51783743 Privatisation

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Introduction -:

Privatization is the incidence or process of transferring ownership of a business,enterprise, agency or public service from thepublic sector(government) to theprivatesector(business). In a broader sense, privatization refers to transfer of any government

function to the private sector including governmental functions like revenue collectionand law enforcement.The term "Privatization" also has been used to describe two unrelated transactions. Thefirst is a buyout, by the majority owner, of all shares of a public corporation orholdingcompany's stock, privatizing a publicly traded stock. The second is a demutualization of amutual organization orcooperative to form ajoint stock companyHistory

History and Origen -:

There is a long history of privatization dating from Ancient Greece when the

government contracted out almost everything to the private sector

In the Roman Republicprivate individuals and companies performed the majority of services including taxcollection (tax farming), army supplies (military contractors), religious sacrifices andconstruction. However, the Roman Empire also created state-owned enterprises forexample, much of the grain was eventually produced on estates owned by the Emperor.Some scholars suggest that the cost of bureaucracy was one of the reasons for the fall ofthe Roman Empire.

In Britain, the privatization of common lands is referred to as enclosure (in Scotland asthe Lowland Clearances and Highland Clearances), and occurred significantly from 1760to 1820, coincident with the industrial revolution in this country.

In more recent times, Winston Churchill's government privatized the British steelindustry in the 1950s, and West Germany's government embarked on large-scaleprivatization, including selling its majority stake in Volkswagen to small investors in apublic share offering in 1961 . In the 1970s General Pinochet implemented a significantprivatization program in Chile. However, it was in the 1980s under the leaderships ofMargaret Thatcherin the UKand Ronald Reagan in the USA, that privatization gainedworldwide momentum. In the UK this culminated in the 1993 privatization of British Railunder Thatcher's successor, John Major; British Rail having been formed by priornationalization of private rail companies.A major ongoing privatization is theprivatization of Japan Post, Japan Post being theJapanese post service and the largest bank in the world. This privatization wasspearheaded by Junichiro Koizumi, and enacted in 2007, following generations of debate.The privatization process is expected to last until 2017.
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Types of privatizationThere are three main methods of privatisation:

Share issue privatisation (SIP) - selling shares on the stock market

Asset sale privatisation- selling the entire firm or part of it to a strategic investor, usuallyby auction or using the Treuhand modelVoucher privatisation - shares of ownership are distributed to all citizens, usually for freeor at a very low price.Share issue privatisation is the most common type of privatisation.Share issues can broaden and deepen domestic capital markets, boosting liquidity andpotentially economic growth, but if the capital markets are insufficiently developed itmay be difficult to find enough buyers, and transaction costs (e.g. underpricing required)may be higher. For this reason, many governments elect for listings in the moredeveloped and liquid markets, for example Euronext, and the London, New YorkandHong Kong stock exchanges.

As a result of higher political and currency risk deterring foreign investors, asset sales aremore common in developing countries.Voucher privatisation has mainly been used in the transition economies of Central andEastern Europe, such as Russia, Poland, the Czech Republic, and Slovakia.A substantial benefit of share or asset sale privatisations is that bidders compete to offerthe highest price, creating income for the state in addition to tax revenues. Voucherprivatisations, on the other hand, could be a genuine transfer of assets to the generalpopulation, creating a real sense of participation and inclusion. If the transfer of vouchersis permitted, a market in vouchers could be created, with companies offering to paymoney for them.Arguments for and against privatisationPro-privatisationProponents of privatisation believe that private market factors can more efficientlydeliver many goods or service than government due to free market competition. Ingeneral, it is argued that over time this will lead to lower prices, improved quality, morechoices, less corruption, less red tape, and quicker delivery. Many proponents do notargue that everything should be privatised. According to them, market failures andnatural monopolies could be problematic. However, some Austrian school economistsand anarcho-capitalists would prefer that everything be privatised, including the stateitself.The basic economic argument given for privatisation is that governments have fewincentives to ensure that the enterprises they own are well run. One problem is the lack ofcomparison in state monopolies. It is difficult to know if an enterprise is efficient or notwithout competitors to compare against. Another is that the central governmentadministration, and the voters who elect them, have difficulty evaluating the efficiency ofnumerous and very different enterprises. A private owner, often specializing and gaininggreat knowledge about a certain industrial sector, can evaluate and then reward or punishthe management in much fewer enterprises much more efficiently. Also, governmentscan raise money by taxation or simply printing money should revenues be insufficient,unlike a private owner.
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If there are both private and state owned enterprises competing against each other, thenthe state owned may borrow money more cheaply from the debt markets than privateenterprises, since the state owned enterprises are ultimately backed by the taxation andprinting press power of the state, gaining an unfair advantage.Privatising a non-profitable company which was state-owned may force the company to

raise prices in order to become profitable. However, this would remove the need for thestate to provide tax money in order to cover the losses.Performance. State-run industries tend to bebureaucratic. A political government mayonly be motivated to improve a function when its poor performance becomes politicallysensitive, and such an improvement can be reversed easily by another regime.Increased efficiency. Private companies and firms have a greater incentive to producemore goods and services for the sake of reaching a customer base and hence increasingprofits. A state-owned firm would not be as productive due to the lack of financingallocated by the entire government's budget that must consider other areas of theeconomy.Specialisation. A privatebusiness has the ability to focus all relevant human and

financial resources onto specific functions. A state-owned firm does not have thenecessary resources to specialise its goods and services as a result of the general productsprovided to the greatest number of people in the population.Improvements. Conversely, the government may put off improvements due to politicalsensitivity and special interests even in cases of companies that are run well and betterserve their customers' needs.Corruption. A state-monopolized function is prone to corruption; decisions are madeprimarily for political reasons, personal gain of the decision-maker (i.e. "graft"), ratherthan economic ones. Corruption (orprincipal-agent issues) in a state-run corporationaffects the ongoing asset stream and company performance, whereas any corruption thatmay occur during the privatisation process is a one-time event and does not affectongoing cash flow or performance of the company.Accountability. Managers of privately owned companies are accountable to theirowners/shareholders and to the consumer, and can only exist and thrive where needs aremet. Managers of publicly owned companies are required to be more accountable to thebroader community and to political "stakeholders". This can reduce their ability todirectly and specifically serve the needs of their customers, and can bias investmentdecisions away from otherwise profitable areas.Civil-liberty concerns. A company controlled by the state may have access toinformation or assets which may be used against dissidents or any individuals whodisagree with their policies.Goals. A political government tends to run an industry or company forpoliticalgoalsrather than economicones.Capital. Privately held companies can sometimes more easily raise investment capital inthe financial markets when such local markets exist and are suitably liquid. While interestrates for private companies are often higher than for government debt, this can serve as auseful constraint to promote efficient investments by private companies, instead of cross-subsidizing them with the overall credit-risk of the country. Investment decisions are thengoverned by market interest rates. State-owned industries have to compete with demands
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from other government departments and special interests. In either case, for smallermarkets,political riskmay add substantially to the cost of capital.Security. Governments have had the tendency to "bail out" poorly run businesses, oftendue to the sensitivity of job losses, when economically, it may be better to let the businessfold.

