PRIVATIZATION

PRIVITAZATION
The past quarter century has witnessed a significant move towards privatization in economics across the globe. Several industrial countries have embraced it after decline of communism in the Erstwhile Soviet Bloc. In India privatization and disinvestment of the public sector emerged as a major public policy after the country embarked on a process of economic reforms in 1991.
Even though the question of the average appropriate balance between public and private enterprise is one of the foundations issues in political economy, it has received relatively little attention in mainstream economic analysis until quite recently.
Privatization maybe broadly defined as a transfer of various activities from the public to private sphere. Specifically, it would mean the sale by government or state-owned-enterprises (SOEs) to private economic agents. It could refer to a sale that is effected in full or in part. It can also mean a partnership between the public and private sector through a transfer of responsibilities from the public to private sector. In terms of broad political economy, it could also simply mean a shrinking of the welfare state.

Since privatization has been accepted as a legitimate, and even a code, too of statecraft by more than a hundred governments in the past two decades of economic merits are firmly settled.

There is in fact a widespread perception that privatization brings about outcomes that are superior to the point of efficiency in terms of resource allocation as compared to the situation under public ownership.
Privatization theory

Within the standard of microeconomics literature, it’s well established that under perfectly competitive conditions, absence of information asymmetries, and complete contracts, it does not matter whether one is operating under private or public ownership. Under conditions of natural monopoly, denoted by decreasing average cost in the relevant range of demand, the possibility of monopoly power by a private owner created the rationale for public ownership.
Public ownership brings about efficiency loses that are non negligible. They could well be higher than the gains that may be ensured by solving a market failure problem. This comes about especially when the scope of competition becomes larger with an increase in the price of the market, with the economy possibly getting opened up to the international trade and adopting higher levels of technology.

There are two broad perceptive viz. political and managerial, that maybe used to explain the presence of inefficiency under the public sector. The managerial perceptive holds that monitoring is poorer in publicly owned firms and therefore the incentives for efficiency are weak.
The political perceptive contends that it’s political interference that distorts the objective and brings in the possibility of soft-budget constraints faced by public sector managers. Using simple gain theoretic tools, it’s possible to demonstrate that the political loss in closing a publicly owned company is grater than the cost of using taxpayer money or public debt to bail out a public sector company. It’s argued that privatization would effectively drive a wedge between politicians and managers and would make restructuring more likely by making it too costly for politicians to subsidize firms.

The choice between public and private provision of goods involve significant delegation of authority. The main difference between two modes concerns the transactions costs faced by the government when attempting to intervene in the delegated production activities. Such an interception is generally less costly under public ownership than private. They then proceed to put forward what they call the fundamental privatization theorem.
It’s shown that the conditions under which privatization is optimal are rather stringent.
Major gains in efficiency can be expected by increasing market contestability via deregulation of policies. Competition implies not only free entry into the market, but the freedom, especially on the SOEs, to fail. Competition also facilitates performance comparisons that can generally improve trade-offs between incentives and risk when several agents, or managers, facing uncertainties are being monitored.

One needs to also consider the macroeconomic implications of privatization. Privatization may be used as a tool for improving the government’s fiscal condition. When carried out through public offerings and mixed sales it can help increase the level of stock market capitalization and the development of the fiscal sector generally.

EMPERICAL EVIDENCE

One needs to determine the correct measure of operating performance, selecting an appropriate benchmark with which to compare performance, and to decide the appropriate statistical tests to be employed.
Empirical studies on privatization may be broadly divided into three categories
Ø Case studies
Ø Cross sectional comparisons of public and private sector performance
Ø Statistical analysis of pre and post divestiture performance of enterprises
Most statistical anal uses of pre and post privatization performance are marked by the failure to control for the economic environment.

There were several experts who had advocated overnight mass privatization programmes in the early 1990s. Many of these measures were simply ‘robbery by the old elite and the new oligarchs’. It’s very important to consider whether it’s desirable to go in for a ‘big bang’ policy of massive overnight asset transfer, or whether one should promote an evolutionist and organic transformation of business enterprises.

The first purports to ending state ownership in drastic manner, using giveaway through voucher schemes and tolerating takeover by managers and management buyouts. The latter maybe described as a bottom-up development of a new private sector but no giveaway of state property.

INDIAN EXPERIENCE SINCE 1991
A consideration of the privatization experience in India may well focus on the period after 1991, when the government embarked on a comprehensive process of economic reform and liberalization. At that time public sector in India accounted for more than one-fifth of the country’s GDP. Since a large number of PSEs regularly showed negative profit margins, the government was keen on a program of privatization, calling it disinvestment instead.
In the interim budget on 1991-92 the government took a policy decision to disinvest upto 20percent of the equity in selected PSUs in favor of mutual funds and financial or investment institutions in the public sector. The disinvestment was to improve management and enhance the availability of resources of these enterprises. The Rangarajan Committee reports on the Disinvestment of Shares in PSEs in April 1993emphasized the need for substantial disinvestment, and recommended that the percentage of equity to be divested could go up to 49 percent for industries especially reserved for the public sector. It recommended that in exceptional cases, such as enterprises that had a dominant market share or where separate identity had to be maintained for strategic reasons, the target public ownership level could kept at 26 percent, that is disinvestment could take place to the tune of 74 percent.
In all other cases it recommended 100 percent disinvestment of the public stake. Holding of 51 percent or more equity by the government was recommended only for six scheduled industries
Ø Coal and lignite
Ø Mineral oils
Ø Arms, ammunitions, and defence equipments
Ø Atomic energy
Ø Radio active material
Ø Railway transport
In 1996 the government established a Disinvestment Commission. The purpose of this body was to formulate procedures so that any decision to disinvest would be taken and implemented in a transparent manner.
The revenues generated from such disinvestment were to be allocated for education and health and for creating a fund to strengthen PSEs.
The recommendations indicated a shift from public offerings to strategic/trade sales, with transfer of management. The Commission also observed that the essence of a long term disinvestment strategy should be not only to enhance budgetary receipts, but also to minimize budgetary support to unprofitable units while ensuring their long-term viability. By 1998 government was of he view that ‘in the generality of cases its shareholding in PSEs will be brought down to 26 percent’.
By 2000-01 the government’s policy regarding privatization and public sector restructuring comprised the following considerations:
Ø restructure and revive potentially viable PSEs
Ø Close down PSEs that cannot be revived
Ø Bring down government equity in all strategic PSEs to 20percent or lower
Ø Fully protect the interests of workers

The Ministry of Disinvestment was converted into Department under the Ministry of Finance with effect from 27 May 2004 after the UPA government assumed office.
All privatizations were from now in to be considered on a transparent and consultative case-by-case basis.

The government constituted ‘National Investment Fund’ in January 2005 into which the realization from sale of minority share holding of the government in profitable PSEs would be channelized. The fund would be maintained outside the Consolidated Fund of India and the income from his Fund would be used for the following purposes
Ø Invest in social-sector projects that promote education, health care, and employment
Ø Capital investment in selected profitable and revivable PSEs that yield adequate returns, in order to enlarge their capital base to financial expansion or diversification.
After the initial phase of enthusiasm in the 1980s and then the onrush during the 1990s, we are now at a stage where we can take a more measured approach to privatization.

There is certainly no clear superiority of private vis-à-vis public ownership from the standpoint of economic theory. Ultimately it’s the consideration that should be of relevance rather than simplistic presumption that the public sector is necessarily inefficient or that privatization is an all-purpose panacea.