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Privatized Form of Governance in Globalized Era

Who should have the control over the business affairs of the State? Whether it should be the state or private entities (be it foreign or local). The whole globe in this respect has experienced two phenomenon, one is State Capitalism (Nationalization), and another one is Privatization. In 2000, China’s GDP at market prices was $1.21 trillion, and represented only about 3.6% of world GDP; by 2009 these values had reached $11.06 trillion and 17.52%, respectively.

Over this period, China became the world’s leading manufacturer. China’s reliance on and support for state-owned and/or state-influenced national champions in key industrial sectors has prompted many observers to conclude that the country is explicitly adopting the same model of state capitalism. Again in from 2009 to 2015 the China had faced towards privatisation. It was the second largest privatizer in 2009 and the first in 2013, 2014 as well as the 8 months period of January to August 2015.

Aggregate privatisation deals in china totalled more than $40 billion both 2013 and 2014 and spectacular $133.3 billion in the first eight months of 2015 through 247 sales. The bulk of these privatization revenues came from public and private placement offering of primary shares by State Owned Enterprises[1]. By looking into the above example it is really hard to decide what is more beneficial to the economy of the country, whether the state capitalism or privatization. Along with this we need to find out that whether this Privatization is only associated with economic aspects of the country or are there any factors which also get affected by it.

In this paper we are going analyse the topic by understanding conceptual depth, while doing so we are going to look into the meaning of privatized form of Government and its forms and most importantly the reasons for Privatization. Secondly we will understand about the evolution of privatized form of government. Then we will move for its impacts whether positive or negative on the economy and other aspects of the country. Next we will study this phenomenon from the prism of Constitution. And here we will analyse the intersections between the aspects of privatization and Constitutional Goals.

Conceptual Analysis
Before moving further one has to understand the gist of the concept unless it is hard to know anything about that concept. Privatized from of government or Privatization has too many different facets. Depending upon how one perceives it, it can be defined. It has many forms too. Paul Starr defines it as privatization refers to shifts from the public to the private sector, not shifts within sectors. Thus the conversion of a state agency into an autonomous public authority or state-owned enterprise is not privatization, though it may well put the enterprise on a commercial footing.[2]

The transfer of ownership, property or business from the government to the private sector is termed privatization. The government ceases to be the owner of the entity or business.[3] The process in which a publicly-traded company is taken over by a few people is also called privatization. The stock of the company is no longer traded in the stock market and the general public is barred from holding stake in such a company.

The company gives up the name limited and starts using private limited in its last name. Privatization includes contracting government functions out of the public sector or selling state assets. Privatization shifts some or all responsibility for producing and providing goods and services from the government to the private sector. When basic services are privatized, governments often retain ownership of the assets and contract out discrete tasks or entire operations. For example, a country might retain control of the water system but contract out the testing of water purity or water provision to a private company.

After understanding the concept we need to learn why it is needed and what its importance is. And what are the factors which are pushing the Government to go for Privatization. Here are the host of factors which addresses the above questions.

(a) Improvement in Efficiency: Privatization works for maximization of profit as against public sector. Increasing competition forces private sector to work efficiently and for maximization of profit.

(b) Proper utilization of resources: As compared to public sector, private sector very quickly accepts and adopts the advanced technology and this helps to exploit natural resources in a better and balanced manner.

(c) Quick decision: Private organization takes quick decision as compared to public sector and this benefits the organization.

(d) Quick remedies: A private organization can very quickly take any type of decisions for solving any problem and any adverse situation can be handled tactfully and quickly.

(e) No political interference: Private sector does not depend on any government agency for taking any sort of action or decision. Also it is not influenced by third class government policies like corruption, etc.

(f) Better services to customers: Success of private sector mainly depends upon consumer satisfaction and hence private sector aims and works for consumer satisfaction.

(g) Easy funding: Government can easily raise huge funds by selling its equities to private sector.

(h) Easy to fix responsibility: In private sector in most of the cases authority and responsibility goes together and the responsibility of every individual is clearly defined. These force individuals to perform their duties efficiently.[4]

(i) Pressure by World Bank:

· The Bank pressures governments to include plans for privatizing infrastructure and social services in their national development strategies. In many cases, the Bank links the disbursement of a loan to the privatization of certain services sectors (Uruguay and Tanszania).

· The Bank has also pressured governments to impose user fees to recover costs from basic service provision – both public and private. These fees have often been exorbitant and have served as a barrier to access of services by the poor.

· Another way that the World Bank promotes privatization is by requiring governments to decentralize responsibility for the delivery of basic services from the central to state and local governments, although the later would not be ready to handle that.

