What is Privatisation? Features, Methods & Importance


Meaning of Privatisation

The government has been solely responsible for developing the country. But it was found that the government’s investment in the public sector was inadequate. As a part of economic reforms, the Government of India announced a new Industry policy in July 1991 seeking to deregulate the industry with the objective of promoting the growth of a more competitive and efficient industrial economy. Nine areas in basic and core industries earlier reserved for the public sector were opened to the private sector. The new set of economic reforms aimed at giving greater role to the private sector in the nation-building process and a reduced role to the public sector.

The Transfer of a public enterprise, property or ownership from the government to the private sector is termed as privatization.

Today, the private sector by itself and also in joint partnership with the public sector has started playing a very important role in the development of the country.

Features of Privatization 

The key features of privatization process are summarized in points given below: –

New concept

Privatization is a new concept for economies which has emerged in last two decades. The wave of privatization process in India come in year 1991-92 under the leadership of P.V. Narsimha Rao via selling minority stake in PSUs. It was the time when public sector enterprises were not doing well and incurring losses whereas private sectors were performing well. 

Widely accepted

The process of privatization has not only emerged in India but it is at present widely accepted across many countries all round the globe. It was a good idea which is now widely followed in Japan, India, USA, UK etc. where government has reduced its role in economic activities. 

Economic democracy

Implementing the concept of privatization denotes establishing economic democracy. Monopolistic power of government is diluted by privatization and private firms are given chance to participate more freely in economic activities of country. The government limit its involvement and remove restrictions which does the work of protecting the private players in economy. The state along with providing the ownership of property also delegate the related responsibilities to private companies for working efficiently. 

Transfer of ownership

Transfer of ownership is the main feature of privatization process. Here in this process, the state-owned business, operations or property are sold off to private firms. The acquired property is now run completely by private persons freely without any restrictions from public authority.  

Lack of government interference

The role of government gets reduced in economic activities of company once it underdoes the process of privatization. Private firms get rights of ownership as well as responsibilities associated with business by government. All the business matters will now be look after by private firms and its personnel’s who work actively to derive better profits.  

Continued process

Privatization is a continuous process which keeps on going. It takes the shape slowly in an economy and cannot be completed within a certain period of time. Economies around the globe are gradually accepting the concept of privatization for improving the productivity of their economic activities.  

Quality management

Another key feature of privatization concept is that enhance the management level of business. A business which was running non-efficiently under the government control become well-efficient by coming in hands of private firms. Managers deployed in private companies are strictly accountable to the owners of companies, thereby making them responsible for ensuring efficient management of business affairs. 

Methods of Privatization

Various methods of privatization are as discussed in points given below: – 

Public Auction

Public auction is one where property or assets owned by government are outrightly sold to private sector. Auctions are organized by government in order to raise the highest amount for their property. Long-term assets or stock of public companies are generally sold through this method. Here, the private sector not only gets possession of assets from government but also receives several related responsibilities of ownership. 

Public Tender

Public tender is a contract which is issued by government for attracting offers from interested procurers. It is somewhat similar to auction where one coming up with most lucrative offer in bidding process is able to procure the contract. Under the process of public tender for privatizing government-owned property, the purchasers are general public who participate and raise their respective bid value for winning the contract.  

Direct Negotiations

Direct negotiations refers to dealings which are entered into by government and specific private bodies for the purpose of state-owned property privatization. It is potentially more beneficial method of privatization in which both seller and purchaser are present, who interact and agree on advantageous stipulations. 

Privatization of operations

Privatization of operations refer to transferring the operational and managerial responsibilities of government-owned property to a private sector. Running of concert venues and sport events are some examples of this type of privatization. The private sector makes profit under it by collecting fees from individual customer of public asset. Another common example of this type of arrangement is operation and maintaince of toll bridges and roads where private companies are deployed for seeing all transactions related to it. 


Franchising involves providing exclusive rights by government unit to private firm for carrying out operations and deliver services within a specific geographical area. Fees are collected from users by private firm which serve as a source of revenue for them. The most common type of franchising privatization is fibrenet services. Various utilities such as gas, water and electricity services also fall under this type of privatization category. 

Open Competition

Open competition is a form of privatization which is similar to pure competition. It is one where competition for attracting customers taking place among many private firms within a governmental jurisdiction. This type of privatization is more commonly seen in case of internet service providers and telephone services.   

Sale of shares

It is a method in which equity shares of public sector undertaking or company is sold via listing on stock exchanges. A full authority of organizational economic activities is relinquished by state via selling off share publicly. 

Lease with a right to purchase

Here, only the possession and usage of government-run entities are assumed by private company by meeting certain criteria. An option is available later on to private company for converting the property lease to ownership by paying a specific sum and meeting certain speculations. 

Contracting out

Contracting out means a contract is done under which private firms are given the responsibility of producing designated services. The government directly pays for the services produced by these private entities. Collection of taxes and user fees serve as a source for financing these services by government. Most common examples of this type of arrangement involves collection and disposal of solid waste, data processing services and security services. 

Importance of Privatisation

Increasing Competition

The entry of foreign firms in the industry has increased the competitiveness of the market for Indian firms, especially in service industries like telecommunications, Airlines, Banking, Insurance, Etc. which were earlier in the public sector.

More Demanding Customers

Today Customers are more demanding because they are well-informed. The increase of competition in the market gives the customers wider choice in purchasing the better quality of products and services.

Improved Efficiency

Due to the profit incentive. Private companies will ensure they improve their operational efficiency in order to reduce their costs and improve profits.

Necessity for Change

The market forces have become turbulent as a result of which the enterprises have to continuously modify their operations.

Need for Developing Human Resources

The Market requires people with higher competence and greater commitment. Privatization helps to improve the human resources of the host country because when investor invest money it improves employees quality that makes human resources more systematic.

Lack of political interference

Privatization reduces the government’s political interference. Privatization helps to reduce interference of the government and give the power to the investors to do the best possible ways to improve the quality and quantity of work.