Financial Daily from THE HINDU group of publications
Monday, Sep 09, 2002
Industry & Economy - Disinvestment
Why disinvestments must go on
R. C. Acharya
THE disinvestment exercise politically the correct word for privatisation is at a crucial stage, pulled in various directions by political and business interests. At stake is the fiefdom of public sector units.
But, looking at the disinvestment exercise dispassionately, it is actually a blessing in disguise. For, if nothing else it will certainly end politicians enjoying free lunches at the cost of the consumer and the tax-payer.
Economic Theory of Politics is a well-known model that assumes that voters are `utility' maximisers and political parties `vote' maximisers. While the individual voter will favour a political party which he considers, or perceives, will provide him with the highest utility (welfare) from government activity, a political party will aim to formulate policies to achieve these goals.
Unfortunately, this conflicts with the social welfare maximising model of government behaviour under which the politicians are supposed to seek office to push through policies for social good. Declining levels of political integrity over the last couple of decades have resulted in widespread abuse of political power for achieving narrow gains and securing personal vote banks. Over the years, unfortunately, the PSUs have become unwilling tools for some unbridled pork barrel politics in the grubby hands of politicians.
The Unit Trust of India is still struggling to get out of the huge losses it suffered on account of unwise investments it made reportedly at the behest of the Finance Ministry. Now, the petrol pump scam has brought into open the blatant favouritism indulged in by the political class, in general. Free lunches enjoyed at Hotel Ashoka and other ITDC units are a legend and recently the Minister for Railways chose to ignore expert advice by announcing the creation of seven new zones. Ostensibly to improve administrative capability of the 1.7-million behemoth, the apparent objective is creation of more job opportunities in the beneficiary States, adding to the already bloated work force and adversely effect the Railway's operational efficiency.
It was the indomitable Lady Margaret Thacher who, as Prime Minister, pursued for 11 long years the privatisation of Britain's nationalised industries with a single-minded determination borne out of the conviction that government had no business to be in business. Since then former citadels of Socialism have embraced the new mantra, broken up state monopolies selling them to private parties choosing to let market forces determine their future course. In the satellite states of the former USSR, the Eastern Bloc countries, Zambia, Vietnam, and China, private enterprise is no longer a dirty word!
What exactly does privatisation involve, and what are the mechanics of achieving the ultimate goal, noble or otherwise? In the UK it involved transfer of public sector resources to the private sector, some of the most publicised sales being of British Telecom, British Gas, British Airways and Regional Water Boards.
Privatisation could also involve deregulation that is, permitting private sector participation by lifting restrictions to enable them to compete. The Open Skies policy of Rajiv Gandhi saw a number of airlines jostling for airspace, in the process making Indian Airlines, the virtual monopoly till then, more efficient and customer friendly.
Recent outright sale of whole or parts of PSUs has resulted in a few success stories in India. Sale of IBP for Rs 1,154 crore to IOC was followed in quick succession by sale of controlling interest in VSNL to the Tatas for Rs 3,689 crore; IPCL to Reliance for Rs 1,491 crore; Hindustan Zinc to Sterlite for Rs 445 crore and now the automotive sector flagship, Maruti Udyog, to Suzuki for Rs 2,424 crore.
Sale of land and property is also a highly profitable exercise. In the UK, tenants of local authorities were given the right to buy their own homes under the 1980 Housing Act. About 1.5 million houses were sold in the 1980s, and the amount realised was as much as from the sale of industries. However, a recent allotment of land to 219 government, social, educational, religious, and cultural institutions has reportedly resulted in the Union Urban Development Ministry drawing considerable political flak.
Reasons given for privatisation have been many, the first being that it generates a great deal of income for the government, giving rise to the now familiar allegation of selling `family silver'. In the exercise carried out in UK, the water companies fetched over $10 billion, British Gas about $13 billion, and British Petroleum over $12 billion. The Indian experience, in spite of the various allegations of a sell off to the private sector and other minor hiccups, has so far been quite encouraging.
In quite a few cases the PSUs were poorly managed, and lacked the incentive to make profit, since their main aim was to provide a public service. It has been argued that when privatised they would be forced to reduce costs by cutting down excess manpower, improving services and showing a profit. Sterlite's take over of Balco could be a test case and will hopefully prove to be a win-win situation for all involved, including its vast labour force.
It is argued that consequent to deregulation an organisation would be forced to improve services and charge competitive prices. It would be forced to innovate; consumers would benefit from reduced prices and also have a greater choice. The recent steep fall in airline tariff appears to have more than justified the deregulation and the Open Skies policy adopted nearly a decade back. Now thanks to the cellular wars, consumers have benefited from the continuing drop in telephone tariffs.
In the Indian scenario perhaps one of the most important gain would be that in the private sector; with little political interference, the PSUs would be free to plan their growth, set price and investment levels and so on, all determined by market forces.
Privatisation is also supposed to increase ownership of shares which would lead to a `property-owning democracy'. This would result in people having a stake in the success of the company and the economy in general.
Workers participation could be given a totally new meaning, with equity being given as bonus in a profit sharing exercise.
Undoubtedly, privatisation is expected to improve accountability to shareholders and consumers who would expect a better return on their investment and a better quality of services at a fair price. The bottomline would be to give customer satisfaction at the lowest possible unit cost, to be achieved by improved efficiency, higher productivity and better response to customer needs.
But to what extent has it been possible to achieve these objectives? What are the lessons learnt from the exercise carried out in the UK? Consequent to privatisation of telephones, electricity and gas supply the cost of services fell, and quality of performance also did improve. However, the consumers were in for a nasty shock when water supply companies raised the prices by 15 per cent, and buyers of new homes were required to cough up six times the previous charges for obtaining a pipe connection from the water mains!
Deregulation of the bus services outside London led to a fierce and somewhat unhealthy competition. For instance, in Manchester the 60-odd private operators resorted to speeding along the routes, trying to beat their competitors to bus stops, not unlike the infamous Red Line buses of Delhi!
Offices of Fair Trading (OFT) were deluged with complaints about `unfair' competition. The Monopolies and Mergers Commission complained about `unstable and potentially destructive competition with little or no benefit to the consumers', and called on the government to set up a `searching review'.
In all cases, privatisation did not lead to greater competition. For instance, some of the public monopolies have now become private monopolies and have only exploited their position to earn higher profits. It is now argued that some of the natural monopolies which had been sold off should have remained under government control to prevent duplication of resources. While it is too early to take stock and list out the lessons learnt in the ongoing exercise in India, eliminating political control and the resultant abuse of power and corruption could perhaps be the single most important gain. And that in itself is quite something for the one billion Indians to celebrate about!
(The author is a former Member (Mechanical) of the Railway Board.)
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