Difference Between Privatization and Disinvestment

Edited by Diffzy | Updated on: May 14, 2023

       

Difference Between Privatization and Disinvestment

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Introduction

The expansion of the industrial sector and its growth are crucial to a country’s development. Since a few decades ago, the privatization of various sectors has become popular due to the perception that there is fierce rivalry in the private sector, which results in superior products at fair pricing and less corruption. Disinvestment is the exact opposite meaning of investing, it refers to withdrawing funds from a corporation by selling a stake, either totally or partially. The goal is to maximize returns on investment by making efficient use of the available resources. Instead, privatization refers to the transfer of a government-owned business, operation, unit, or division to a privately-owned entity. It occurs when more than 51% of the government’s stock is transferred to private ownership.

Disinvestment vs. Privatization

The process of privatization involves handing over control of a company, enterprise, agency, or public service to the private sector. Disinvestment, on the other hand, describes the transfer of a government stake to private investors in a public corporation. In other words, privatization entails the transfer of ownership, whereas disinvestment entails the sale of a portion of an entity’s ownership. Because private businesses may be more effective and productive than government-run organizations, privatization may result in greater output, more jobs, and higher incomes. Disinvestment may result in higher economic growth because private businesses may be more effective and productive than governmental organizations, which may lead to higher output, more jobs, and higher incomes. The industry may experience more competition and innovation as a result of privatization since private businesses may be more flexible and sensitive to market pressures than government-run organizations. Additionally, it may result in less oversight and regulation from the government, which would allow the SOE to run more effectively. As private companies may be nimbler and more responsive to market forces than government-run entities, disinvestment can result in increased competition and innovation in the industry. Additionally, it may also result in less oversight and regulation from the government, which would allow the SOE to run more effectively.

Difference Between Privatization and Disinvestment (In Tabular Form)

PARAMETERSPRIVATIZATIONDISINVESTMENT
Meaning and objectiveThe government relinquishes ownership and control of a certain state-owned enterprise (SOE) or asset to a private business in a transfer of ownership from the public to the private sector. The SOE’s efficiency, productivity, and profitability are to be increased.Reduction of the government’s ownership position in a public firm, which occurs when the government sells a portion of its stock to the private sector. The goal is to increase tax income, lower depth, or both.
BenefitsNumerous advantages including increased productivity and efficiency, better services, and more competition, can result from privatization. In the short run, meanwhile, it might also result in job losses when private businesses decide to streamline operations and save expenses.Disinvestment has a lot of advantages, including more competition, increased effectiveness, and increased tax revenue for the government. In the short run, meanwhile, it might also result in job losses when private businesses decide to streamline operations and save expenses.
Change in ManagementResults in a change in managementMay or may not result in a change in management.
Shareholding of GovernmentThe government shareholder is more than 50%The government shareholder is less than 50%
Foreign InvestmentForeign businesses may be more likely to invest in privately owned companies than in government-run ones, hence privatization may increase foreign investment. Increased economic growth and development may result from this.Foreign businesses may be more willing to invest in a publicly traded corporation with a smaller government share than a completely owned one, hence disinvestment may increase foreign investment. Increased economic growth and development may result from this.
Scope Comparatively NarrowComparatively Wider

What Is Privatization?

The term “Privatization” refers to the full or partial selling of the public sector’s ownership in a state-owned enterprise to the private sector. Selling government-owned stock in an enterprise is one way to privatize, while the other is removing barriers that prevent private businesses and individuals from participating in a given sector. The contracting out of public sector services to private companies is also included.

Privatization is the term used to describe the movement of ownership, control, and management from the public to the private sectors, notably as a result of the sale of assets. The government no longer owns such an undertaking after the transfer takes effect. The impact of this shift on government revenue can be either beneficial or negative.

Forms of Privatization

Eight forms of privatization can take place, namely:

  • Liberalization or Deregulation
  • Subsidies
  • Management Privatization
  • Contracting Out
  • Sale of assets to the private sector
  • Private payment
  • Voucher
  • Load Shedding

How to Privatize?

Only when privatization is carried out with careful preparation and collaboration can its advantages be seen. When putting it into practice, three things need to be taken into account:

  • Creation of Conducive Environment: Constructing a conducive environment entails implementing further measures that were intended to encourage competitiveness and growth.
  • Streamlining of the Process: Create a strong, inclined, centralized, and transparent procedure by deciding to privatize something little but important while keeping its fairness.
  • Prepare the company/industry for privatization: Several procedures must be taken to get the company ready for privatization, starting with careful planning. Afterward, making the necessary adjustments to ensure that it is put into practice to improve efficiency while overcoming the adverse effects, caused by it.

Advantages of Privatization

  • Efficiency Gain: Since private businesses are motivated by profit and competition, which motivates them to run more effectively, privatization can result in increased efficiency.
  •  Increased Innovation: To enhance operations and boost competitiveness, private businesses are more inclined to invest in novel technology and procedures.
  • Greater Flexibility: Making decisions and adapting to shifting market conditions are both made possible by privatization.
  • Better Services: Private businesses are driven to offer higher-quality services to draw and keep clients, which can result in better services for consumers.
  • Increased investment: Since private businesses are more inclined to engage in expanding and modernizing their operations, privatization may increase investment in infrastructure and other assets.
  • Reduced Government: As private enterprises undertake the costs of delivering services and maintaining assets, privatization may result in reduced government spending. This may help to lower the budget deficit and debt load.

