Saturday, October 18, 2014


Arun Shourie is a man after my heart: an intelligent and upright man with the courage to take on vested interest. Atal Bihari Vajpayee made him minister of communications, nformation technology and disinvestment. He tried hard to privatize public enteprises. This column, in Business Standard of 2 October 2001, celebrates his promotion from minister of state to minister.


The cabinet reshuffle was a triumph for Arun Shourie. Not only was he promoted to cabinet rank, but two of the most obstreperous enemies of privatization, Sharad Yadav and Ram Vilas Paswan, were removed out of his way. Yet, if he reflects upon his prospects, he must find them distinctly bleak. He managed to carry through the privatization of Balco with terrible bloodshed; but the victory turned sour when SEBI banned Sterlite from the capital market for two years. Then his enemies ganged up and managed to introduce the rule disqualifying all buyers who had had a brush with the law or a regulator. That disqualifies most of India’s leading industrialists.
In the circumstances, if Shourie were a normal human being, he would have a bout of paranoia. If he were a normal politician, he would start plotting to get out of his ministry. But if he were an economist - as he once was - he would start looking for solutions.
If he were to do so, he must recognize that his problem is not sneaky politicians and industrialists but the structure of Indian industry. The private corporate sector is financially much smaller than the public enterprise sector; it simply does not have the money to buy the latter. Companies abroad are certainly big enough to buy up the public sector several times over; but the BJP’s swadeshi predilections make them ineligible. The BJP tries to steer between its prejudices and reality by inventing mystical numbers of foreign share in equity - different for different sectors. Although it does not say so, it hopes that foreign equity investors will also bring vast amounts of debt to make up the purchase price. But this too is unrealistic.
As Shourie fully recognizes, what is saleable is not a share in the capital of the enterprises but their control; that is the reason for the BJP’s shift from disinvestment to privatization. Some people, generally close to the Congress, calculate vast sums of money that could be raised by selling further equity to the public. But their calculations assume that infinite numbers of PSU shares can be sold at the current market prices. Actually, the demand for these shares is extremely inelastic; sale of even 10 per cent of the shares will bring prices crashing down. Our ignorant politicians regard the public sector as a treasure trove, and take it as their duty to ensure that it is not sold cheap. So Shourie has no chance of success in privatization, and he must think of something else.
Privatization is only a means; he must ask himself what it is he aims to achieve. Privatization is supposed to increase efficiency. S R Mohnot has done a massive study to prove it will not. What he does is to compare the financial parameters of central PSUs with those of the largest private companies. The comparison is statistically questionable. It ignores the enormous variation within each of the two classes. It neglects the effect of differing industry composition: most of the PSU profits are made in the oil industry, which has been highly sheltered, where prices were fixed so as to guarantee high profits, and whence the private sector was kept out till recently. It ignores the impact of inflation: investment in PSUs was made long ago when prices were much lower, whereas profits are made in today’s rupees; so rates of return are exaggerated. By contrast, there was much private sector investment in the 1990s at high prices, so the rate of return on it is depressed.
Nevertheless, the strongest argument for privatization is not based on efficiency but on the unholy nexus between the state and the PSUs. The state favours PSUs and discriminates against the private sector. It runs many PSUs badly, and the cost is paid by the private sector and the taxpayer. The ownership of PSUs increases the weight of the government in the economy, and the arbitrariness of its decisions increases macroeconomic uncertainty. And politicians find it much easier to use the public sector for corruption - for collecting money, for employing unwanted supporters, and for favouring private industrialist friends.
But few public sector employees accept this argument. They think of privatization as nemesis, and of private promoters as scum. Some of them no doubt fear the pressure to perform in the private sector; but they also give perfectly good reasons to resist privatization. They think that their poor performance is due to certain shortcomings arising from government ownership: for instance,
Ø The public sector works like a closely held private limited company, but the owner’s commitment is missing. Instead of an owner who cares for and insists on results, government companies’ board and MOU (memorandum of understanding) meetings are attended by undersecretaries who have neither the vision nor the power to take decisions.
Ø PSUs are often headless; currently, about 100 PSUs are without managing directors. When appointed, an MD inherits historical problems that would need time and power to solve. He is given neither.
Ø Article 12 of the Constitution confers upon every PSU (public sector undertaking) employee the status of a permanent civil servant. Promotions and increments become justiciable; rewards and punishments are impossible.
Ø The Prevention of Corruption Act applies: if a decision by a public servant benefits a third party, it is criminal unless it is taken in public interest. Since all commercial deals benefit someone, they are criminal.
Ø Politicians who have no stake in the company nevertheless have influence. Trade unions become vote banks; they look to MLAs and MPs for rewards; the authority of management is eroded. Profits cannot be shared with workers.
Ø One mistake can finish a career; no one can make a mistake if he does nothing. Hence everyone tries to avoid making decisions, and to share the responsibility for decisions made as widely as possible by getting signatures on the file.
Ø The Industrial Disputes Act hamstrings PSUs as much as private employers. When PSUs send workers abroad, they lose the protection of the ID Act, and can be transferred back. This threat makes them behave much better.
If Shourie removes these and other disabilities, the PSUs will perform better, and will fetch a higher market value. One way of removing them would be to carry a lot of difficult legislation through Parliament. But there is another, simpler way.

Let the government transfer all the shares of PSUs to a new mutual fund in whose equity the government has a minority share. That would make the PSUs private and release them of all the public sector privileges and constraints. It would also free them from the clutches of politicians and bureaucrats. The mutual fund would be charged with two tasks. First, it must reduce its share in the equity of every PSU to less than 10 per cent in ten years. Second, it must maximize net asset value. To this end it would have the power to appoint and change managements, and to sell off its holdings as it likes. Maybe in a decade its corpus would grow enough to retire the public debt.