July 26th, 2007 
Deepak PRIVATISATION
For the last four decades, India has been pursuing a path in which the public sector was expected to be the engine of growth. But now, it is accused to have failed miserably in achieving its goal and so disenchantment is growing.
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THE PRINCIPAL CHARGES AGAINST THE PSU’s:
The principal charges against the public sector are: low rate of return on investment, declining contribution to national savings, poor capacity utilization, over-staffing and bureaucratization leading to excessive delays and wastage of scarce resources.
Performance of PSU
It was stated in various plan documents that PSUs should earn a rate of return of 12 per cent per annum. But gross profit as a percentage of capital employed ranged between 4 to 8 per cent till 1980-81. During the seventh plan period the gross profit was 12 to 13 per cent. This was because the petroleum sector which accounted for 18.4 per cent of capital employed provided 40.5 per cent of total gross profit earned by all public sector undertakings. The performance of all other sectors was well below the targeted level of 12% gross rate of return. The operational efficiency of state government enterprises revealed that they were perennial loss makers. The chief culprits among them’ were: State Electricity Boards, Irrigation Works and Road Transport Corporation. The situation is distressing and is the cumulative result of the poor performance and absence of any remedial action taken to alleviate the situation.
The failure of public sector is glaring in respect of savings. After 39 years of planning, the public sector contributes only 8% of the- nation’s saving: that also in part, through heavy taxation and semi-fictitious profits of reserve bank. The remaining 92% of the nation’s saving came from the private sector.
The PSUs show a mixed record judged by the criterion of capacity utilization. There are high performates like Indian Oil Corporation, National Textile Corporation and in news-print who can equal any private sector undertaking in terms of efficiency, absorption of advanced technology and even in surplus generation along with a better deal for its employees.
There are of course scores of low performates who bring the overall standing of PSUs down.
Causes of non-performance: The major problems faced by public sector enterprises could be summed up as under:
The freedom for decision-making by PSU managers was extremely limited because of political interference. Consequently inordinate delays resulting in inefficiencies, lack of capacity, utilisation and low productivity took place.
Pricing policies in a number of public sector enterprises are not guided by rational economic consideration. Social and political constraints compel public enterprises to charge uneconomic prices resulting in losses. This being the position especially in PEs catering to infrastructure like power, irrigation, ‘public transport, etc.
Public enterprises can afford soft budget options because their losses can be met out of the general revenues. In view of the availability of this option and absence of competition, the pressure to take bard economic decisions is conspicuous by its absence.
The managers of public enterprises tend to become procedure oriented rather than outcome oriented.
As a consequence of all these factors the element of subsidisation of the public sector assumed intolerable proportion.
As a reaction to the inefficient working of state owned enterprises, the wave of privatisation has spread all over the world.
India, in order to lift its lower rate of growth of3 percent per annum to a sustainably higher one, abandoned its reliance on the public sector and shifted attention to privatisation.
Meaning and Scope of Privatisation
Privatisation is the general process of involving the private sector in the ownership or operation of a state owned enterprise. Thus privatisation covers three sets of measures:
(a) Ownership measures: The sets of measures which transfer ownership of public enterprises, fully or partially, lead to privatisation. The higher the proportion of transfer of ownership to-the individual, co-operative or corporate sector, the greater is the degree of privatisation. This can take three forms such as total denationalization, joint venture and liquidation. Management buy-out is a special version of denationalization.
It implies sale of assets to the employees.
(b) Organisational Measures: A number of organizational measures are conceived to limit the state control. A holding company structure may be so designed that the government limits its control interventions to apex level decisions and leaves the operating companies within the arrangement to a sufficient degree of autonomy in decision-making within the framework of the market forces. Sometimes a very big monolithic organisation is split into smaller units without loss of economies of scale. Although the smaller units comprise of a family, but they become independent in certain product lines or regional operations.
