Privatization

Notes

Privatisation is the transfer of ownership, management or control of public enterprises or services to the private sector. Nationalisation is the reverse (the 1969 and 1980 bank nationalisations, 1956 LIC, 1971-73 coal and general insurance).

Forms

Denationalisation (full sale), partial privatisation or disinvestment, strategic sale, management contracts, leasing, franchising, outsourcing and Public-Private Partnerships (PPPs).
PPP models: BOT (build-operate-transfer), BOOT, DBFOT, annuity and the Hybrid Annuity Model (HAM) (roads, 2016); Viability Gap Funding (VGF) supports unviable projects; the PPP Appraisal Committee (PPPAC); and the National Infrastructure Pipeline (2019).

Rationale: greater efficiency and competition, reduction of the fiscal burden of loss-making PSUs, political insulation, quicker investment and technology, and consumer choice.

Arguments against: social objectives may suffer (rural and affordable services), private monopolies in place of public ones, job losses, sale at low valuation or to favoured buyers, and loss of control over strategic assets.

Indian examples

BALCO (2001) to Sterlite, VSNL to the Tata group, Hindustan Zinc, Maruti Udyog (moved to Suzuki), and Air India (2022).
Airports: Delhi and Mumbai were run as PPPs from 2006; six airports leased in 2019.
Banks: the Union Budget 2021-22 announced the privatisation of two public sector banks and one general insurer; the Government is also selling its stake in IDBI Bank. For nationalised banks, Parliament must amend the acquisition and transfer laws and the Government must keep a stake as the law requires.
2021 policy (Atmanirbhar Bharat PSE policy): four strategic sectors keep a limited number of public enterprises, and enterprises in non-strategic sectors are to be privatised or closed.

Key Points

Privatisation: transfer of ownership, management or control to the private sector.
Forms: denationalisation, disinvestment, outsourcing, PPPs (BOT, HAM).
Pros: efficiency, fiscal relief; cons: social goals, monopoly, job losses.
Examples: BALCO, VSNL, Air India.
The 2021 policy defines strategic and non-strategic sectors.

MCQs

Q1. The Hybrid Annuity Model is used in: (a) Banking (b) Road projects (c) Insurance (d) Agriculture Ans: (b). Introduced in 2016.

Q2. Nationalisation is: (a) Transfer of private assets to the Government (b) Sale of PSUs (c) Outsourcing (d) FDI Ans: (a).

Q3. BOT in PPPs stands for: (a) Build-Operate-Transfer (b) Buy-Own-Trade (c) Borrow-Operate-Transfer (d) Build-Own-Tax Ans: (a).