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Marketization Of Public Enterprises – IMPRI Impact And Policy Research Institute

Marketization of Public Enterprises

Session Report

A month Online Immersive Intermediate Certificate Training Course on Contours of Public Policy in India in Amrit Kaal was organized by IMPRI. The topics for the Day 7 of the online program were A New Idea for India, Key trends issues in India’s State Finances and Key Challenges Facing India’s Foreign Policy.

The third session for the day was conducted by Prof Mukul Asher, Visiting Distinguished
Professor, IMPRI; Former Professor, Lee Kuan Yew School of Public Policy,
National University of Singapore (NUS) on Marketization of Public Enterprises.


Firstly, he started by introducing the topic of Marketization by explaining the
following points:

During the 1940 to 1070 period, nationalization of business enterprises, and
setting up of new public enterprises was widely pursued in many countries. The
prevailing ideology then supported it.

But with experience and mounting evidence, nationalization has been
increasingly viewed as a policy in search of a theory; and as a policy which had some short term political and economic benefits, but enormous medium to long
term economic and social costs.

Evidence strongly suggests that in India, nationalization of banks and insurance
companies, airlines, mining and space sectors fall into this category. There is a
drastic change in thinking globally. Example of this kind of thinking is that government has no business to do business. Its job is to think about food for the poor, make houses & toilets for them, get them clean drinking water, make health facilities available to them, make roads, to think about the small farmers.

COVID-19 has had a direct and highly damaging impact on many state-owned
enterprises, including airlines, airports and other tourism-linked enterprises that
have seen revenues plummet. As have national oil companies and other state-
owned commodity producers, state-owned enterprises are also helping to bailout
the wider economy.

This includes corporate governance reform, the introduction of performance
management systems, and greatly enhanced transparency. It must include the
proper identification of and accounting for community and public sector

Many state-owned enterprises will require deeper restructuring, including ones
that have just been created from failing private sector companies. These state-
owned enterprises will need proven and professional management to place the
restructured state-owned enterprise into a sustainable recovery plan; and
independent board members qualified to oversee this process. Non-core
functions should be shut down or spun-off, and transparency and accountability
will be essential for the entire restructuring process, including in the sensitive
disposal of impaired and other assets.

He added successful reform requires going beyond state-owned enterprise level
governance and restructuring. It requires a fundamental change in how the state
acts as an owner of assets. This function must be professionalized, de-
politicized, and separated from policy-making and regulation. This usually
involves the creation of a holding company or other specialized entity.

It also requires developing a two-sided balance sheet for public commercial
assets. This process can help identify new assets, like real-estate, that are undervalued and under-utilized. The IMF has estimated that better utilization of
public assets in this way can add additional public revenue equal to 3% of GDP.

Part of this reform includes the correct classification of state-owned enterprise
debt and borrowing. State-owned enterprise borrowing often has an implicit or
explicit sovereign guarantee, making it part of the national debt, and the
government’s overall debt burden. Sometimes governments claim that there is
not a guarantee, but push social programs and spending through state-owned
enterprises. This is just hiding the debt.

Framework 1: Marketization of State Enterprises and Organizations

He elaborated on the Framework of Marketization of state enterprises and
organization and focusing different topics:


The transformation of a government body in a Companies Act Company.
Corporate governance issues – composition of the Board, recruitment policy
reform, access to outside expertise, greater flexibility to pursue scale,
technological adaptation, and domestic and global business opportunities. He further talked about fragmentation which is breaking up of a firm into a number of separate entities.

Business Environment

He defined it as any measure aiming to increase competition and provide freer
access to the market.


The removal of government-imposed restrictions on any level or type of
economic activity. When an activity is privatized, appropriate and effective regulation must be
established when natural monopolies (mainly utilities) are involved.


He added the removal of rules ensuring monopoly or quasi-monopoly markets by
only selectively undertaking re-investments in existing enterprises; and by
allowing investments from the private sector is demonopolization.


Divestment refers to the act of selling, liquidating, or otherwise getting rid of
assets, investments, or holdings, often for financial, ethical, or strategic reasons.
It is typically associated with divesting from certain stocks, industries, or
companies due to concerns about their social or environmental impact. This term
is commonly used in the context of responsible investing and corporate social

Disinvestment (with control) through FDI

He elaborated that Foreign Direct Investment (FDI) divestment is the process of
a foreign investor or a multinational corporation selling or reducing its ownership
stake in a business, asset, or subsidiary located in a foreign country. This
divestment can be a strategic decision made for various reasons, such as
financial restructuring, changing business priorities, or complying with
regulations. FDI divestment may involve selling shares or assets to a local entity
or another foreign investor, thereby decreasing the foreign investor’s level of
ownership or control in the foreign venture.

Strategic Disinvestment

Strategic disinvestment is a government policy or corporate strategy where a
company or government sells off a part or the entirety of its ownership stake in a
particular business or asset as part of a strategic plan. Strategic disinvestment
may involve selling to private or public entities, but it is typically done with a well-
thought-out plan to maximize the value and benefits derived from the divestment.

