(Sample Material) Gist of Important Articles from IIPA
Topic: Privatisation and Public Enterprises in India: Issues
of Policy and Implementation C.V. Raghavulu
THE CONCEPT OF LIBERALISATION
Privatisation has come to be used as an omnibus term for
heterogeneous policies and a mixed bag of ideas. In the broad context of
liberalisation, privatisation refers to policies aimed at bringing the
operations of enterprises within the discipline of market forces: thereby
implying a shift from public domain to the market arena.
According to V.V. Ramandham, privatisation covers a wide
continuum of possibilities, between denationalization at one end and market
discipline at the other. There can be a sale of the enterprise in full; or,
private capital may be introduced in public enterprise either through a sale of
some government equity or in the course of its expansion. The larger the private
equity proportion the greater the degree of privatization. Liquidation
represents the ultimate, step in the arsenal of the owner. It may imply, in
practice, a sale of the use them again in the-same activity or moves them away
from their erstwhile activity. A management buy-out is a special version of
denationalization. It represents the sale of assets to the employees who, with
appropriate loan provisions, take over the, ownership. This, could be a
cooperative, if the distinctive legal features of a cooperative society are
satisfied by the organisation that buys the enterprise or the assets.
In most cases, the criteria for privatisation in the sense of
denationalization have not been derived from a specific evaluation of the
comparative advantage of the public enterprise concerned. Several results
ensued. First, the criteria have varied from country-to-country. Second, what
appear to be proxies for the comparative, advantage criterion do not invariably
have that value. Third, periodic change easily occur in the listing or otherwise
of an enterprise as a candidate for denationalization, partly on grounds of
bureaucratic or political preferences.
Strategy of Privatizing the PSEs in India
The Industrial Policy Statement of July 24, 1991, prescribed
a five-pronged strategy to take care of the problems of public enterprises in
India. Firstly, their portfolio would be reviewed with a view to focusing on
strategic, high-tech and essential infrastructure. Secondly, sick and unviable
enterprises will be referred to the BIFR. Thirdly, a part of the equity of these
enterprises will be referred to mutual funds, financial institutions, general
public and workers. Fourthly, their Governing Board would be more professional
and given greater powers. Lastly, through the Memoranda of Understanding (MoU)
system, the enterprises would be granted greater autonomy and will be
held-accountable. Disinvestment is one measure which the governrnent has taken
The exercise of the Union Finance Ministry for disinvestment
of PSE shares has proved to be a challenging one. Until the end March, 1995, the
Ministry was able to sell shares to the tune of over Rs, 10,187 crore. There
were hardly any takers for the sale of public sector shares in 1995-96 as the
government could off-load only 85 per cent of the targeted amount (Rs.169 crore
of a target of Rs. 1,996 crore). That the offerings related to successful
PSEs-ONGC, MTNL, SAIL and Container Corporation of India only exposes the utter
incompetence terms of preparatory work and the timing of the sale. There is a
demand their shares should be publicly traded at the earliest so that they could
provide an index of their performance and efficiency. However, one cannot be
oblivious to inherent problems. The first one is that except for the oil sector
profitability of the PSEs does not permit attractive dividends due to their
large equity base. This poses a deterrent to market demand for PSE shares. The
second problem relates to organisation: a consistent bane of the enterprises has
been bureaucratization of decision-making lit the Board level. The disinvestment
should take care of this damaging phenomenon.
Employee Participation in PSE Equity
One academician suggests that disinvestment provides an
excellent opportunity to make employees of the enterprises partners in their
ventures. Employee alienation has been a marked phenomenon of public
enterprises. The ineffectiveness of the reward and punishment system has
seriously damaged employee motivation. Employees’ participation in equity would
generate their concern about the growth and welfare of the enterprise. It can
also bring about an attitudinal change and create a sense of belonging, So far
the government has paid only a lip service to the employee issue of
participation in equity. If the concept is seriously and sincerely implemented,
it can take the sting out of the opposition to disinvestment of public
enterprise equity. But the effort in this regard is hesitating and slow. In UK,
Margaret Thatcher was able to build new coalitions through her policy of selling
equity to employees and public.
In Sri Lanka the sale of shares in public enterprises has
been termed as “peoplisation”, instead of “privatisation”. In our context, the
employee ownership needs to be emphasised. Say, for example, if the shares of
the BHEL or HMT are preferably offered to their 74,000 and 28,000 employees,
respectively, on attractive and facilitating terms, the process would be- termed
as “BHELisation” and “HMTisation”, This would increase acceptability of the
disinvestment and bring about a sea change in the work environment and
performance of the enterprises.
Politics of Privatisation
Rolling back the boundaries 0f the public sector is not easy.
There are many intricate problems and complex issues in the process. Several
different objectives, of a non-additive character behind privatisation moves,
must be taken account of. There are too many role players into context of
developing countries with diverse objectives. Politicians, bureaucrat enterprise
managers, labour union leaders, international donors and significant other bring
different objectives, and consensus among these actors is highly unlikely.
Compromises are not only time-consuming and the content reduces the gains of
privatisation. Of far-reaching importance is commitment at the highest political
level without which resistance from the workers and the government bureaucracy
cannot be overcome. Further, a government which is politically weak or
preoccupied with more pressing socio-political problems, as is the case in
India, would attempt only “token privatisation”.
An optimal policy of privatisation must consider several
issues. Which types of public enterprises should be privatized? When should they
be privatized? How should the privatisation programme be carried out, for
example, to whom should public enterprises be sold end at what price?
The-answers to questions of this sort depend on the objectives of-the
divestiture. To say that the success of privatisation can be judged by the
extent to which it improves the performance of a public enterprise begs the
qucstlon.wha; docs “good performance” mean? Performance would, however, be
related to the objectives of privatisation. Of fundamental importance is the
market structure. In short, a change of ownership without a change in market
structure may not improve efficiency.
Absence of Criteria for Judging Efficiency of the Two Sectors
Some economists see other benefits ensuing from privatisation.
Among them is the opportunity of “load-shedding" by government enabling
depoliticisation of economic decision-making. Many assert that the
depoliticisation of decision-making and the, improved efficiency resulting from
privatisation will enable governments to reduce budget deficit and public debt.
In addition they expect privatisation to increase government receipts through,
the sale of assets. Finally, they see the removal of a certain enterprise of
service from government responsibilities as a way to reduce the monopoly power
of unions, which tend to be especially strong in state owned enterprises.
However, the objective evidence on the comparative
performance of the public and private sectors presents no clear picture in
support of such expectations. On the contrary as asserted earlier, the strength
of competitive forces seems to be a more important determinant of efficiency
than ownership. Thus, if the success of privatization is judged by its effect on
efficiency, the critical consideration may be the extent to which the
privatisation exercise changes market structure.