A public enterprise while retaining ownership may lease out to private bidders for a specific period for use. The government enjoys the right of obtaining profits as per agreement; on the other hand, tenure ownership is expected to lead to improved efficiency or lower costs of operation. In case a particular bidder fails. To come up to the expectations of the government, the latter reserves the right to replace him with a more promising bidder.
To bring public sector enterprises under market discipline, it would be desirable to go in for two forms of restructuring:
(i) Financial restructuring can be affected in the sense that accumulated losses are written off and capital composition is rationalist in respect of debt equity ratio.
(ii) Basic restructuring may be affected by redefining a set of commercial activities which the enterprise will undertake henceforth.
(c) Operational Measures: To improve efficiency of the organization, even when full denationalisation has not been undertaken, operational measures can be taken. The measures include grant of autonomy to PEs in decision-making, provision of incentives to blue collar as well as white collar employees consistent with increase in efficiency or productivity, development of proper investment criteria and permitting PEs to go to capital markets to raise funds. The basic purpose of these measures of operational privatisation is to bring about a drastic reform and reduce government control over the enterprise.
The upshot of the list of measures enunciated above is that while privatisation is more often equated with transfer of ownership, the critical manifestation of privatisation is the transfer of managerial control to private hands, individual or co-operative.
The Indian Experiment
Though it has been long felt that some amount of Privatisation is to be injected into the public sector to make them viable, it was not until 1991 that anything worth noting happened. The Government announced 20 per cent disinvestment in public sector undertaking as a first step towards privatisation. In the industrial policy 1991; the Government limited the priority areas for public sector and hence allowed competition in the fields where public sector was enjoying monopoly previously.
Some Public Enterprises which are chronically sick and which are unlikely to be turned around are planned to be referred to the Board for Industrial and Financial Reconstruction (BIFR) for the formulation of revival/rehabilitation schemes.
Voluntary Retirement Schemes (VRS) have been floated to get rid of labour from the overstaffed PEs. During 1993-94 budget the government allowed selected public sector banks like SBI to raise funds from capital markets by floating equities. The boards of public sector companies are being made more professional.
The Difficulties of Privatisation
Although there is a strong rhetoric in favour of privatisation, in reality it is becoming increasingly difficult to push through proposals of privatisation.
Firstly, in India with the emergence of strong trade unions, privatisation in the sense of denationalisation is not considered possible. Strong resistance by worker’s union is being organised against privatisation proposals from time to time. In a democratic set-up it would not be possible to carry out privatisation in blatant disregard of the interests of workers, because privatisation involves pruning of labour strength. In doing so the welfare motive of the government is questioned.
The workers who loose their job especially through closure have had in almost all cases, nothing to fall back on. The absence of social security system in India, as against well organised social security systems in the developed countries is the potent reason why the trade unions are against schemes of retrenchment or voluntary retirement.
A relevant question that may be raised is : why would the private sector be willing to take a loss making sick unit? It is only an excuse to appropriate the real estate attached with these units that it would make use of the land and other physical assets to start fresh undertakings. This implies that the principal objective of privatisation which is to infuse the commercial spirit in PSU may not be achieved and revival of the sick unit may not be the priority for the private sector.
The point is that there is a serious crisis of management that has plagued the public as well as the private sector. Privatisation of PSUs would not be of any help so long as there is this crisis of good management. And if we succeed in evolving an efficient management culture and practices probably the issue of privatisation will be irrelevant since in that environment both the public sector and the private sector would be working efficiently.
In India, privatisation is not considered as a panacea f, the present ills of the economy. Neither do people have -excessive faith in the market forces. In view of the historical background of public enterprises in India, it is inconceivable that privatisation in the country will be accepted by the society as an end in itself. The real issues center on alleviation poverty and upgrading of technology in a highly differentia’ society of continental dimensions. Ibis implies that privatisation will have to be viewed essentially as the best possible mea achieving pre-determined ends, and ensuring that it does distort the parameters of such ends.
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