operational measures: The efficiency of public sector enterprises depends upon the organizational structure. Unless this structure grants a sufficient degree of autonomy to the operators of the enterprise of develops a system of incentives, it cannot raise its efficiency and productivity. These measures include: (a) grant of autonomy to public enterprises in decision making, (b) provision of incentives for workers and executives consistent with increase in efficiency and productivity, (c) freedom to acquire certain inputs from the markets with a view to reducing costs, (d) development of proper criteria for investment planning, and (e) permission to public enterprises to raise resources from the capital market to execute plans of diversification/expansion. The basic purpose of operational measures is to infuse the spirit of private enterprises so that government control is effectively reduced and private initiative is promoted.
Privatization in a narrow sense indicates transfer of ownership of a public sector undertaking to private sector, either wholly or partially. But in another sense, it implies the opening up of the private sector to areas which were hitherto reserved for the public sector. Such deliberate encouragement of investment to the private sector in the economy, while emphasizing to a lesser degree the expansion or growth of the public sector, will our a period of time increase the overall share of the private sector in the economy. This is the broader view in which privatization of the economy can be effected. The basic purpose is to limit the areas of the public sector and to extend the areas of private sector operation, including heavy industries and infrastructure.