· Furthermore, the indebtedness of Southern countries is used as leverage by the World Bank and other financial institutions to impose privatization programs on them. Many governments are mired in debt, in part due to excessive borrowing from the World Bank. The servicing of these huge debts has been eating up a large part of government resources for several decades. Consequently, revenues from taxes are not enough to finance government spending. This in turn leads to restrictions on expenditures, leaving little money for basic services and investments in public utilities and pushing government towards privatization.

The next most important aspect to have a look on is the forms of Privatization. Five forms of privatization are identified by Richard C. Brooks in his paper Privatization of Government Services: An Overview and Review of the Literature. These five forms of privatization are:

• Complete Privatization,
• Privatization of Operations
• Use of Contracts
• Franchising
• Open Competition.

Complete Privatization

Complete privatization is the outright sale of government assets to the private sector. This type of privatization not only confers assets but also the related responsibilities of ownership to the private sector. Government run industries and assets have generally been completely privatized through one of three main ways. The first way is share issue privatization. The government sells shares of the government run company which can then be traded on various stock markets. Share issue privatization has been the most prevalent method used, though a developed secondary market is necessary. The second method is through asset sale privatization. In this method, the whole firm or asset is sold to an investor. This is usually done by auction. The final method is voucher privatization in which shares of ownership are distributed to all citizens for free or for a very low price. Complete privatizations have been seen mostly in the transition economies of Central and Eastern Europe in recent years.[5]

Privatization of Operations

The privatization of operations is the turning over of managerial and operational responsibilities of publicly owned facilities to private sector firms. This kind of privatization is often seen with the running of sports and concert venues. Under this arrangement, the private sector firm generates revenue through the collection of fees from individual customers of the government asset. For example, the sports stadiums in New York City are managed by the baseball teams that use the facilities during the baseball season but are run by the New York City Department of Parks during the off season. This kind of arrangement can also be seen in transactions concerning the operation and maintenance of toll roads and toll bridges.[6]

Contracting Out

Contracting out is the production of designated services by a private firm under a contract. Under this scenario, the private sector firm is paid directly by the government for their services. The government finances these services through the taxes or the collection of user fees. This type of arrangement is commonly used for the collection and disposal of solid waste. Other types of services that have been privatized through this type of agreement include security services, data processing services, and consulting services for numerous professions.[7]

Franchising

Franchising is the awarding of exclusive rights to perform services within a specific geographic area to a private firm by a governmental unit. The private firm generates revenue by collecting user fees. Cable television is the most common example of this kind of privatization. Utilities such as electricity, gas, and water service could also fall under this category.[8]

Open Competition

Open competition is the last form of privatization under this classification. Open competition is similar to pure competition as many private firms are allowed to compete for customers within a governmental jurisdiction. This type of privatization can potentially be seen in telephone and internet service providers. This type of privatization is not appropriate for some services as it most likely would not be efficient to have multiple suppliers of electricity, gas, or water service.

Birth Of Privatization In Golabalized World

The Economist Magazine introduced the term "privatization" (alternatively "privatisation" or "reprivatization" after the German Reprivatisierung) during the 1930s when it covered Nazi Germanys economic policy. It is not clear if the magazine coincidentally invented the word in English or if the term is a loanword from the same expression in German, where it has been in use since the 19th century.[9]

The history of privatization dates from Ancient Greece, when governments contracted out almost everything to the private sector.[10] In the Roman Republic private individuals and companies performed the majority of services including tax collection (tax farming), army supplies (military contractors), religious sacrifices and construction. However, the Roman Empire also created state-owned enterprises—for example, much of the grain was eventually produced on estates owned by the Emperor. Some scholars suggest that the cost of bureaucracy was one of the reasons for the fall of the Roman Empire.

Perhaps one of the first ideological movements towards privatization came during Chinas golden age of the Han Dynasty. Taoism came into prominence for the first time at a state level, and it advocated the laissez-faire principle of Wu wei literally meaning "do nothing". The rulers were counselled by the Taoist clergy that a strong ruler was virtually invisible.

During the Renaissance, most of Europe was still by and large following the feudal economic model. By contrast, the Ming dynasty in China began once more to practice privatization, especially with regards to their manufacturing industries. This was a reversal of the earlier Song dynasty policies, which had themselves overturned earlier policies in favour of more rigorous state control.

In Britain, the privatization of common lands is referred to as enclosure (in Scotland as the Lowland Clearances and the Highland Clearances). Significant privatizations of this nature occurred from 1760 to 1820, preceding the industrial revolution in that country.

