Nationalization: Ivatization, Transfer of Government Services or Assets To The Private Sector. State-Owned Assets

ivatization, transfer of government services or assets to the private sector.
State-owned assets
may be sold to private owners, or statutory restrictions on competition between privately and
publicly owned enterprises may be lifted. Services formerly provided by government may be
contracted out. The objective is often to increase government efficiency; implementation may
affect government revenue either positively or negatively. Privatization is the opposite
of nationalization, a policy resorted to by governments that want to keep the revenues from
major industries, especially those that might otherwise be controlled by foreign interests.
IMPORTANCE
(a) Improvement in Efficiency: Privatization works for maximization of profit as
against public sector. Increasing competition forces private sector to work efficiently
and for maximization of profit.
(b) Proper utilization of resources: As compared to public sector, private sector
very quickly accepts and adopt the advanced technology and this helps to exploit
natural resources in a better and balanced manner.
(c) Quick decision: Private organization takes quick decision as compared to public
sector and this benefits the organization.
(d) Quick remedies: A private organization can very quickly take any type of
decisions for solving any problem and any adverse situation can be handled tactfully
and quickly.
(e) No political interference: Private sector does not depend on any government
agency for taking any sort of action or decision. Also it is not influenced by third
class government policies like corruption, etc.
(f) Better services to customers: Success of private sector mainly depends upon
consumer satisfaction and hence private sector aims and works for consumer
satisfaction.
(g) Easy funding: Government can easily raise huge funds by selling its equities to
private sector.
(h) Easy to fix responsibility:In private sector in most of the cases authority and
responsibility goes together and the responsibility of every individual is clearly
defined. This force individuals to perform their duties efficiently.
REASONS
AADMIN, RESPONSIBILITY
A separate question is whether the reliance on a privatisation agency or a similar
centralised unit
should be considered as a good practice. The answer is not straightforward. Clearly,
a government need to
ensure that those entrusted with privatising SOEs are independent, competent, well
resourced, and subject
to high standards of accountability and transparency and all of this can be
effectively achieved by relying
on a specialised agency. However, governments also need to safeguard efficiency
that is, ensuring that
the benefits are obtained at the lowest cost and this militates against specialised
agencies unless the
volume of privatisation is large. (This point is further borne out by the recent
discontinuation of
privatisation agencies in transition economies.) Good practice might be (1) where
state-ownership units
exist, take full recourse to the expertise in these agencies; (2) where ownership is
dispersed among several
government bodies, establish a coordinated approach to privatisation. The latter
would either, where cost
effective and politically feasible, be delegated to a specialised agency, or take the
form of an enhanced
collaboration between the relevant government departments which would have to
be adequately resourced,
reporting to one clearly identified part of the executive power, and be subject to the
highest standards of
transparency and accountability.
LEGAL CONCERNS
It would appear that the legal and approvals frameworks for privatisation fall in two
main categories:
First, countries that (still) have large, active privatisation programmes mostly rely
on framework
authorisation acts in part, presumably, because parliament does not have the time
and inclination to
monitor each transaction. Secondly, infrequent privatisors are mostly either
required to seek parliamentary
approval or chose on their own to involve legislators in order to gain acceptance
around the privatisation
efforts.
It is not clear that general good practices should be formulated concerning
national legislative
frameworks, which are firmly embedded in national political and constitutional
realities. At the same time,
it should be recognised that embedding privatisation in the legislative process can

have important
beneficial impacts on the transparency and predictability of the process. Even
governments that are
formally entitled to privatise state assets without specific legal authorisation, or
which need only to seek
the approval of parliament, have sometimes chosen to pass a sales act setting
out the agreed modalities
of privatisation. Where different parts of the political spectrum differ on privatisation
and not least in the
current environment of large, sequenced privatisations this may be useful in
signalling a political
commitment to investors and reassuring them concerning the likely future path of
sell-offs.
EMPLOYEES
Summing up: Changing conditions of employment
Privatisation entails both opportunities and risks for SOE employees. Where the
transfer of ownership
puts at risk job security, wages and benefits of incumbent staff, the general rule
applies that existing
contractual rights should continue to be honoured. However, the automatic or
uncritical grandfathering the
rights of civil servants and other public employees cannot be considered as a good
practice. A corporatized
SOE, in particular, will find it difficult to compete with private sector operators if it is
weighed down by
heavier obligations than these. In the case of direct transfers of corporate entities
such as trade sales the
buyers are of course free to discount the price they offer in case of obligations
toward incumbent staff.
However, the continuing company will be staffed by class A and B employees,