Lack of market discipline. Poorly managed state companies are insulated from the samediscipline as private companies, which could go bankrupt, have their managementremoved, or be taken over by competitors. Private companies are also able to take greaterrisks and then seek bankruptcy protection against creditors if those risks turn sour.Natural monopolies. The existence ofnatural monopolies does not mean that thesesectors must be state owned. Governments can enact or are armed withanti-trustlegislation and bodies to deal with anti-competitive behavior of all companies public orprivate.Concentration of wealth. Ownership of and profits from successful enterprises tend tobe dispersed and diversified -particularly in voucher privatisation. The availability ofmore investment vehicles stimulates capital markets and promotes liquidity and job

creation.Political influence. Nationalized industries are prone to interference frompoliticians forpoliticalorpopulist reasons. Examples include making an industry buy supplies fromlocal producers (when that may be more expensive than buying from abroad), forcing anindustry to freeze its prices/fares to satisfy the electorate or control inflation, increasingits staffing to reduce unemployment, or moving its operations to marginal constituencies.Profits. Corporations exist to generate profits for their shareholders. Private companiesmake a profit by enticing consumers to buy their products in preference to theircompetitors' (or by increasingprimary demand for their products, or by reducing costs).Private corporations typically profit more if they serve the needs of their clients well.Corporations of different sizes may target different market niches in order to focus onmarginal groups and satisfy their demand. A company with good corporate governancewill therefore be incentivized to meet the needs of its customers efficiently.Job gains. As the economy becomes more efficient, more profits are obtained and nogovernment subsidies and less taxes are needed, there will be more private moneyavailable for investments and consumption and more profitable and better-paid jobs willbe created than in the case of a more regulated economy.[6][edit] Anti-privatizationOpponents of privatisation dispute the claims concerning the alleged lack of incentive forgovernments to ensure that the enterprises they own are well run, on the basis of the ideathat governments are proxy owners answerable to the people. It is argued that agovernment which runs nationalized enterprises poorly will lose public support and votes,while a government which runs those enterprises well will gain public support and votes.Thus, democratic governments do have an incentive to maximize efficiency innationalized companies, due to the pressure of future elections.Opponents of certain privatisations believe certain parts of the social terrain shouldremain closed to market forces in order to protect them from the unpredictability andruthlessness of the market (such asprivate prisons, basic health care, and basiceducation). Another view is that some of the utilities which government provides benefitsociety at large and are indirect and difficult to measure or unable to produce a profit,
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such as defense. Still another is that natural monopolies are by definition not subject tocompetition and better administrated by the state.The controlling ethical issue in the anti-privatisation perspective is the need forresponsible stewardship of social support missions. Market interactions are all guided byself-interest, and successful actors in a healthy market must be committed to charging the

maximum price that the market will bear. Privatisation opponents believe that this modelis not compatible with government missions for social support, whose primary aim isdelivering affordability and quality of service to society.Many privatisation opponents also warn against the practice's inherent tendency towardcorruption. As many areas which the government could provide are essentially profitless,the only way private companies could, to any degree, operate them would be throughcontracts or block payments. In these cases, the private firm's performance in a particularproject would be removed from their performance, and embezzlement and dangerous costcutting measures might be taken to maximize profits.Furthermore, large corporations can paypublic relationsprofessionals to convincedecision-makers that privitazation is a sensible idea, whether or not this is actually the

case. Corporations typically have far more resources for expert testimony,advertisements, conferences and otherpropaganda efforts than anti-privatisationadvocates.Some would also point out that privatising certain functions of government might hampercoordination, and charge firms with specialized and limited capabilities to performfunctions which they are not suited for. In rebuilding a war torn nation's infrastructure,for example, a private firm would, in order to provide security, either have to hiresecurity, which would be both necessarily limited and complicate their functions, orcoordinate with government, which, due to a lack of command structure shared betweenfirm and government, might be difficult. A government agency, on the other hand, wouldhave the entire military of a nation to draw upon for security, whose chain of command isclearly defined. Opponents would say that this is a false assertion: numerous books referto poor organization between government departments (for example the HurricaneKatrina incident).Furthermore, opponents of privatisation argue that it is undesirable to transfer state-owned assets into private hands for the following reasons:Performance. A democratically elected government is accountable to the people througha legislature, Congress orParliament, and is motivated to safeguarding the assets of thenation. The profit motive may be subordinated to social objectives.Improvements. the government is motivated to performance improvements as well runbusinesses contribute to the State's revenues.Corruption. Government ministers and civil servants are bound to uphold the highestethical standards, and standards of probity are guaranteed through codes of conduct anddeclarations of interest. However, the selling process could lack transparency, allowingthe purchaser and civil servants controlling the sale to gain personally.Accountability. The public does not have any control or oversight of private companies.Civil-liberty concerns. A democratically elected government is accountable to thepeople through aparliament, and can intervene when civil liberties are threatened.Goals. The government may seek to use state companies as instruments to further socialgoals for the benefit of the nation as a whole.
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Capital. Governments can raise money in the financial markets most cheaply to re-lendto state-owned enterprises.Lack of market discipline. Governments have chosen to keep certaincompanies/industries under public ownership because of their strategic importance orsensitive nature.

