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Essay On Bank Privatisation Pros And Cons {Step by Step Guide}

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Essay On Bank Privatisation

Introduction.

Privatization means selling Whole or Partially a Govt. Sector Company to Private Sector. Or in Other Words, Transferring Ownership to Private Sector. This Step Was also taken in 1991 in New Economic Reform to Reform India’s Economy.

Privatization is considered to bring efficiency and accuracy to a company. The market share of private banks on loans has risen to 36% by 2020 from 21.26% in 2015, while the share of public sector banks has dropped to 59.8% from 74.28%.

Competition has intensified after the RBI has allowed more independent banks since the 1990s. PSBs have higher NPAs than private sector banks. PSBs have underperformed in comparison to private banks.

PM Narendra Modi said that it is the responsibility of the government to give full support to the enterprise and business of the country. But the government itself should run the enterprise and remain its owner, in today’s era it is neither necessary nor is it possible.

The government’s focus should be on the projects related to people’s welfare and development. PM Narendra Modi also said that such a system has to be created in the country, in which there is no lack of government and there is the influence of the government.

Along with the investment, private sectors also bring top-quality manpower, management, as well as global best practices. And this makes things more modern, modernization takes place in the whole sector, the sector expands rapidly and new job opportunities are also created.

Therefore, by monetize and modernize we can increase the efficiency of the entire economy more.

Currently, the government is reportedly looking into the possibility of Punjab & Sind Bank, Maharashtra Bank, and the Indian Overseas Bank , which is currently not part of the existing consolidation program.

It is noteworthy that, there are twelve state-owned banks in India and this comes after a recent merger involving the merger of ten government lenders in four banks. The government wanted the merger of the banks so that they could increase their competition.

Niti Aayog reportedly suggested that the government provide a green flag for “long-term private capital” in the banking sector. Also, it is recommended to provide banking licenses to a few who have built industrial houses with clear instructions that they do not lend to group companies.

According to the Reserve Bank of India’s (RBI) policy on universal banking licenses, large industrial houses are allowed to enter 10 percent but are not eligible as “eligible entities” facilities for operating banks.

The ownership and management of state-owned banks are regulated by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.

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Why Banks Privatise and What Will Be Its Impact

Improving the Efficiency and Performance of Public Sector Banks (PSBs) is a key element of India’s economic transformation. It is believed to help improve performance and performance.

India is the Largest Country in Southeast Asia with a Large Financial System represented by many financial institutions. India’s financial sector was well developed even before the country’s political independence in 1947.

Bank Privatisation Pros And Cons

How to privatise banks.

Public companies can be converted into private companies in two ways:

One option is to sell a controlling stake to a private entity in India.
The second option for the government is to let its equity States in public sector banks drop below 50%.

Conclusion (Essay On Bank Privatisation)

Any large-scale privatization of public sector banks appears to be fraught with problems. and In the medium term, the best solution is improving governance at public sector banks.

Good, timely as transparent appointments are required at PSBs. Adequate tenure is required to give to chief executive officers. Good quality independent directors are required on PSB boards.

The government is required to play as a regulator rather than the director of the bank. And nudge the PSB management through government nominees rather than through the department of financial services.

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Essay on Privatisation of Banks

Students are often asked to write an essay on Privatisation of Banks in their schools and colleges. And if you’re also looking for the same, we have created 100-word, 250-word, and 500-word essays on the topic.

Let’s take a look…

100 Words Essay on Privatisation of Banks

Introduction.

Privatisation of banks refers to the transfer of ownership from the public sector to private entities. This process is believed to enhance efficiency and competitiveness in the banking sector.

Benefits of Privatisation

Privatisation can lead to improved services, as private banks generally focus on customer satisfaction. It can also result in increased competition, leading to better products and services.

Drawbacks of Privatisation

However, privatisation can also lead to job losses, as private banks may prioritise cost-cutting. Furthermore, there may be less focus on social responsibilities, as profit becomes the primary goal.

Thus, while privatisation of banks has its benefits, it also has potential drawbacks. It’s important to carefully consider these factors before implementing such changes.

250 Words Essay on Privatisation of Banks

Privatisation of banks refers to the transfer of ownership and control of banking institutions from the public sector to the private sector. This shift has been a major topic of debate globally, with various countries adopting different approaches based on their unique economic and political contexts.

The Rationale Behind Privatisation

The primary argument for privatisation is efficiency. Private sector banks, driven by profit motive, are believed to operate more efficiently, providing better customer service and innovative financial products. Furthermore, privatisation can reduce fiscal burden on the government, allowing it to focus on other areas like infrastructure and social welfare.

Concerns Over Privatisation

However, privatisation is not without concerns. The most significant is the potential for financial exclusion of the underprivileged, as private banks might prioritize profit over social responsibility. Moreover, there are worries about job security for employees and the possibility of a monopolistic market.

The Balanced Approach

A balanced approach could involve maintaining a mix of public and private banks, ensuring competition and safeguarding public interest. This necessitates strong regulatory frameworks to prevent malpractices and ensure accountability.

In conclusion, privatisation of banks is a complex issue with potential benefits and drawbacks. It requires careful consideration of economic, social, and political factors. The ideal banking landscape might be a blend of public and private entities, working under robust regulatory oversight to serve the nation’s financial needs efficiently and responsibly.

500 Words Essay on Privatisation of Banks

Privatisation of banks represents a significant shift in the financial sector, transitioning from public to private ownership. This process has been a topic of debate globally, with arguments both in favour and against it. The subject requires an in-depth understanding of the potential benefits and drawbacks.

Understanding Privatisation

Privatisation is the process where government-owned assets or services are transferred to the private sector. The primary goal is to increase efficiency, promote competition, and reduce public sector burdens. In the context of banks, privatisation can mean selling state-owned banks or reducing the state’s stake in them.

The Case for Privatisation

Proponents of privatisation argue that it can lead to improved efficiency and service quality. Private banks are driven by profit motives and are, therefore, likely to be more efficient in their operations. They are also more inclined to innovate and adopt technology, leading to better customer service.

Privatisation reduces the financial burden on the state. Government-owned banks often require capital infusions to stay afloat, which is a drain on state resources. Privatisation can help alleviate this problem.

Concerns About Privatisation

Despite these potential benefits, privatisation of banks also raises several concerns. One significant concern is the potential for increased risk. Private banks, driven by profit, may engage in risky lending practices, which could lead to financial instability.

Another concern is the issue of social banking. Public sector banks often cater to the needs of rural areas and other sectors that may not be profitable. Privatisation could lead to a decrease in such services, affecting financial inclusion.

Global Experiences

Globally, experiences with bank privatisation have been mixed. In the UK, the privatisation of banks in the 1980s led to increased competition and improved services. However, the 2008 financial crisis raised questions about the stability of private banks.

In contrast, China has maintained a balance of both state-owned and private banks. This has allowed it to achieve financial stability while also promoting competition and innovation.

The privatisation of banks is a complex issue with potential benefits and drawbacks. It could lead to increased efficiency, better services, and reduced state financial burdens. However, it could also increase financial risk and reduce services to less profitable sectors.

The decision to privatise banks should, therefore, be made with careful consideration of these factors. It may be beneficial to adopt a balanced approach, maintaining a mix of both public and private banks, as seen in countries like China. This could help achieve the benefits of privatisation while mitigating the potential drawbacks. Ultimately, the goal should be to create a banking sector that serves the needs of all sectors of society.

That’s it! I hope the essay helped you.

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Privatization of Banks: Benefits and Concerns – Explained, pointwise

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1 Introduction
2 About the Ownership Trend in Banking Sector in India
3 What have been the benefits of nationalization of banks?
4 What are the arguments in favour of Privatization of Banks (NCAER Report)?
5 What are the challenges in Privatization of Banks?
6.1 Recommendations of the NCAER report
6.2 Recommendations of PJ Nayak Committee
6.3 Recommendations of Narashimham committee
6.4 Other Measures
7 Conclusion

Introduction

A report by National Council of Applied Economic Research (NCAER) has recommended that the Union Government should privatize all Public Sector Banks (PSBs), except the State Bank of India (SBI). The Report further states that the Government ownership hinders the ability of the RBI to regulate the sector. The recommendation of complete privatization of banks has led to sharp reactions from the critics. According to them complete exit of the Government will give rise to systemic risks in the financial sector. The Union Government is aggressively pursuing the exercise of disinvestment. For the ongoing fiscal year FY22, the Government has set a disinvestment target of Rs 1.75 lakh crore. The plan includes privatization of two public sector banks, public listing of the Life Insurance Corporation of India, Shipping Corporation of India, and many other PSUs.

About the Ownership Trend in Banking Sector in India

After the formation of Reserve Bank of India in 1935, to the period till Independence (1947), there were 900 bank failures in India. From 1947 to 1969, 665 banks failed. The depositors of all these banks lost their deposited money. T he Government nationalized 14 major banks in 1969. After this 36 banks failed but these were rescued by merging them with other government banks. This included even bigger banks like Global Trust Bank. 6 more banks were nationalized in 1980.

However, since the liberalization of the economy in 1991, the discourse on bank onwership has changed significantly. Guidelines for setting up private banks were established in 1993 and the ICICI Bank was set up in 1994. Since then the Private Banks have expanded their footprint.

Simultaneously, the approach of the Government has been to reduce its presence in the Banking Sector and reduce the number of Public Sector Banks. In 2019, after a massive consolidation exercise, the number of PSBs reduced from 28 to 12.

During the Union Budget 2020-21 presentation, the Government announced a new policy for strategic disinvestment of public sector enterprises. This policy provides a clear roadmap for disinvestment in all non-strategic and strategic sectors. The Banking Sector falls under the strategic sector. The Government announced privatisation of two PSBs as a part of its disinvestment plan.

What have been the benefits of nationalization of banks?

The nationalization of private banks in 1969 resulted in the penetration of banking sector in the rural areas of India. Private Banks were reluctant to open branches in rural India due to low profitability. However, nationalized banks followed the mandate of the Government and helped in financial inclusion.

Distribution of Bank Branches in India Privatization of Banks UPSC

The Share of Bank Branches in rural areas increased from <18% in 1969 to ~60% by 1990. This shift happened due to several initiatives by Public Sector Banks like the Lead Bank Scheme launched by the RBI in 1969.

Only after nationalization of banks could small borrowers get credit and there was a shift from class banking to mass banking .

Banks were used to bring about a revolution in agriculture and to carry out activities related to it.

Sectoral Allocation of Bank Credit Privatization of Banks UPSC

The Sectoral allocation of Bank Credit underwent a change after nationalization of banks. The Share of Agriculture improved from 2.2% in 1968 to 16% in 1989. The share of credit to Industry decreased from 67.5% in 1968 to 37.5% in 1989. This shift happened due to expansion of rural branches and Priority Sector Lending norms.

The proliferation of branches created job opportunities for large section of educated youth. It also benefitted local rural economies.

There was an increased public confidence in the banking system . The growth rate of saving bank deposits witnessed a rapid rise post 1969.

42 crore ordinary people have opened bank accounts as a result of the immense contribution of state-owned banks in opening Jan Dhan Yojana accounts .

What are the arguments in favour of Privatization of Banks (NCAER Report)?

First , private banks have emerged as a credible alternative to PSBs with substantial market share. PSBs have lost ground to private banks, both in terms of deposits and advances of loans. Since 2014-15, almost the entire growth of the banking sector is attributable to the private banks and the SBI.

Second , Government ownership hinders the ability of the Reserve Bank of India (RBI) to regulate the sector.

At present PSBs are under the dual control of the RBI and the Department of Financial Services of the Ministry of Finance. The RBI handles the governance side of the PSBs under the RBI Act, 1934 . The Department of Financial Services maintains the regulation of PSBs under the Banking Regulation Act, 1949. Thus, RBI does not have the powers to revoke a banking license, shut down a bank, or penalize the board of directors for their faults. Privatization will provide the powers to RBI to control them effectively.

Third , barring SBI, most other PSBs have lagged behind private banks in all the major indicators of performance during the last decade. These PSBs have attained lower returns on assets and equity than their private sector counterparts. The non-performing assets (NPA) of PSBs remain elevated as compared to private banks even as the government infused US$ 65.67 billion into PSBs between 2010-11 and 2020-21 to help them tide over the bad loan crisis.

The market valuation of PSBs, excluding SBI, remains ‘hugely’ below the funds infused in such banks as of May 31, 2022.

Fourth , the under-performance of PSBs has persisted despite a number of policy initiatives aimed at bolstering their performance during this period. These initiatives include: (a) Recapitalisation of PSUs; (b) Constitution of the Bank Board Bureau to streamline and professionalize hiring and governance practices; (c) Prompt corrective action plans ; (d) Consolidation through mergers .

Fifth , the steady erosion in the relative market value of PSBs is indicative of a lack of trust among private investors in the ability of PSBs to meaningfully improve their performance.

Sixth , the current fiscal position of the Union Government is not strong enough to provide huge sums for recapitalization and keep on sustaining sick PSBs.

Seventh , the privatization of banks will have a positive impact on the economy by bringing stability at the macroeconomic level. Privatization of a few loss-making PSBs will ensure that market discipline forces them to rectify their strategy, and this will have a ripple effect on other PSBs.

The pandemic has led to the severe decline in the economic curve of the nation and has made a negative impact on banks as a whole, which makes it imperative to take all possible steps to revive the banking sector.

Methods to Undertake Privatization of Banks UPSC

What are the challenges in Privatization of Banks?

