I had argued unsuccessfully for privatization of state enterprises when I was in government in 1991-93; I had pressed it upon the BJP government which came into power in the late 1990s. Prime Minister Vajpayee was sympathetic to the idea, but hesitated. I wrote two columns in Business Standard of 30 January and 6 February 2001 to encourage him and other liberals in his cabinet.
TWO SUCCESSES AND A FAILURE
The Congress government began to sell shares in
public enterprises in 1992; it called the process “divestment”. As a result,
the government – that is, the finance ministry – received money that it used to
reduce its fiscal deficit for the year; but the control of no public enterprise
passed out of the government’s hands.
Earlier, in the 1980s, the Congress government had
also introduced memoranda of understanding - documents annually negotiated between
some of the enterprises and the government, which specified targets for the
enterprises to achieve during the year. Those enterprises that performed
especially well got recognition. But overall, MoUs made little difference. They
applied only to a minority of enterprises. The targets they specified were
generally too vague to monitor. And external circumstances supplied enough
excuses for any underperformance. Above all, the enterprise managers’ chief
grievance – that the ministries interfered too much – went unaddressed. Later
in 1997, the government gave some autonomy to nine better run enterprises, but
looking back, it has not improved their performance.
The share sales were limited by the unwillingness of
the government to give up control. Within this limit they were determined by
the expected profitability of the enterprises. It managed to sell more shares
of the highly profitable enterprises in a near-monopoly position: for instance,
in the telephone corporations, and in the financial institutions. It could sell
no shares in the many unprofitable enterprises. In between were about 50
enterprises in which the divestment process stalled at fairly low levels. Till
1995, a buoyant stock market enabled the government to sell shares; but then
the market declined, and the government ran out of well run enterprises. By
1996, it was clear that this process could not go much further; something more
needed to be done.
What were the next steps to take? There was no
single answer for all enterprises. Hence the Congress government appointed a
Divestment Commission to study each enterprise individually and tell the
government what to do with it. It covered some 60 enterprises. Its
recommendations fell into three broad classes:
(a) Improved and more autonomous management: A number of enterprises
were fairly profitable or close to being so, and had good prospects in their
industry. For them, the Commission proposed that the managements should be
strengthened or given more autonomy. Such recommendations did not preclude, and
were often accompanied by, proposals for disinvestment.
(b) Bringing in a strategic partner: The idea was that the government should retain a
substantial share of equity, but that it should hand over management to a
private partner who brought in industry and management expertise. The intention
was that better management should lead to better use of the enterprise’s assets
and hence a rise in the company’s market capitalization. The government would
have the benefit of the rise in asset value; and if it wished, it could realize
the value by selling off the rest of the equity, either to the strategic
partner or in the domestic market.
(c) Selling the enterprise: The Commission proposed outright sale of a very
few enterprises, which could not be revived under government ownership or for
keeping which there was no reason.
The Divestment Commission did not recommend a fourth
alternative in the case of any enterprise. This is to strip an enterprise – to
sell off its assets piece by piece, so that in the end it would cease to exist
as the enterprise.
The Divestment Commission had no executive powers;
it could only recommend. Still, some of its reports evoked much hostility
amongst trade unions, parts of the Congress, and the parent ministries. To make
it clear that its recommendations did not have the backing of the government,
the government appointed a Committee of Secretaries. Like the Disinvestment
Commission, this committee also had no powers of decision; in the
circumstances, it just made sure nothing happened. So just as divestment had
ground to a halt earlier, the process begun by the Divestment Commission was
also grinding to a halt when the United Front came to power. The commission
continued to live for another two years before it was wound up.
The second BJP government used the word
“privatization” instead of divestment; it thus signalled that it proposed to
sell public enterprises outright. It disbanded the Divestment Commission and
appointed a minister in charge of divestment instead. It thus also signalled
that enterprises would be privatized by ministerial action. The Prime Minister
believes that public enterprises should be privatized; he has appointed a
minister and told him to get on with the job. He also would seem to have got
the agreement of the cabinet, although this approval is clearly only pro forma,
for a number of ministers continue actions behind the scenes to sabotage
privatization.
What the Prime Minister wants has been tried before.
When East and West Germany were unified in 1989, the German government
appointed an agency and told it to sell off all enterprises belonging to the
erstwhile East German government. The agency advertised which enterprises were
on sale and sold them off to the highest bidder. It showed a preference for
bidders who would continue the enterprise as a running business, but made no
attempt to ensure that such promises would be kept; in the case of many small
enterprises it did not even secure any such promise. Within six years, it sold
off all the enterprises, and wound up. One of its chiefs was assassinated, open
unemployment in East Germany rose to 20 per cent, and another third of the
labour force was on short time. Divorce rates shot up, and the birth rate
plummeted. Not all of this was due to privatization; the major culprit was the
parity of 1:1 fixed between the eastern and western currencies on unification,
which at a stroke made East German enterprises uncompetitive. But privatization
cannot have been popular amongst the silent minority of East Germany.
The British government also sold off most of its
enterprises between 1980 and 1990, with less disruption. It had the advantage
that Britain has the world’s second biggest capital market, and it was much
easier to find a market for shares of public enterprises. It managed to sell
off the shares by heavily underpricing them – in other words, by taking heavy
losses – and made the selloff popular by selling shares to millions of people
in small numbers. All these millions sold off their shares and made some money;
that is how the British government overcame opposition and made divestment
popular.
The lesson I draw is that neither the PM’s
determination nor the disinvestment minister’s earnestness is enough to
privatize. The government as a whole must show determination by divesting the
cabinet’s authority to the disinvestment minister; the government must
understand what privatization involves, and use that understanding to make it
politically acceptable. In the process of doing so, the political establishment
– and not just the divestment minister – should have a clear strategy of
vanquishing or buying off political opposition.
