Privatization is a process by which the government transfers the productive activity from the public sector to the private sector.
According to the supporters of privatization, the rationale for privatization and disinvestment is as follows:
1. Improvement in efficiency and performance. :
The private sector introduces the ‘profit oriented’ decision making process in the working of the enterprise leading to improved efficiency and performance.
2. Fixing responsibility is easier.
While personnel in the public enterprises cannot be held responsible (or accountable) for any lapse, the areas of responsibility in the private sector are clearly defined. This makes it possible to take people to task in the private sector units for any blunders committed by them whereas in public sector units.
3. Private units are subject to capital market discipline.
Private sector firms are subject to capital market disciplines and scrutiny by financial experts. In fact, the ability to raise funds in the capital market is crucially dependent on performance. Not so in the case of public enterprises.
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| Bimal Jalan |
4. Political interference is unavoidable in public enterprises.
According to noted economist and former Governor of RBI, Bimal Jalan, political interference is unavoidable in public corporation and is a major cause of decline in operational efficiency.
5. Succession Planning.
Many public sector enterprises remain ‘headless’ for long periods of time. This causes confusion and delay in decision making as nobody I sure how the new incumbent will act (or react) on the policy decision being undertaken.
6. Response time in the case of private sector is less.
In a quick changing business environment it often becomes necessary to take spot decisions without having to worry too much about not having consulted others. In fact, delayed decision making is often equivalent to making no decision at all. Time is almost totally absent as no one is willing to disturb the status quo.
7. Remedial measures are taken early in private sector.
Private sector firms are more subject to liquidation, threat of takeover, and loss of assets for owners than public sector enterprises. When owners stand to lose control over assets, there is greater likelihood of remedial measures being taken earlier.
8. Political considerations make improvement in efficiency difficult in public enterprises.
According to Bimal Jalan, efforts to improve managerial efficiency in public enterprises by administrative measures are generally short lived and unsustainable as, sooner or later, political considerations take precedence over economic or commercial considerations. This has happened in many countries including Italy, France, Korea, India and Pakistan.
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| Populist Policies Fuse the Bulbs |
Populist announcement before the elections like free electricity to farmers and deprived sections of society. Waiving off of the outstanding loans and penalties under political pressure harm the efficiencies of the electricity companies and PSU banks.
9. Privatization leads to better service to customers.
The very survival of private sector enterprises depends on customer satisfaction since only such satisfaction can ensure more widespread and repeat buying. As against this, so the argument goes, caring for the customer is generally not a priority with public sector enterprise.
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