First , as per the stated policy of the Reserve Bank of India, banks cannot be run by industrial houses . However, excluding the industrial houses, there are no entities that have the required financial capability to take over any of the government banks.

Second , private banks have a long history of failures, as noted above (>1500 banks failed between 1935-1969). Recently, the RBI had to come to the rescue of Lakshmi Vilas Bank and YES Bank by pumping of capital by other entities to save these banks. Bank failures and lack of Government intervention will increase the risk in the banking system.

Third , Banks owned by the sovereign government provide more comfort level to depositors . Expansion of private sector in banking will reduce consumer confidence in the sector.

Fourth , Private banks operate with the sole aim of adding shareholder value . In contrast, the government banks also try to serve society and ensure implementation of all government programmes for the social sector. Privatization might have a negative impact on financial inclusion, agriculture credit etc.

Fifth , bank workers are opposed to privatization . as they fear loss of jobs.

What should be the approach going ahead?

Recommendations of the ncaer report.

The two banks chosen for privatization must be the ones with the highest returns on assets and equity, and the lowest NPAs in the last five years. It has recommended Indian Bank and Bank of Baroda as the two top choices for privatization. This would set an example for the success of future privatizations.

It also makes a case for corporate ownership in banks with due diligence as there is “scarcity” of potential large-scale investors in banks. The government must allow foreign investors, including foreign banks and domestic investors, as well as corporate houses to enter the auctions with due diligence

Any potential risk may be minimized by letting a consortium of corporations enter the bidding with the stake of any single corporation capped.

Recommendations of PJ Nayak Committee

Though the Government approved the Bank Board Bureau, the government has to provide enough support for proper functioning. The government can split the Chairman and Managing Director roles. Further, they should be allowed a fixed tenure of 3-5 years.

Recommendations of Narashimham committee

The Government can explore the concept of Narrow Banking. Under this weak PSBs will be allowed to place their funds only in the short term and risk-free assets. This will improve the performance of PSBs.

Other Measures

The Government must create strong recovery laws and take criminal action against wilful defaulters. The challenges in the Insolvency and Bankruptcy Code (IBC) must be addressed. This will provide a faster resolution process. In the meantime, the Government can explore alternate steps such as the concept of Bad Banks.

Privatizing all the PSBs and complete exit of the Government might have significant negative consequences. The Government must find ways to strengthen the governance of banking system and ensure safety of depositors’ money. Complete exit may not be an option, for now.

Source: Business Standard , The Hindu BusinessLine , Outlook , CNBC

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Privatization of Banks: Opportunities and Challenges

In 1969, 14 banks were nationalised and in 1980, another 14. The goal was to expand financial services and boost economic growth, but it was already failing. Private banks emerged after reforms of 1991.

12 public sector banks and 21 private sector banks control 70% of the market. The Union Budget 2021-22 aimed at privatizing two public sector banks.

Opportunities

Effective Regula tions - Government ownership makes it difficult for RBI to regulate the sector, according to NCAER.
Credit growth - According to economic survey 2020, PSB credit growth has declined since 2013 while new private banks had significant credit growth (between 15 percent and 29 percent).
Complacency followed by recapitalization - Government controls all PSB operations. This implies bank liability bailout.
The ex-government recapitalized PSBs with 3.1 lakh crore capital infusion over five years, burdening the state exchequer.
Decreased risk Appetite - PSB officers are subjected to scrutiny by CVC and CAG making them wary of taking risks
Strengthening banks –Effective management through private sector participation would create big banks as economic survey suggests India should have at least 6 banks in global top 100 based on its size.
To deal with banking frauds – PSBs commit 92.9 percent of corporate lending fraud due to poor screening and monitoring.
Effective management of NPAs – India's banking system's NPAs were 80% PSBs in 2019. 14.6% of loans are gross NPAs.
More market value - Private banks fetch five times as much value as that of a rupee invested in PSBs.
Against financial inclusion objectives - Under PM JDY-as of July 2022, more than 45cr beneficiaries have been covered and 78% of these accounts were in PSBs
Resilience – Indian PSBs were more resilient during the 2008 subprime lending crisis and have also fared well during the Covid crisis.
Unemployment - Uncertainty in employment prospects of the already employed in PSBs, fear of possible retrenchment might lead to protest from the labour unions.
Socialistic objectives - PSBs' ATMs in rural areas are twice as many as private banks.
Labour cost efficiency - PSBs produced more with less labour, according to RBI's recent report.
Public sector banks played a major role in boosting public confidence due to government guarantees.
Long history of failures in private banks - EX - RBI had to rescue YES bank by pumping capital by other entities to save the bank.

Way Forward

NCAER suggested that the banks chosen for privatization must be the ones with the highest returns on assets and equity and the lowest NPAs in the last 5 yrs.
Research paper by RB I suggested for a more gradual approach towards privatization instead of full exit
Economic surve y suggested that the efficient of the PSBs could be increased by adopting fintech technology across all banking functions and employee stock ownership across all levels.
P J Nayak committee recommended that government must reduce its stake in PSBs to less than 50%, establishment of bank investment company to run PSBs.
Effective usage of data analytics like geo tagging of collateralized assets, connecting lenders all across the banking system through legal identifier system.
Using credit analytics for prevention of large proportion of NPAs.
Economic survey suggested for creating a PSB network on line with GSTN for recognizing credit patterns, screening the corporate for fresh loans etc.

Initiatives taken for banking sector reforms-

Conclusion

According to RBI's report, privatisation isn't a cure-all, so a more nuanced approach to bank privatisation is needed to promote economic growth and welfare.

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Privatisation of Banks

February 11, 2021

UPSC Articles

ECONOMY/ GOVERNANCE

Topic: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment; Government Budgeting GS-3: Government Budgeting

Context : In the Union Budget for 2021-22 , the government has announced taking up the privatisation of two public sector banks (in addition to IDBI Bank) and one general insurance company in the upcoming fiscal.

Laying down a clear policy roadmap for disinvestment, the government has identified four strategic sectors in which it will have bare minimum presence.

Atomic energy,space and defence;
Transport and telecommunications;
Power, petroleum, coal and other minerals;
Banking, insurance and financial services.

All CPSEs in other sectors will be privatised.

Do You Know?

PSU banks are under dual control, with the RBI supervising the banking operations and the Finance Ministry handling ownership issues.
Many committees had proposed bringing down the government stake in public banks below 51% — the Narasimham Committee proposed 33% and the P J Nayak Committee suggested below 50%.

Which are the two PSBs that will be Privatised?

Currently, there are ten nationalised banks in addition to IDBI Bank and SBI.
While the government is unlikely to touch the top three including SBI, smaller and middle-level banks are likely to be privatised.
Government has not disclosed which two banks will be privatised this fiscal.
The two banks that will now be privatised will be selected through a process in which NITI Aayog will make recommendations, which will be considered by a core group of secretaries on disinvestment and then the Alternative Mechanism (or Group of Ministers).

Reasons for Privatising Public Sector Banks

Previous reform measures have not yielded results : Years of capital injections and governance reforms have not been able to improve the financial position of in public sector banks significantly. Many of them have higher levels of stressed assets than private banks, and also lag the latter on profitability, market capitalisation and dividend payment record.
Aligned with Long Term Goal : Privatisation of two public sector banks will set the ball rolling for a long-term project that envisages only a handful of state-owned banks, with the rest either consolidated with strong banks or privatised.
Reduces Government Burden: Privatisation will free up the government, the majority owner, from continuing to provide equity support to the banks year after year. The government front-loaded Rs 70,000 crore into government-run banks in September 2019, Rs 80,000 crore in in FY18, and Rs 1.06 lakh crore in FY19 through recapitalisation bonds.
Rationalisation of Banks in Post-COVID Scenario : After the Covid-related regulatory relaxations are lifted, banks are expected to report higher NPAs and loan losses. This would mean the government would again need to inject equity into weak public sector banks. The government is trying to strengthen the strong banks and also minimise their numbers through privatisation.
Changed Approach to Financial Sector Problems : Privatisation and proposal of setting up an asset reconstruction company entirely owned by banks, underline an approach of finding market-led solutions to challenges in the financial sector.
Private Participation promotes innovation in market : Private banks’ market share in loans has risen to 36% in 2020 from 21.26% in 2015, while public sector banks’ share has fallen to 59.8% from 74.28%. They have expanded the market share through new innovative products, latest technology, and better services.

What are the challenges associated with increasing Privatisation of Banks?

Private banks are not without faults
In the last couple of years, some questions have arisen over the performance of private banks, especially on governance issues.
ICICI Bank MD and CEO Chanda Kochhar was sacked for allegedly extending dubious loans.
Yes Bank CEO Rana Kapoor was not given extension by the RBI and now faces investigations by various agencies.
Lakshmi Vilas Bank faced operational issues and was recently merged with DBS Bank of Singapore.
Former Axis Bank MD Shikha Sharma too was denied an extension.
Moreover, when the RBI ordered an asset quality review of banks in 2015, many private sector banks, including Yes Bank, were found under-reporting NPAs.
Dangers of private banks repeating the mistakes of 1960s
There is widespread perception that the private sector then was not sufficiently aware of its larger social responsibilities and was more concerned with profit.
This made private banks unwilling to diversify their loan portfolios as this would raise transaction costs and reduce profits.
The expansion of branches was mostly in urban areas, and rural and semi-urban areas continued to go unserved

The initial plan of the government was to privatise four. Depending on the success with the first two, the government is likely to go for divestment in another two or three banks in the next financial year.

Connecting the dots:

Corporates as Banks: Click here

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Privatization of Public Sector Banks in India: Why, How and How Far

Banks play a critical role in economic growth. In India, the banking sector, dominated by public sector banks (PSBs), has underserved the economy and their stakeholders. The under-performance of PSBs has persisted despite several policy initiatives during the past decade. Meanwhile, private banks have further improved their performance and have gained significant market share. In this paper, we have made the case for privatization of PSBs. Due to its better performance and adhering to the development view of the PSBs, we propose that the State Bank of India (SBI) may remain under government ownership for now, but all other banks should be privatized. In order for them to set an example for the success of future privatizations, the first two banks for privatization should be the ones with better asset quality and higher returns. The most critical element for privatization to succeed would be the withdrawal of the government from the post-privatization board of the bank. The paper proposes a couple of different pathways to successfully transition the sector toward private ownership. It cautions that the status quo will result in further erosion of the market share of PSBs toward oblivion, while impeding India’s economic growth and inflicting substantial costs onto the depositors, firms, taxpayers and the government as their majority owner in the interim.

Researchers

288Privatization of Public Sector Banks in India: Why, How and How Far

Poonam Gupta is the Director General of National Council of Applied Economic Research (NCAER), India’s largest economic policy think tank, and a member of the Economic Advisory Council to the Prime Minister. Gupta is the founding Director of NCAER’s National Macro and Growth Centre, and editor of its two journals: Margin and Indian Policy Forum. She joined NCAER ... Read More

1364Privatization of Public Sector Banks in India: Why, How and How Far

Arvind Panagariya is Professor of Economics and the Jagdish Bhagwati Professor of Indian Political Economy in the School of International and Public Affairs at Columbia University. From January 2015 to August 2017, he served as the first Vice Chairman of the NITI Aayog, Government of India in the rank of a Cabinet Minister. He simultaneously ... Read More

Poonam Gupta

Arvind panagariya, ncaer project team:.

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Article Contents

Privatization trends: stylized facts, the effects of privatization: efficiency and firm performance, privatization process: distributional impacts, policy implications, concluding comments.

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Privatization in Developing Countries: What Are the Lessons of Recent Experience?

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Saul Estrin, Adeline Pelletier, Privatization in Developing Countries: What Are the Lessons of Recent Experience?, The World Bank Research Observer , Volume 33, Issue 1, February 2018, Pages 65–102, https://doi.org/10.1093/wbro/lkx007

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This paper reviews the recent empirical evidence on privatization in developing countries, with particular emphasis on new areas of research such as the distributional impacts of privatization. Overall, the literature now reflects a more cautious and nuanced evaluation of privatization. Thus, private ownership alone is no longer argued to automatically generate economic gains in developing economies; pre-conditions (especially the regulatory infrastructure) and an appropriate process of privatization are important for attaining a positive impact. These comprise a list which is often challenging in developing countries: well-designed and sequenced reforms; the implementation of complementary policies; the creation of regulatory capacity; attention to poverty and social impacts; and strong public communication. Even so, the studies do identify the scope for efficiency-enhancing privatization that also promotes equity in developing countries.

There is a large body of literature about the economic effects of privatization. However, since it was mainly written in the 1990s, there was typically limited emphasis on issues which have come to the fore more recently, as well as more recent developments in the evidence about privatization itself, much of it from developing economies. This motivated us to write this paper, which summarizes the evidence about the impact of recent privatizations, not only in terms of firms’ efficiency but also with regard to the effects on income distribution. In addition, we are particularly attentive to the process of privatization in developing countries, notably with respect to the regulatory apparatus enabling successful privatization experiences.

When governments divested state-owned enterprises in developed economies, especially in the 1980s and 1990s, their objectives were usually to enhance economic efficiency by improving firm performance, to decrease government intervention and increase its revenue, and to introduce competition in monopolized sectors ( Vickers and Yarrow 1988 ). Much of the earlier evidence about the economic impact of privatization concerned these topics and was based on data from developed countries and later, transition countries. These findings have been brought together in two previous surveys, by Megginson and Netter (2001) and Estrin et al. (2009) respectively. The former assesses the findings of empirical research on the effects of privatization up to 2000, mainly from developed and middle-income countries, while the latter concentrates on transition economies including China, over the 1989 to 2006 period. 1 However, the experiences from the wave of privatizations that have occurred in developing countries before and since these studies warrant a new examination of the impact of privatization in the context of the development process.

