Privatization is a term implying the transformation of a public sector company into a private sector company. Also, when government regulations on a private company are lessened or removed; the company is said to have undergone “deregulation”. The term “deregulation” is also often used as a synonym of privatization.
In other words privatization means that the control of government over a particular service has been shifted into private hands. Privatization had both the advantages and disadvantages over the economy, social welfare and other sectors. We will further understand “Privatization” with suitable examples and also its pros and cons.
Examples of Privatization
1) Privatization in Healthcare
In simple words, privatization in healthcare implies involvement of private hospitals and clinics in the government’s healthcare schemes and services. It could mean full or partial transfer of the ownership of healthcare services to private entities. A government can take such decision if it finds it difficult to manage or provide the services on its own. One finest example of privatization in healthcare is Great Britain where health industry is rapidly growing after the government adopted a policy of sustaining old age people in private hospitals, on state budget, when there is no bed available in public sector hospitals.
2) Privatization in Education
Privatization in education has been a hot topic for debates over its advantages, disadvantages and social consequences. Still, several governments around the world have displayed their interest in privatization of education sector, from time to time. The ever growing need of education sector and the government’s commitment to provide free and compulsory education to all, is ultimately getting more difficult to be managed by government authorities alone, even funding of education expenses through the taxpayers money is no longer a feasible idea.
3) Privatization in Welfare
Privatization in welfare refers to the full or partial management of public welfare schemes by private entities. It includes services like water supply, skill and job training and job placements etc. In some countries shelter homes and community lunch centers are also managed by private players. Many countries, including India have largely privatized their waste water treatment plants. Though, the privatization of public welfare should be meticulously carried out else it will only remain a method to excuse government of its prime responsibility towards its citizens.
4) Privatization of Infrastructure
Privatization of Infrastructure refers to the leasing of roads, bridges and tunnels to private entities, for revenue collection and maintenance. Such deals have been common in European countries, but today it’s gaining global popularity. The terms and conditions of such contracts are flexible. Private contractor who has constructed a particular road is allowed to recover a particular amount of company’s bill by collecting toll for the leased time duration as mutually agreed upon in the contract agreement.
Reasons of Privatization
There are several reasons of privatization, as visualized by the governments. Some of the most significant reasons are cost reduction, risk transfer and a good source of revenue. Several other reasons like the inefficiency of government agencies, and a willingness to improve the service level, can also be the valid reasons for privatization. Below we will discuss some of the reasons for privatization briefly.
1) Reduction in Cost
The cost reduction is one of the main reasons for privatization of public sector undertakings. Private players managed to achieve the target at a lower cost as compared to the government. Private contractors have more flexibility in employee’s compensations and benefits, which hugely impacts the overall cost of a project.
2) Transfer of Risk
Risk transfer is another reason why governments prefer privatization of several sectors. By handing over a project to the private players, the government transfers the responsibility and risk to private player for an agreed sum of money. Now the private company has the risk of completing the project on time or else pay penalty or bear the losses on its own.
3) Potential Revenue Source
Privatization in some sectors can be a useful source of revenue generation by leasing out public assets like roads, bridges and tunnels to private firms. A profitable lease or purchase agreement can be drafted by the government to benefit monetarily from the deal. The revenue thus generated by the government can be used for other projects or to pay debts.
4) Service Quality Improvement
One of the main reasons of privatization is that the government might be looking for improvement in quality of services at a lower cost. Private sector companies/contactors can manage to improve service quality without affecting cost, due to their flexible policies in management and low compensation paid to the employees.
5) Punctuality of Delivery
Another factor behind privatization is the willingness of the government to complete the project on time. Despite having the necessary skills, the government might not be able to complete the project on time due to several other restraints. Private companies on the other hand can have a 24/7 dedicated resources for timely completion of the project.
Privatization in India
Privatization in India has long been a political issue at national level. Privatization of some sectors in past had stirred up protests from employee unions and political parties; nevertheless, in some cases it was imposed while in some the government backed off.