Cuts in essential services. If a government-owned company providing an essentialservice (such as the water supply) to all citizens is privatised, its new owner(s) could leadto the abandoning of the social obligation to those who are less able to pay, or to regionswhere this service is unprofitable.Natural monopolies. Privatisation will not result in true competition if a naturalmonopoly exists.Concentration of wealth. Profits from successful enterprises end up in private, oftenforeign, hands instead of being available for the common good.Political influence. Governments may more easily exert pressure on state-owned firms tohelp implementing government policy.Downsizing. Private companies often face a conflict between profitability and service

levels, and could over-react to short-term events. A state-owned company might have alonger-term view, and thus be less likely to cut back on maintenance or staff costs,training etc, to stem short term losses. Many private companies have downsized whilemaking record profits.Profit. Private companies do not have any goal other than to maximize profits. A privatecompany will serve the needs of those who are most willing (and able) to pay, as opposedto the needs of the majority, and are thus anti-democratic. The more necessary a good is,the lower theprice elasticity of demand, as people will attempt to buy it no matter theprice. In the case of price elasticity of demand is zero (perfectly unelastic good), demandpart of supply and demand theories does not work.Privatisation and Poverty. It is acknowledged by many studies that there are winnersand losers with privatisation. The number of losers which may add up to the size andseverity of povertycan be unexpectedly large if the method and process of privatisationand how it is implemented are seriously flawed (e.g. lack of transparency leading to state-owned assets being appropriated at minuscule amounts by those with politicalconnections, absence of regulatory institutions leading to transfer of monopoly rents frompublic to private sector, improper design and inadequate control of the privatisationprocess leading to asset stripping.[7]Job Loss. Due to the additional financial burden placed on privatized companies tosucceed without any government help, unlike the public companies, jobs could be lost tokeep more money in the company.[edit] Intermediate ViewsOthers don't dispute that well run for-profit entities with sound corporate governance maybe considerably more efficient than an inefficient governmental bureaucracy orNGO,however many implementations of privatization can - in practice - lead to the firesale ofpublic assets, and/or to inefficient or corrupt - for profit management.[edit] Developed / Low corruption economiesIt is fairly easy for a top executive to reduce the perceived value of an asset - due toinformation asymmetry. The executive can accelerate accounting of expected expenses,delay accounting of expected revenue, engage in off balance sheet transactions to make
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the company's profitability appear temporarily poorer, or simply promote and reportseverely conservative (eg. pessimistic) estimates of future earnings. Such seeminglyadverse earnings news will be likely to (at least temporarily) reduce sale price. (This isagain due to information asymmetries since it is more common for top executives to doeverything they can to window dress their earnings forecasts). There are typically very

few legal risks to being 'too conservative' in one's accounting and earnings estimates.When the entity gets taken private - at a dramatically lower price - the new private ownergains a windfall from the former top executive's actions to surreptitiously reduce the salesprice. This can represent 10s of billions of dollars (questionably) transferred fromprevious owners (the public) to the takeover artist. The former top executive is thenrewarded with a golden handshake for presiding over the firesale that can sometimes bein the 10s or 100s of millions of dollars for one or two years of work. (This isnevertheless an excellent bargain for the takeover artist, who will tend to benefit fromdeveloping a reputation of being very generous to parting top executives).When a publicly held asset, mutual ornon-profit organization undergoes privatization,Top executives often reap tremendous monetary benefits. The executives can facilitate

the process by making the entity appear to be in financial crisis - this reduces the saleprice (to the profit of the purchaser), and makes non-profits and governments more likelyto sell.Ironically, it can also contribute to a public perception that private entities are moreefficiently run reinforcing the political will to sell of public assets. Again, due toasymmetric information, policy makers and the general public see a government ownedfirm that was a financial 'disaster' - miraculously turned around by the private sector (andtypically resold) within a few years.[edit] Underdeveloped &/or High corruption economiesIn a society with substantial corruption, privatization allows the government currently inpower and its backers to siphon a large portion of the entire net present value of stateassets away from the public and into the accounts of their favored power brokers.Without privatization, corrupt officials would have to slowly harvest their corruptearnings over time. As such, efficient privatization depends on their being a very low ofcurrent corruption among the current government officials since it allows for far more'efficient' extraction of corrupt rents.Of course, corrupt governments can also extract corrupt rents quite efficiently in otherways - particularly by borrowing extensively to engage in spending on overly favorablecontracts with their backers (or on tax shelters, subsidies or other give-aways).Generations of subsequent taxpayers are then left with paying back the debt incurred forcorrupt transfers made decades previously. Naturally, this may lead to the sale of publicassets....In the end, the public is left with a government that taxes them heavily, and gives themnothing in return. Debt repayment is enforced by international agreements and agenciessuch as the IMF. Infrastructure and upkeep is sacrificed - leading to a further decay in theeconomic efficiency of the country over time.[edit] OutcomesLiterature reviews [8][9] find that in competitive industries with well-informed consumers,privatisation consistently improves efficiency. Such efficiency gains mean a one-offincrease in GDP, but through improved incentives to innovate and reduce costs also tend
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to raise the rate ofeconomic growth. The type of industries to which this generallyapplies include manufacturing and retailing. Although typically there are social costsassociated with these efficiency gains[10], many economists argue that these can be dealtwith by appropriate government support through redistribution and perhaps retraining.In sectors that are natural monopolies orpublic services, the results of privatisation are

much more mixed, as a private monopoly behaves much the same as a public one inliberal economic theory. In general, if the performance of an existing public sectoroperation is sufficiently bad, privatisation (or threat thereof) has been known to improvematters. Changes may include, inter alia, the imposition of related reforms such as greatertransparency and accountability of management, improved internal controls, regulatorysystems, and better financing, rather than privatisation itself.Regardingpolitical corruption, it is a controversial issue whether the size of the publicsector per se results in corruption. TheNordic countries have low corruption but largepublic sectors. However, these countries score high on the Ease of Doing Business Index,due to good and often simple regulations, and forpolitical rights and civil liberties,showing high government accountability and transparency. One should also notice the

successful, corruption-free privatisations and restructuring of government enterprises inthe Nordic countries. For example, dismantling telecommunications monopolies haveresulted in several new players entering the market and intense competition with priceand service.Also regarding corruption, the sales themselves give a large opportunity for grandcorruption. Privatisations in Russia and Latin America were accompanied by large-scalecorruption during the sale of the state-owned companies. Those with political connectionsunfairly gained large wealth, which has discredited privatisation in these regions. Whilemedia have reported widely the grand corruption that accompanied the sales, studies haveargued that in addition to increased operating efficiency, daily petty corruption is, orwould be, larger without privatisation, and that corruption is more prevalent in non-privatised sectors. Furthermore, there is evidence to suggest that extralegal and unofficialactivities are more prevalent in countries that privatised less.[11]

[edit] Alternatives to total privatisation

This article may contain original research. Please improve it by verifying theclaims made and adding references. Statements consisting only of originalresearch may be removed. More details may be available on the talk page.(January 2010)

[edit] Public UtilityThe enterprise can remain as a public utility.[edit] Non-ProfitThe enterprise could be managed by a private non-profit organization.