The tone of the privatization debate has evolved in recent years in international financial institutions as privatization activity has shifted towards developing economies, and as a consequence of the difficulties of implementation and some privatization failures in the 1980s and 1990s ( Jomo 2008 ). As a result, more emphasis in policy-making is now being placed on creating the preconditions for successful privatization. Thus, in place of a simple pro-privatization bias characteristic of the Washington consensus ( Boycko, Shleifer, and Vishny 1995 ), it is now proposed that governments should first provide a better regulatory and institutional framework, including a well-functioning capital market and the protection of consumer and employee rights. In other words, context matters: ownership reforms should be tailor-made for the national economic circumstances, with strategies for privatization being adapted to local conditions. The traditional privatization objective of improving the efficiency of public enterprises also remains a major goal in developing countries, as does reducing the subsidies to state-owned enterprises (SOEs).

This article therefore reviews the recent evidence on privatization, with an emphasis on developing countries. The first section presents some stylized facts. The next section examines the effects of privatization in terms of firms’ efficiency and performance. In the following section, we go on to examine the distributional impacts of privatization. Policy recommendations are developed in the final section.

Privatization Trends Since the Late 1980s

The data on privatization prior to 2008 (with a regional breakdown) is sourced from the World Bank Privatization database but unfortunately this was discontinued in 2008 and no consolidated data is available after that date. Since we have not been able to find disaggregated data post-2008, we therefore present world aggregates, based on the Privatization Barometer database.

The early literature focused on developed economies and Western Europe represented roughly one-third of global privatization proceeds over the period 1977 to 2002 ( Roland 2008 ). Even so, many of these deals only concerned minority stakes of SOEs ( Bortolotti and Milella 2008 ). There were also spectacular numbers of privatizations during the transition process after 1990 in Central and Eastern Europe, with proceeds totaling $240 billion to 2008, in addition to widespread free or subsidized allocation of shares in former SOEs ( Estrin et al. 2009 ). The revenues from privatization have been more limited in Africa, the Middle East and South Asia, with total proceeds below $50 billion for each (see figure 1 ). 2 However, proceeds are on par with or above Europe once they are expressed as a percentage of GDP.

Value of privatisation transactions in developing countries by region, 1988 to 2008

Source: World Bank, Privatization database. Note: comparable data not available after 2008.

For the rest of Asia, the picture is rather different. While South Asia has experienced only a limited number of privatizations (especially India), this was not the case in East Asia, where total privatization proceeds represented 30% of the world's total ($230 billion) over the 1988 to 2008 period. China, in particular, stands out. Over a 25-year period, the Chinese government has encouraged innovative forms of industrial ownership, especially at the subnational level, that combine elements of collective and private property ( Brandt and Rawski 2008 ). New private entry and foreign direct investment have also been encouraged. As a result, by the end of the 1990s, the non-state sector accounted for over 60% of GDP and state enterprises’ share in industrial output had declined from 78% in 1978 to 28% in 1999 ( Kikeri and Nellis 2004 ). The OECD estimated the state-owned share of GDP had further declined to 29.7% by 2006 ( Lee 2009 ).

Finally, in Latin America and especially in Chile, large-scale privatization programs have been launched, especially in the infrastructure sector, starting in 1974 in Chile and peaking in the 1990s. Between 1988 and 2008, the total privatization proceeds in Latin America amounted to $220 billion (28% of total world proceeds).

One needs to be cautious, however, when interpreting the raw data because of differences in the size of economies. The differences between the privatization experience of Africa, Asia, and Europe become less striking when proceeds are normalized by GDP, though privatization revenue to GDP is high in Latin America, representing, on average, 0.5% of GDP over the period.

Privatization Trends Since 2008

The five years to 2015 have been marked by the predominant role of China in global privatizations, while the EU's share has been below its long-term average of 45% of the world's total proceeds, running at only one-third of worldwide totals, on average. According to the Privatization Barometer (PB) Report 2013–2014, global privatization total proceeds exceeded $1.1 trillion from January 2009 to November 2014, with $544 billion of divested assets between January 2012 and November 2014. 3

In addition, the 20-month period beginning in January 2014 witnessed privatizations totaling $431.4 billion ( PB report 2015 ). This is far more than any comparable period since the beginning of the privatization programs in the U.K. in the late 1970s (see figure 2 ), though as noted below, a significant part of this was driven by the unwinding of positions taken in banks by governments during the financial crisis.

Worldwide Privatization Revenues 1988 to 2015 (billions of USD)

Note: 2015 is an estimate as August 30, 2015. Source: Privatization Barometer Available at: http://www.privatizationbarometer.com/ .

Indian Revenues from Privatization

Source: World Bank Privatization database.

China has consistently been one of the top privatizers from 2009 to 2015; it was the second-largest privatizer in 2009 and the first in 2013, 2014, as well as the 8-month period of January to August 2015. Aggregate privatization deals in China totaled more than $40 billion in both 2013 and 2014 and a spectacular $133.3 billion in the first eight months of 2015 through 247 sales. The bulk of these privatization revenues came from the public and private placement offering of primary shares by SOEs ( PB report 2015 ). However, the state's equity ownership stake was generally only reduced indirectly, by increasing the total number of shares outstanding ( PB report 2015 ). In fact, Hsieh and Song (2015) have shown that almost half of the state-owned firms in 2007 and nearly 60 percent of them in 2012 were legally registered as private firms. The term used in China for this ownership change is that the large state-owned firms are “corporatized” rather than privatized. The typical form this “corporatization” takes is that of a minority share traded in the stock market and merged into a large state-owned conglomerate, the controlling shareholder ( Hsieh and Song 2015 ).

The next-leading country in terms of privatization proceeds after China is the United Kingdom, but it is far behind, with total proceeds of $17.2 billion in 2014 (against $7.8 billion in 2009).

In the EU as a whole, with countries addressing their government deficits post-2008, privatization proceeds rose to a five-year peak in 2013, to $68.0 billion, and a nine-year peak of $77.6 billion in 2014, while the annualized value of privatizations during 2015 (based on the first 8 months) reached $63.3 billion. This represents more than one-third of the global annual totals in 2014, but is only 20.0% of worldwide totals in the first 8 months of 2015, and lower than the long-run average EU share of about 44.6% ( PB report 2015 ). This relative decline of EU privatization proceeds is also reflected in the fact that China alone generated revenues from privatization almost as great as did the EU countries combined during 2015 ($68.0 billion versus $77.6 billion for China; PB report 2015 ).

China and India were the two top emerging countries by total privatization revenues in 2015. The five largest single deals outside the developed world in 2014 were realized in China, with the recapitalization and primary share offering of CITIC Pacific Ltd, the private placement of BOE Technology Group, the primary-share initial public offering (IPO) of Dalian Wanda Commercial, and finally the primary-share IPO of CGN Power and of HK Electrical Investments Ltd.

In the following section, we focus on the privatization experience in Africa and South Asia. While the privatization programs in Eastern Europe, China, and Latin America are among the most important in terms of total proceeds, a rich literature already exists discussing them (see Estrin et al. 2009 on transition economies and Estache and Trujillo 2008 on Latin America). Moreover, while privatization in Latin America and Eastern Europe culminated in the 1990s, much privatization in Africa and South Asia is more recent ( Roland 2008 ).

Privatization Patterns in Africa: A Few Countries Only

Privatization programs in sub-Saharan Africa (SSA) occurred in successive waves, with some countries privatizing much earlier than others ( Bennell 1997 ). The first group to start such programs in the late 1970s to early 1980s was composed of francophone West African countries (e.g., Benin, Guinea, Niger, Senegal, and Togo) but their progress was limited. The second group, both Anglophone and Francophone countries (Ghana, Nigeria, Ivory Coast, Mali, Kenya, Malawi, Mozambique, Madagascar, and Uganda), started privatizing in the late 1980s. These programs were often influenced by pressure from the international financial institutions ( Nellis 2008 ) though, as noted by Bennell (1997) , no significant progress was made anywhere except Nigeria until the late 1990s. The final group, the “late starters”, did not begin to privatize until the early to mid-1990s. Among this group, Tanzania, Burkina Faso and Zambia have shown a strong political commitment to privatization, whereas in the other three countries (Cameroon, Ethiopia, and Sierra Leone), only minimal progress was made in the 1990s.

Privatization in the 1990s: A Slow Start.

Only a minority of SOEs in SSA were subject to privatization over the period 1991 to 2001, and very little privatization has taken place outside of South Africa, Ghana, Nigeria, Zambia, and Cote d'Ivoire ( Nellis 2008 ). African states have privatized a smaller percentage (around 40%) of their SOEs than in Latin America and the transition economies ( Nellis 2008 ). In addition, privatization has generally concerned smaller manufacturing, industrial, or service firms. Bennell (1997) also reports that smaller SOEs were usually targeted during the initial stages of privatization programs in SSA because they were easier to sell. Five industries in particular were prominent in most programs: food processing, alcoholic beverages, textiles, cement and other non-metallic products, and metal products. These industries accounted for 60% of the total proceeds from the sale of manufacturing SOEs during 1988 to 1995 ( Bennell 1997 ), if we exclude the exceptional and large sale of ISCOR (Iron and Steel Industrial Corporation) in South Africa.

Bennell (1997) explains that the slow progress in privatization in the 1990s was due to a lack of political commitment compounded by strong opposition from entrenched vested interests (senior bureaucrats in ministries and SOEs themselves, as well as public sector workers concerned about their job security). For instance, in Cameroon, only five of the thirty SOEs scheduled for privatization were sold by the end of 1995. In other countries such as Nigeria, the privatization program started well but then stalled. Despite the fact that Nigeria's program had been one of the most successful in SSA in the 1990s, it was suspended in early 1995 in favor of a mass program of “commercialization”. In Madagascar, the privatization program was also suspended in mid-1993 due to serious mismanagement and its subsequent unpopularity. In addition, Bennell (1997) reports that there were nationalist concerns about the possible political and economic consequences of increased foreign ownership as a result of privatization.

However, in the late 1990s, certain political constraints lifted. First, a growing number of governments in SSA started to undertake significant economic reforms, under the aegis of the World Bank and the IMF, in which privatization was an integral part. Reforms and privatization were also progressively being accepted by the population. In addition, important political liberalization, with multi-party elections, broke with the previous statist policies, and created some room for maneuver to implement privatization programs. Finally, the weak financial position of SOEs in many SSA countries and their rapid deterioration, in conjunction with the fiscal crisis the state experienced in the 1990s, also opened the way for a sell-off of SOEs to raise government revenues and reduce expenditures.

Despite this stronger commitment, Nellis (2008) notes that there were actually only a few privatization deals in Africa in the 1990s, mainly in infrastructure, and even in these the state retained significant minority stakes; around one-third of the shares on average were retained. Between 1988 and 1999, the total proceeds from privatization in SSA amounted to $9.8 billion, with the manufacturing and services sector accounting for 36% of the total, infrastructure 28%, the energy sector 17%, the primary sector 14%, and the financial (and other) sector 6% (see World Bank Privatization Database).

The Early to Mid-2000s; More Rapid Progress.

There were some important privatizations in SSA between 2000 and 2008, and total proceeds increased to $12.654 billion (see World Bank Privatization Database). Nigeria comprised 51% of this amount, followed by Kenya (10%), Ghana (9%) and South Africa (6%). Infrastructure 4 represented 73% of the total amount of the deals, followed by the manufacturing and services sector 5 (17%), the financial sector 6 (6%), energy 7 (4%) and the primary sector 8 (1%; see World Bank Privatization Database).

Privatization Post-2008: A Slowdown.

Privatization activity slowed in SSA with the economic downturn after 2008. One notable exception was Benin, with the privatization of the cotton and the public utility sectors. The concession for the operation of the container terminal of the Port of Cotonou and the majority stake in the cement company were awarded to a strategic private investor in September 2009 and March 2010, respectively, and the privatization of Benin Telecom was launched in 2009 (this is still ongoing; IMF 2010 ). Nigeria was also notable for its sale of 15 electricity-generating and distribution companies in 2013, raising $2.50 billion (see Megginson 2014 ). In Chad, the government announced in 2015 that it was re-launching the sale of 80% of Société des Telecommunications du Tchad (Sotel-Tchad), after the previous attempt collapsed in 2010. Because the World Bank Privatization Database does not have data on privatization after 2008, one cannot compare the aggregated privatization proceeds post-2008 to those of earlier decades.

Privatization in South Asia: A Slow Opening

Privatizations in South Asia have traditionally been rare, despite the notable inefficiency of SOEs ( Gupta 2008 ). The governments’ reluctance to privatize can be partly explained historically, with the government's close involvement in the establishment of an industrial base in the postcolonial era, especially in India ( Gupta 2008 ). Particular sectors had been reserved exclusively for SOEs, such as the infrastructure sector and capital goods and raw materials industries such as steel, petroleum, and heavy machinery. In addition, the government nationalized many loss-making private companies; more than half of the firms owned by the Indian federal government were loss-making in the 1990s.

Following the balance of payment crisis of 1991, the Indian government implemented a series of reforms under the Industrial Policy Resolution of 1991 to encourage private enterprise. Privatization was initiated mainly through two approaches: partial privatization and strategic sales. However, the former was very limited, with the government selling only minority equity stakes until 2000, and without transferring management control. Political uncertainty prevented the emergence of a coherent privatization policy. Majority stakes sales and the transfer of management control were only conducted after the elections of 1999, and even then, until 2004 the government retained an average ownership stake of 82% in all SOEs ( Gupta 2008 ).

