The Hindu Business Line : Privatisation: Perils of dithering

With the disinvestment target falling short by a whopping Rs 8,000 crore, it is surprising that the Government is still dithering about offering shares to the public in such major undertakings as IOC and ONGC, which can easily fetch over Rs 5,000 crore. With the Sensex at an all-time high, this is the time to offer the public shares in state-owned enterprises, says T. C. A. Ramanujam.

"Bad Government is the biggest single reason for poverty in the third world, and less government is the most effective single remedy".

— The Economist.

THE Mid-year Review of the Economy is notable for a significant omission. There is no mention of the on-going efforts to privatise public sector undertakings. More than 120 loss-making public sector units have tripled their losses in the past decade, the figure growing at an annual average rate of 12 per cent. The target of Rs 13,000 crore, set as probable realisation from disinvestments, falls short by Rs 8,000 crore.

Instead of the route of offering shares to the public in such major undertakings as IOC and ONGC, which can easily fetch over Rs 5,000 crore and still help it retain effective control, the Government has decided to squeeze as much profit as possible by way of interim dividends.

The Supreme Court's ruling in the BPCL case appears to have thrown a spanner in the works . The Centre would not like to face Parliament for amendment of the statute. Obviously, politics stands in the way.

Public expenditure versus growth

The mid-year review points out that the fiscal deficit during the first half of the financial year went up to Rs 81,014 crore, representing 52.7 per cent of the current year's Budget estimates, against 42.6 per cent last year.

Non-Plan expenditure, at Rs 1,70,211 crore, exceeded last year's figures by Rs 50,046 crore. Such excessive increase in government expenditure often results in stunted economic growth.

James Gwartney writes in the Wall Street Journal: "As the size of the Government has expanded in the US, growth of real GDP has steadily fallen. The growth of real GDP in the 1990s is only about half of what it was during the 1960s and well below even that of the turbulent 1970s."

The World Development Report of 1997 concluded that the large and growing role of governments in the last 50 years has been counterproductive. OECD studies indicate that as government expenditure in 23 countries rose from an average of 27 per cent of GDP in 1960 to 48 per cent in 1996, average annual economic growth fell from 5.5 per cent to 1.9 per cent. The greater the government share of GDP, the greater the decline in growth, and vice-versa.

Aristotle put it graphically 2000 years ago: "That which is owned in common by the greatest number has the least care devoted to it".

A former Union Minister succinctly analysed the two developments that wrecked the public sector:

The practice of government appointing IAS officers to run PSUs.

The declaration by the courts that PSUs were "state" and, therefore, all Government rules would apply to their functioning.

The American author E. S. Savas identifies the characteristics of potential privatisation candidates as inefficiency, overstaffing, low productivity, continuing losses, unresponsiveness to the public, insufficient funds for needed capital investments, excessive vertical integration, obsolete practices and corruption.

Privatisation has been thought of as the solution to reduce the cost of Government, generate revenues, bring in specialised skills and accelerate the rate of economic development.

Forms of privatisation

A competitive environment is necessary for successful privatisation. Different techniques and terms are used depending on the socio-political environment.

The various terms used are: Public-private partnerships; contracting out; denationalisation; de-governmentalisation; destatisation; sharisation; divestment; corporatisation; commercialisation and marketisation.

Post-socialist countries revived their devastated economies by repealing laws that prohibited private ownership, thereby encouraging entrepreneurs and allowing market mechanism to prevail. Marketisation aims to achieve economic efficiency through exposure to market discipline.

The end result of deregulation, says Savas, is the emergence of demand-driven, market-based arrangements to satisfy unmet needs.

China experimented with deregulation of agriculture in 1978, enabling farmers to exercise property rights on payment of rent to the State in the form of contracted deliveries of grain. That was privatisation by displacement and created agricultural wealth, contributing to the Chinese economic boom.

China also withheld support to state-owned enterprises, often by failing to pay the workers, and thereby hastening their departure from inactive, moribund enterprises. Displaced workers started doing business in the booming private sector and firm autocratic control avoided significant social unrest.

A study of 6,300 firms in seven post-socialist countries showed that privatised firms recorded appreciable productivity gains ranging from three to five times, leading to the conclusion that privatisation is the key to restructuring state-owned enterprises.

Evaluation of the British privatisation programme showed improvements in efficiency, reduction in the power of the state and the trade unions, and increased opportunities for competition.

Offering of shares to the workers in the disinvestment process led to the British trade unions objecting to re-nationalisation at the time of change of Government. It has been pointed out that privatisation leads to increased efficiency, not by lowering wages and benefits but by greater productivity.

Fewer workers are needed to do the same amount of work. The single greatest problem in implementing privatisation is the long-standing paternalistic and patronage policies towards public employment.

Labour opposition can lead to outsourcing of jobs as is happening even in the US and Europe. Services may have to be contracted out (for instance, the Income-Tax Department asking the UTI to take over PAN work).

Redundant workers will have to be shed by attrition and early VRS. It is useful to remember that unions exist in privatised units also.

Hazards and remedies

Legitimate nationalist fears about foreign participation in privatised units call for such measures as putting majority ownership in the hands of the nationals and the introduction of a "golden share" to veto any subsequent sale to a foreign entity.

A weak capital market need not be a deterrent. Jamaica was able to carry out the sale of shares to the public in the Government bank even though the Kingston Stock Exchange was open only two afternoons a week for two hours each time.

Concerns about the concentration of wealth in a few hands would, of course, have to be addressed. The Tory Government in the UK avoided this problem by limiting the number of shares per buyer and promoting purchases by workers and all members of the public.

The subsequent Labour Government had to abandon the party's economic creed of nationalisation and stood by the policy of privatisation. It even divested 51 per cent of share in the air traffic control system. Concepts like lease-build-operate (LBO), build-transfer-operate (BTO), build-operate-transfer (BOT), buy-build-operate (BBO), and build-own-operate (BOO) have come to occupy centre-stage with regard to infrastructure development.

It may be too late to stop the privatisation juggernaut. But successful privatisation requires public trust in the government.

Maruti Udyog is a pointer to show how revenue can be gathered in transparent ways by offering shares to the public.

With the Sensex at an all-time high, this is the time to offer shares in the state-owned enterprises to the public.

Article E-Mail :: Comment :: Syndication

Stories in this Section
A master for shipping

Succession and secularism: Will a common civil code help?

Steel war across the Atlantic

Privatisation: Perils of dithering

`We need to mould our scientific talent'

Scary scene

Competition Commission

Trade fair Web site