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In defence of privatisation

A V Rajwade

The recent debate on privatisation of Hindustan Petroleum Corporation and Bharat Petroleum Corporation reminded me of a Marathi newspaper headline that appeared a few years back: 'A private railway in Maharashtra even 50 years after independence!'

The reference was to a few miles long connection between the Indian Railways network and a textile mill in Vidarbha.

The headline is a great example of how we have been conditioned to consider independence as being synonymous with government ownership of assets.

Indira Gandhi, in her leftist phase, played her own part in this: the Constitution was amended to convert India into a socialist republic.

For years after reforms began, none of our political masters dared utter the word 'privatisation.' They talked of divestment, of the need to reduce the fiscal deficit, et cetera.

To his credit, Yashwant Sinha was the first to talk about privatisation - but his own commitment to, and concepts about, genuine privatisation are a bit confusing to me.

Remember his talk of bringing government shareholdings in public sector banks down to 33 per cent even while retaining their public sector character?'

The first conceptual issue in relation to privatisation is not to look at it principally as a means of reducing the fiscal deficit.

To my mind, there are many more important reasons to privatise much of the industry currently owned by government. The most important is that, under government control, the assets are not anywhere near as productive as they optimally need to be.

Quite apart from issues of patronage distribution, misuse of PSUs for personal reasons, corruption and so on, there are several inherent constraints on optimal economic output from the public sector:

* The extremely complex and indeed byzantine decision-making processes. While lip service continues to be paid to autonomy, there is too often a bureaucratic stranglehold from the ministry.

Important decisions involve powerful bodies like the Planning Commission, various Cabinet committees, ad hoc groups of ministers, courts and the burden of being a 'state' under Article 12 of the Constitution. It takes years of amateurish scrutiny to come to a decision.

Everyone at every stage - from section officers to parliamentarians - is free to question everything. And once an objection is raised at a lower level, no senior dares question its relevance or wisdom.

* Business decision making has much to do with spotting opportunities. The decision-making processes in PSUs place no value on opportunity costs. For instance, see how ICICI has changed its business model even as IDBI continues to flounder.

* At the more routine levels of management, the processes are very often constrained by the bogey of vigilance. Indeed, quick decisions are often considered prima facie evidence of mala fide, and innovation frowned upon.

There is an old and universal law of economics that says that private virtue is often a public vice. In much of the public sector, too often, private virtue consists in not taking decisions for, if you do not take decisions, you cannot be questioned for taking wrong ones in 20/20 hindsight.

Such private virtue is of course a vice in terms of efficient functioning of the organisation.

* The owner himself is not too interested in efficient functioning of PSUs. Else, why should a large number of top positions remain vacant?

Again, the way they are filled, the CEO is far keener on pleasing the minister than running his organisation properly. With the CMD appointed by Delhi, the board's governance is weak to non-existent.

* While on the one hand, vigilance and accountability rule supreme, on the other, nobody will be/can be held responsible for the mess in Unit Trust of India / IFCI/ ITDC, et cetera.

Result? Money borrowed at 12 per cent by government give a return of 2 per cent year after year after year. How long can we afford this?

Again, managerial/administrative/monetary resources badly needed by sectors like education and health get diverted to loss-making activities.

In the recent annual conference of the plastics industry, there was a very interesting presentation about the contrast between India and China in terms of their encouragement of industry, by a company with units in both the countries.

The minister's speech was to follow and we were all eager for his reactions to the contrast presented.

He did not utter even a word about it, not even saying that 'we need to improve,' contenting himself with reading a prepared speech, full of platitudes with not one new thought in it.

One can imagine the kind of interest he takes in the functioning of PSUs within his control.

As for the specific objections raised in the recent debate, there is no gainsaying that the issue of monopoly power has to be addressed.

On the other hand, to believe that public (sector) servants are more patriotic than the rest of the population is an insult to the remaining 99 per cent of us.

Would, for example, Ram Naik's patriotism be any less if he were not to be a minister? As for one PSU bidding for another, if the basic objective is a change in the culture, this obviously is not achieved.

Again, those who advocate public issues over strategic sales, seem more interested in selling some shares in the name of economic reform, while retaining full control on the unit concerned.

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