Impacts of Privatization

The act of privatizing public services and assets comes with some points of contention. Opponents to privatization have pointed out some concerns that arise with privatization. Issues that arise when privatization is considered are:

• Public Employees • Transparency • Ownership • Competition within the system •Importance of the Contract.

Public Employees

One group who often opposes privatization is public employees. A major way private sector groups are able to provide services for less is through the use of less or more efficient labour inputs. When private groups take over assets such as toll roads or lotteries, they often want to lay off personnel or lower their wages and benefits. Public employees are also affected when services are outsourced. When a service is provided by a private firm, a governmental unit may not need to keep people who previously provided those services on staff.

Issues relating to public employees can be handled in the sale or lease agreement. Often certain guarantees are put into place concerning public employees, concerning continued employment, and salary level when these agreements are entered into. Another way public employee concerns are being dealt with is through the use of open competition. In some situations, public sector agencies are being allowed to bid on public contracts along with private sector groups. An example of this can be seen in Texas where public agencies are openly competing with private sector groups on contracts associated with the construction of new roads.

Transparency

Another problem often cited with privatization is the lack of transparency once services are provided by a private sector group. With the numerous open meeting regulations public agencies operate under, the general public is used to being able to have some ability to oversee the operations of a public asset. Once public assets or services are transferred to the private sector, some of this transparency is often lost. This problem can be avoided by mandating certain reporting criterion in the contract and employing public oversight in the form of boards or authorities.

Ownership

Ownership issues can arise when deciding to privatize an asset. In many instances, an asset or service is supported by numerous public groups. For example, a mass transit district may be supported by government funding at the local, state, and federal level. When deciding to privatize this service, which level of government should receive the proceeds of the sale or lease?

Another ownership dilemma that can arise out this kind of situation is how to spend the proceeds. An example of this type of problem is when a state owned toll road is leased or sold. The use of these proceeds can lead to disagreements. The question that often arises is should the proceeds be spent on more projects near where the toll roads are located (as the people who primarily use the toll roads live there) or should they be spread out around the state (as the state as a whole owns the asset)? Issues like this can be very contentious when discussions on privatization occur.

Competition

Keeping competition within the privatization problem can be difficult when privatizing public assets. Competition leads to more efficient operations and lower costs. Unfortunately, leases for toll roads, building operations, and other large assets tend to be long term agreements. As such, the private sector group who initially wins the bid to own or lease an asset will be the lessee for decades if not up to a century. The lease for the Indiana Toll Road was for 75 years and the lease for the Chicago Skyway was for 99 years. The quality of service provided by these groups may slacken in the pursuit of higher profits. Service levels may be mandated in the sale or lease contract but even this might not be enough. To enforce the contract, the government might have to use legal means which they may be reluctant to use.

One way to fight this problem is to have contracts come up for bid more frequently. By having shorter length contracts, the private contractor has more incentive to keep the quality of service at a high level as they would be more likely to retain the contract by doing so. Though this comes with its own problem as the upfront fee for shorter length leases would be less than the long term lease of a revenue generating asset.

Importance of the Contract

As one can infer from the previous points in this section, the contract for these kinds of transactions are very important. The terms of the agreement would define what assets, rights, and limitations would be transferred to the purchaser/leaser and to the State. Things like quality of service, any revenue or cost sharing, and courses of action in case of one party not living up to the agreement can be outlined. Often defined in the contract are what is to happen to any public employees who are affected. In the case of toll roads, toll bridges, and toll tunnels, one main feature of the contract is the amount and time frame in which tolls can be raised. Contracts associated with the lease of public assets can be very detailed. An example of this can be seen in the lease of the Indiana Toll Road which had a contract that was 400 pages long.

The example of the U.K. lottery privatization can highlight the importance of the contract. The Camelot Group was accepted as the lottery operator for seven years starting in 1994. The company was granted a certain percentage of the profits with the rest going to cultural projects in the U.K. Public sentiment towards the agreement turned sour when the company‘s executives and board members gave themselves huge raises after the first few years. While this lessened the company’s profits marginally, the majority of the increased salaries were picked up at the expense of the cultural projects.

5. Privatized Form Of Government And Constitutional Goals In India
In this part the emphasis has to be supplied from the point of view of Preamble, Fundamental rights and duties along with Directive Principles of State Policies.

Preamble

We do know that preamble is the key to open the minds of the makers of the Constitution and the same has been held in plethora of Supreme Court judgements. Preamble spells out the intentions of framers of the Constitution. Whenever we refer Privatization from the point of view of Preamble the word Socialist tends to bridge the relationship between the two. Many scholars argue that privatization in a way promote Socialist principles. Before taking these points on hand one should learn what Socialist stands for in the preamble.