[edit] MunicipalizationTransferring control to municipal government[edit] Outsourcing or Sub-contractingIt is possible that national services may sub-contract or out-source functions to privateenterprises. A notable example of this is in the United Kingdom, where manymunicipalities have contracted out their garbage collection or administration of parkingfines to private companies. In addition, the British government has involved the privatesector more in the workings of theNational Health Service principally through
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outsourcing the construction and operation of new hospitals to private companies. Thereare also moves to refer patients to private surgeries to ease the load on existing NHShuman resources, and covering the cost of this.See also:private finance initiative[edit] Partial ownership

An enterprise may be privatised, with a number of shares in the company being retainedby the state. This is a particularly notable phenomenon in France, where the state oftenretains a "blocking stake" in private industries. In Germany, the state privatised DeutscheTelekom in small tranches, and still retains about a third of the company. As of 2005, thestate ofNorth Rhine-Westphalia is also planning to buy shares in the energy companyE.ON in what is claimed to be an attempt to control spiraling costs.Whilst partial privatisation could be an alternative, it is more often a stepping stone to fullprivatisation. It can offer the business a smoother transition period during which it cangradually adjust to market competition. Some state-owned companies are so large thatthere is the risk of sucking liquidity from the rest of the market, even in the most liquidmarketplaces, and thus must be sold off bit by bit. The first tranche of a multi-step

privatisation would also in the first instance establish a valuation for the enterprise tomitigate complaints of under-pricing.In some instances of partial privatisation of contracted services, provision of someportion(s) of the state-owned service are provided by private-sector contactors, but thegovernment retains the capacity to self-operate at contract intervals, if it so chooses. Anexample of partial privatisation would be some forms ofschool bus service contracting,such as arrangements where equipment and other resources purchased with governmentcapital funds and/o those already owned by a governmental entity are used by thecontractor for a period of time in providing services, but ownership is retained by thegovernmental unit. This form of partial privatisation eases concerns that once anoperation is contracted, the government may be unable to obtain sufficient competitivebids, and be subjected to terms less desirable than the prior operation under state-ownership. Under that scenario, a reverse privatisation would be more feasible for thegovernment. (see section below)See also: Public-private partnership[edit] Notable privatisationsSee also: List of privatisations

The largest privatisation in history was Japan Post. It was the nation's largest employerand one third of all Japanese government employees worked for Japan Post. Japan Postwas often said to be the largest holder of personal savings in the world.The Prime MinisterJunichiro Koizumi wanted to privatise it because it was thought to bean inefficient and a source for corruption. In September 2003, Koizumi's cabinetproposed splitting Japan Post into four separate companies: a bank, an insurancecompany, a postal service company, and a fourth company to handle the post offices asretail storefronts of the other three.After privatisation was rejected by upper house, Koizumi scheduled nationwide electionsto be held on September 11, 2005. He declared the election to be a referendum on postalprivatisation. Koizumi subsequently won this election, gaining the necessary
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supermajority and a mandate for reform, and in October 2005, the bill was passed toprivatise Japan Post in 2007.[12]

Nippon Telegraph and Telephone's privatisation in 1987 was the largest share offering infinancial history at the time.[13] 15 of the world's 20 largest public share offerings havebeen privatisations of telecoms.[13]

The United Kingdom's largest public share offerings were privatisations ofBritishTelecom and British Gas. The largest public share offering in France was FranceTelecom. Privatisation in Europe has led to genuine competition: the formerstate-ownedenterprises lost their monopolies due to legislation and technological change, competitorsentered the market, and prices forbroadband access and telephone calls fell dramatically.[citation needed]

[edit] Negative responses to privatisationPrivatisation proposals in keypublic service sectors such as waterand electricity are inmany cases strongly resisted by opposition political parties and civil society groups,many of which regard them as natural monopolies. Campaigns typically involvedemonstrations and democratic political activities; sometimes the authorities attempt to

suppress opposition using violence (e.g. Cochabamba protests of 2000 in Bolivia andprotests in Arequipa, Peru, in June 2002). Opposition is often strongly supported by tradeunions. Opposition is usually strongest to water privatisation as well as Cochabamba,recent examples include Haiti, Ghana and Uruguay (2004). In the latter case a civil-society-initiated referendum banning water privatisation was passed in October 2004.[edit] Reverse privatisationA reversion from contracted ownership of an enterprise and/or services to governmentalownership and/or provision is called reverse privatisation ornationalization. Such asituation most often occurs when a privatisation contractor fails financially and/or thegovernmental unit has been unable to purchase satisfactory service at prices it regards asless than with state-ownership or self-operation of services. Another circumstance mayoccur when greater control than viable under privatisation is determined to be in thegovernmental unit's best interest.National security concerns may be the source of reverse privatisation actions when themost likely providers are non-domestic or international corporations or entities. Forexample, in 2001, in response to the September 11th attacks, the then-private airportsecurity industry in the United States was nationalized[citation needed] and put under theauthority of the Transportation Security Administration.Insurance sector grew 83% after privatisationThe insurance industry has grown by 83 per cent since the opening up of the sector. Remarkingon the performance of the insurance industry, C S Rao, chairman, Insurance Regulatory &Development Authority, said public sector players have not suffered with the opening up of thesector.

Insurance premium income has risen to Rs 82,415 crore (Rs 824.15 billion) in 2003-04, againstRs 45,000 crore (Rs 450 billion) in 2000-01. Rao expects premium income in the life insurancesector to rise further by 15-16 per cent and non-life insurance premium by 14 per cent in 2005-06. The growth comes on the back of healthy demand from the manufacturing sector."There has been no reduction in growth rates as seen in the case of the Life Insurance Corporationof India [ Images ]. It is able to hold on to its existing share in terms of business growth. Marketshare is bound to stand reduced as some business goes to the private players," said Rao.The health and personal line segments are expected to see maximum growth during the currentfinancial year.
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"The health insurance sector is expected to grow by 10-15 per cent," Rao said at a one-dayseminar on 'Growth of Insurance Industry in India' organised by the Indian Merchants' Chamberin Mumbai [ Images ] on Friday.If the cap on foreign direct investment is increased to 49 per cent from the current 26 per cent, theindustry can expect greater entry of players. But this, said Rao, should not be seen as a threat topublic sector players.