In India, PSUs (Public Sector Undertakings) have been contributing to the economic and industrial growth of the country; though, they themselves suffer from acute inefficiencies. Many India PSUs have reported losses due to several factors such as overstaffing, overly compensated employees, delay in project deliverance, managerial delays etc.
Some of the important examples of privatization in India are briefly stated below-
- Hotel Corporation of India Limited (HCL)
Initial to its privatization, the HCL was operating as a completely owned subsidiary of Air India (AI), India’s international Airlines. The decision of privatization /sale of HCL properties and assets were taken by the government when it posted a total loss of 15 million in the financial year 2000-2001. HCL was in persistent loss, totally amounting to the tune of over 900 million, mainly due to mismanagement by the government and Air India.
- Videsh Sanchar Nigan Limited (VSNL)
Incorporated in 1986, Videsh Sanchar Nigam Limited (VSNL) was a public sector undertaking with the main objective of catering to overseas communication services. In 2002, the government of India took a decision to privatize VSNL, transferring the maximum company’s stake to the Tata Group.
Privatization has its own set of pros (advantages) and cons (disadvantages) as discussed below-
Advantages of Privatization
1) Increased Productivity
Privatization of a Public Sector Undertaking can increase its efficiency as private enterprises are more profit oriented than the government. The management level employees of a privately rum business are more profit oriented. British Telecom (BT) and British Airways are the two finest examples of improved efficiency after privatization.
2) No Political Intrusion
Privatization of a government owned subsidiary removes all the political interferences, which in turn improves efficiency, turning losses into profits. Managers in a government run enterprise work under political pressure and thus can’t think rationally on making profit. State run companies often employ more than required persons, under political pressure, ultimately compromising their profits.
3) Far Sighted Commitment
Transferring the authority of a government run company into private hands, mean that more free hand is given to the management, which can now make commitments for long term gains. A far sightedness is lacking in the government sector which is more concerned about the short term electoral gains.
4) Competitive Environment
Privatization increases competition by allowing more and more private firms to try their hands in the industry. More competition among private entities naturally brings out efficiency and imposes quality restrictions on them. They become more quality and service oriented in order to be number one.
5) Revenue Generation
Privatization could be an instant mode of revenue generation for government which is looking for funds for investing in some project or welfare scheme. Leasing roads or bridges or selling them right away to private firms return quick monetary rewards; though, looking at the long term benefits, it is actually a loss for the government in some cases, if not all.
Disadvantages of Privatization
1) Natural Monopoly
Privatization in some sectors where there is low competition, may lead to complete monopoly of a single private firm. Having complete monopoly over a particular sector the firm gets a free hand to compromise its quality and also to fix higher price rates etc in order to churn out large profits. On the other hand, a government run agency would have prioritized public interest over profit.
2) Decline in Public Interest
Private companies dealing mainly in public welfare sectors like health, education and others are more profit oriented than welfare oriented. This dearly costs the common person in form of excessive taxes, higher prices and poor state of quality and services.
3) Lack of Regulations
Privatization slips the power of financial and other managerial decisions out of the government into private hands. This means that the government has limited or no say at all in the decisions of the company, neither the government can impose much regulation over the functioning of the company or its policies.
4) Low Future Investment
Private firms, out of the government’s regulation and control may look out for short term gains, compromising the long term future projects. This forces the companies to invest in short term beneficial projects rather than long term ones.
5) Fragmentation of Companies
Privatization might lead to breaking up of one giant company into several other rather small enterprises. This fragmentation ultimately decreases the efficiency and also reduces the accountability in the management. Companies throw the responsibility of any losses on to each other and try to escape from responsibility.
Whether privatizing a particular industry will be beneficial in long run or not, depends entirely on the industry. For example, let us compare the transport industry and education sector. In transport industry the revenue collected can be used for further improvement, but there is a need to regulate the fare charges as it may compromise public interest by overcharging. Switching to the education industry, the motive of profit generation becomes less significant, hence it would be an uphill task for any private firm to work for absolutely no or very low profit. Even if it do so, it’s more likely that public interests will be compromised in some way or the other.