Tuesday, October 21, 2014


This column resumes a chain of thought that went into the column four weeks earlier on petrol pumps. It was published in Business Standard of 10 September 2002. The BJP government was intent on privatizing state enterprises and running their better. In the process it got into controversies, and made mistakes; but that was better than the previous government’s inactivity.


Newspaper debate tends to be rather simple: reforms are good, opposing them is bad, privatization is good, public ownership of productive facilities is bad, and so on. But two issues have come up recently on which such naïve positions would be mistaken. First, there is the issue of the best way to privatize. Second, there is the question of how to allocate petrol pumps.
The pressure to privatize first came from the Fund and the Bank during the payments crisis of 1990-91. The Congress at that time was unwilling to give up its loyalty to public ownership. So Manmohan Singh found a via media – sell shares in public enterprises to the public, but retain government majority ownership and management. This model had its limitations. Only shares in profitable enterprises could be sold; there was no policy for the 200-odd loss-making enterprises. Some were taken to BIFR, but its instructions to liquidate them were ignored.
Then came the era of the disinvestment commission. It took a close look at each enterprise and proposed a way of dealing with it – sale of shares in some, strategic partners into others, closure of a few, and so on. The United Front ignored the commission, and the NDA government disbanded it.
Then came the BJP era of privatization. But first it gave the task to Arun Jaitley, who just sat on his haunches. Things started moving only when he was taken off and Arun Shourie was brought in. He has been keen on either selling a majority stake or bringing in a strategic partner with a substantial stake; this really means bringing in new private management without selling off the enterprise.
Belatedly, George Fernandes has jumped into the fray and proposed a different model, namely selling shares in the market, even a majority of the shares, but not bringing in a strategic partner. This sounds like opposition to privatization, a rollback to the Manmohan Singh strategy. But it could be something else: he may be saying that government enterprises should not be sold off to big business, for that will only make it bigger and increase its market power. This is not idle speculation. The way the auctions operate, only big Indian businesses can buy big government companies. Thus as privatization proceeds, two big non-ferrous conglomerates – the Aditya Birla group and the Sterling group – are emerging. In oil it is worse. Reliance is already India’s biggest refiner, and its lead increases with every public enterprise it buys. Privatization is encouraging market concentration.
So it is not stupid to ask why the public enterprises cannot be privatized without losing their identity – why they must be absorbed into one of the big business groups. One answer may be that they will not be free of ministerial influence – and this is what everyone thinks Fernandes, Ram Naik and Pramod Mahajan want. But if the government really sold off its entire holdings in the market, there would be no scope for such influence. The important thing is to sell the holdings – not to keep a majority or strategic stake in the enterprise.
Shourie would counter that the government can realize more value by bringing in a strategic partner; he would improve management, raise the market value of the company and thus get the government a better price. But should the government aim solely at getting the best price? There can be other objectives. For instance, the British government sold off shares in public enterprises to thousands of small investors: it sought to create dispersed ownership. I myself think that this is a better objective than that of value maximization. Creating and maintaining competition is equally desirable.
Let me now come to the allocation of petrol pumps. These pumps are attached to the government oil companies, and they should allocate them. But on their nationalization in 1976, the oil ministry assumed the power. Soon ministers found the allocation a lucrative source of patronage, and took it in their own hands. Captain Satish Sharma was found to have given out the pumps to relatives and friends of Congressmen; and he was only the last of a string of nepotic oil ministers. This was only one of their improper practices; they also gave out contracts for transport of oil imports, with benefits flowing to themselves and their industrialist friends.
The Supreme Court condemned Satish Sharma for his shady practices, and Ram Naik decided to steer clear of them. He set up district selection committees headed by judges and populated by local worthies. But they too were found to have favoured friends and relatives of politicians – not just BJP politicians but politicians of parties locally in power. Stung by the scandal that followed, the Prime Minister cancelled the dealerships and announced that they would be auctioned. The aggrieved allottees are suing the government, which is in a deep judicial morass.
The decision to auction the dealerships looks right in theory; that way, the government would capture most of the rents of dealership. My doubt arises from the fact that the government buys almost everything through some kind of auction – tenders are a form of auction – and yet the tender system is most susceptible to misuse and corruption. One only has to ask any seller of telecommunication equipment how tender procedures are misused.
There are two other ways of tackling the issue. First, abolish the system of dealerships attached to oil producers, and let the dealers sell the products of any oil company. This would have two advantages. It would destroy the monopoly power the oil companies get through their control of dealer networks. And the issue would be divorced from oil companies, and would become a simple issue of auctioning pump sites. Alternatively, let oil companies decide criteria for choosing licensees. They may auction the licences; but more likely, they will set up a selection procedure best suited to their interests – for instance, they will look for licensees with business experience, adequate capital, a record of honesty and so on. Either way, the power must be taken away from the ministry.

This brings me to the idea first floated by Vijay Kelkar and refloated by Ajay Shah – the idea of a warehouse for government shares. In theory, the warehouse will insulate public enterprises from ministerial influence. But some minister or other will appoint directors of the warehousing corporation, dismiss them, pressure them and bring them under control; the warehouse is subject to the same infirmities as Ram Naik’s district committees. The UTI is just such a warehouse, and see how much it has cost the taxpayer. It is not enough to abolish the petroleum ministry; all ministries that look after public enterprises should be finally and permanently disbanded, and the shares of public enterprises should be entrusted to a mutual fund whose only function should be to set up hospitals around the country.