Insurance, the Future Boom Sector of IndiaThe reforms in the insurance sector leading finally to the opening of the insurance sector for private

participation have brought in its wake major changes not only in the design of the productsavailable in the market but also the manner in which they are marketed. We have today a host ofproducts coupled with a large number of intermediaries who market them.The post-liberalized insurance industry panorama in India is witnessing dramatic changes interms of a slew of latest products and services, new channels of distribution, greater use of I.T. asa service facilitator etc. There is also the phenomenon of noticeable shifts in consumerpreferences impacting the product mix being offered by insurers. The market structure dominatedby a few stabilized public sector players and the 'new' players in the market (some of whom claimtheir lineage from established international insurance behemoths) is in a state of flux- in terms of

figure out market shares but is full of potential.Added to these are the rising trends of convergence of financial services, especially in the areaslike wealth management and evolution of newer risk management tools, particularly in thecontext of reinsurance management. Greater attention is also being bestowed on the areas likeAgricultural Insurance and risk coverage of export-import trade. Then there is impact of visiblesocio-economic changes like greater urbanization, greater job mobility, growth of the servicesindustry, weakening of traditional family structure, impact of globalization etc. All in all,interesting things are happening in the Indian insurance scene.Insurance undergone rapid and massive changes in all aspects of their business: product and

services, sectoral structure, market segmentation, competitive environment.It is believed thatthe information sharing has not taken its expected shape in the insurance industry for the purposesof practices, research and education. However, data is one of the most needed ingredients in the

insurance business development as well as for research and consultancy. There have been regularefforts by IRDA for collection and sharing of the data and other information of public interest.The industry is facing problems in terms of data review as parliament need to register thisbeforehand. We believe that progress of the industry should not be constrained by any extraneousconditions in the interest of research and development in the area.Manpower India today released the Manpower Employment Outlook Survey for the first quarter

of 2006 revealing sustained positive hiring intentions of employers in India. India continues tolead all 23 countries surveyed this quarter, with a positive overall Net Employment Outlook of+27%. Even though this figure represents a decrease of 13 percentage points from the fourthquarter of 2005, the employment outlook remains extremely healthy. For the first time since theSurvey was launched in India, the Finance, Insurance and Retail industry sector emerged as

the most optimistic sector for a quarter with a Net Employment Outlook of +32%, surpassing

the Services sector.Privatization of insurance sector has allowed insurance companies to work in the market bydepositing 100 crore rupees in the reserve of government. This has encouraged many overseasinsurance companies, having a required amount in their reserve, to open their branch in ourcountry. Introduction of the sector has changed the employment pattern, but people must knowhow to make profit from it. To be in the global market and have advantage of it, capital and skillas per the demand and knowledge of market is the requirement. It is necessary that institutions,which form a part of this financial system, have internal management, governance andaccountability structures, which measure up to the highest standards
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Advantages of PrivatizationMany reasons explain the movement by cities and states toward privatization torestructure and "rightsize" government. Much of the impetus is the desire to injectcompetition into the delivery of state services in order to provide services to citizens in a

more-efficient and cost-effective manner. If structured appropriately and sufficientlymonitored, privatization can:1. SAVE TAXPAYERS' MONEY

2. INCREASE FLEXIBILITY

3. IMPROVE SERVICE QUALITY

4. INCREASE EFFICIENCY AND INNOVATION

5. ALLOW POLICYMAKERS TO STEER, RATHER THAN ROW

6. STREAMLINE AND DOWNSIZE GOVERNMENT

7. IMPROVE MAINTENANCE

SAVE TAXPAYERS' MONEY

By applying a variety of privatization techniques to state services, infrastructure,facilities, enterprises, and land, comprehensive state privatization programs can reduceprogram costs.Over 100 studies have documented cost savings from contracting out services to theprivate sector.[17] Cost savings vary but average between 20 and 40 percent, dependingon the service. For some services, such as prison construction and operation, savings aregenerally less, while for others, such as asphalt resurfacing, savings are often greater.Competitive bidding whenever possible and careful government oversight are crucial tosustained cost savings.States can also realize large one-time windfalls from the sale or lease of stateinfrastructure and facilities. Moreover, privatization can put an end to subsidies topreviously government-run operations.Privatization also creates a steady stream of new tax revenues from private contractorsand corporations who pay taxes and license fees, while state units do not.INCREASE FLEXIBILITY

Privatization gives state officials greater flexibility to meet program needs. Officials canreplace the private firm if it isn't meeting contract standards, cut back on service, add toservice during peak periods, or downsize as needed.IMPROVE SERVICE QUALITY

A number of surveys have indicated that public officials believed service quality wasbetter after privatization. In a survey of 89 municipalities conducted in 1980, forexample, 63 percent of public officials responding reported better services as a result ofcontracting out.[18]If competitive bidding is instituted for a service, service quality can improve even if theservice is retained in-house. The reason is simple: competition induces in-house andprivate service providers to provide quality services in order to keep complaints downand keep the contract.Service quality is not assured, however, by privatization. Contracts must be well-designed with performance standards that create incentives for high quality service.Furthermore, diligent monitoring of the contractor's performance through customer
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surveys and on-site inspections must also be performed by government in its oversightrole.INCREASE EFFICIENCY AND INNOVATION

Private management can significantly lower operating costs through the use of moreflexible personnel practices, job categories, streamlined operating procedures, and

simplified procurement.[19]Private ownership can stimulate innovation. Competition forces private firms to developinnovative, efficient methods for providing goods and services in order to keep costsdown and keep contracts. These incentives, for the most part, do not exist in the publicsector.ALLOW POLICYMAKERS TO STEER, RATHER THAN ROW

Privatization allows state officials to spend less time managing personnel andmaintaining equipment, thus allowing more time to see that essential services areefficiently delivered.STREAMLINE AND DOWNSIZE GOVERNMENT

Privatization is one tool to make bureaucracies smaller and more manageable. Large

private corporations often sell off assets that are underperforming or proving too difficultto manage efficiently. Under new owners and leaner management, such divisions oftenreceive a new lease on life. Entrepreneurial governments can replicate this experience.IMPROVED MAINTENANCE

Private owners are strongly motivated to keep up maintenance in order to preserve theasset value of the investment in the facility. Public owners often defer maintenance due topolitical considerations, increasing overall long-term costs.

