Chapter 15 Summary of Modern Entrepreneur and Entrepreneurship

Privatization

Privatization is a process of transferring of ownership and/or management of an organization from public

sector to the private sector or withdrawal in fully or partially of State from economic sector.
The trend of privatization can be seen in various countries such us UK since 1970, Argentina, Bangladesh,
Brazil, Federal Republic of Germany, France, Italy, Japan, Mexico, Nigeria, Spain, Thailand Turkey and
also India that will be discussed more in this summary.
The reason why privatization comes up is an unsatisfaction of the performance of State-Owned Enterprises
(SOEs). For example, the net deficit of a sample of SOEs accounted for about 4 per cent of Niger's GDP in
1982. For the seven largest Latin American economies, the combined deficit of SOEs rose from about 1 per
cent of GNP in the mid-1970s, to about 4 per cent in 1980-82.
Professor Samuel Paul, former visiting professor at Harvard Business School and advisor to the World
Bank, indicated that the uncontrolled state expansion especially in economic sector, can led to:
a. Economic inefficiency in the production activities of the public sector, with high costs of
production, inability to innovate, and costly delays in delivery of the goods produced.
b. Ineffectiveness in the provision of goods and services, such as failure to meet intended objectives,
diversion of benefits to elite groups, and political interference in the management of enterprises.
c. Rapid expansion of the bureaucracy, severely straining the public budget, causing problems in
labour relations within the public sector, inefficiency in government, and adverse effects on the
whole economy
Three types of privatization method that already applied in many countries:
a. Divestiture or privatisation of ownership, through the sale of equity. In countries which has well
functional market, it can be applied through selling stock to public. Bangladesh, Chile, Jamaica,
Brazil, Peru, Zaire, Pakistan, the Philippines, Sudan, Japan, Korea and some western Europe
already applied this attempt.
b. Contracting, though contract out services that have planned and specified to other enterprises that
produce and deliver them, Contracting is common in public works, defence and many specialized
services. Where suppliers compete for contracts and where there is no loss of economies of scale,
contracting is efficient.
c. Leaving goods and services wholly or partly to the private sector.
When compared to industrial countries the progress of privatization in Least Developed Countries are
slower. A World bank reveals some obstacles of the privatization progress:
a. Governments usually want to sell the least profitable enterprises, those that the private sector is not
willing to buy at a price acceptable to the Government.
b. Divestiture tends to arouse some issues, like political opposition from employees who may lose
their jobs; from politicians who fear short-term unemployment consequences of liquidation or of
cost reduction by private owners.
c. Relatively undeveloped capital markets sometimes make it difficult for governments to float shares
and for individual buyers to finance large purchases.
In order to achieve a success privatization, Professor Samuel Paul points out seven condition must be met:
a. Privatization cannot be sustained unless the political leadership is committed to it, and unless it
reflects a shift in the preferences of the public arising out of dissatisfaction with the performance
of other alternatives.
b. Any alternative institutional arrangements chosen should not stifle competition among suppliers.
Replacement of a government monopoly by a private monopoly may not increase public welfare -
there must be a multiplicity of private suppliers.
c. Freedom of entry to provide goods and services.
d. Public services to be provided by the private sector must be specific or have a measurable outcome.
e. Consumers should be able to link the benefits they receive from a service to the costs they pay for
it.
f. Privately provided services should be less susceptible to fraud than government services if they are
to be effective.
g. Equity is an important consideration in the delivery of public services.

Village and small industries sector are one of the important factors to foster an effective privatisation. The
major advantages of these industries, taking example of Khadi and village industries in India, are:
a. High employment potential, they can provide employment in the off-season, vast scope of
employment on special categories like women, children or old men.
b. Location advantage, mostly within the household premises or near residence.
c. The capital output and capital-labour ratios are comparatively very low which can promote non-
inflationary growth.
d. These industries promote economizing of resource utilisation and conservation of resources.
e. These industries can develop in almost all areas including backward, tribal, hilly and inaccessible
areas.
f. They help increase the pace of rural development through the generation of additional employment
opportunities.
g. The small industries have acquired more attention in recent years due to the very less ecological
problems they create.
h. Do not cause energy crisis and foreign exchange crisis.
i. Significance contribution to the total export.
A number of measures have been taken by the India governments, central and state, to protect Village and
small industries sector from the onslaught of the large sector and to promote its growth:
a. Preference is given to the small-scale sector in government procurement.
b. Infrastructure and institutional supports are provided though industrial estates.
c. Arranges supply of machines on hire purchase to small-scale units.
d. Marketing assistance's including export promotion assistance are provided.
e. Financial assistance is provided at concessional terms by commercial banks, state level financial
institutions, and etc.
f. Training for existing and potential entrepreneurs and others associated with the working of the
small units are offered.
g. Arrangements have also been made for the supply of raw materials, particularly of scarce items, to
the small-scale units.
h. The Industrial policy also gives importance to ancillarisation.
Integration of small and large industries through ancillarisation is an important feature of industrial
development of countries like U.S.A and Japan. One benefit of ancillarisation is the realisation of
economies of scale. If the requirement of any item is less than the economic size of production, it stands to
gain by purchasing the item from an outside unit of economic size.
Ancillarisation and sub-contracting, however, have some problems also. The parts or components supplied
by these units may not sometimes be of satisfactory quality. The small units usually do not have the
resources for carrying out research and development. Hence, parent units will have to help them to update
technology and enforce strict quality control. Some of them also face financial and marketing problem.
Competition between small units can weaken their bargain position, while at the same time they possibly
have to compete with the large units.