Difference Between Privatization and Disinvestment

Disinvestment is just the opposite of investment, i.e. it means pulling out the money invested in the company by selling the stake, either partially or fully. It is driven by the effective use of the resources, to earn the highest returns out of the money invested.

On the contrary, Privatization is a transition of government-owned company, operation, unit or division to the privately-owned enterprise. It happens when more than 51% of the shareholding of the government is transferred to private hands.

The development of a nation is highly dependent on the growth of the industrial sector and its growth. Privatization of various sectors is in vogue since the last few decades, as it is believed that there is a tough competition in the private sector, which brings in better offerings at reasonable prices and less corruption.

Content: Privatization Vs Disinvestment

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion

Comparison Chart

Basis for Comparison	Privatization	Disinvestment
Meaning	Privatization is the process of transfer of ownership of a public sector undertaking to the private sector.	Disinvestment is a process in which an organization or government sells or liquidates the assets which it owns.
Involves	Change in ownership	Dilution of ownership
Shareholding of Government	More than 50%	Less than 50%
Change in management	Results in a change in management	May or may not result in a change in management
Scope	Narrow	Comparatively wide
Objective	To provide financial support and to enhance the efficiency of the concern.	To make effective use of the public resource, and to increase operational and dynamic efficiency.

Definition of Privatization

In simple words, Privatization implies the complete or partial sale of government’s equity in a state-owned undertaking, to the private sector.

Privatization can take place in two ways, i.e. either by selling government-owned shares in an undertaking or lifting the restrictions that block private individuals and firms to take part in a particular industry. It also includes contracting out services provided by the public sector with private contractors.

When there is a transfer of ownership, control and management, from the public sector to the private sector, specifically due to the sale of assets, it is called Privatization. When the transfer becomes effective, the government ceases to be the owner of such an undertaking. This change has a great impact on government revenue, which can be positive or negative.

Forms of Privatization

There are eight ways in which privatization can take place, namely:

1. Contracting out
2. Liberalization or Deregulation
3. Management Privatization
4. Load shedding
5. Sale of assets to the private sector
6. Private payment
7. Voucher
8. Subsidies

How to Privatize?

The benefits of privatization can be visible only when it is implemented with proper planning and cooperation. There are three points which should be considered while effectuating it.

• Creation of Conducive Environment: Development of an appropriate environment by carrying out other reforms, which were designed to promote competition and growth.
• Streamlining of the process: Develop a powerful, inclined, centralized and transparent process, by establishing a small yet significant goal to privatize, while maintaining its fairness.
• Prepare the enterprise/industry for privatization: Preparing the enterprise for privatization involves a series of steps, beginning with proper planning. Thereafter, making required changes to assure that it is implemented to improve efficiency while overcoming with the negative outcomes, caused by it.

Definition of Disinvestment

Disinvestment refers to a strategy of selling off or liquidating some assets like plant, division, subsidiary, unit, etc, owned by the government or the organization. The strategy is adopted to reduce the losses incurred from non-performing assets, pulling out investment in a specific industry or sector, or to raise funds.

The strategy is commonly used by the government, by selling the shares of a Public Sector Enterprise (PSE) in which the government (centre or state) owns a majority stake, so as to raise funds. The proceeds received from selling the stake can be used in productive areas.

The shareholding of government in a public sector undertaking represents the investments at the disposal of the government and so when these shares are sold for cash, it means the investment is converted into cash called as disinvestment. The degree of disinvestment depends on the disinvestment policy of the government.

Conclusion

Privatization and disinvestment are undertaken with the aim of improving the efficiency of the enterprise. However, these are highly criticized, due to political reasons and become a matter of debate these days.