Disadvantages of Privatisation

1) Very Expensive-: Privatization is expensive and generates a lot of income infees for specialist advisers such as banks.

2) Less consumer benefit -: Public monopolies have been turned into privatemonopolies with too little competition, so consumers have not benefited as

much as had been hoped. This is the main reason why it has been necessary

to create regulators (OFWAT, OFGAS etc). This is an important point. It

partly depends on how the privatisation took place. For example, the

railways were privatised in bit of a rush and there might have been other

ways to do it so that more competition was created. It partly depends on the

market. Some markets are 'natural monopolies' where competition is

difficult. For example, it would be very wasteful and expensive to build two

sets of track into Liverpool Street just to create some competition. Natural

monopolies create a special justification for public ownership in the general

public interest.

3) Loss To Government companies -:

The nationalised industries were sold off too quickly and too cheaply. With patience

a better price could have been had with more beneficial results on the government's
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revenue. In almost all cases the share prices rose sharply as soon as dealing began

after privatisation.

4) Shutting down the business -:

The privatised businesses have sold off or closed down unprofitable parts of the

business (as businesses normally do) and so services eg transport in rural areas havegot worse.

5) Less share ownership -:

Wider share ownership did not really happen as many small investors took their

profits and didn't buy anything else.

Defined in the strictest of terms, privatization means the sale of public utilities to privateconcerns. But asPublic Works magazine noted, "in the broader sense of the term andthe definition that applies to most contemporary discussions, privatization is the contractoperation of a public utility or service by a private entity. It most often occurs in solid

waste management, water/wastewater treatment, fleet maintenance, road/bridge buildingand maintenance, and municipal management." Small businesses that provide services inthese and other areas (for-profit school academies, for instance) have been among thebiggest winners in the growing national trend toward privatization. AsPublic Workscommented, "opportunities abound for private concerns to offer to manage publicservices with a close eye on cost and efficiency."Privatization efforts in America today are in large part a reaction to dissatisfaction withgovernment performance and/or unhappiness with the level of taxation that is levied onindividuals and businesses by municipal, state, and federal governments to pay forservices. This trend has grassroots origins, with local governments in the forefront andstate and federal levels of government trailing behind. The purpose of privatization is totake advantage of the perceived cost efficiencies of private firms. Indeed, proponents ofthe practice say that privatization results in better performance of needed services atlesser cost. "The government usually allows the firm to choose how it will satisfy thecontract," wrote Simon Hakim and Edwin Blackstone inAmerican City and County. "Forexample, a contract may specify trash removal services for the area residents a certainnumber of times per week. The firm is normally allowed to choose the methods it willuse to perform the requirements of the contract, the trash trucks, used, and the number ofworkers on each trash truck. The profit motive will encourage the firm to produce theservices efficiently at the least cost, a motive absent in government provision ofservices." Even after privatization, however, government monitoring is necessary in orderto ensure that satisfactory services are provided to residents.

GROWTH OF PRIVATIZATION

"Privatization may be a popular buzzword today, but the concept has been around sincethe first municipality hired Joe and his wagon to pick up the trash instead of getting cityemployee Frank to do it," remarkedPublic Works. "The difference today is thatprivatization is encroaching into all areas of public administration. And governments areexpecting public agencies to competedollar for dollarwith private operators orsurrender management of services. For years, our country has supported the idea that a


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public workforce was the best provider of essential services. Public employees wouldreliably and efficiently protect the public safety and deliver water and power; maintainroads and bridges; collect refuse and treat sewage. In return, public employees enjoyeda certain job stability and a wide range of desirable benefits." But proliferatingresponsibilities, fiscal belt-tightening, sometimes lackluster performance by workers, and

in the cases of larger cities, especiallyfestering problems with infrastructure ledincreasing numbers of city planners and public policy makers to look to privatization.Today, several of the nation's largest cities, including New York, Indianapolis,Philadelphia, and Phoenix have contracted out a broad spectrum of services that werepreviously attended to exclusively by city employees. Indeed, New York City opened upbidding from private companies on 40 different municipal services in 1995alone. Smallercities and towns have instituted outsourcing philosophies as well, and many servicebusinesses, both large and small, have garnered significant new contracts as a result.American City and County reported that various analyses indicate that this trend willlikely continue. "Cost pressures, both internal and external, are rated as the mostimportant reasons that officials decided to privatize a service," stated a report on

privatization conducted by a coalition of Illinois academic, business, and municipalgroups. "The main obstacle is the lack of information or evidence of the benefits ofprivatization. Many officials also report they would like more information on certainaspects of privatization. It can be deduced that providing additional information onprivatization to city officials will lead to increased acceptance."

VARIATIONS IN PRIVATIZATION

The term privatization has been applied to three different methods of increasing theactivity of the private sector in providing public services: 1) private sector choice,financing, and production of a service;2) public-sector choice and financing with privatesector production of the service selected; 3) and deregulation of private firms providingservices. In the first case, the entire responsibility for a service is transferred from thepublic sector to the private sector, and individual consumers select and purchase theamount of services they desire from private providers. For example, solid-wastecollection is provided by private firms in some communities. The third form ofprivatization means that government reduces or eliminates the regulatory restrictionsimposed on private firms providing specific services.The second version of privatization refers to joint activity of the public and privatesectors in providing services. In this case, consumers select and pay for the quantity andtype of service desired through government, which then contracts with private firms toproduce the desired amount and category of service. Although the government providesfor the service, a private firm carries out the actual execution of it. The governmentdetermines the service level and pays the amount specified in the contract, but leavesdecisions about production decisions to the private firm.

