Privatization: It’s Feasibility in the Indian Context

Introduction:

The Indian economy has developed to the extent that public investment is to be considered as the last option when other alternatives are unavailable. But Privatization may not be feasible or practical: in all areas and its viability need's to be studied on a case by case basis

Development of Thought:

Privatization has become a fashionable subject. The literature is full of discussions of methodologies and techniques of privatization and the experience of various countries in undertaking privatization.

However, it is essentiality and efficiency that remains the test for any policy and strategy and hence a pragmatic point of view needs tube; adopted to examine the scope of privatization in the Indian context. Privatization has plenty of scope to grow but it may not be feasible to do away with public enterprises completely.

Various studies show that privatization may not be feasible in organizations such as STC and Coal India Ltd. Privatization hash would entail many problems in actual practice. The very magnitude of public enterprises that need to be privatized will require some kind of selectively approach-but selectivity on what criteria?

Conclusion:

Ultimately, what is needed is privatization in the stem of functioning of public enterprises; this is even more important than attempts to privatize ownership in certain cases.

In the last few years the entrepreneurial base in the country has considerably widened and the professional management capabilities have expanded toil significant extent. It is no longer true that the private sector will fight shy of investments involving large magnitudes or long gestation periods.

A reasonable well-developed capital market has come into existence. Both, severe constraint on resources for the public sector and the desirability of keeping it with in manageable and monitor able limits, clearly demand that in future we stall regard public investment not as a preferred option but as a course of the last resort, to be considered only if alternatives are not available.

Such an approach need not be confined to certain non-core or low-priority sectors. While significant public investments may continue to be necessary in the infrastructure areas, we could also think of a role for the private sector in fields such as power, oil and natural gas, steel, etc.

However, such acceptance of an enlarged role for the private sector is based on the assumption that the investment would be genuinely private.

If the private entrepreneur contributes or raises only a fraction of the investment resources needed and depends for the bulk of the resources on public financial institutions, this would not be genuine private investment.

We shall have to insist on a larger mobilization of resources by the entrepreneurs and a much smaller draft on the; public financial institutions.

The term privatization is normally used in the context of existing public enterprises, and we shall now consider the scope for privatization in that context.

If we were to formulate certain criteria or principles for public investment such as essentiality from the point of view of policy or strategy or the difficulty of bringing about the desired development in the private sector and then carry out a review of the existing configuration of public enterprises from a 'zero base' approach, we may find that many of them really do not qualify by such criteria.

The fact, nonetheless, remains that, these exist and some of them have struck roots in the economy; and in the aggregate they represent a massive investment. The question is: what is the scope for privatization of some or many of these?

There are some organizations in the public sector whose activities have strong public policy content. This would be true, for instance, of organizations established essentially for acting as an agency of the government in undertaking market interventions for bringing about stabilization of prices or supplies.

The Food Corporation of India, the Futon Corporation of India, and the National Dairy Development Board (in so far as it is concerned with edible oils), are examples.

State trading organizations like the STC and MMTC have the objectives of promoting exports, bulking imports for obtaining better terms, exploring counter trade possibilities and the stabilization of supplies and prices in the case of certain commodities.

It is difficult to think in terms of privatization of such organizations. We can go into the need for the State to intervene in the interest of some of the objectives mentioned above, and may well come to the conclusion that in a particular case, here is no such need and that the operations can be abandoned; or even that an entire organization can be wound up.

Theoretically, it may be possible to think of a private organization undertaking such market intervention operations as an agency of the government on an agreed remuneration; however, in practical terms this seems very doubtful. The scope for privatization here seems to be very limited.

Let us consider next what are generally regarded as 'core' or 'infrastructure' public enterprises such as Coal India Ltd., Oil & Natural Gas Commission, Oil India Ltd, the Railways, the power generation organizations (NHPC, NTPC, the State Electricity Boards), and so on.

It seems rather difficult to think in terms of privatization in the case of coal -mining. It was because of the unscientific mining of this natural resource (slaughter-mining) and the severe exploitation of the workers by private owners that coal mining was nationalized in the seventies, leading eventually to the establishment of Coal India Ltd.

Not all the objectives have been achieved, though massive investments have taken place and coal production has gone up substantially.

Coal India faces many problems and a major package of rehabilitation measures, including the shutting down of some uneconomical operations, rationalization of the work force, and so on, is clearly called for. However privatization does not seem to be one of the options available in this context.

Considering the scarcity and importance of oil and natural gas resources, major role that these play in the national economy, such as the need for imports and the implications thereof on balance of payments, the rationale of cross subsidization of certain products.