The stalled privatization program was revived in 2010 with a secondary offering of shares in National Thermal Power Corporation Ltd (NTPC), which owns 20% of India's power generation capacity ( Gupta 2009 ). However, the sale of the $1.85 billion block of shares only reduced the government's stake by an additional 5%, leaving 85% still under government control. In addition, the process of privatization was viewed as poor, with the secondary offering subscribed only 1.2 times, and even this after assistance from government-owned financial institutions.

In summary, between 2000 and 2008, the proceeds of privatization in South Asia totaled $ 17.45 billion, the bulk being realized in India (see figure 3 ) (55%) followed by Pakistan (43%). Afghanistan, Bangladesh, Nepal, and Sri Lanka provided the remaining 2% (see World Bank Privatization Database). Between 2000 and 2008, the infrastructure sector represented 51% of the proceeds, followed by the energy sector (26%), the financial sector (12%), manufacturing and services (10%), and the primary sector (2%) (see World Bank Privatization Database).

Which firms are privatized; there can be a positive (or negative) selection effect.

Whether privatization is total or partial; evidence suggests that the former is more beneficial.

The regulatory framework, which in turn depends on the institutional and political environment.

The characteristics of the new owners; foreign ownership has been associated with superior business performance post-privatization, especially relative to “insider” ownership (privatization to managers and workers). 9

Effective competition. This has been found to be critical in bringing about improvements in company performance because it is associated with lower costs, lower prices, and higher operating efficiency. 10

In the following sub-sections, we introduce the estimation techniques that have been used to measure the impact of privatization on firms’ performance, and then examine privatization experiences in three sectors (banking, telecommunications, and utilities) in developing countries. We also provide an analysis of the robustness of the evidence in the literature about the impact of privatization.

Measuring Efficiency and Firms’ Performance Post-Privatization

As Megginson and Sutter (2006) note, researchers face numerous methodological problems when they analyze the economic effects of privatization. In particular, data availability and consistency, especially in developing countries, and sample selection bias—occurring, for example, if the “best” firms are privatized first—represent key issues. Other problems arise when using accounting data: the determination of the correct measure of operating performance, the selection of an appropriate benchmark and statistical tests are important challenges. These issues are germane to the interpretation of the results of the studies surveyed below.

A variety of methods have been used to measure the impact of privatization on firms’ post-privatization performance and efficiency, measured in a number of ways including return on equity, output growth, labor productivity and changes in cost and income. We distinguish between two different empirical approaches. The first consists of comparing the performance of government-owned firms to that of privately-owned firms. The second approach consists of comparing pre-and post-divestment performance for companies privatized via share issues (public offerings; Megginson, Nash, and van Randenborgh methodology).

Comparing Government-owned Firms to Privately-owned Firms

An obvious way to examine the impact of privatization is to compare the performance of government-owned to privately-owned firms. Studies in this tradition compare post-privatization performance changes with either a comparison group of non-privatized firms or with a counterfactual. However, important methodological issues arise, especially in the earlier studies. First, it is difficult to determine the appropriate set of comparison firms, especially in developing countries where the private sector is limited. Second, selection effects and endogeneity may bias the comparison, as factors determining whether the firm is publicly or privately owned are also likely to affect performance ( Gupta, Ham, and Svejnar 2008 ).

Single Country or Single Industry Comparisons of Costs and Productivity Growth of Private and Government-Owned Firms.

One of the first studies to compare SOE and private firm performance is that of Ehrlich et al. (1994) . These authors used a sample of 23 comparable international airlines (18 from developed countries and 5 from developing/emerging countries) of different ownership categories over the period 1973 to 1983 for which they have data on cost and output for comparable goods. These authors find a significant association between ownership and firm-specific rates of productivity growth. Interestingly, the empirics also suggest that the benefits derive primarily from complete privatization of the firm, and that a partial change from state to private ownership has little effect on long-run productivity growth. Other studies have employed a similar approach examining differences in efficiency between private and government-owned firms within a specific country, such as Majumdar (1996) for Indian firms and Tian (2000) with Chinese firms. These authors both find that private-sector firms are more efficient. However, these results are not highly robust from the perspective of contemporary methods, as they do not directly address selection issues.

Concerning studies using a counterfactual approach, one can cite the influential study by Galal et al. (1994) , which was sponsored by the World Bank. These authors compare the actual post-privatization performance of twelve large firms in the airlines and utilities industry in Britain, Chile, Malaysia, and Mexico to a counterfactual performance. Further, they estimate net welfare gains in eleven of the twelve cases considered, equaling on average 26 percent of the firms’ pre-divestiture sales. La Porta and Lopez-de-Silanes (1999) study privatization in Mexico and find that privatized Mexican SOEs rapidly close a large performance gap with industry-matched private firms that had existed prior to divestment. These authors find that output increases by over 50% and that the privatized firms reduce employment by half, while the remaining workers see a significant pay rise.

Cross-country, Multi-industry Comparisons of X-efficiency and Profitability Ratio of Private and Government-owned Firms.

Another approach has been to exploit a multi-industry, multi-national cross-sectional time series to analyze the effects of government ownership on efficiency. The advantage of this method is that it captures differences that are not apparent in single-country or single-industry series, and the results are therefore methodologically more soundly based. In their seminal work, Boardman and Vining (1989) use measures of X-efficiency and profitability ratios of the 500 largest non-U.S. manufacturing and mining corporations in 1983 (“The International 500”; Fortune 1983 ). Privately-owned firms are found to be significantly more profitable and productive than state-owned and mixed ownership enterprises, but mixed enterprises are no more profitable than SOEs. Another important study is that of Frydman et al. (1999) , which compares the performance of privatized and state firms in the transition economies of Central Europe in 1994 using a fixed-effects model. To control for the possibility that better firms are selected for privatization, these authors compare the pre-privatization performance of managerially-controlled firms with those controlled by other owners. Frydman et al. (1999) find that privatized firms perform better than the state-owned firms but that the performance improvement is related to revenue improvement rather than cost reduction in privatized firms.

As noted, governments sequence privatizations strategically, often leading the most profitable firms to be privatized first ( Gupta, Ham, and Svejnar 2008 ; Dinc and Gupta 2011 ). To control for selection and endogeneity biases, the latest studies have employed more advanced econometric techniques including differences in difference, triple differences matching methods, and instrumental variable methods.

For instance, Dinc and Gupta (2011) examine the influence of political and financial factors on the decision to privatize government-owned firms in India using data from the 1990–2004 period. They find that profitable firms and firms with a lower wage bill are likely to be privatized early and that the government delays privatization in regions where the governing party faces more competition from opposition parties. The results therefore suggest that firms’ financial characteristics have a significant impact on the government's decision to privatize. This raises an identification issue for evaluating the effect of privatization on firm performance: if more profitable firms are more likely to be privatized, we may overstate the impact of privatization on profitability when we compare the performance of government-owned to that of privatized firms. The authors then proceed to use political variables as instruments for the privatization decision, adopting a two-stage least squares treatment effects regression. After addressing the selection bias, they find that privatization still has a positive impact on performance in India.

Comparing Pre-post Divestment Sales and Income Data for Companies Privatized by Public Share Offering

This set of studies examines the effects of privatization on firm performance by comparing pre- and post-divestment data for companies privatized via public share offerings. Each firm is compared to itself (a few years earlier) using inflation-adjusted sales and income data. The first study using this methodology is by Megginson, Nash, and van Randenborgh (1994) . As Megginson and Netter (2001) note, this methodology suffers from several drawbacks, among which selection bias is probably the greatest concern, since privatizations through share sales—Share Issue Privatization (SIPs)—represent the largest companies sold during a privatization program. Another weakness is that the Megginson, Nash, and van Randenborgh methodology can only examine simple accounting variables (assets, sales, etc.), which is an issue when comparing accounting information at different points in time and in different countries. Most of the studies in this tradition also imperfectly account for macroeconomic or industry changes in the pre- and post-privatization window (see Megginson and Netter 2001 , for a critique). These studies also cannot account for the impact on privatized firms of regulatory or market-opening initiatives that are often launched in parallel with privatization programs. However, the Megginson, Nash, and van Randenborgh methodology allows the analysis of large samples of firms from different industries, countries, and time periods and, while carrying the risk of selection bias, SIP samples contain the largest and most (politically) important privatizations.

Most of these studies do identify a significant improvement in company performance, post-privatization, though methodological reservations remain. Research in this tradition has focused on specific industries (banking [ Verbrugge, Owens, and Megginson 2000 ] and tele-communications [ D'Souza and Megginson 2000 ]); has used data from a single country (Chile [ Maquieira and Zurita 1996 ]) and employed multi-industry, multinational samples. However, the significance of many of the operating and financial improvements is not robust to adjustments for changes experienced by other firms over the study period.

A very recent work by Li et al. (2016) overcome the empirical limitations of the previous SIPs studies mentioned above by employing a triple difference approach. The authors are able to separate the pure privatization effect from the listing effect, using a database of 204 Chinese SIPs from 1999 to 2009 matched with otherwise comparable state-owned enterprises and privately-owned firms. The first double-difference compares the performance change of SIP firms before and after listing with the performance change of a control group of fully state-owned and unlisted SOEs to capture the combined “SIP effect” of going public and privatizing. The second double-difference compares the performance change of privately-owned firms before and after their listing with the performance change of a control group of privately-owned firms that remain unlisted. This captures the “pure listing effect”. These authors obtain the “pure privatization effect” by taking the difference between these two double differences. Interestingly, they continue to find a positive impact from privatization using this exacting methodology: they find a significant positive increase in profitability post-SIP in divested Chinese state-owned companies, even after the negative IPO listing effect is taken into account.

Empirical Evidence to Date in Developing Countries

In this section, we summarize the empirical evidence to date about the effects of privatization on firms’ performance and efficiency in developing countries, drawing on the discussion of methodology outlined above. The sectors covered include banking, telecommunications, and utilities. To examine the reliability of the evidence in drawing policy conclusions, we classify the papers reviewed into four categories depending on the quality of the sample and the robustness of the methods used.

The Banking Sector

The studies reviewed by Clarke, Cull, and Shirley (2005) , which focus on developing countries and employ the Megginson, Nash, and van Randenborgh methodology or a stochastic frontier approach, find that bank performance usually improved after privatization. For instance, Boubakri et al. (2005) , applying the Megginson, Nash, and van Randenborgh methodology to analyze 81 bank privatizations in 22 low- and middle-income countries, find that some measures of performance improved after privatization, but that this pattern was not common across countries; environmental factors also played a role. The study by Beck, Cull, and Jerome (2005) in Nigeria shows that privatization can improve bank performance, even when the macroeconomic and regulatory environment is inhospitable and the government sells the weakest banks. However, Beck, Cull, and Jerome argue that an adverse macroeconomic and regulatory environment reduces the benefits of privatization. 11 Azam, Biais, and Dia (2004) also show (both theoretically and empirically) the benefits of having a strong, independent regulatory agency to ensure that privatized banks play an efficient role in financial development.

The studies surveyed by Clarke, Cull, and Shirley (2005) also find that bank privatization has a greater positive effect when it is total rather than partial. This result has been found in transition countries ( Bonin, Hasan, and Wachtel 2005 ) as well as in Brazil ( Beck, Crivelli, and Summerhill 2005 ) and Nigeria ( Beck, Cull, and Jerome 2005 ) 12 . Furthermore, there is evidence that privatization boosts competition in the banking sector. For instance, Otchere (2005) examines share-issue privatizations in nine countries using the Megginson, Nash, and van Randenborgh methodology and finds that rival banks suffered abnormally negative returns following privatization announcements, which suggests that shareholders expected more intense competition and lower returns.

Thus, evidence suggests that performance improves more when the government fully relinquishes control; when banks are privatized to strategic investors rather than through share issues; and when bidding is open to all, including foreign banks ( Clarke, Cull, and Shirley 2005 ; Megginson 2005 ). A more recent paper by Clarke, Cull, and Fuchs (2009) , which examines the privatization of Uganda Commercial Bank (UCB) to the South African bank Stanbic, shows that these elements of best practice also apply when the banking sector is concentrated and under-developed. The government fully relinquished control to a strategic investor in an open sales process that allowed foreign participation, and the authors found that profitability improved post-privatization with no evidence that outreach declined. A similar impact of privatization to a foreign bank has been found in the case study of the privatization of Tanzania's national bank of commerce to the Dutch Rabobank ( Cull and Spreng 2011 ).

The Telecommunications Sector

One of the first telecom studies focused on developing countries, by Wallsten (2001) , used a panel of 30 African and Latin American countries from 1984 to 1997 with a methodology similar to Megginson, Nash, and van Randenborgh. Overall, the author finds that competition is significantly associated with increases in per capita access and decreases in costs. However, privatization alone is associated with few benefits, and is negatively correlated with connection capacity. In addition, privatization only improves performance when coupled with effective and independent regulation and increases in competition.

More recently, Gasmi et al. (2013) have examined the impact of privatization of the fixed-line telecommunications operator on sector performance, analyzing the outcomes of privatization reforms in a 1985 to 2007 panel dataset on a selection of 108 countries (including OECD countries, Asia, Africa, Latin America). These authors find that the impact of privatization on sector outcomes (fixed-line deployment, cellular deployment, labor efficiency, price of fixed-line) was positive in the OECD countries, Central America, and the Caribbean, and in resource-scarce coastal Africa and Asia. However, the impact was negative in South America and in African resource-scarce landlocked countries, and no significance was identified in resource-rich African countries.

