The Telegraph
Since 1st March, 1999
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The so-called “success story” of the privatization of public sector units under the present government has now taken a predictable turn. Led by Ram Naik and George Fernandes, the “socialist lobby” has hit back. They have been successful in stalling the move to sell PSU oil majors like Hindustan Petroleum Corporation Limited and Bharat Petroleum Corporation Limited to private strategic investors. Their worry is that such sales will lead to private monopolies in the strategic oil sector which is so vital for the national economy. They are in favour of the open public sale of shares which would mean a wider distribution of the ownership of PSUs among the general public, while the government would retain majority and strategic control. Presumably, that would avoid concentration of economic power which the strategic sale of a big chunk of shares to one private investor would imply.

At times, anti-disinvestment lobbies also suggest that the strategic investors should be public sector financial institutions who would look after national interests, unlike private parties. Many others — many socialists, leftists, swadeshis and laypersons among them — wonder why the government is so keen to sell off profit-making PSUs like HPCL and BPCL — the “family silver” — while they are not disposing of the loss-making ones.

Let us look at the major issues involved.

One, why try to sell the family silver first and not the family junk' The simple truth is that no one is willing to buy the junk whereas there are people still willing to buy the silver at good prices before it loses its shine. The opening up of the economy, the consequent competition from new domestic players and imports, and finally, international prices gradually determining domestic prices, following the dismantling of the administered pricing mechanism for oil products, mean that the high profits of public sector oil- and- related companies would not be guaranteed in future. So, assuming that the government will sell these PSUs, it is advisable to sell them fast when they are still making profits. That way, the government would be able to get better prices. We can not reasonably expect that our PSUs, under the effective control of ministers and bureaucrats, would be able to maintain their profit records in a highly competitive regime.

As for the junk PSUs, many of them have become sick for a long time. Private investors would be willing to buy them provided they can restructure by infusing different technologies which would imply getting rid of excess workers or diversifying into different product lines by closing down and selling off the assets (including real estate) of the company. Given the opposition from governments, trade unions and the long legal process of liquidation, no one wants to come forward to buy these perennial loss-makers. So, the government should not wait for the junk to be disposed of first.

Next, why sell to private strategic investors' Selling to a large number of widely dispersed individuals would mean that effective management and control would remain in the ministry’s hand and nothing basically would change. That may serve the interest of the political bosses but it does not coincide with the national interest. The block sale of shares to public financial institutions would not change the basic quality of management, if the recent experience with the management of Unit Trust of India, Industrial Finance Corporation of India or ICICI is any guide. It is only by selling controlling interest to one major private investor who has the funds and expertize to manage and, if necessary, restructure the company that the government can hope to get the best possible price.

An investor would be willing to pay the maximum only when he gets effective control and that sets the market price. Divestment through retail sales can take place simultaneously, but not as a substitute. Moreover, merchant bankers feel that the retail capital market in India cannot absorb the Rs 30,000 crore worth of shares of HPCL and BPCL proposed to be divested. Finally, the experience of privatization in the former Soviet Union and east Europe overwhelmingly supports the case for selling to a strategic outside investor over distribution of shares to the general public including the employees of these companies.

Should strategic investors include foreign investors' Many analysts believe that Indian investors will not be able to garner funds of Rs 30,000 or $ 6 billion. If we add the value of divestment in other big PSUs like Indian Oil Corporation, Bharat Sanchar Nigam Limited, National Thermal Power Corporation and Oil and Natural Gas Commission, we are talking of a really staggering sum. So, the help of foreign investors will be needed if the proposed divestments are to be carried through.

Will foreign investors play havoc with our national interest and choke off supplies in times of war' It is a ridiculous fear. Foreign investors would come here to make money. They are not the flagbearers of their governments, unlike the East India Company. Also, in times of national emergency, governments are free to impose whatever restrictions are necessary in the national interest. If in specific cases like IOC or ONGC, block sales to strategic foreign investors are deemed risky, then why not put a cap on the sale of shares to individual institutional investors'

Will strategic sales lead to private monopolies' Remember, in many countries like the United States of America oil companies are all private companies. Yes, if an existing private player buys a controlling interest in HPCL or BPCL, the chances of a private monopoly increases.

But, these companies are involved in oil refining and marketing, a field in which there are a number of players already along with the potential of competition from new private players. In today’s world you don’t need a large number of players to maintain competition. Even two of three players can do it. Look at Coke-Pepsi or Indian Airlines-Jet-Sahara. Finally, the government’s job is to put in place independent regulators to curb anti-competition practices. If there are doubts about the effectiveness of an independent regulator, how can one trust a ministry or its surrogate public financial institution to run a PSU efficiently with sleeping private shareholders exercising no effective control'

The worry is not about the creation of a private monopoly through divestment. The real question is what the government will do with the proceeds of divestment. In the past, whatever small amount was garnered by the government in this way was used to show a smaller fiscal deficit but the government did not use it to retire past debt or to increase public investment in much-needed infrastructure. In other words, the government maintained its consumption expenditure by selling off family silver. It is like an alcoholic selling his wife’s jewellery to pay for his addiction.

Disposing of PSU assets is a one-off incident which can not be repeated indefinitely. Unless the government uses the money to retire past high-cost loans or invests in creating physical and social infrastructure, it would be just postponing the day of reckoning by hiding the fiscal mess for the time being. Today’s success story will then be a story of betraying the nation.

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