The importance of ensuring availability in re- areas, any large scale privatization in this sector as well does not seem feasible. However, under the coordination and control of an umbrella public enterprise such as ONGC, it seems possible to contract out some parts of the explorer and development efforts to the private sector, Indian or foreign.

There is also scope for allowing some degree of private sector participation in the refining marketing of hydrocarbons without seriously undermining the Governor control over the management of the energy economy of the country. Prop for joint-sector refineries are, in fact, in existence but have not made much progress for a variety of reasons.

Allowing the private sector a role in power generation is again an accepted idea which has not made much progress, appears that while there are a scope for some degree of private participation these crucial infrastructural sectors, our experience so far has not been very promising.

Turning to the Indian railway system, which is the national freight carrier foil the economy, the need for coordination, the massive investments needed for the modernization and the up gradation of the system and the relatively low profitability of this activity, would seem to rule out any scope for privatization here.

In so far as the state road transport corporations are concerned (including the Delhi Transport Corporation), there is certainly a good face for privatization.

It must, however, be borne in mind that many of the state road transport corporations have come into existence through the nationalization of activities which were earlier in the private sector, which was aimed at bringing about a more extensive communication network and providing better service.

If we now think in terms of privatization of some of these services, we shall have to consider two crucial questions: (i) If it is desired to subsidize road transport for passengers (as is being done through the DTC), can this be done through a private agency? (ii) How can we ensure that private transport operators who are essentially profit- seeking will provide a satisfactory transport linkage to remote areas?

It is possible that the operators may concentrate on what they regard as more profitable routes and ignore many localities and pockets which do not offer them much cope for making money; such areas will then be very poorly served or not served at all, is not impossible to find solutions to such problems, but any privatization effort would need to go into such matters, which were in fact the considerations which led to the development of public transport.

Similarly, with banking and insurance, postal services and telecommunications, urban areas and economically better-off sections of population will probably receive greatly improved service under privatization. The question then is: will the needs of the poor sections and the remoter areas be adequately taken care of?

There is no particular reason why a significant part of the production of steel or petrochemicals or fertilisers or automobiles should be in the public sector. Whatever the historical reasons for public investment in these areas, we ought to re-examine the matter.

However, the public enterprises in this sector exist and some have existed for a long time. If they are doing well (e.g., National Fertilisers Limited, IPCL, Hindustan Organic Chemicals Ltd., Maruti Udyog Ltd., BHEL is there any special reason other than ideological why they should be privatized?

Several arguments can be advanced in favour of privatization: recouping a part of the invested resources; getting out of some unimportant or low-priority activities; exposing the public enterprises to questioning by private shareholders; subjecting them to the discipline of the capital market.

Purely from the point of view of policy or strategy, there is clearly no serious objection to these activities being in the private sector. However, we have to consider "scope" in the other sense, namely, feasibility- and the problems that will have to be faced in any such efforts at privatization.

The 244 Central public enterprises accounted for a massive investment of Rs. 99,315 cores at the end of March 1990. Even if no attempt is made to revise that past investment figure into current terms, and even if only a part of that figure is taken as equity, raising funds of this order from the capital market seems unthinkable.

Wholesale privatization is, therefore, not a feasible or a practical proposition. Even if only profit-making enterprises are taken up for privatization, the figure would still be very large. A selective approach seems inevitable.

But selectivity on what criteria? The Government may wish to get rid of loss-making enterprises, but would those be readily saleable? If only profit- making enterprises are privatized, the Government will be left with the loss making enterprises, and might be worse off. Some kind of a mix will have to be tried, taking care to see that policy objectives are not adversely affected.

In this context, we must take note of the announcement made by the Government of a partial disinvestment programme: the idea was to disinvest 20 per cent of the equity in selected enterprises.

No indication has been given of how the selection would be made. The equity was proposed to be disinvested in favour of mutual funds and public financial institutions, and an amount of Rs.2, 500crores was expected to be raised in this manner.

Essentially, this was one of the devices which the Government had in mind to reduce the budgetary gap; it was not really addressed to the problems of public enterprises and was not a well thought-out privatization programme. It does not appear that the Government has considered the implications disinvesting in favour of mutual funds and public financial institutions.

In first place, it would be wrong for the Government to tell the mutual funds invest in specific enterprises; that would be a serious abridgement of autonomy in the management of the funds that they have collected from the; number of people.

Secondly, there is a certain commitment to the public their funds would be invested in a manner which ensures maximum possible return; and the portfolio management by the mutual funds has to keep view. They would need to consider how precisely their portfolio would be affected if they were to invest in certain public enterprises at the behest of the Government.