Gasmi et al. (2013) note that countries with successful privatizations have developed their infrastructure through the creation of appropriate institutional structures which have improved the effectiveness of infrastructure policies, and that the coverage of networks increased thanks to the additional capital available with privatization. In contrast, privatization outcomes proved to be poor in South America, in both resource-scarce landlocked African countries and resource-rich African countries due to weak contractual design and inadequate enforcement of policies in the infrastructure sector, as well as insufficient aggregate demand. In the absence of strong state capacity, competition appeared to be a more effective instrument to foster performance than privatization.

The extent of infrastructure privatization also diverged across regions. While almost all OECD countries have privatized their telecommunications utilities, the rate of privatization is only around 70% in Latin American, Asian, and African resource-scarce coastal countries. In African resource-scarce landlocked and resource-rich countries, the percentage of privatized infrastructure in telecommunications is even lower, at around 40% and 30%, respectively. Overall, the study by Gasmi et al. (2013) shows that there were limited privatization effects on network expansion, and that productive efficiency did not increase in all the regions post-privatization. As such, the authors conclude that there is no unique model of reform for infrastructure sectors.

The Utilities Sector

Turning to water privatization, Estache and Rossi (2002) estimate a stochastic cost frontier using 1995 data from a sample of 50 water companies in 29 Asian and Pacific countries. These authors find that efficiency is not significantly different in private and public companies. Kirkpatrick, Parker, and Zhang (2006) use a questionnaire survey on water utilities in Africa, covering 13 countries and 14 utilities that reported private sector involvement, and undertake data envelopment analysis and stochastic cost frontier techniques. These authors do not find strong evidence of performance differences between state-owned water utilities and water utilities involving some private capital. The authors consider that this result is related to the technology of water provision, the costs of organizing long-term concession agreements, and regulatory weaknesses. In particular, the authors argue that the nature of the product severely restricts the potential for competition and therefore the efficiency gains. 13 This means rivalry under privatization must derive from the form of competition for the market—competition to win the contract or concession agreement. But, as the authors explain, transaction costs can be high in the process of contracting for water services provision; for example, the costs of organizing the bidding process, monitoring contract performance, and enforcing contract terms where failures are suspected. The importance of transparent competition for the market to achieve efficiency gains and prevent the grabbing of assets by political cronies was also evidenced by more recent research by Tan (2012) in the context of private participation in infrastructure (PPI) in water in Malaysia. The author shows that the efficiency gains of water privatization (measured by water loss and unit costs) were inconclusive over the period 2001 to 2008. Despite this, and the subsequent renationalization of water assets, PPI continues to be promoted—it is being recast in the form of management contracts—because it provides captive rents. This is also evidenced in the “cherry-picking” of segments and areas for privatization: private sector participation is concentrated in the more lucrative water treatment segment and higher income states, leaving the less profitable segments and (more rural) areas to the public sector.

In terms of privatizing electricity, the study of Zhang, Parker, and Kirkpatrick (2008) provides an econometric assessment using panel data for 36 developing and transition countries over the period 1985 to 2003. These authors examine the impact of these reforms on generating capacity, electricity generated, labor productivity in the generating sector, and capacity utilization. They find that, overall, the gains in economic performance from privatization and regulations are limited, while introducing competition is more effective to stimulate performance. In particular, they do not find that privatization leads to improved labor productivity or to higher capital utilization, or to more generating capacity and higher output, except when it is coupled with the establishment of an independent regulator. The authors conclude that when competition is weak, an effective regulatory system is needed to stimulate performance, while the regulation of state-owned enterprises without privatization is ineffective.

A more recent study by Balza, Jimenez, and Mercado (2013) examines the relationship between private sector participation, institutional reform, and performance of the electricity sector in 18 Latin American countries over the last four decades (1971 to 2010) This also finds that, regardless of the level of private participation, well-designed and stable sectoral institutions are essential for improving the performance of the electricity sector. In particular, privatization is robustly associated with improvements in quality and efficiency, but not with accessibility to the service. In contrast, regulatory quality is strongly associated with better performance in terms of both quality and accessibility.

To bring together this evidence and evaluate its robustness as a basis for policy, we classify the papers reviewed in this section into four categories depending on the quality of the sample and the robustness of the methods used. Category I: single country data, basic statistics, or econometrics (or small sample). Category II: cross-country data, basic statistics, or econometrics (or small sample). Category III: single country data, more advanced econometric techniques. Category IV: cross-country data, advanced econometric techniques. The findings are reported in table 1 and taken together, provide qualified evidence that privatization can improve company performance, including from studies that use the most advanced econometric methods.

Methodology and Classifications of Empirical Papers

Summary of Distributional Impacts of Privatization (Spillovers)

Thus, the evidence from empirical studies of privatization in developing countries suggests that the performance of banks improved significantly after privatization in many cases. However, the gains from privatization in the utilities sector (electricity and water) have tended to be limited. Finally, concerning the telecommunications sector, the impact of privatization on efficiency and coverage varies by region. It has been shown to be positive in Central America and in resource-scarce coastal Africa and Asia, but negative in South America and in African resource-landlocked countries. Thus, the impact appears to be context- as well as sector-specific. The main factors explaining this variation are regulatory quality (and behind that the quality of institutions), heterogeneity in effective competition, differences in the detail of contractual design, and in the characteristics of the new owners.

Thomas Piketty's recent book ( 2014 ), which has highlighted the importance of income distribution in the growth process, also discussed the impact of privatization on capital accumulation. In principle, privatization need not affect the stock of wealth in an economy, nor its distribution. State-owned firms are public assets which earn a return for their owners. Provided the assets to be privatized are valued in such a way that their price represents the discounted sum of the profits to be earned from them, then privatization means that the state is replacing an income stream with its discounted capital value in its asset portfolio. At the same time, the private sector is purchasing an asset which generates its full value over time from its annual earnings. Hence, privatization does not necessarily entail a net transfer of wealth between the public and private sectors.

However, the privatization process has not always followed these principles of public finance ( Estrin et al. 2009 ). In the extreme, as in the programs in the Czech Republic or Russia, significant state assets were transferred to private hands at nominal or zero prices; in effect, a transfer of wealth from the state to the private sector. More generally, state assets have frequently been undervalued. This may have been in order to make the assets more attractive to the market, or because the SOEs were loss-making and the short-term requirement to balance the budget dominated long-term state asset portfolio criteria. In some cases, ideological arguments have also played a role; Margaret Thatcher and several of her admirers in transition economies viewed privatization as a policy mechanism for broadening the private ownership of shares in companies ( Estrin 2002 ). Whatever the motivation, the undervaluation of state assets leads to a net redistribution of assets from state to private hands. Piketty argues that this was an important element in relatively larger growth of private wealth in Britain than in other Western European countries between 1970 and 2010. Furthermore, it was almost certainly a major factor in what he describes as the “considerable growth of private wealth in Russia and Eastern Europe. . . . which led in some cases to the spectacularly rapid enrichment of certain individuals (I am thinking of the Russian oligarchs),” (2014).

As the quotation from Piketty makes clear, the impact on income distribution of privatization depends on how the ownership of the assets is transferred from state into private hands; both the pricing and to whom the SOEs are privatized. In the extreme case when assets are transferred by voucher to each citizen equally from the state to private hands at a zero or nominal price, as in the Czech Republic, there is a transfer from public to private assets equal to the value of the privatized firms, but the impact on income distribution will be egalitarian because the process transfers shares to all citizens equally. In contrast, if assets are freely transferred to a single wealthy individual, the impact will be to severely worsen the distribution of income. In practice, state-owned assets that are transferred at below their market value are often also transferred to individuals who are already wealthy, leading to increasing inequality.

Political factors may play a significant role in this process, with corrupt elites seizing state assets for themselves, or using them to reward their cronies or political supporters. Thus, rather than being used to improve efficiency, privatization may be employed by the ruling group as a mechanism to redistribute wealth and resources. Acemoglu and Robinson (2012) point to the transfer of state assets into the hands of the governing elite (often associated with the deliberate continuation of monopoly power) as a mechanism of extractive political institutions; they cite the telecommunication privatization in Mexico and the huge amount of wealth accumulated by Carlos Slim ($47 billion in 2016 dollars) as an example.

But negative distributional effects may also occur for reasons of perceived efficiency enhancement, for example because the state believes that particular private individuals are those most likely to be able to improve company performance. This implies a trade-off between efficiency and equity objectives in the privatization process. Equity is supported by processes which engender dispersed ownership, while it is usually argued that efficiency is driven by concentrated ownership ( Estrin 2002 ). The empirical evidence highlights this trade-off; improvements in the performance of privatized firms have been found to depend on subsequent ownership arrangements ( Djankov and Murrell 2002 ). Notably, privatization to concentrated owners, such as to foreign firms or to small groups of strategic owners, yields greater improvements in performance than privatization to the general population via share offerings, or to managers and workers ( Estrin et al. 2009 ).

Birdsall and Nellis (2003) place the issue of the distributional impact of privatization more formally into an efficiency/equity framework. The effect of privatization on income distribution between taxpayers and the new owners depends both on the initial price and on the post-sale stream of value produced. There is no unambiguous prediction about the distributional effects of privatization, which will instead depend on initial conditions, the privatization process and the post-privatization political and economic environment. Any assessment of the effects should be dynamic and highly country-specific, depending on the political and economic context and its history. However, they argue that there is scope for efficiency-enhancing privatization which also promotes equity in developing countries.

We review below the distributional impacts of privatizations through their effect on ownership, employment, prices and their fiscal effects (see table 2 for a summary).

A Review of the Distributional Impacts of Privatizations in the Last Decade

As Megginson (2000) notes, in countries that have privatized through asset sales, the process has frequently been non-transparent and plagued by insider dealing and corruption. Thus in Russia, the “loans for shares” programs enabled well-connected financiers to obtain controlling stakes in the country's most valuable firms for a price well below their true value ( Megginson 2000 ). Moreover, the distributional impact of voucher privatizations has also been disappointing; in Russia and the Czech Republic, the returns on the vouchers were much lower than anticipated, and very small in comparison to what a very few well-connected groups of people obtained in the privatization process ( Birdsall and Nellis 2003 ).

Employment.

Privatization can also affect the distribution of income through its impact on employment. As public enterprises tend to be overstaffed prior to privatization, private ownership can lead to restructuring and consequently disproportionate redundancies for specific categories of worker (low-skilled, for instance). The study by Chong and Lopez-de-Silanes (2002) based on a survey of 308 privatized firms (covering 84 countries) over the period 1982 to 2000 showed that employment was reduced in 78% post-privatization, likely worsening income distribution ( Birdsall and Nellis 2003 ).

That being said, if the newly-privatized firm becomes more efficient, total employment might recover after the initial restructuring phase. In addition, government-owned firms that do not privatize may also have to reduce workforce size. Research by Gupta (2011) on privatization in India covering the 20-year period of 1989 to 2009 shows that privatization increases employment significantly and is not associated with a decline in employee compensation. 14 Moreover, Gupta argues that an evaluation of the redistribution of wealth from the government to private owners must also take account of the cost of subsidies to government-owned firms. However, the employment costs of privatization will be borne by specific groups of workers, while the benefits, in terms of reduced subsidies, are distributed across taxpayers. Hence, privatization may face opposition from organized interests who benefit from maintaining government ownership.

While Gupta's (2011) work is a single-country study, it has the merit of using more advanced econometric methods to control for dynamic selection bias by applying firm fixed effects and comparing privatized firms to a control group of firms that have also been selected for privatization but have not yet been sold. In addition, the share of private ownership is introduced with a lag to reduce the possibility of simultaneity between privatization and performance.

Prices and Access.

Privatization can also have different impacts on income groups through prices and access to services. First, privatization can lead to a fall in prices if it is accompanied by increased competition. In addition, if private management leads to efficiency gains, some of the savings can be passed on to consumers. However, prices may increase if they were previously below cost-recovery level. The distributional impact depends on how the consumption of the firms’ goods and services varies by income levels. Access may increase if the privatized business is expanded through investments which could not be undertaken in public ownership. However, private owners may decrease their engagement in specific, low-return market segments, which may disproportionately affect the poor. Price increases are common following privatization in network or infrastructure industries, along with increases in the quality of services. On the one hand, subsidized services tend to benefit relatively wealthy consumers more than poorer ones; as such, they may be relatively more impacted than the lower-income segment by privatization. On the other hand, price increases following the privatization of electricity and water will increase the burden of poorer consumers, especially if it is accompanied by the end of illegal water and electricity connections ( Birdsall and Nellis 2003 ).

Several studies in Latin America have shown that utility privatization has in fact led to network expansion and increased access to the service by the population, especially the rural poor (for Peru, see Torero and Pasco-Font 2001 ; for Argentina, see Chisari, Estache, and Romero 1999 , Delfino and Casarin 2001 , and Ennis and Pinto 2002 ; for Bolivia, see Barja and Urquiola 2001 ; for Mexico, see Lopez-Calva and Rosellon 2002 ). This increased network coverage has often been the consequence of market expansion enabled by private investment capital (see Clarke, Kosec, and Wallsten (2004) ).