The term Socialist has not been defined in the Constitution. Black’s Law Dictionary defines it as A political and economic theory of social organization which advocates that the means of production, distribution and exchange should be owed or regulated by community as a whole[11]. Prof. M.P. Jain observes that, the term does not, however envisage doctrine Socialism in the sense of insistence on state ownership as matter of policy. It does not mean total exclusion of private enterprises and complete state ownership as a matter of policy.[12]

Comparing these principles one can say easily note down that Privatization is one of the mode through which the Socialism principles of the Constitution are getting realized. Instead of State Monopoly where the complete ownership of the resources of the country will be in the hands of Government, we have moved for laissez fair policy, where any private person can come and invest in the respected spheres of economy. It is so noteworthy that, these Socialist principles of the Constitution are becoming trans-boundary because under Privatization it is not only our community or our state people who are coming to invest but also the foreign and multinational companies.

Fundamental rights

Part III of our constitution guarantees these rights to the people of India (Sometimes even for Foreigners). The responsibility of the observance of these rights has been vested with the State. Hence any violation of these rights can make the state responsible. These rights are only enforceable against the State only. And the definition of State is confined to the meaning given to it under Art.12 of the constitution.

It has been alleged that in the guise of Privatization the State is escaping from its liability to observe the Fundamental rights. However judiciary had evolved Instrumentality Test in Ajay Hasya Case[13], but how far it holds good for the emerging trends of privatization is a matter of debate.

Role of Judiciary in this regard is much more essential. In NGO Goa Foundation case[14] Justice A K Patnaik makes an observation, We (judges) have taken oath to uphold this Constitution and not western economic model. By quoting this, he says if there is any violation of any Human Rights even by a private entity one can enforce their right through the Court of law. This decision is of 2013 but it has been felt that Judiciary is now tilting towards privatization. We can quote an example for this, where in 26th March 2019 Supreme Court of India (the bench comprising of Justice D Y Cahndrachud and Justice Hemant Gupta) by diluting Instrumentality Test iterates that statutory regulation on the private bodies by itself does not make them subject to writ jurisdiction.

Directive Principles of State Policies

These policies are laid down under Part IV of the Constitution. Even though Art.36 of the Constitution clearly provides

Directive Principles of State Policies set forth the humanitarian social precepts that were the aims of the Indian Social Revolution.[15]

Viewing these Policies from the point of privatization we need to understand that whether the State is really striving to achieve the goals set forth in the DPSP or in the guise of Privatization is it moving negative to it.

The directive under Art. 38 of the Constitution i.e., State to secure a social order for the promotion of welfare of the people has been to some extent fulfilled by the Privatized form of Government. As per the directive through privatization the State had minimized the income inequities by creating many jobs under the guise of privatization. Art.39 (b) can also be said to be fulfilled by the Privatization. This Article says that the ownership and control of the material resources of the community are so distributed as to best to sub serve the common good.

The most moot able pint lies in Art.48A where the obligation is imposed upon the state to Protect and improve the environment and safeguarding of forests and wild life. The most booming issue in this regard is that those private industries that got licencing from the Government to carry out their activities are in other way harming the environment and on the other side it is also notable that ignoring environment Impact Assessment even our Governments are allowing private entities to exploit the environment. It is noteworthy that Protection of environment is not merely a directive rather had been recognised as fundamental right.[16]

There is plethora of cases including M.C.Mehta v. Union of India[17], Kinkiri Devi v. State of Himachal Pradesh[18], PUDR v. Union of India[19] where PIL has been sought against those private entities for polluting the environment.

Fundamental duties

Fundamental duties are introduced to Indian Constitution through Constitution (42nd Amendment) Act, 1976. Fundamental Duties are enshrined under Part-VIA of the Constitution. Even though these duties are not enforceable[20] they aimed at securing social and economic freedoms by appropriate state action[21]. Though even they are also not enforceable but they set up a code of conduct to the people of India.

When it comes to privatization and environment issues it is not wrong to say that Indian people have taken their duties in a strict sense. The incident happened in Chatthisghar stands as a live example for this. The Sheonath River Project was one of the initial water privatization projects in India. Thousands of people protested against the government’s decision to hand over 23 kms of the river to private companies and the banning of the locals from using the river water.

Conclusion
Privatized form of Government in indeed for a developing Country like India but too much of Privatization can also leads to disastrous results. To what extent a privatization is needed and what form of Privatization is needed all depends upon the socio- economic and also political factors of that particular country. However in a Country like India service sectors like Health, education and basic amenities should be excluded from the sphere of Privatization.