which is rarely an
efficient outcome.
The moment of corporatisation is the best time to agree with SOE employees their
future employment
conditions, wages and benefits in a manner compatible with prevailing conditions
in the private sector, so
that the terms are easily transferrable in the case of privatisation. The question is
how to manage the
transfer and, in many cases, loss benefits. Insofar as benefits are legislated (as is
the case with civil
servants in some countries) then the state can in principle simply change the
relevant laws, but, in view of
the political economy of reform, they may in practice have to compensate those
who stand to lose. In the
case of specific contractual entitlements such as pension rights, rescinding these up
front in return for a
compensation corresponding to their market value is arguably preferable to a
continuation in some form
within the corporatized entity.
In the case of the direct purchase of a non-corporatized SOE by a private company
existing contracts
must as a general rule be honoured by the buyer, for instance in the form of
successor rights. However, this
does not necessarily extend to salaries and benefits in particular where these are
covered by collective
agreements. The practice of demanding that the buyer guarantees wages,
employment or benefits for a
transitory period, whilst hardly optimal from an economic efficiency perspective, is
not inconsistent with
good governance if the extent of such guarantees is fully disclosed and reflected in
the privatisation
proceeds.
Summing up: The role of external advisors

For a government, a decision to use external advisers rests on the trade-off between
external and
internal capabilities, set in the larger context of whether to maintain a central,
specialised state ownership
unit. The outcome needs to target the most efficient use of public resources. In
many cases, the externally
sourced services will concern issues that private sector operators are genuinely best
placed to address,
though the choices made may also reflect the inadvisability of building public sector
expertise in states
with limited privatisation and state ownership. Governments should neither shy
away from contracting
external expertise for reasons of short-term savings, nor should they rely on private
sector expertise simply
as a way of safeguarding themselves from responsibility.
The three main operational challenges are the avoidance of conflicts of interest, the
selection of the
best and most cost efficient advisors, and the incentivisation of the latter. In most
cases, sound general
contractual and legal practices should be sufficient to ensure this. A competitive
tendering procedure is
vital, as are strong ex ante and ex post mechanisms to stamp out conflicting
engagements by the external
advisors. However, some additional safeguards may be needed. Good practice calls
for advisory functions
in different but related parts of the privatisation process to be administered by

different advisors. And, the
incentives scheme for advisors must be carefully designed to ensure that bonuses
and success fees are
payable if and only if the outcome of the privatisation at least conforms with what
could and should have
been expected.
METHOD
Trade sales: This together with joint ventures represent the most widely used method of privatisation in
countries without developed capital markets. These may be sales of shares or of assets to another
company, and can be carried out by direct negotiation, tender or auction.
Joint ventures: These combine components of other methods, typically partial trade sale and
management contracts. A joint venture partner would be expected to bring significant expertise in
production, marketing, management and the capacity to expand the business.
Public share offers: While shares can be sold without a stock market, the latter is important both
to tap savings and to provide buyers with liquidity.
Public Auction: This provides a quick mechanism for the rapid privatisation of small enterprises.
Sales are usually of assets rather than shares.
Private placement, typically with institutional investors, by negotiation.
Buyouts by management and/or employees.
Privatisation funds as purchase vehicles for wider share ownership.
Liquidation for highly indebted hopeless cases.
Where methods involving sale of shares or assets are not feasible, alternative options could be
considered that do not involve a change in ownership. These options would be relevant in selected cases
only, and could include:
Lease contracts, with or without a purchase option.
Management contracts.

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Nationalization: Ivatization, Transfer of Government Services or Assets To The Private Sector. State-Owned Assets

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ivatization, transfer of government services or assets to the private sector.

it should be recognised that embedding privatisation in the legislative process can

However, the continuing company will be staffed by class A and B employees,

Summing up: The role of external advisors

in different but related parts of the privatisation process to be administered by

Private placement, typically with institutional investors, by negotiation.

Buyouts by management and/or employees.

Privatisation funds as purchase vehicles for wider share ownership.

Liquidation for highly indebted hopeless cases.

Lease contracts, with or without a purchase option.

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