When access has increased significantly without a steep rise in prices, privatization has had positive distributional effects ( Birdsall and Nellis 2003 ). However, increased access has often been accompanied by substantial price increases ( Estache, Foster, and Wodon 2002 ). In addition, an important negative distributional impact has been realized through the elimination of illegal connections to electricity and water networks by lower-income people. A recent paper by Hailu, Guerreiro-Osorio, and Tsukada (2012) on water service privatization in Bolivia in the late 1990s and early 2000s shows how tariff increases required for full cost recovery may lead to adverse privatization outcomes; in this case, the eventual renationalization of the company. To examine the impact of privatization on access, the authors use a difference-in-difference approach comparing two groups: households in cities where the utility was privatized, and households in other cities, with two points in time, before (1996) and after (2001 and 2005) privatization. These authors find a positive relationship between access to water and living in cities where the water utility was privatized. However, the water sector was renationalized in 2006, partly because of popular movements against the tariff increases required for full cost recovery and the failure of the concessionaire to meet targets stipulated in the contract.

Finally, Austin, Descisciolo, and Samuelsen (2016) point to the limits of privatization in sectors with public goods characteristics. Examining the privatization of healthcare in 99 less-developed nations over the 1995–2000 period, they employ two-way fixed effects ordinary least squares regression models. The fixed effects allow them to deal with unmeasured, time-invariant variables that are excluded from a regression model. They regress tuberculosis prevalence per 100,000 on the log of private health expenditures, the log of public health expenditures and a set of controls (economic development, education, HIV prevalence and access to water and sanitation). They find that, while public health expenditures reduce tuberculosis rates in developing nations over time, this is not the case for private health expenditures.

Fiscal Effects.

The fiscal effects of privatization on income distribution are indirect and come through changes in revenues and expenditures. In particular, privatization may affect real income (net of taxes) if it reduces the tax burden differentially across households, or if it leads to increased access by the poor to government services funded by new tax flows. The study of Davis et al. (2000) on 18 developing and transition countries showed that the net fiscal effects of privatization were receipts in the order of 1% of GDP. In some countries, the main fiscal benefits of privatization have been to eliminate subsidies. Subsidies in critical infrastructure services have often led to the rationing of under-priced services, hardly affecting poorer households that often had little or no access to these services, while the non-poor enjoyed the underpriced access. To the extent that privatization stops these flows of subsidies, it produces indirect benefits in terms of increased retained revenues ( Birdsall and Nellis 2003 ), which could indirectly benefit the poor.

The traditional literature, primarily concerning developed economies, argued that privatization had largely positive effects on the economic and financial performance of the companies involved, as well as wider spillover benefits, for example, via technological diffusion from foreign ownership of former SOEs and enhanced efficiency from the privatization of utilities and other forms of infrastructure. Moreover, privatization programs also frequently achieved additional objectives, including the generation of revenues to relax state budget constraints and a broadening of share ownership amongst the population. On this basis, privatization became an important element of reform programs in transition and then developing economies from the 1990s. The experience of the past twenty years leaves some of these conclusions unchanged, but leads us to a more nuanced evaluation of the effects of privatization in the context of economic development.

In particular, though state sectors are often very large in developing economies, it has been hard to establish widespread privatization programs in many parts of the world, partly because of political opposition. This has arisen for a variety of reasons. First, the record of privatization as it spread to middle income and then transition economies (including China) was not always so positive as in developed economies. The lesson of the transition economy experience was that privatization was not always a panacea: if the mode of privatization was inappropriate or the market environment not competitive, privatization might not enhance the performance of the firms involved ( Estrin et al. 2009 ). Moreover, privatization programs were associated with scandals: inappropriate valuations led to the emergence of extreme inequalities of wealth. Second, in developing economies where the institutional environment, particularly with respect to regulation of monopolies, was sometimes even weaker than in transition economies, the benefits of privatization were even less automatic, depending on the sector, and were contingent to a significant degree on the design of the privatization program. Third, distributional issues are especially significant in developing economies, so privatization programs also had to consider distributional impacts in ways that had been less relevant for developed economies; opposition rested on issues raised by the efficiency-equity trade-off. Finally, political economy issues are perhaps of even greater consequence for policy choices in developing economies, and privatization programs are especially open to manipulation by extractive political institutions and elites in fragmented political environments.

This long list of concerns has meant that the spread of privatization programs to developing countries has been limited, both geographically and with respect to sectoral reach. The slowdown in privatization has no doubt been exacerbated by the global recession of 2008 and the resulting flight from risk, which has particularly affected stock markets in developing economies. Moreover, the evidence about the effects of such privatizations of economic performance is quite nuanced. To be successful, a privatization program needs to align its objectives with its methods of privatization, taking into account the sector in which the company operates and the national, institutional, and political context.

Necessary Pre-conditions for Successful Interventions: Regulatory Agencies and Managerial Incentives

As Lopez-de-Silanes (2005) notes, good rules and contracts are key for a smooth and beneficial privatization process. However, government restructuring of SOEs prior to their sale is likely to be fraught with political difficulties because officials may try to extract private benefits. Although restructuring could increase revenues from the sale, Lopez-de-Silanes suggests that restructuring policies do not lead to higher revenues. In addition, Lopez-de-Silanes (2005) notes the importance of policies to complement privatization; of particular importance is the need to set up an appropriate regulatory and institutional framework for the post-privatization period.

Indeed, several papers have shown how a strong and independent regulatory institution can help address the negative impact of corruption on the privatization process. Wren-Lewis (2013) uses a fixed-effects estimator on a panel of 153 electricity distribution firms across 18 countries in Latin America and the Caribbean from 1995 to 2007. He regresses the log of labor employed on a corruption indicator, independent regular authority dummies (including dummies for good and bad regulators), and private ownership dummies and interaction terms. Wren-Lewis employs firm fixed effects to control for time-invariant unobservables. Because each firm is present in only one country or province, the corruption and regulation terms are estimated based only on changes in these variables within countries/provinces. He also includes year fixed effects to take into account time effects. Wren-Lewis shows that greater corruption is associated with lower firm labor productivity, but this association is reduced when an independent regulatory agency is present. However, because of broader institutional weaknesses, developing countries face many challenges in establishing a strong regulator. One limit of this study is that there may be important (unobserved) parts of the reform package that also impact productivity. As such, it should not be assumed that the (observed) reform will have the same impacts elsewhere.

Gassner and Pushak (2014) have examined the impact that the UK regulatory model has had in developing and transition countries, and the extent to which they have successfully followed its key features; competition, independence and efficiency of service delivery through incentive-based regulation. The authors note that while regulatory agencies have spread rapidly, the success of the UK regulatory model has been only partial in middle and low-income countries. They argue that the context of developing countries, with below cost-recovery tariffs and continued state-ownership, makes it more difficult to establish truly independent regulatory institutions.

Thus, developing countries face many regulatory challenges; they often start with important operational inefficiencies and insufficient revenue generation. In addition, a majority of firms in potentially regulated sectors are still publicly-owned because they are not attractive enough for private sector investors, and because governments do not want to cede control of essential services. Under these circumstances, incentive regulation for efficiency savings is difficult: given the low tariffs, not enough investment can be undertaken to improve service delivery, and without private profit motives there is not a strong incentive for managers to bring about efficiency. Under-pricing and poor operational performance are serious problems: according to the 2010 Africa Infrastructure Report published by the World Bank (2010) , the under-pricing of electricity costs the sector at least $2.2 billion a year in forgone revenues (0.9% of GDP on average).

Recently, the concept of hybrid regulatory models has been proposed as a solution to the challenges in developing countries ( Eberhard, 2007 ). In hybrid models, regulatory contracts and independent regulatory agencies coexist. In a context where the institutional capacity is low and/or regulatory commitment is weak, an independent regulatory agency is supplemented by contracting out or outsourcing certain regulatory functions. An illustration of this is the 20-year water and electricity concession contract in Gabon, which requires external experts to monitor the service provider's performance in achieving coverage targets. The experts are paid from dedicated funds set aside from the concessionaire's revenues and produce only nonbinding studies. This monitoring mechanism is aimed at strengthening the independence and competence of the ministerial department responsible for supervising the contract. Policymakers may also obtain regulatory assistance from regional regulators or from other countries through twinning arrangements. For example, the Eastern Caribbean Telecommunications Authority (ECTEL) serves the member countries of the Organisation of Eastern Caribbean States as a shared regulatory body ( Tremolet, Shukla, and Venton 2004 ).

Taking into consideration local management and incentives is also important for successful privatization. Liu, Sun, and Woo (2006) identify the motives of local government leaders and the constraints that they face during a privatization process. These authors conclude that local governments’ motivation to privatize their SOEs depends on whether the ownership transfer sufficiently stimulates the growth of local tax revenues without sacrificing bureaucrats private control benefits. In addition, Dinc and Gupta (2011) in their study of privatization in India observed that no firm located in the home state of the minister in charge is ever privatized, which highlights the importance of local political factors in the privatization process.

What about Remaining SOEs?

To a certain extent, the recommendations about regulation and managerial incentives also apply to remaining SOEs. In fact, Bartel and Harrison (2005) argue that public-sector inefficiency is due to the softness of budget constraints and the degree of internal and external competition. This implies that efficiency gains in SOEs could be achieved by reducing or eliminating government financing for public enterprises, and/or increasing import competition.

Regarding agency-type problems, Hsieh and Song (2015) observed that one of the key reorganizations of state-owned “corporatized” firms in China was that the parent company (the controlling shareholder) of the firm incorporated as Limited Liability Corporation was to monitor the firm and be responsible for the compensation of the firm's senior managers. These managers were held accountable for the firm's bottom line, which reduced agency-type problems. The senior executives of the parent company, in turn, were directly appointed by the local government or by the Central Organization Department of the Communist Party.

Privatization to Foreign Owners

Work on transition economies established that when SOEs are privatized to foreign investors, the efficiency gains are particularly pronounced. The results on foreign ownership do seem, however, to be replicated in the developing economy context. Thus Du, Harrison, and Jefferson (2014) have found that foreign equity participation is associated with an improvement in productivity which is greater for SOEs than for non-SOEs in China's manufacturing sector, suggesting that foreign firms can play an important role in improving SOE performance. The benefits of privatization via transfer to foreign firms have also been observed in the case of banking in Africa (see Clarke, Cull, and Shirley 2005 ).

Part of the reason that foreign ownership improves productivity can be found in the relation between foreign ownership and corporate risk-taking. Boubakri, Cosset, and Saffar (2013) found that foreign (state) ownership is positively (negatively) related to corporate risk-taking, and that this relation is stronger in countries with better institutions. To the extent that corporate risk-taking is an important driver of economic growth, privatization via the transfer of ownership to foreign owners should yield important economic benefits through a reorganization of prevailing incentive structures and changes in the degree of risk aversion. Jaslowitzer, Megginson, and Rapp (2016) also observe that risk aversion and financial conservatism are one of the reasons that state ownership is associated with inefficiency. Using a matched panel of 624 firms, these authors find that state ownership curtails firms’ responsiveness to investment opportunities. Despite these findings, in some developing countries the sale of state assets to foreigners, which carries overtones of colonial legacies, can be a politically charged subject.

Privatization involves the transfer of productive assets from the state to private hands. Such transfers are, by their very nature, politically sensitive and subject to potential corruption and abuse. We outline below some important issues that policy makers in a developing country should consider when examining a proposed privatization. In so doing, we assume that the primary purpose of privatization is to enhance economic growth.

Depth and liquidity of the capital market (particularly important for privatization via IPO).

Barriers to new domestic firm entry (formal entry costs, bureaucratic costs, possibilities for incumbents to restrict entry by the use of political relationships).

Quality of the legal system concerning corporate governance, for example company accounting procedures, rules on minority shareholders, etc.

Quality of business support, for example, legal firms, accounting firms, management consultants, recruitment firms.

Openness to foreign direct investment, both via acquisitions (via privatization) or via greenfield (to create competition), and access to foreign portfolio capital.

Depth and competitiveness of managerial market (pool of qualified managers).

Strength and effectiveness of competition, and competition agency.

Independence of anti-monopoly agency from state.

The quality and independence of the state's administrative apparatus is particularly important. Privatization makes considerable demands on the capability of the state, both in ensuring that the process is not captured by local elites, and in managing the relationship between the government and the firm at arm's-length post-privatization, for example, via regulation. Successful privatization requires competent government with low levels of corruption.

Turning to the privatization process itself, there is strong evidence that openness of bidding to all, including foreign firms, is a key factor of success.

Sale to high-quality foreign firms. 15

Sale on domestic capital market via IPO.

Sale to domestic businesses or business groups (trade sale).

Sale to existing managers and/or workers.

Free distribution of shares to the population (mass privatization).

There are obvious trade-offs. Free distribution ensures equality in the allocation of assets around the population, but is likely to lead to weak corporate governance. Selling to foreign owners, with appropriate safeguards, can raise company efficiency but may lead to job losses.

Privatization seeks to improve company efficiency via corporate governance. However, as we have seen, a number of side-effects may impact other key policy targets and these need to be considered in advance.

Social and Economic Side Effects. Higher efficiency/profitability may be obtained through lower levels of employment, lower wages, reduced public service provision and higher product prices, with negative distributional and social effects.

Competition Side Effects. Especially if the government is concerned with selling to foreigners and/or maximizing revenues, competition effects may be negative and serious.

Global Impact. Selling key assets such as banks or resource companies to foreign firms may restrict the range of domestic policy and hinder long-term development.

Political Side Effects. Selling assets to elites may concentrate political power and economic wealth into fewer hands.

