Privatization: Objectives, Methods, Advantages and Disadvantages

Privatization: In the year 1991, India faced the most terrific calamity, a financial crisis. The Public Sector Undertakings were under losses and that became the reason behind the birth of LPG (Liberalization, Privatization, and Globalization).

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What do you mean by privatization?

Privatization is simply the contracting of the business agencies, enterprises, or industries from government control to the private sector. When this happens, the private sectors are permitted to construct industries that were under the reservation for the public sector.

When privatization happens, there is a transfer of ownership with less political interference and it reduces the state monopoly by giving chance to efficient private companies.

There are some exceptions and why?

There are six major sectors that are not permitted to be privatized always, they are:

  1. Defense
  2. Railways and
  3. Atomic Energy
  4. Cigarette
  5. Chemical Fertilizers
  6. Hazardous Chemicals

This is because these sectors are confidential, or they might involve a lot of work and time to be privatized.


Privatization has its own advantages and disadvantages. But the idea or concept of privatization was brought up keeping the following in mind:

  • Efficiency Improvement

Nowadays, the concentration of certain ruling parties is politically intentional. They do not see the side of the economy of the state and the well-being of the people. It stops or puts a barricade when it comes to the growth of public sector companies.

So, Privatization reduces the political influence and concentrates on aiding the public well-being and economic growth.

  • Increase in Competition

While state-run companies do not have competition, they enjoy a monopoly and tend to forget the cause of their work. They either take time to finish a particular project or do not involve in quality work and output.

But when privatized, people work better keeping in mind the competitions they have. This also accelerates the overall growth in industries and the economy.

  • Diversifying Market Options

Privatization advances the market progression which makes the market work organically. Also, because there is no influence from the political side, market dynamism is promoted and people keep track of the demand and supply and work accordingly. This also produces higher revenues.

  • For Revenue

This is one of the major objectives of privatization. This one-time revenue from the sale of the sector or company helps a lot when there is a financial crisis.


Privatization happens in six major methods. And they are:

  • Sale of Shares

The shares of a public sector company can be sold through stock exchanges in order to privatize. Through this, the state hands over the complete power and authority of the sector’s economic activities.

  • Public Auction

Public Auction’s main motive is to raise the highest funds for government property. Auctioning includes the shares and long-term assets of a public company.

  • Direct Negotiations

There are certain companies that are directly approached by the government for the cause of privatization of a public sector or company. This is called the direct negotiation method. This method is potentially beneficial and has necessary advantages for both the participants, the buyer, and the seller.

  • Public Tender

A public tender is a contract that is to attract the offers that are provided by the procurers. The tender is given to the person whose offer is the most profitable. It is almost similar to the previous method, except that the bidder is selected from the options provided where indirect negotiations, are already selected.

  • Lease with a right to purchase

In this method, there is a set of rules and criteria for the company to be possessed and used by a private company. Later, the private company chooses to convert whether the property should be converted from leased to ownership after knowing the sum to be paid.

  • Transfer of Control

Under this method, just the control of a public sector transfers from the hands of the government to a private company. They are hired to make changes and improvise the sector.


Below given are the advantages that are resulted due to privatization of a public sector:

  • Improvement in performances

Private companies work for profits and not to influence people. So, they turn out to be more efficient and work on putting an end to the unnecessary elements. For example, red tape and bureaucracy.

Furthermore, employment in private companies is dependent on performance. People who perform well are provided with an incentive or an increment that boosts the performance.

  • Better Service

Since private companies work for profits, they tend to function better than anybody to come up in the competitive market. Their focus lies on the customer’s satisfaction. This motivation does not exist in a government company as they need not worry about competition.

  • Management Development

Privatization aids in improving the management of a company. This is because, when there is a good or a bad happening in a company, the managers turn out to be accountable. They are responsible and answerable to the owners of the company. Automatically they turn out to be cautious about everything that they do and also about what people under them do.

  • Less Political Intervention

When the political intervention is driven away, people start working for the betterment of the public. Also as the major decision-making is transferred, the company moves freely and efficiently towards the growth of the economy.

  • Multiplication of Investments

Privatization is the reason behind the multiplication of investments. This happens through the stock exchange when the owner and the investor gain confidence about their own company. So, this is also a great step towards a good economical impact.

  • Tax Reductions and Job Opportunities

By privatizing the public sector, the government can pay attention to the reduction of taxes from the residents. Also, through privatizing certain services like prisons, a lot of job opportunities are created.


There are also some disadvantages that are caused due to privatization, and they are:

  • Less Transparency

The fact is private companies are very much less transparent when compared to the government. This paves a pathway for bribery and corruption.

  • Inflexibility

When there is a contract signed by the government for a particular number of years, the people are locked with the same company for those years whether they like it or not. The contract cannot be withdrawn in a middle way.

  • Higher costs to consumers

When a sector is privatized and transferred to the wrong company, there are chances that they increase costs that will affect the consumers. For example, the water supply costs 22% extra when bought from a private company.

  • Employment Problems

While privatizing the public sector, there are chances that a person loses their government job or they tend to work with the private firm for a lesser salary amount.

Being all that said, when asked if “privatization is a solution for economic development?” Any idea has its pros and cons. Privatization would be a great help in boosting the economy depending on two things, one is the sector that is to be privatized and the other is the company that takes the ownership. So, it is important to think right before taking the bigger steps.

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