Difference between Privatization and Divestment

Difference between Privatization and Disinvestment

Privatization is the transition from a government-owned company, operation, unit or division to a privately owned company. This occurs when more than 51% of government share ownership is transferred to private hands. Whereas Divestment is the opposite of investment, which means pulling out the money invested in a company by selling shares either partially or completely. It is driven by the effective use of resources to get the highest return on the money invested.

Privatization is the process of transferring ownership from the public sector to the private sector. Divestment is the process by which an organization or government sells or liquidates the assets it owns.

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 fierce competition in the private sector which brings better deals at fair prices and less corruption.

Definition of Privatization

In simple words, Privatization implies the sale of government equity in whole or in part in state-owned enterprises, to the private sector.

Privatization can occur in two ways, namely by selling government-owned shares in a business or creating restrictions that prevent private individuals and companies from taking part in certain industries. It also includes contracting 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 is no longer the owner of such a venture. These changes have a major impact on government revenues, which can be positive or negative.

There are eight ways that privatization can occur, namely:

  1. rent out
  2. Liberalization or Deregulation
  3. Management Privatization
  4. Loading shedding
  5. Sale of assets to the private sector
  6. Private payment
  7. Vouchers
  8. Subsidy

How to privatize?

The benefits of privatization can only be seen if it is implemented with proper planning and cooperation. Exist three points which should be considered when running it.

  • Creating an Enabling Environment: Development of the right environment by carrying out other reforms, designed to promote competition and growth.
  • Streamlining the process: Develop a strong, inclined, centralized and transparent process, setting small but significant goals for privatization, while maintaining its fairness.
  • Preparing companies/industry for privatization: Preparing a company for privatization involves a series of steps starting with proper planning. After that, make the necessary changes to ensure that it is implemented to increase efficiency while overcoming the negative results caused by it.

Definition of Divestment

Divestment refers to the strategy of selling or liquidating some assets such as factories, divisions, subsidiaries, units, etc., which are owned by a government or organization. This strategy is adopted to reduce losses arising from idle assets, attract investment in a particular industry or sector, or to raise funds.

This strategy is usually used by the government by selling shares of Public Sector Companies (PSE) in which the government (central or state) has a majority stake, so that it can raise funds. The proceeds received from sales can be used in productive areas.

Government shareholdings in public sector ventures represent government owned investments and when these shares are sold for cash it means the investment is converted into cash which is referred to as Divestment. The rate of Divestment depends on the Disinvestment policy of the government.

Difference Between Privatization and Divestment

  • When more than 51% of the shares are sold by the government from the conducting public sector to private individuals or companies, this process is referred to as privatization. On the other hand, Divestment refers to the disposal of assets by a government or other organization leading to a change in ownership and control, influenced by financial, political or strategic reasons.
  • Privatization involves a change in ownership, whereas Divestment involves the dilution of ownership.
  • In the case of privatization, the government sells more than 50% of its shareholding, while in the case of divestiture the ownership of less than 50% is sold by the government.
  • Divestment refers to the dilution of the government’s shareholding in a public sector entity. However, if the dilution is less than 50%, the management of the company is kept by the government. However, when the share dilution exceeds 50%, there is a change in management along with ownership, which is practically called Privatization.
  • Privatization includes Divestment, but Divestment does not necessarily mean privatization, only when the share dilution is greater than 51%, then it is referred to as privatization.
  • The divestment aims to reduce the government’s fiscal burden due to the inefficiency of Public Sector Efforts. In addition, it also aims to provide financial assistance. On the other hand, privatization is encouraged to make the best use of state resources as well as to improve operational efficiency and dynamics of these concerns.

Red Thread | Privatization and divestment are carried out with the aim of increasing company efficiency. However, it has been heavily criticized, for political reasons and has been the subject of much debate lately.