Effects on Distribution of Income. An enhanced focus on the profitability of firms may lead to increased prices of important products for poor households, as well as reduced pay, worse employment conditions, and fewer job prospects.

Effects on Fiscal Balance . In principle, this should be unchanged because if the asset is priced correctly, the price should reflect the future expected earnings from the company. In practice, pricing may be set low to achieve distributional targets or to support elites and friends. This would worsen the government's balance sheet. At the same time, the new owners may be more productive than the state, and hence raise activity and profits, with a positive effect on GDP and government revenues.

Saul Estrin is a professor of management at the London School of Economics; correspondence to be sent to [email protected] . Adeline Pelletier is a lecturer in strategy at the Institute of Management Studies, Goldsmiths College, University of London. This work was supported by the U.K. Department for International Development and the Overseas Development Institute. The authors would like to thank Tim Green, Alberto Lemma Deborah McGurk, Anne McKinnon, Bill Megginson, John Nellis, Jon Stern, and Jan Svejnar.

Kikeri and Nellis (2004) have also conducted a wide-ranging assessment of privatization.

Each of these three regions representing between 3% and 5% of total world privatization proceeds over the 1988 to 2008 period.

The privatization barometer database provides world aggregate data on privatization and a country breakdown for developed countries. We are not aware of an alternative database providing such information. This was also confirmed by several academic and practitioner experts on privatization whom we contacted during the course of this research.

Infrastructure includes transportation, water and sewerage, telecommunications, natural gas transmission and distribution, and electricity generation, transmission, and distribution.

The manufacturing and services sector includes agribusiness, cement, chemicals, construction, steel, hotels, tourism, airlines, maritime services and other sub-sectors that are not infrastructure or finance related.

The financial sector includes banks, insurance, real estate, and other financial services.

The energy sector includes the exploration, extraction, and refinement of hydrocarbons, oil, and natural gas.

The primary sector includes the extraction, refinement, and sale of primary minerals and metals such as coal and iron ore.

The ownership pattern resulting from privatization often depends on the mode of privatization chosen. Thus, private sales usually lead to concentrated strategic owners, while mass privatization usually generates widespread ownership, at least initially. The impact of mode of privatization on national economic performance in transition economies is explored in Bennett, Estrin, and Urga (2007) .

Note, however, that in the utilities sector (particularly for water), the technology and the nature of the product restrict the possibility of competition in the market and therefore the efficiency gains following privatization. In this case, competition for the market (to win the contract or concession agreement) has to be organized. Given the ambiguous results of privatization in noncompetitive markets in terms of improving economic performance ( Megginson and Netter 2001 ), regulation may prove to be more effective ( Kirkpatrick, Parker, and Zhang 2006 ).

The performance of privatized banks in the seven countries of the West African Economic and Monetary Union from 1990 to 1997 improved in the first year after privatization, but not after that.

Improvements in performance in Nigeria were observed in fully-divested banks, but not in the ones where the government retained minority shareholdings.

Whereas competition is feasible in telecommunications markets, it is usually cost-inefficient in the market for water services, given the scale of the investment in network assets required to deliver the product.

Privatization is also not associated with the profitability and efficiency of government-owned firms.

Note, however, that this method may suffer from a trade-off with competition objectives since foreign firms may seek local monopoly power. Such sales may be accompanied by conditions with respect to technology transfer, domestic content of inputs, employment, environment, etc.

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Privatization of Banks Pros and Cons

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Privatization of Banks? What is a Bank? The word ‘Bank’ does not need any kind of introduction. Everyone, now a day, is familiar to what Bank is. It is a financial institution that works according to the structure of the economy and helps to promote it. Banks have proved to be very helpful in connecting the people directly to the economy of the nation. Banks are mainly authorized to receive the deposits of the people and also provide them loans easily and according to their need. Banks are the key to drive the economy smoothly and efficiently.

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Short History of Banks in India

“ The Bank of Hindustan ”, established in 1770, was the first Bank of India which ran for about 60 years and soon failed. The modern day “ State Bank of India ” was established in 1806 and was first named “ Bank of Calcutta ”. It was later renamed as the “ Bank of Bengal ” by the British Government. Soon this bank merged with “Bank of Madras” and “Bank of Bombay” and formed a new bank called “ Imperial Bank of India ”.

“ Reserve Bank of India (RBI) ” which is the central banking institution in India, was established on 1 st April 1935 with the RBI act 1934. In succeeding years, India got many other private banks working well with the economy. The Government of India took a step to nationalize the 14 major banks of India in 1964 after independence. After the 6 years, 6 more banks were nationalized in 1970 and thus we got 20 nationalized banks in India but soon “ The New Bank of India ” merged with the “Punjab National Bank” and now we have all over 19 nationalized banks in India.

Functions of Banks

The basic functions of all the banks are to deposit the savings of the customers through opening their Bank accounts and also providing them loans. These are the functions that every bank in India works on. Apart from these two basic operations, the modern day Banks also work on many other financial activities. The functions of a bank are as follows:

Deposit Savings
Providing loans
Mutual fund
Providing lockers
Conducting social welfare programs
Transferring funds
Collecting cheques

As it will not be wrong to say that The Banks absorb the excess capital from the economy stopping them from being circulated and use them in the right direction properly to increase the productivity and the growth of the nation.

Public Sector and Private Sector Banks

Before we further proceed, it is very important for us to understand what the key difference between a public sector bank and a private sector bank is.

A public sector bank is a bank in which the majority of its stake is held by the Government. In other words, we can say that a public sector bank is such a bank which has its majority of shares under the hand of the Government. The Public Sector Banks are classified into two groups as:

Nationalized Banks
State Bank and Associates

In the other hands, a private sector bank is a bank in which the majority of the shares of the bank are under the control of its share holders. There are currently 22 Private Sector Banks working in India.

Privatization of Public Sector Banks in India

The privatization of any institution is the process of transferring the ownership from the government to the private hands. As we all know that India has 19 Nationalized Banks which act under The Reserve Bank of India and Indian Government.

Pros of Privatization of Banks

Many Organisations in India conducted surveys and found that the privatization of the Banks will result quite positive outcomes. It led the Indian Government to think about the privatization of all the Banks. Let’s see why privatization of Indian Banks has become indispensable for the Government of India:

It is found that the Private sector banks are more advanced than Public sector Banks and are also working more efficiently.
The foreign investors prefer to invest in private sector banks rather than the public sector banks.
The private sector banks are much strict against loans and frauds.
Public Sector banks are usually less competitive than the private sector banks.
Private sector banks are obedient and quite serious towards their work and responsibility which lacks in the most of the Public sector banks.
The private sector banks follow the concept of lowest risk.
Privatization will also help to reduce the burden of the Government of India.

Cons of Privatization of Banks

No doubt the private sector banks are very efficient but they also fail somewhere. Privatization of the banks leads to several undesirable situations. Some of these are:

The privatized banks will focus on maximizing their benefit and it will put an adverse effect on the middle class and poor people of the society.
Every organisation, whether government sector or private sector, has some issues within its structure. It is not necessary that a private sector bank will never go with any fraud.
The people in present India mostly believe on Public Sector Banks and don’t prefer to deposit their savings in private sector Banks.
The public sector banks usually work on social welfare while the motive of private sector banks is generation of profit.
Many government schemes like “Jan-Dhan Yojna” and “Pension Yojna” worked well and also became successful only because they were applied in Public Sector Banks.
Another disadvantage of privatization is the excess use of nepotism which will affect the banking services.

Impact of Privatization of Banks in India

Privatization of Banks will definitely have some positive and also some adverse effect directly on society and indirectly on economy.

Privatization of banks will be helpful in getting a better customer service. It will also affect the economy and helps in growth. It may be said that the privatization of Indian Banks will remove irregularity and bring punctuality and will led to accountability in the service. It is obviously seen that the private institutions provide incentives to the employees according to their work so Privatization of Banks will definitely increase the productivity of the employees.

One of the most adverse affect of privatization will be the widespread economic gap. It will support the rich people of the society leaving poor behind. This concept will make poor poorer. Also the Privatized banks will mainly focus on urban areas and it will slowly diminish in rural areas of the nation.

As we all know that the Banks are the backbone of the economy. The Indian Constitution says “Every economic activity in the nation should be centred at the welfare of the people” but, in my view, privatization will violate this concept because it is obvious that the Private Bank will be aimed at maximizing their own profit. Where there are some bad aspects of privatization of banks there are also some good aspects of it. We must examine on our own and decided whether Privatization of Banks should be supported or opposed.

Related Information:

Pros and Cons of Privatization

Pros and Cons of Privatization of Indian Railway

Pros and Cons of Privatization of BALCO

Pros and Cons of Privatization of PSU

Pros and Cons of Privatization of VSNL

Essay on Bank Privatization – Pros and Cons

500 + words essay on bank privatization – pros and cons.

Privatization is the process by which the government transfers ownership and control of economic units to the private sector. The primary tenet of privatisation is that the competitive environment and market system compel corporations and private entities to function more efficiently. Littlechild and Beesley (1989) believe that privatisation can improve economic performance by increasing market forces, provided that at least 50% of their shares are transferred to the private sector.

Privatization is a broad and diverse phrase that refers to the process by which the private sector assumes operational or financial control of public institutions. In other words, privatisation entails the abolition of all government controls and involvement in the establishment of supply and demand mechanisms.

Banks are significant because they play a critical role in the economy. According to Levine (1997), a critical variable in the process of financial development and economic growth is the ownership structure of banks and their fundamental role in the national economy. The banking sector’s primary objective is to move financial resources into more productive and efficient initiatives that will aid future growth. The government’s job in the financial system is to ensure that banks perform this critical function efficiently through their rules and regulations. As a result of this critical role, governments in developing nations frequently hold banks.

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The profit incentive is said to motivate the private sector to manage a business more efficiently. However, private corporations can exploit their dominant strength while ignoring greater social costs, say opponents. The first and most essential cause for privatisation is the weakening economy. The ongoing pandemic has significantly harmed the Indian economy, prompting the government to take such drastic disinvestment measures. The growing NPA issue has further fueled the privatisation drive. Because of their welfare state programmes and loan forgiveness, PSBs contribute the most to NPA. The government wants to reduce the NPA problem and relieve the PSBs by privatising them.

Dual control is also an issue, with the Ministry of Finance having dual jurisdiction over PSBs under the Banking Regulation Act, 1949, and the Reserve Bank Act, 1934. Instead of being autonomous like private banks, the RBI is constantly interfering with routine PSB operations. With an economic and political analysis of the decision, the privatisation of PSBs has sparked a large national debate. Privatisation has both beneficial and negative effects on the Indian economy.

Disadvantages of Bank Privatization

Privatization plan/scheme excludes dual inspection by the Ministry of Finance and the RBI. That leaves private banks out of the purview of the Central Vigilance Commission and the Central Bureau of Investigation, which is bad for depositors.

Due to the PSBs dominance in rural areas, rural banking will be a key hurdle for privatisation. Unlike commercial banks, which have branches only in the country’s more developed or populous locations, the PSBs have branches in virtually every district. In comparison, private banks would be hard-pressed to match the PSBs’ dominance and reach across the country That said, even if private banks take over existing PSB branches in rural areas, building trust among the rural population will be tough.

Profitability is the primary concern of private sector banks. A recent example of this is YES Bank. The PSBs’ vision of a welfare state may suffer due to private banks’ profit-making objectives. The welfare state’s PSBs provide low-cost services, subsidised accounts, and other government-related initiatives. They often offer loan forgiveness and write-offs to the underprivileged populace at the behest of changing political landscapes.

Advantages of Bank Privatization

There is substantial evidence that state ownership is inherently inefficient in comparison to private ownership. Numerous political and economic factors contributing to government management inefficiencies include insufficient rewards and incentives for managers and supervisors, a lack of required commitments to improve performance, and non-economic goals. Privatization of banks is one of the most significant concerns confronting most governments worldwide. Governments continue to fight divesting themselves of banks and financial systems and reducing their intervention. On the other hand, the state banking system is perilous in virtually every country that has state-owned banks. However, if the government’s objective is to foster a more efficient and market-oriented economy, it is critical to mitigate the government’s influence on credit allocation decisions.

The ever-increasing and never-ending burden of the Non-Performing Asset (NPA) problem is the most contentious topic of privatisation and its impact on the economy. It is a crucial issue to be addressed for successful and rapid economic progress. The rise in non-performing assets (NPAs) has a negative impact on the economy, in the long run, privatising PSBs will help reduce NPAs.

Capitalizing PSBs with new equity will enable them to restart lending, enhance performance, and simultaneously privatise their ownership structure. Encouraging new stock and international investment could help the debt-ridden PSBs recover.

During the epidemic, the privatisation drive will help stabilise the economy by reducing macroeconomic uncertainty. Due to market discipline, the privatisation of a few losing PSBs will force other PSBs to change their strategies. For this reason, it is more important than ever to resurrect the banking industry. This will assist the economy recover after the pandemic by allowing private investors, including foreigners, to invest in banks.

Administrative efficiency is important for a bank’s effective operation and governance. Private banks have superior administrative efficiency than PSBs. A private bank offers better overall customer service. So, privatising PSBs will improve customer service. Improving administrative efficiency and customer service will be aided by more technologically advanced items. In addition to expanding their reach in rural banking, these tech-driven offerings will help private banks provide quality service to their clients.

Privatisation also loves market competition. Less government intervention means more private-sector competition, which means higher performance and efficiency for private banks. Confronted with increased competition, private banks will develop new products that cater to specific consumer needs while minimising risks.

