(Sample Material) Gist of IIPA Journal: Privatisation and Public Enterprises in India: Issues of Policy and Implementation C.V. Raghavulu

(Sample Material) Gist of Important Articles from IIPA Journal

Topic: Privatisation and Public Enterprises in India: Issues of Policy and Implementation C.V. Raghavulu


The Concept

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 up promptly.

Disinvestment Deterrents

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.

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