Privatization – Meaning, Types, Examples, Pros and Cons

Privatization is a widely accepted concept, and almost all countries have adopted it, like the USA, UK, Japan, India, and Canada. Privatization is an indispensable part of the economy. Fields of privatization can vary from banks, educational institutions, and hospitals to insurance. 

Privatization is a situation in which the sectors that are reserved for the government are opened to private players. In other words, we can say that the private sector is given importance for the development of the country. In India, it was introduced in 1991 as a part of the new economic policy, which includes liberalization, globalization, and privatization.

Components of Privatization:

The main components of privatization are: 

● Deregulation 

● Decontrol 

● Denationalization 

● Disinvestment 

● Transfer of ownership

Features of the Private Sector:

Some of the basic features of privatization are mentioned under 

1. Privatization leads to the contraction of the public sector. In India, all sectors have been privatized except two: railways and atomic energy. 

2. Some sick Public enterprises are controlled by private sector, while some public enterprises are sold to the private sector for their revival. 

3. In privatization, shares of the public sector are sold to the private sector. These are sold through the bidding process. 

4. Privatization restricts the participation and control of the government in the day-to-day activities of the enterprise. 

Public vs. Private Sector

● Ownership: In the public sector, ownership is in the hands of the government; on the other hand, in the private sector, ownership is in the hands of an individual or company. 

● Motive: The main objective of the public sector is the welfare of its people, not to earn just profit, while the main objective of the private sector is to earn more and more profit. 

● Job Security: Public sector employees are called civil servants, and their job is permanent. In the private sector, there is no job security; employees can be fired at any time in times of financial crisis. 

● Funds: The public sector is funded by taxes and government revenue. Investments, loans, and profits are the main sources of funds for the private sector. 

An example of Privatization: 

1. In January 2022, the Government of India disinvested the loss-bearer Air India. It was sold to Tata. The TATA group gave INR 18000 crore to acquire Air India. The Indian government received INR 2700 crores as cash, while the rest of the amount was given to clear the airline’s debt. 

2. In 1987, the United Kingdom sold British Airways to private hands. Similarly, British Telecom was privatized in 1984 by the British government led by Margaret Thatcher.

Types of Privatization 

1. Sole Proprietorship: It is made up of two words. Sole means single, and proprietor means owner. So in this type of privatization, there is only one owner of the enterprise. He is responsible for taking all the major decisions in the enterprise.

2. Partnership: Another important type of privatization is partnership. In a partnership, there are two or more people who share all the profits and liabilities. All the decisions are taken mutually by them. 

3. Corporations: A corporation is a group of individuals that act as a single entity. They are all shareholders in the business and elect the board of directors to take all major decisions for the business entity.

Advantages or Pros of Privatization 

1. Lessen the burden of government:

When the government sells the public enterprises, it receives a large amount of cash that can be used for developmental projects. The government is also free to spend money on sick public units. So privatization lessens the financial burden on the government. 

2. Beneficial to consumers:

In privatization, there are many producers and sellers. As a result, competition between them increases, and they sell quality products at a fair price to consumers. The customers also get the chance to choose from various products. It also breaks the monopoly of a few firms in the market. 

3. No Red Tapism:

We all know that in the public sector, every decision is taken with delays, which decreases the efficiency of these sectors. On the other hand, in the private sector, all decisions are taken quickly, which results in the efficiency of the services provided by these private enterprises. There are also fewer chances for political interference. 

4. New invention:

The private sector encourages new innovation and technology, which is responsible for the development of the country.

5. Globalization:

Privatization tends to lead to globalization. Globalization means the interdependence of world economies on each other for the import and export of products and services. 

6. Foreign Direct Investment:

Foreign direct investment inflow is another benefit of privatization.

Disadvantages or Cons of Privatization 

1. No social welfare:

The major disadvantage of the private sector is that it only focuses on profit and does not give importance to the welfare of society. 

2. Exploitation of Customers:

Another disadvantage of privatization is that it exploits consumers. It provides poor-quality goods and services at higher prices. 

3. Monopoly:

However, the government took various measures to restrict the formation of monopolies, but instead, the private players form the monopolies and concentrate economic power in their hands. It leads to inequality between different sections of society. 

4. Regional Imbalance:

The private sector sets up its companies and industries in areas where there are facilities for transportation, electricity, water, etc. As a result, the backward areas become more backward. 

5. Accountability:

The public sector is responsible and accountable to the people for the function it is performing. In comparison to public enterprises, private enterprises have no accountability to the public.

In short, we can say that the private sector is the major reason for the growth and development of the country. It is the backbone of the economy, whether it is developed or not.