Difference Between Privatization and Disinvestment

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9 years ago

Privatization vs Disinvestment

Though privatization and disinvestment are terms that are used interchangeably there is a difference between them with regard to the ownership. Disinvestment may or may not be an outcome of privatization. When it comes to defining the term privatization, it usually involves transforming the ownership of a public sector business to the private sector known as a strategic buyer. In disinvestment, the same transformation process happens while retaining 26% or in some contexts 51% percent of share right (i.e. the voting power) with the public sector organization. The rest is transferred to the desired partner. In this 26% of holding of the voting stake, all the vital decisions remain with the public sector organization.

What is Privatization?

As a definition, privatizations means transforming the stake of a public sector organization to a strategic partner, usually a private sector organization. For example, during the 1980s and 1990s many UK government organizations were privatized. Such as British Airways, gas companies, electric companies, etc. Theoretically, there are potential advantages and disadvantages in privatization. Benefits in terms of efficiency is highlighted as an advantage. The prime argument on this advantage is private companies seeks for cost cutting and efficiency procedures and thus efficiency improvements are anticipated. It is said that, companies such as British Airways and BT has benefited from improved efficiency after privatization. Secondly, the low involvement of political interference is highlighted. The general understanding is that, government managers make poor decisions because they work under political pressure. But once privatized that pressure does not exist and thus effective decision are anticipated. Thirdly, in terms of view, comparatively governments have short term views provided the election pressures, etc. As a result, the unwillingness to invest in valuable infrastructure is seen. Fourthly, in privatization, benefits are expected in the view of the stakeholders. Once privatized, shareholders are direct stakeholders, who push the company, and thus effectiveness is expected. Moreover, increased competition levels can also observed as a benefit. Once privatized, competition is increased provided the high number of relative competitors. To gain advantages over the other competitors, privatized company is required to implement competitive strategies to secure its competitive position and thus effective work procedures are expected.

Provided the advantages, disadvantages of privatization can also be seen. Importantly, disadvantages in relation to the public image are seen. Once a public organization is privatized, public image in relation to the privatized company is reduced because the public assumes that the entity is privatized due to lack of management, profitability, etc. Also, fragmentations of relative industries and creation of monopolies are also seen as disadvantages.

In Privatization, the full ownership goes to the private sector

What is Disinvestment?

Regardless of the ownership (i.e. public or private), each firm comprehend the value of expansion. Simply, growing is expected by almost all the companies in the globe. In disinvestment, the same transformation process happens like in privatization while retaining 26% or, in some contexts, 51% percent of share right (i.e. the voting power) with the public sector organization. The rest is transferred to the desired partner. In this 26% or 51% of holding of the voting stake, all the vital decisions remain with the public sector organization. Same as privatization, disinvestment as well comprises of advantages and disadvantages. Comparatively high inflow of private capital, capacity enhancements in entering into new markets and increased competition are seen as advantages of this strategy. In relation to disadvantages, loosing of the public interest, fear for foreign controlling power, problems in relation to employees are seen as disadvantages of disinvestment.

In Disinvestment, ownership is with both public and private

What is the difference between Privatization and Disinvestment?

• Definitions of Privatization and Disinvestment:

• Privatization involves transforming the ownership of a public sector business to the private sector known as strategic buyer.

• Disinvestment is also a transformation process that happens while retaining 26% or, in some contexts, 51% percent of share right (i.e. the voting power) with the public sector organization. The rest is transferred to the desired partner.

• Ownership:

• In privatization, full ownership is transferred to the strategic partner.

• In disinvestment, usually, 26% or 51% of share is retained with the government company, and the rest is transferred to the strategic partner.

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