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Significance of Privatization

Significance of Privatization

Privatization that has gathered momentum since around the 1980’s has become the hallmark of the new wave of economic reforms sweeping across the world.

It refers to the transfer of ownership or management of an enterprise from the hands of the public sector to private sector. It also means the withdrawal of the state from an industry or sector, partially or fully.

Privatization marks a change from dogmatism to pragmatism and amounts to a reversal of policy. It is evident that the economic growth rate has multiplied ever since privatization has come into existence.

What is Privatization?

1. The transfer of ownership of property or businesses from a government to a privately owned entity.

2. The transition from a publicly traded and owned company to a company which is privately owned and no longer trades publicly on a stock exchange.

Performance of Public Sector:

The performance of state owned enterprises in many countries have, by and large been far from satisfactory. This may be attributed to the prevalence of bureaucracy and red tapism in most of the public sector administration.

They have often put large burdens on public budgets and external debt. Economic inefficiencies in the production activities with high costs of production, inability to innovate and costly delays in delivery of the goods produced are some of the shortcomings of the public sector.

There is also ineffectiveness in the provision of goods and services such as failure to meet intended objectives, diversion of benefits to elite groups, and political interference in the management of enterprises. The relationship between the management and the labor unions is strained owing to the expansion of bureaucracy.

significance of privatization

Why Privatization?

These problems have led many governments to undertake programmes of public sector reform. One Such reform is privatization of publicly managed activities to discard the inefficiencies and improve the economic growth rate. For privatization to succeed:

significance of privatization

  • Privatization cannot be sustained unless the political leadership is committed to and unless it reflects a shift in the preferences of the public arising out of dissatisfaction with the performance of other alternatives. Now-a-days, private sector enterprises have started dominating even core industries like petroleum, power and communication under the leadership of visionaries who may be the heads of the states or owners of such private organizations.
  • Public services to be provided by the private sector must be specific or have a measurable outcome.
  • Consumers should be able to link the benefits they receive from a service to the costs they pay for it. Since they will then shop more wisely for different services.
  • Privately provided services should be less susceptible to fraud than government services if they are to be effective.
  • Equity is an important consideration.
  • Privatizing the state owned enterprises reduces corruption and the benefit goes to the society. The process encourages entrepreneurship and leads to intense development of capital market.
  • Governments usually want to sell the least profitable enterprises, those that the private sector is not willing to buy at a price acceptable to the Government. The Government may even fear that if it gives a free rein to the private sector management, its power might be at stakes. All said and done most of the governments view privatization as an important strategy of economic rejuvenation.