Bibliography
1. Boubakhri N. Cossett JC, Role of State and Foreign owners in corporate Risk Taking: Evidence from privatization, Vol.3, Journal of Financial Economics, (2013).
2. David Parker, David S. Saal, International Handbook on Privatization, (Abingdon: Taylor & Francis Ltd, 1997).
3. Edwards, Ruth Dudley,The Pursuit of Reason: The Economist 1843–1993,Harvard Business School Press, (1995), p. 946. ISBN 978-0-87584-608-8.
4. Gupta, Nandini, Partial Privatization and Firm Performance, Vol.2, The Journal of Finance, (2005).
5. Krutilla. et al., Public versus Private Ownership: The Federal Lands Case, 2J Pol. Analysis & Mgmt. 548 (1983). Also available at, https://doi.org/10.2307/3323573 accessed on 26.03.2019 at 17:55.
6. M.P.Jain, Indian Constitutional Law , 8th ed., (Nagpur: Lexis Nexis Butterworths, 2018).
7. Oum, T., N. Adler, and C. Yu., Privatization, corporatization, ownership forms and their effects on the performance of the world’s major airport, Journal of Air Transport Management. (2006).
8. Paul Starr, "The Meaning of Privatization," Yale Law and Policy Review 6 (1988): 6-41. This article also appears in Alfred Kahn and Sheila Kamerman, eds., Privatization and the Welfare State (Princeton University Press, 1989).
9. Saul Estrin, Privatization in developing Countries: What are the lessons of recent experience?, The World Bank Research Observer, Vol.33, issue1, (February 2018).
10. Shleifer,A., State versus private ownership, vol.12, Journal of Economic Perspectives,(1998).
11. Wei, Z., F. Xie, and S. Zhang, Ownership structure and firm value in China’s privatized firms: 1991-2001., vol.1, Journal of Financial and Quantitative Analysis, (2005).

End-Notes
[1] Saul Estrin, Privatization in developing Countries: What are the lessons of recent experience?, The World Bank Research Observer, Vol.33, issue1, (February 2018).
[2] Paul Starr, "The Meaning of Privatization," Yale Law and Policy Review 6 (1988): 6-41. This article also appears in Alfred Kahn and Sheila Kamerman, eds., Privatization and the Welfare State (Princeton University Press, 1989).
[3] . Krutilla. et al., Public versus Private Ownership: The Federal Lands Case, 2J Pol. Analysis & Mgmt. 548 (1983). Also available at, https://doi.org/10.2307/3323573 accessed on 26.03.2019 at 17:55.
[4] Gupta, Nandini, Partial Privatization and Firm Performance, Vol.2, The Journal of Finance, (2005).
[5] Wei, Z., F. Xie, and S. Zhang, Ownership structure and firm value in China’s privatized firms: 1991-2001., vol.1, Journal of Financial and Quantitative Analysis, (2005).
[6] Boubakhri N. Cossett JC, Role of State and Foreign owners in corporate Risk Taking: Evidence from privatization, Vol.3, Journal of Financial Economics, (2013).
[7] Shleifer,A., State versus private ownership, vol.12, Journal of Economic Perspectives,(1998).
[8] Oum, T., N. Adler, and C. Yu., Privatization, corporatization, ownership forms and their effects on the performance of the world’s major airport, Journal of Air Transport Management. (2006).
[9] Edwards, Ruth Dudley,The Pursuit of Reason: The Economist 1843–1993,Harvard Business School Press, (1995), p. 946. ISBN 978-0-87584-608-8.
[10] David Parker, David S. Saal, International Handbook on Privatization, (Abingdon: Taylor & Francis Ltd, 1997).
[11] Socialist Definition, Black’s Law Dictionary (9th ed. 2009), available at Westlaw.
[12] M.P.Jain, Indian Constitutional Law , 8th ed., (Nagpur: Lexis Nexis Butterworths, 2018).
[13] AIR 1981 SC 487.
[14] Goa Foundatiion v. M/s Sesa Sterlite Ltd. & Ors., WRIT PETITION (C) NO. 711 OF 2015.
[15] Kesavananda Bharathi v. State of Kerala, (1973) 4 SCC 225.
[16] M. C. Mehta vs. Union of India, 1987 SCR (I) 819.
[17] (1997) 2 SCC 353.
[18] Civil Writ Petition 82 Of 1987.
[19] AIR 1982 SC 1473.
[20] Art.37 of the Constitution.
[21] Akhil Bharathiya Soshit Kermachari Sangh v. Union of India, (1981) 1 SCC 246.

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