COSTS AND PRODUCTIVITY

Proponents of privatization argue that whereas government producers have no incentiveto hold down production costs, private producers who contract with the government toprovide the service have more at stake, thus encouraging them to perform at a higherlevel for lower cost. The lower the cost incurred by the firm in satisfying the contract, the


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greater profit it makes. On the other hand, the absence of competition and profitincentives in the public sector is not likely to result in cost minimization. Of course,small- and mid-sized companies also need to make sure that they do not sacrifice anacceptable profit margin in their zeal to secure a contract.Although private firms may pay lower wages and fringe benefits than local governments,

the major cause of the cost differences between the private and governmental sectors isemployee productivity. Lower labor costs may arise either from lower wages (whichmeans that the government was paying wages higher than necessary for a given skill) orfrom less labor input (which means that the government retaining more employees thannecessary to fulfill need). Private firms have more flexibility than governmental units touse part-timers to meet peak periods of activity, to fire unsatisfactory workers, and toallocate workers across a variety of tasks. Moreover, critics of municipal governmentsargue that they are less likely to reward individual initiatives or punish aberrant behaviorwhen compared with their private sector counterparts.Finally, supporters of privatization argue that the trend has spurred improvements inperformance by public service providers. "Evidence shows that public agencies should be

allowed to bid on contracts along with private operators," wrote Blackstone and Hakim,"since this exposure to competition has led many public agencies to improve their servicedelivery and significantly reduce costs."Service. Expected quality of service varies from community to community, depending ona wide range of factors such as historical service levels, local taxation, and possiblechanges in service requirements. Moreover,Public Works observed that good service issometimes defined differently by citizens, public service providers, and private serviceproviders. "Response time and public confidence need to be taken into account whenjudging the pros and cons of private/public," statedPublic Works. "Stability may be aconcern in the eyes of the public; a government agency cannot walk away at the end of acontract period."Operating Philosophies. Proponents of privatization state that private firms may be morelikely to experiment with different and creative approaches to service provision, whereasgovernment tends to stick with the current approach since changes often create politicaldifficulties for elected officials. In addition, private firms may use retained earnings tofinance research or to purchase new capital equipment that lowers unit production costs.On the other hand, government may not be able or willing to allocate tax revenues tothese purposes as easily, given the many competing demands on the government'sbudget.Regulatory Realities. In some cases, local, state, and federal regulations may determinewhether a service can even be handed over to a private provider. Moreover, "the ultimateresponsibility (in the eyes of the public, if not the courts) rests with the public agency thatassigns operating rights to a private concern," statedPublic Works. "The localgovernment will still be held responsible for the cost and quality of the service undercontract."Competition. Supporters of privatization often cite the competitive environment that isnourished by the practice as a key to its success. Private owners have a strong incentiveto operate efficiently, they argue, while this incentive is lacking under public ownership.If private firms spend more money and employ more people to do the same amount ofwork, competition will lead to lower margins, lost customers, and decreased profits. The


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disciplining effect of competition does not occur in the public sector. Still, evenadvocates of privatization agree that private ownership produces the public benefits oflower costs and high quality only in the presence of a competitive environment.Privatization cannot be expected to produce these same benefits if competition is absent.Given this reality, analysts strongly encourage municipal governments to make sure that

the bidding process is an ethical one.Monitoring and Enforcement. Critics of privatization of government services contend thatproblems sometimes arise in various aspects of the process, including the biddingprocess, the precise specification of the contract, and the monitoring and enforcement ofthe contract. For example, some observers have raised concerns that potential suppliersmay initially offer a price to the government that is less than actual production costs toinduce the government to transfer the service to the private sector or to win the contract.Subsequently, the contractor would then demand a higher price after the government hasdismantled its own production system. Such "low-balling" in the bidding process may bereduced if the local government requires relatively long-term contracts, or constructscontracts that give them flexibility in hiring and firing outside firms.

Public Personnel Managementmagazine also noted that governments need to takeseveral important precautions before handing out a contract in order to avoid litigationand legal liability. These precautions include detailed performance specifications forservice providers, guidelines for the evaluation of competitive bids, and labor relationsstrategies. For their part, private bidders need to make certain that these precautions arereasonable ones that will not unduly impact their ability to perform both profitably andprofessionally.Commonly utilized methods of contract monitoring, meanwhile, include performanceappraisals, tracking complaints, citizen satisfaction surveys, reports from contractors,field observations, and ongoing cost comparisons.Employment. Privatization is understandably viewed as an alarming trend by publicemployee groups. In some cases, privatization results in layoffs of public sectoremployees, although governments often reassign them to other government jobs, placethem with private contractors, or offer them early retirement programs. Thesepossibilities have been particularly upsetting to public employee unions, which have beenat the forefront of efforts to block privatization. Indeed, one of the principal objections toprivatization is that it replaces positions that featured compensation that could be used tosupport a family with private sector spots that offer modest compensation. Indeed, criticssuch as theJournal of Commerce and Commercial's David Morris contend that privatecompanies are only able to promise meaningful financial savings over public agenciesbecause of the comparatively low salaries they pay their workers. Another charge leveledat privatization initiatives is that they too often have a disproportionate impact onminorities. "Governments often hire minorities in larger proportions than other workers,"wrote Blackstone and Hakim. "Thus, if government size is reduced, relatively moreminority workers are likely to lose their jobs." In recognition of these fears, some servicecontracts now require private contractors to hire affected public employees or give themhiring preference.Demographic and Geographic Factors. Smaller municipalities may incur relatively highunit costs if they operate their own services as a result of not being able to achieveeconomies of scale. These localities may benefit from turning to a contractor that serves


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multiple communities. Privatization is also more acceptable in fast-growing communities.If services are being expanded to cover new residents, private contractors are less likelyto displace existing public sector employees. Finally, contracting out varies with thenumber of services provided to residents. As the number of services increases,differences in the cost and effectiveness with which they are provided become more

apparent. Therefore, municipalities providing diverse services may be more open toexploring private sector options than those localities where services are more limited.

