The Hindu Business Line : Is privatisation the way to go?

At least the key sectors — water, electricity, railways — should not be privatised. If one were to argue that the regulating bodies, such as the RBI and SEBI, will prevent scams, one would do well to remember the various stock scams. Also, it is possible for any industry which enjoys monopoly to create an artificial scarcity or at least control the demand and supply position in the market.

ONE of the factors that is likely to play a key role in India's economy is privatisation.

By whatever called — privatisation, disinvestment or sell-off — it will surely determine the country's future in a broad socio-economic aspect. Though much has been written on the topic it remains a highly-debated issue even among the economists.

The PSUs were set up more as an instrument of social welfare. Hence, to successfully implement privatisation or disinvestment without disturbing the socio-economic framework can be a Herculean task.

The issues

Corruption: The concept's (privatisation) success depends a lot on how policy is framed.

One reason given for privatisation is corruption. It is held by the "reformers" that the PSUs are corrupt. Looking from the other side of the coin, it is the same government officials who decide on matters relating to disinvestment. The question is who will take the responsibility for ensuring that those who decide on privatisation are not corrupt.

Control: Another aspect to be considered is control. At least the key sectors — water, electricity, railways — should be left untouched.

If one were to argue that the regulating bodies, such as the RBI and SEBI, will prevent scams, one would do well to remember the various stock scams.

Also, it is possible for any industry, which enjoys monopoly, to create an artificial scarcity or at least control the demand and supply position in the market.

Efficiency: It is also held by some economists that the privatised sectors are far more efficient than the PSUs. If that is the case then why have some corporate giants disappeared.

Under selling: Then there is the risk of under selling the PSUs, especially considering that privatisation is an irreversible process.

In the wake of a sell-off or partial disinvestment, the shares cannot be sold at the book value, or on the net assets basis.

A few things need to be considered to make the act worthwhile to the government and the exchequer: The original market value of the assets — land, building, and so on — and the infrastructure.

More important, the goodwill created over the years, the licences held by the unit, tax benefits available, and the market share should be considered before arriving at the price.

A valuation of the aforesaid intangible assets will certainly be only on a highly notional basis and quite obviously it is highly prone to off the book deals between the political parties and the corporate giants.

Human resource: For any industry to succeed the human resource involved in the same is more decisive than all other assets put together. Hence, due consideration has to be given to the same. The after effect of the sell off on the employees and the management is a cause for concern.

If the privatised unit goes in for retrenchments in the name of cost cutting or brings in its own pool of staff from the parent group, the results can be more disastrous.

One should also understand that once the private parties take over the public sector there will be no more reservations for the weaker sections.

Public welfare: It is a fact that the performance of some PSUs is unsatisfactory and they are a drain on the public exchequer.

They are not up to the mark despite the government patronage, encouragement and support, and even monopoly enjoyed by some. But is sell-off the only answer?

For instance, the Metropolitan Transport Corporation in Chennai has been incurring losses for some time. But one has to consider the after effects of its sale.

One has also to understand that if the Corporation is privatised the private player will quite stop all loss making routes and reduce the number of buses. This will definitely affect the welfare of the local population.

As privatisation is irreversible it will have a far-reaching consequences on the economy. Hence, to ensure sustainable socio-economic growth the process should be based on a pragmatic approach.

The Government and its think-tank will have to display initiative in adopting a foolproof method if it is to go ahead with disinvestment, and reforms, in general, regardless of the time taken and the political conflicts involved.

(The author is with a leading consultancy.)

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