Western countries privatized state enterprises because of
an ideological belief that governments should not produce goods and services.
The privatization programmes in Britain and Germany were driven by conservative
governments. In Britain, many industries were nationalized by the Labour
government in 1945-50. That was the government that gave India freedom. It was
a revolutionary government; it had radical ideas about how to run the economy.
Conservative governments soon followed it in the 1950s, but they did not undo
the nationalizations. That was done by Margaret Thatcher in the 1980s, whose
conservative ideological convictions were as strong as the socialist
convictions of Attlee, Bevin and Gaitskell who had nationalized industries
earlier.
But ideology was not enough. Thatcher had also to buy off
political opposition. It mostly came, as in India, from trade unions. But they
had made themselves deeply unpopular by strikes during the 1970s; Thatcher
could use their unpopularity both in denationalizations and in making new laws
to curb trade union power.
In Germany also, the government that privatized East
German enterprises was a conservative government. It could overcome political
opposition, which came from East Germans who accounted for only a quarter of
the population. And Helmut Kohl, the German Chancellor, bought off their
opposition by fixing the parity between the west and the east German mark at
1:1. So the purchasing power of east German wages improved; it was only later
that because of this high parity, a large proportion of East German workers
lost their jobs. There have been massive privatizations in East European
countries, but they were preceded by the fall of their communist governments –
just as in East Germany.
Then there are countries where privatization was the
result of external economic crises. They had to take the help of either the
International Monetary Fund and the World Bank or of private banks; they gave
their aid only on the condition that the governments improved their capacity to
repay the debts, and that required that they should stop subsidizing state
enterprises. In these countries, there was no ideological commitment, no
powerful domestic political forces favoured privatization, and to this day, the
privatizations that were carried out remain unpopular, at least in part.
This is also the reason why there has been so little
privatization in India despite much talk: no political party believes in
privatizing. The divestment that was done had its roots in the government’s
financial troubles – and initially in the conditions to the aid it sought from
the Fund and the Bank. The BJP preens itself for having used the dread word
“privatization”; but it too wants to privatize only to finance the budgetary
deficit. A certain philosophy of privatization could have emerged from the
pragmatic labours of the Disinvestment Commission if it had been allowed to
continue. But the BJP government wound it up, and gave over the task of privatization
to a minister.
A minister on his own can do very little when such
powerful forces are ranged against him: the trade unions, their pet MPs, other
ministers who dislike privatization, the national taboo against depriving
anyone of his livelihood, the constitutional guarantee of permanent employment
to all government employees. If it is serious about privatization, it must
develop a philosophy of privatization. That philosophy must be publicly
propagated by the Prime Minister and by the party’s leaders.
What might that philosophy be? It should take on
board the universal argument against state enterprise, that it is not a part of
the proper function of a democratic state. A democratic state is an institution
devised to provide public goods – services that cannot be priced and marketed –
and to arbitrate in conflicts between citizens. It is not its function to
produce goods and services that can be priced and supplied by competing
producers. If it produces such goods as a monopoly, it will produce them inefficiently
and prevent private competitors from providing them; if it competes with them,
it will tend to discriminate against them. There is abundant evidence of both:
for instance, of the inefficiency of the state as a producer of electricity,
transport or water, and of its favouring its own enterprises against private
competitors in telecommunications or finance.
But in addition there are arguments against state
enterprise that are particularly relevant to India. First, the inability of the
state to control or manage its enterprises. Almost universally, it has lost
control over the employees; since they cannot be dismissed, they have ceased to
be subject to any discipline. The work they do has become a voluntary
contribution. Their wages are decided by custom built into pay commissions and
triennial wage agreements; their numbers have been decided by politicians
creating employment. The enterprises have become employees’ cooperatives in
effect: they do not appoint the managements or direct enterprises, but they
hold management at ransom.
Second, at least some of the enterprises are hotbeds
of corruption organized and protected by trade unions. A sizeable proportion of
the Food Corporation’s stocks is sold off privately by employees and disappears
without trace. Telephone linesmen transfer lines to dishonest customers for a
commission. Power linesmen similarly help customers steal electricity. Public
enterprises are criminal conspiracies to a greater or lesser extent.
Finally, those who exploit the enterprises control
and corrupt the representative bodies. Oil corporations and oil pump owners can
get enough MPs to sabotage reform. So do State Electricity Boards and road
transport undertakings at the state level. Government enterprises have become
powerful lobbies; legislators have become their vassals. Politics cannot be
cleaned up in India without destroying the political influence of government
enterprises – their managers and employees.
Precisely because of this unhealthy influence on
politics, it is difficult for a political leader to call for privatization. But
the Prime Minister has done so, and appointed a minister for the purpose.
Having gone so far in his conviction, he must communicate it to the people if
he wants privatization to succeed. He must address the people repeatedly, in
meetings, public forums, on television, and tell them why he thinks
privatization is imperative. His reasons for pushing it may not be the above
ones; he may also want to give them different emphasis. But he must convince people:
he must generate strong enough popular support to overcome the lobbies that
have sabotaged privatization till now.
Nor is it his task alone. If the BJP believes in
privatization, then it is the duty of its every leader to plead for it, to
explain it, and to overcome opposition. This includes the home minister, the
minister of education, the industry minister, and the president of the party.
Nothing is more damaging to the government than if ministers support
privatization in the cabinet and work sneakily against it outside. The remedy
for this malaise is that all ministers should propagate it publicly and unequivocally.
Privatization should not be the private enterprise of the Prime Minister. His
party must work for it; only then will it reap the political fruits of privatization.
These can be very substantial; they can mean reliable power and water supply,
cheap and easily available telephones and gas, lower taxation and less
inflation.