Management/Employee Buyout (MBO)

A Management Buyout (MBO) is a business transaction in which the existing
management team or employees of a company acquires a significant ownership
stake or the entire ownership of the company they work for. This is often done
with the support of external investors, lenders, or through a combination of debt
and equity financing.

Leveraged MBO

He explained a Leveraged Management Buyout (Leveraged MBO) is a specific
type of management buyout in which the management team, along with
potentially external investors, acquires a company primarily using borrowed
funds or leverage. In a leveraged MBO, a significant portion of the purchase price
is financed through loans or debt instruments, and the assets or cash flow of the
acquired company are often used as collateral for these loans.

Contracting Out

Now , he talked about performance of Contracting out, which is an external entity
that is paid to perform a service. Technology is making many areas of
government activities amiable to this mode. Drawing of contracts enforcements
are the key, so are transparency and accountability.


The transfer of the performance to a subject who acts in name and on behalf of
the SOE is agency.


The lease of the enterprise to a firm who pays to acquire the right and bear all
the entrepreneurial effects.

User Pay

User pay typically refers to a pricing model or system where the users or
consumers of a particular service or resource are directly responsible for
covering the associated costs. In this model, individuals or entities pay fees,
charges, or subscription costs based on their usage or consumption of the
service or resource. The main reliance is on financing by the users.

Contractor Equity Financing

Contractor Equity Financing (CEF) is a financial arrangement used in the
construction industry, primarily in real estate development projects. It involves
contractors, often the builders or construction firms, providing equity or capital for
a construction project in addition to their services. This equity contribution is
typically made in exchange for an ownership stake in the project.

Public Private Partnership

A Public-Private Partnership (PPP) is a collaborative arrangement between a
government or public sector authority and a private sector entity, typically a
business or consortium, to jointly plan, finance, design, implement, and operate
projects or services that were traditionally within the domain of the public sector.

Broader System Reforms and Divestment Methods

He explained that India has embarked on a path of broader system reforms and
divestment methods to modernize its economy and improve the efficiency of
government operations. Privatization efforts have been seen in sectors like
telecommunications and utilities, aiming to enhance competitiveness and reduce
the government’s role. Disinvestment strategies involve selling government-
owned shares in publicly-listed companies, mobilizing resources, and promoting
private sector participation.

Deregulation in areas like finance and aviation is fostering innovation and competition. Public-Private Partnerships (PPPs) are facilitating collaboration for infrastructure development, from healthcare to transportation. Financial sector reforms are promoting transparency and stability, while digital transformation is modernizing government processes. Tax and administrative reforms aim to improve governance and fiscal management. India’s commitment to these reforms reflects its vision for a more efficient and dynamic economy, attracting both domestic and foreign investments while ensuring better public services and governance for its citizens.

Marketization of the Indian Banking Sector, with Minimal Ownership

He mentioned that India has witnessed a significant marketization of its banking
sector while maintaining minimal ownership change. This transformation has been driven by a series of financial sector reforms and policies designed to
enhance competition, improve efficiency, and broaden access to financial

While the majority of banks in India remain publicly owned, the
marketization efforts have introduced private sector banks and non-banking
financial institutions, injecting healthy competition into the sector. Market forces
and regulatory changes have encouraged banks to innovate, expand their
services, and improve customer experiences. This gradual shift towards
marketization has helped India strike a balance between retaining public
ownership for stability and inclusivity while allowing market dynamics to drive
growth and innovation in its banking sector

Continuing Need to Reform State Enterprises

Finally , he ended the session by focusing on the topic that the continuing need
to reform state enterprises in India that remains a critical imperative for the
country’s economic growth and development. While state-owned enterprises
(SOEs) have historically played a vital role in various sectors, they often suffer
from inefficiencies, lack of competitiveness, and governance issues. These
challenges can lead to resource misallocation and fiscal burdens on the

Reforming state enterprises involves measures such as privatization, divestment,
restructuring, and enhanced corporate governance. These reforms not only help
in unlocking the true potential of these entities but also encourage competition
and attract private investments. Additionally, they can free up government
resources for more critical areas such as healthcare, education, and

Later , the session concluded when he focused on the ongoing reform efforts
seek to strike a balance between retaining strategic control over certain sectors
and allowing market forces to drive efficiency and innovation. Successful reform
of state enterprises is essential for India to achieve its economic goals, improve
service delivery, and ensure a sustainable and competitive business environment
in the global arena. It remains a crucial component of India’s journey towards
economic growth, resilience, and modernization.

Acknowledgement: Riya is a Research Intern at IMPRI.

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.

Read more event reports of IMPRI here:

A New Idea for India

Key Challenges Facing India’s Foreign Policy

Posted by Chaitanya Deshpande, Research Intern at IMPRI.

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