With better infrastructure and people, private banks will be able to achieve their target-oriented objectives.

With the sustained expansion, the Indian banking sector is one of the greatest contributors to the economy. However, the banking sector, particularly public sector banks, has been heavily impacted by the pandemic. Private players, increased capital inflows and foreign investment may help the banking sector emerge as a new age eventually leading to economic resilience. The government’s decision to privatise PSBs may help boost the economy and the sector’s growth. It will increase competition and help the debt-ridden PSBs grow.

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Essay on Impact of Privatization for Students and Children

500 words essay on impact of privatization.

When we say privatization, a lot of things come to one’s mind. They are both positive and negative. It basically refers to the shift of control from the public sector to that of private. The first world countries brought this concept first after which the developing nations caught on the trend.

In other words, it mainly aims to enhance the conditions of the services which people get. In addition, it also lowers the burden of the government by taking over certain industries. Privatization has no doubt made quite an impact on the world. Like there are two sides to a coin, over here also comes with benefits as well as drawbacks.

Benefits of Privatization

Privatization has created quite a positive impact on the world. Firstly, it has reduced government debts. Similarly, it has lessened the burden of the government. Furthermore, the quality of services has enhanced by a great margin. As there is increasing competition in the private sector, everyone is competing to give their best.

Moreover, there are now new products that are entering the market on a daily basis to help people get innovative goods. This helps in mixing creativity with private making and it also benefits the consumers greatly. In addition to that, political interference in various sectors has stopped which is a great sigh of relief.

Most importantly, the scenario of rates has increased. Due to the ever-growing competition in the industry, everyone is trying to make the most out of their goods. In order to do that, they offer competitive rates so that everyone can benefit. This brings profits to consumers as well as business owners.

Drawbacks of Privatization

While privatization has numerous benefits, it also has a fair amount of drawbacks. The first one being the drop in quality of goods as they mainly aim to make a profit. When people have this intention, they have little or no care about the benefit of the customers, so just to gain maximum profit, they compromise the quality and opt for unfair means.

In addition, there is also the drawback of the rise in prices. As the private owners usually have a monopoly, they take advantage and charge high prices knowing very well that consumers will have no choice left but to do so. Similarly, this also gives rise to the rise in corruption. There are more and more cases of bribery, fraud, and others on a daily basis.

Moreover, transparency levels also drop due to this. In the public sector, people get a clearer picture than in the private sector. As they are not obligated to transparency, they often deceive the consumers. Other than that, privatization has also caused uncertainty amongst the consumers.

As there are more and more options being added to the market every day, the same product is sold at different forms and prices. This just leads to confusion and difference in quality. Thus, we see how it has both positive as well as negative sides. Consumers need to be more careful and not be fooled.

Some FAQs on Privatization

Q.1 How did privatization benefit us?

A.1 Privatization has a lot of benefits. It reduced the government’s debts, improved the services and also helped in introducing innovative products. Moreover, it also stopped any political interference plus brought competitive rates.

Q.2 What are the drawbacks of privatization?

A.2 Privatization also has some major drawbacks. Its main aim is to make a profit with little care to consumer wellness. There was also a price rise plus corruption rise after privatization. Moreover, it also created a lack of transparency and ambiguity in society.

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Key Banking System Risks in the WAEMU

Author/Editor:

Knarik Ayvazyan

Publication Date:

May 17, 2024

Electronic Access:

Free Download . Use the free Adobe Acrobat Reader to view this PDF file

The gradual alignment of prudential regulations on Basel II/III standards since 2018, as well as improvements in banking supervision and macroprudential surveillance, have contributed to the WAEMU’s banking system’s resilience to recent global and regional shocks. However, while cyclical vulnerabilities have been contained, bank credit portfolios remain highly concentrated, and their exposure to sovereign risks has grown substantially in recent years, together with liquidity risks. Further reforms building on those recently implemented in line with recommendations from the 2022 Financial Sector Assessment Program (FSAP), including to enhance macroprudential policy’s effectiveness and banking supervision frameworks, will help address such vulnerabilities.

Selected Issues Paper No. 2024/014

International organization Monetary policy

9798400275142/2958-7875

SIPEA2024014

Please address any questions about this title to [email protected]

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Safra private bank assembles new dealmaking team for ultra-rich clients

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Ivan Levingston in London and Michael Pooler in New York

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The Swiss private bank J Safra Sarasin has tapped Bank of America and Goldman Sachs for a new advisory team that will strike deals for its ultra-rich clients. The 180-year-old bank is part of a $25bn global business built up by the late Lebanese-Brazilian patriarch Joseph Safra, known as the world’s wealthiest banker when he died in 2020.

J Safra Sarasin, based in Basel, is an arm of the Safra family’s banking interests outside Brazil that has focused on providing wealth and asset management services. It had more than SFr204bn ($225bn) in assets under management at the end of last year. The bank is now seeking to expand into providing advice in areas such as mergers and acquisitions and equity capital raises, aiming to offer clients — including entrepreneurs and family offices — more services. The unit will be led by Edward Joudrey, a former managing director at Bank of America in London who focused on M&A sales processes, according to his LinkedIn profile. Other new members will include Yegor Bryukhanov, also previously at Bank of America, and Lorenzo Sforza, formerly at Goldman Sachs, according to LinkedIn posts from them. The team will focus on dealmaking in private markets, which have become an increasing locus of activity amid the growth of private equity and private credit.

A majority stake in Bank Sarasin was acquired by the J Safra Group in 2011 under a deal valued at CHF1.04bn ($1.12bn), before it later purchased the outstanding shares. J Safra Sarasin said its net profit rose nearly 7 per cent to SFr470mn in 2023, compared to SFr440mn in the prior year. The bank has 30 offices globally with more than 2,500 employees, according to its website.

The wider Safra conglomerate includes real estate, such as the Gherkin tower in London, with a core of financial institutions that also comprises São Paulo-headquartered Banco Safra, Brazil’s fifth-largest private sector lender by assets, and the Safra National Bank of New York, based on Manhattan’s Fifth Avenue.

Tracing its roots to financing trade caravans in Ottoman times, a branch of the banking dynasty moved to Brazil in the 1950s with the family playing an important role in shaping global private banking. Joseph Safra shunned the spotlight but was known for his philanthropy and love of the arts before his death in December 2020.

J Safra Sarasin did not immediately respond to a request for comment outside working hours.

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Essay On Bank Privatisation Pros And Cons {Step by Step Guide} » ️
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Essay On Bank Privatisation Pros And Cons {Step by Step Guide}
Privatization is considered to bring efficiency and accuracy to a company. The market share of private banks on loans has risen to 36% by 2020 from 21.26% in 2015, while the share of public sector banks has dropped to 59.8% from 74.28%. Competition has intensified after the RBI has allowed more independent banks since the 1990s.
Privatisation of Banks Advantages and Disadvantages
Indian Overseas Bank and Central Bank of India are feasible banks for privatisation. The government has estimated ₹1.75 crores from the stake deals in public sector organizations and financial establishments during the current fiscal year, including one insurance company and two PSU banks.
Essay on Privatisation of Banks
250 Words Essay on Privatisation of Banks ... Globally, experiences with bank privatisation have been mixed. In the UK, the privatisation of banks in the 1980s led to increased competition and improved services. However, the 2008 financial crisis raised questions about the stability of private banks.
Privatization of Banks: Benefits and Concerns
Banks were used to bring about a revolution in agriculture and to carry out activities related to it. The Sectoral allocation of Bank Credit underwent a change after nationalization of banks. The Share of Agriculture improved from 2.2% in 1968 to 16% in 1989. The share of credit to Industry decreased from 67.5% in 1968 to 37.5% in 1989.
PDF Recent Trends in Bank Privatization
e papers carry the names of the authors and should be cited accordingly. e ndings, interpretations, and conclusions expressed in this paper are entirely those ... This paper revisits trends in bank privatization and analyzes their economic impact over the past 25 years. Building on a novel data set of privatization events for 70 developed
What is Bank Privatisation ? Pro and Cons of Privatisation
A Simplified Guide on Bank Privatisation in India. Bank Privatisation is the process of transferring ownership, assets, or businesses from the public to the private sector. The government no longer owns the corporation or business. Privatisation transfers ownership, assets, or businesses from the public to the private sector.
Privatization of Banks: Opportunities and Challenges
To deal with banking frauds - PSBs commit 92.9 percent of corporate lending fraud due to poor screening and monitoring. Effective management of NPAs - India's banking system's NPAs were 80% PSBs in 2019. 14.6% of loans are gross NPAs. More market value - Private banks fetch five times as much value as that of a rupee invested in PSBs ...
PDF PRIVATIZATION: TRENDS AND RECENT DEVELOPMENTS
Section II of the paper highlights privatization trends for developing countries as a whole, followed by regional and sectoral breakdowns. Section III examines the extent to which government ownership is prevalent in developing countries, by region and sector. Section IV concludes with a summary of recent developments and issues going forward. II.
Privatisation of Banks
Bank unions have termed the privatisation process a "bailout operation" for corporate defaulters. Private sector is responsible for the huge bad loans. In fact, they should be punished for this crime. But the government is rewarding them by handing over the banks to the private sector.
Privatisation of Banks
Reduces Government Burden: Privatisation will free up the government, the majority owner, from continuing to provide equity support to the banks year after year. The government front-loaded Rs 70,000 crore into government-run banks in September 2019, Rs 80,000 crore in in FY18, and Rs 1.06 lakh crore in FY19 through recapitalisation bonds.
Privatisation of Banks
Why in News. The Union Budget 2021 has announced the privatisation of two public sector banks and one general insurance company in the upcoming fiscal 2021-22.. The move, coming after 51 years of nationalisation of government-owned banks in 1969, will give the private sector a key role in the banking sector.; Presently, India has 22 private banks and 10 small finance banks.
PDF The Lessons of Experience
The World Bank Group supports privatization in the context of its broader goals of economic development and the reduction of poverty.' An efficient private sector makes essential contributions to the attain-ment of these goals. Among the means available for promoting private sector development is the privatization of state-owned enterprises
PDF Privatisation of Banks
Presently, India has 22 private banks and 10 small finance banks. Key Points Background: The government decided to nationalise the 14 largest private banks in 1969. The idea was to align the banking sector with the socialistic approach of the then government. State Bank of India (SBI) had been nationalised in 1955 itself, and the insurance ...
Privatization, Performance, and Efficiency: A Study of Indian Banks
Sathye(2005) studied the impact of privatization on bank performance and efficiency for the period 1998-2000 and found that partially privatized banks have performed better than fully Public ...
Privatization of Public Sector Banks in India: Why, How and How Far
Banks play a critical role in economic growth. In India, the banking sector, dominated by public sector banks (PSBs), has underserved the economy and their stakeholders. The under-performance of PSBs has persisted despite several policy initiatives during the past decade. Meanwhile, private banks have further improved their performance and have gained significant market share. In […]
Privatization in Developing Countries: What Are the Lessons of Recent
A more recent paper by Clarke, Cull, and Fuchs (2009), which examines the privatization of Uganda Commercial Bank (UCB) to the South African bank Stanbic, shows that these elements of best practice also apply when the banking sector is concentrated and under-developed. The government fully relinquished control to a strategic investor in an open ...
Privatization of Banks Pros and Cons
"The Bank of Hindustan", established in 1770, was the first Bank of India which ran for about 60 years and soon failed. The modern day "State Bank of India" was established in 1806 and was first named "Bank of Calcutta".It was later renamed as the "Bank of Bengal" by the British Government.Soon this bank merged with "Bank of Madras" and "Bank of Bombay" and formed a new ...
Essay on Bank Privatization
500 + Words Essay on Bank Privatization - Pros and Cons. Privatization is the process by which the government transfers ownership and control of economic units to the private sector. The primary tenet of privatisation is that the competitive environment and market system compel corporations and private entities to function more efficiently.
Impact of privatisation of public sector banks in India
Issue of accessibility. Inclination towards profit-making. Private players are prone to failure. Positive impact. Mitigation of the NPA problem. Macroeconomic stability post-COVID. Administrative efficiency and quality of customer service. Competition. Capital infusion and foreign investment.
Essay on Impact of Privatization for Students
A.1 Privatization has a lot of benefits. It reduced the government's debts, improved the services and also helped in introducing innovative products. Moreover, it also stopped any political interference plus brought competitive rates. Q.2 What are the drawbacks of privatization? A.2 Privatization also has some major drawbacks.
What is Privatisation?
In government operations, privatization typically involves the transfer of ownership of facilities or business processes to a for-profit private company.The overarching goal of privatization is often to enhance efficiency and reduce costs, thereby providing governments with financial savings. The topic of privatisation holds significant ...
Privatisation of Banks
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Key Banking System Risks in the WAEMU
The gradual alignment of prudential regulations on Basel II/III standards since 2018, as well as improvements in banking supervision and macroprudential surveillance, have contributed to the WAEMU's banking system's resilience to recent global and regional shocks. However, while cyclical vulnerabilities have been contained, bank credit portfolios remain highly concentrated, and their ...
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Safra private bank assembles new dealmaking team for ultra-rich clients. Subscribe to unlock this article. Try unlimited access Only 10 kr. for 4 weeks. Then 739 kr. per month.
Privatisation of Public Sector Banks
When the Economic Survey reviewed bank nationalisation in 2020, it is found that every rupee of taxpayer money invested in PSBs fetches a market value of just 71 paise. This is called the market to book ratio. In stark contrast, every rupee invested in new private sector banks fetches a market value of Rs 3.70.
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