We may begin with a simple question; whether expansion of any kind is possible withoutefficient operational flexibility? I think this is the crux of the issue. When we talk ofglobalization, it simply implies the fact that competition of any sort should not be confined to aparticular territory.Competition should be allowed to expand itself beyond traditional frontiers. In other words, allpossible quantitative restrictions should be removed to prepare a new atmosphere of free interplayand free movement of creative ideas, goods and services for which a new pattern and structure ofthe economy is called for. Well, how can you expect benefit for the larger production without

ever enlarging the extent of the market. Hence a time has come for all of us to think globally andact locally.Global interaction has thus become a new reality. It is a process associated with increasingeconomic openness, growing interdependence and deepening economic integration. In factisolation in the long run, becomes a breeding ground for underdevelopment and poverty. Theworld trade has perceptibly increased from 12 per cent of World Gross Domestic Product inseventies to 13 per cent in 1990s. Global foreign exchange transactions have soared from $ 60billion per day in 1983 to $ 1200 billion per day in 1996. There is also a surge in the internationalinvestment flows. Between 1980 and 1996 foreign direct investment as a proportion of worldoutput rose from 4.8 percent to 10.6 per cent. The change is clear.The flow of international finance, international knowledge, international technology andinternational information has really gained a new momentum. The so-called information

revolution, technological revolution and scientific revolution has opened up new opportunitiesand new advantages.Now a new culture of larger interaction and larger production has come to stay. The reach of theelectronic media is enormous. So is the power of television as a medium. The culture of the youthin metros is globalized jeans, T-shirts, jogging suits, fast food, pop music, Hollywood movies,satellite TV and so on. Consumerism is global. Even corruption and crime have become similareverywhere. What we see today is really exciting and equally challenging.Thus the emergence of a global village has necessarily given rise to a new pattern ofliberalization. What is liberalization? In a plain language liberalization means free entry and freeexit within the framework of greater competitive efficiency. The new article of competitivecoexistence further implies a new social and economic order where the article of faith is bound tobe competitive efficiency. Who can give you competitive efficiency more? This is a fundamental

question. Remember where there is greater competition, there is strength. And where there isstrength, there is growth. This is a simple message of liberalization and privatization.If we want to accelerate the pace of competition, we have to prepare a new environment for betterparticipation of private initiatives. Look at the balance sheets of the Birla, Tata, Malavia andMafatlal companies whose performance is really amazing.The high degree of efficiency and outstanding commercial achievement is really convincing. Canyou expect development without innovative management? By and large private enterprises dobetter because they are operating in a free environment where they can act swiftly in response tomarket signals. They hardly act on established lines for long. Innovation is their religion. Risk


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taking is part of their commercial life. They can tune their operational pattern to the needs oftime. They can take their investment decision based on their own commercial perception.On the other hand, the government owned-units are very slow and normally go along the age-oldestablished tracks - and thus invite acute disadvantages of time-overrun and cost overrun.Ultimately the state-owned units are caught in the rut of loss and stagnation. Why should weallow the scarce resources to be misused in the government sector while there are many better

organizations in the private sector able to make best use of scarce resources? Look at the dismalperformance of the Manipur State Road Transport Corporation and so on. We have incurred acumulative loss of Rs 50 crores on these sick units. A poor state like Manipur cannot and shouldnot afford this loss when the fate of Manipur depends on the repeated overdrafts and marketborrowings.One of the important factor for the dismal performance of state-owned industries in Manipur isobviously lack of entrepreneurial spirit, a spirit that is so rare and vital. One fact is quite clear thatthe government of Manipur cannot personally and directly act as entrepreneur. At most thegovernment can act as facilitator.The commercial enterprises demand a serious attention of daily character, acontinuous process of monitoring, evaluation and planning: that also in this age of cutthroatcompetition. Lack of high degree of specialization, professionalization and innovation becomes a

comfortable breeding ground for retardation. In fact in the commercial world one has to be alertand prompt to change the track to take fuller advantage of market opportunities. We cannotexpect this frame of mind in the government sector.Secondly the public sector units are plagued with corruption, fraud and waste; mainly becausethere is less financial discipline and also the sense of belongingness and loyalty is fairly low.Even a thief does not steal his own money and property. Theft, pilferage and corruption takeplace in the atmosphere of mutual suspicion and absence of loyalty and discipline.In the private sector the vision and mission of the organization is shared and made transparent.The sense of partnership is very high. In fact the psychological foundation is high. The risingperformance of the Shija Hospital Private Ltd. is a telling example.The picture is very different in the government sector where one experiences the multiplyingissues of monopoly, concentration, domination, subordination, secrecy, avoidance of

responsibility and lack of transparency. These inherent issues remain unsolved and may continueto frustrate any attempt in future also. They have become part of the established system. Hencewe have to change the outdated system of license, permit and quota. We have to decontrolgradually if we hope to revitalize and strengthen our economy.Yashwant Sinha, finance minister of India has gone ahead with reform process by privatizing 27companies. Rs 12,000 crore expected from these disinvestments would be hopefully used forrestructuring public sector units, safety nets and reduction of fiscal burden. The rationale is veryconvincing. Why should the whole economy suffer for the gross weakness of a handful few?The government of West Bengal is also going ahead with the process of privatization of 67 ailingstate owned/state-run companies. Because the government of West Bengal knows fairly well thatefficiency goes with privatization and also that the state run enterprises distort market relationsand ultimately invite economic slow-down, the new economic strategy is really private sector

friendly.But caution is the need of the hour. When we uphold the rising imperative forprogressive privatization in central areas, the enforcement of a sound domestic policy for a highoperational standard is not ruled out. What the government should do is to review, revise and seta new operational standard from time to time keeping in view the challenges and threats.Thus to take fuller advantage of global opportunities the process of liberalization andprivatization needs to be meticulously planned and stepped up. The role of the government isequally important particularly in policy planning, policy direction and policy coordination at alllevels i.e. before privatization, during privatization and after privatization. In other words, the


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roles of the government and private sectors are not mutually contradictory - but very muchcomplimentary.It is thus increasingly clear that a sound policy of privatization should be an integral part ofdevelopment strategy.

BROAD MEANINIG OF PRIVATIZATIONContracting-outFranchisingDeregulation and DecontrolUser chargesGrant systemVoucher systemManagement contractLeasingJoint ventureBuild operate transfer (BOT)system

Non-Profit organization1-CONTRACTING-OUT :The government contracts out with the for profit as well asnot- for profit organizations for the delivery of goods and services. Contracting-out iscommon especially in such services as public works and transportation, public safetyservices,health and human services, parks and recreations services etc2-FRANCHISING :The government gives a special monopoly privilege to a private firmto produce and suplly some part of a particular services.3-DEREGULATION AND DECONTROL:Public regulation and public control arebroad concpts in the sense that they define the various ways, in which governmentmayintervene directly to the economic agent. All type of public controls be abolished.4-USER CHARGES: (Higher education, health services, cable TV, electric power, likes

that) some types of goods and services can be either provided free of charge and financedby taxes or by the imposi

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51783743 Privatisation