As regards the public financial institutions will they be able to take up equity public enterprises of this magnitude without cutting into the funds meant equity/term-loans for the private sector?

In any case, how can a transfer of equity in selected public enterprises from the government to government-owned final institutions be described as "privatization" in any sense?

If a part of the equity were to be offered to the general public, that certainly would be partial privatization. However, if the offered equity were to be taken up by a few large houses, would this really be in public interest? Apart from question of increased concentration of economic power in certain groups, would this kind of privatization improve competition?

How will the equity of the selected public enterprises be priced? There some very difficult issues here. It may be recalled that there has been a severe criticism in Britain of the under-pricing of assets in certain cases.

If a part of the government equity in a profit-making public enterprise is disinvested, the dividend income of the Government will be reduced to some extent. A comparison of the one-time capital inflow with the reduction in the recurring stream of dividends would be necessary.

Moreover, public enterprises are being repeatedly exhorted to increase their generation of internal resources so as to maximize their contribution to the financing of their plan programmes and to minimize the draft on the government budget for investment funds, could be said that the Government is willing to accept a lower rate of dividend provided a public enterprise makes a substantial contribution of internal resources towards its investment programmes.

This situation will change if there is private equity. Private share-holders will insist on a much higher rate of dividend. If the dividend rare is stepped up because of this, then the generation of internal resources by a public enterprise for plan outlay purposes may be affected.

Lastly, if the proceeds realized from the disposal of shares is used by the government to reduce the budget deficit or to avoid the imposition of additional taxes, it will be a case of using capital receipts towards current expenditures.

This, in fact, is what Britain has been doing, and such a course has been criticized in that country as "selling the family silver". Selling capital assets to finance current expenditures is not a course of action which can be sustained for long.

Some of the sick private undertaking should never have been taken over as no restoration to health was possible. In such cases, the closure of the enterprise file only sensible course of action.

Examples of public enterprises which fall (this category will include Scooters India, the Surgical Instrument Plant of IDPL at Madras, the Tannery and Footwear Corporation. Privatization may be an alternative to closure in certain cases if a private industrial group is interested in sing it for whatever reasons.

Some of the loss-making or problematic public enterprises can, indeed, be militated given time and funds. However, there are difficult political and financial decisions involved, such as the shutting down of uneconomic activities or plants, the rationalization of the work-force and shedding the surplus, investing in modernization or balancing facilities.

Among the public enterprises which fall category are the National Textile Corporation, the sick engineering companies taken over from the private sector and grouped under Bharat Yantra Nigam and Bharat Bhari Udyog Nigam Ltd., the Indian Iron and Steel Co. Ltd.

Bengal Chemicals, and Bengal Immunity Ltd. Fertilizer Corporation of India and Hindustan Fertilizer Corporation. The crucial question which arises in such cases whether the rehabilitation effort is worthwhile, whether the Government can the funds needed and whether the investment will be justified or will it be only a case of throwing good money after bad.

A very careful appraisal of the possibilities of rehabilitation and the economic results which will follow would be required. There may be cases in which the activity involved is not so important as to warrant a major effort at rehabilitation (for instance, the manufacture of bicycles, the production of prefabs).

In any case, what is needed is a very quick appraisal and an urgent decision. If a labialization package seems viable, it should be put through with urgency; if labialization does not seem feasible or worthwhile, the unit should be closed down promptly.

If a sick unit is successfully turned around by whatever means and becomes healthy, we may have to consider the question whether we need to privatize a rehabilitated unit. Some of the difficulties and complexities mentioned above not arise in regard to the financing of new projects (expansions, 'diversifications) of existing public enterprises.

In such cases, public enterprises are already under pressure to minimize the draft on the Government for fresh investment funds and to maximize internal and other extra-budgetary resources, including funds from the general public.

There is no reason why some of this mobilization of resources from the public should not be in the form of equity, is will introduce a measure of private participation and also bring the enterprises to some extent under the discipline of the capital market. This seems to be a/ sound proposition without regard to any doctrine of privatization.

It needs to be recognized that even if a certain number of public enterprises are partially or wholly privatized, a large number of public enterprises will remain.

Their role will continue to be important and the efficiency of their operations will be a matter of major consequence to the economy, improvement of the performance of public enterprises.

Therefore, is a matter of great importance, and it is urgently necessary to put through a package of reforms aimed at this objective. We should not allow ourselves to be distracted from in our preoccupation with privatization.

Through all these means, it should be possible to bring about privatization in style of functioning of public enterprises; this is even more important than attempts to privatize ownership in certain cases.