Disadvantages of Privatization

  • Reduced Access to Services: Privatization may cause some populations, particularly low-income and marginalized communities, to have less access to services.
  • Loss of Public Control: Since private corporations are motivated more by profit than by the common good, privatization may result in a loss of public control over crucial services and assets.
  • Consumer Costs Will Rise: Since private businesses must frequently demand higher prices for their services to turn a profit, privatization may result in higher consumer costs.
  • Job Losses: Privatization may result in job losses for public sector workers because private businesses might not provide the same perks and job security.
  • Reduced Transparency: Since private companies are not held to the same standards of public scrutiny and oversight as public entities, privatization may result in decreased transparency and accountability.
  • Focusing on the Short Term: Private businesses frequently prioritize short-term gains at the expense of sustainability and long-term investments. This can result in a lack of consistency and continuity in the services offered.

What Is Disinvestment?

Disinvestment is a tactic used to sell or liquidate some assets owned by the government or an organization, such as a plant, division, subsidiary, or unit. The technique is used to raise money, decrease losses from non-performing assets, or withdraw investment from a particular industry or sector. The tactic is frequently employed by the government to obtain money by selling shares of Public Sector Enterprises (PSEs) in which the government (central or state) holds a majority stake. The money raised from selling the stake can be put to good use.

The government’s ownership of shares in a PSE reflects the investments at its disposal; as a result, when these shares are sold for cash, the investment is disinvested, or transformed into cash. The government’s disinvestment policy determines the level of disinvestment.

Advantages of Disinvestment

  • Increased Tax Revenue: Selling the government’s part in a state-owned company through disinvestment results in a sizable increase in tax revenue.
  • Improved Efficiency: Improvements in productivity and profitability might result from disinvestment since private businesses are frequently more efficient than those run by the government.
  • Increased Competition: Increased competition can result in lower prices and better products for consumers as a result of increased competition in an industry.
  • Better use of Resources: Disinvestment can release funds for other crucial purposes including infrastructure development, healthcare, and education.
  • Reduced Government Debt: By creating income and lowering the demand for government subsidies, disinvestment can assist lower government debt.
  • Greater Corporate Governance: Private organizations frequently face stronger reporting and governance standards, which can result in greater management and accountability.
  • Improved Public Services: The general public will profit when public services are improved and social welfare programs are funded using the money raised by disinvestment.

Disadvantages of Disinvestment

  • Loss of Control: The government loses control over the business and its operations when it stops investing in a state-owned corporation.
  • Losses of Jobs: Disinvestment may result in employment losses, particularly when a new private owner decides to reconstruct the business.
  • Reduced Social Welfare: Since state-owned businesses frequently must offer services to neglected or marginalized areas, disinvestment may result in a reduction in social welfare.
  • Reduced National Security: National security could be reduced by underinvesting in important assets like defense-related businesses or essential infrastructure.
  • Inequalities: Disinvestment can contribute to greater income and economic inequality since the advantages of privatized businesses may not be allocated fairly.
  • Lack of Long-term Planning: Private businesses are frequently more concerned with immediate financial gains, which can fail to prioritize long-term strategic planning and development.
  • Short-term Thinking: Disinvestment can be motivated by short-term political or economic objectives rather than a long-term strategic vision, which can have unforeseen effects and harm the economy.

Main Differences Between Privatization and Disinvestment (In Points)

  • Privatization is the process through which the government sells more than 51% of a public sector undertaking to a private person or company. Disinvestment, on the other hand, refers to the government or any other organization’s disposal of assets that results in a change in ownership and control and is motivated by financial, political, or strategic considerations.
  • While disinvestment involves dilution of ownership, privatization involves a change in ownership.
  • In privatization, the government sells more than 50% of its stock, whereas, in disinvestment, the government sells more than 50% of its stock.
  • Disinvestment is the term for the reduction of government ownership in a company operating in the public sector. However, if the dilution is less than 50% the government continues to be in charge of the business. The term “privatization” actually refers to the change in management and ownership that occurs when the share dilution crosses 50%.
  • Disinvestment does not always imply privatization; rather, privatization is only referred to when share dilution exceeds 51%. Privatization also includes disinvestment.
  • Because the Public Sector Undertaking is inefficient, disinvestment aims to reduce the financial burden on the government. Additionally, it aims to offer financial assistance. On the other hand, privatization is supported to maximize the utilization of the nation’s resources and to boost the operational and dynamic effectiveness of the concern.

Conclusion

In a nutshell, the goal of privatization and disinvestment is to increase an organization’s effectiveness. However, these are subject to harsh political criticism and are currently up for discussion. Both privatization and disinvestment aim for efficiency gains and reduce the budget which can result in more competition and better customer services. Both can be used to sell assets to generate money for the government.

Both scenarios may lead to job losses for government workers and can have a big effect on society and the economy. In the end, privatization and disinvestment have strong proponents and opponents from different groups.


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"Difference Between Privatization and Disinvestment." Diffzy.com, 2023. Sat. 16 Sep. 2023. <https://www.diffzy.com/article/difference-between-privatization-and-disinvestment>.



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