PRIVATISATION; AN AGE OLD SAGA
A factual overview of the lesser known and largely ignored notion of privatisation and its due eminence in today's world.
"That which we want less of in society should rarely be privatised and that which we want more of, often should be." - William MacGregor Robson
Inception of the Notion
For nearly a decade since the onset of economic liberalisation in India, a key
component - privatisation – remained dormant. The usual explanation has been that
weak governments could not overcome the many vested interests, from rent seeking
bureaucrats and ministers to public sector trade unions. In addition ideational resistance
in India’s elites has also been attributed to the virtual absence of privatisation in India’s
However, when the Indian President in his opening address to Parliament in the
2002 budget session, stated, "It is evident that disinvestment in public sector enterprises
is no longer a matter of choice but an imperative … The prolonged fiscal hemorrhage
from the majority of these enterprises cannot be sustained any longer,"1 Indian
privatisation finally came out of the shadows.
Antecedents of Privatisation
After the Industrial Policy Resolution (1956), there was a structural change in Indian society, with the people shifting from agriculture and shifting to industries as their source of livelihood.
But in the latter stages of the life of the PSU's, they became social dead-weights, with mounting losses, as well rampant corruption, inefficiency and pilferage.
Thus, the only remedy that seemed viable was privatisation.
The Indian approach to the process of privatisation was one that was gradual with the commitment toward the cause increasing throughout the 1990's, despite changes in the party in power.
The first step towards the eventual future of privatisation was deregulation which gradually increased the ambit of the private sector in the economy. This meant that the state's role as a direct producer of goods as well as services had declined, partly by design and partly by fiscal stress.
The change in perception of the private sector was another key determinant that allowed the contemplation of the process in a way that was not possible in the past.
In the second step, the government adopted a limited approach of selling a minority stake in public sector enterprises while retaining management control with the government, a policy that came to be described as "dis-investment" to make it stand apart from the policy of "privatisation".
This initial policy had very limited success, as disinvestment receipts were consistently below budget expectations, which clearly showed that there was a limited appetite for purchasing shares in public sector companies in which government remained in control of management.
In the next stage, the government decided that it would be willing to reduce it's shareholding to 26%, and effectively transfer management control to private shareholders who purchased substantial stakes in all public enterprises, with the exception of few "strategic" areas.
This effectively meant that the government escalated its commitment from merely privatising ownership to privatising control.
The first example of such privatisation occurred in 1999 when 76% of the equity of Modern Foods India Ltd. (A public sector bread making company) was sold with full management control to Hindustan Unilever.
The third step in the commitment to the goal of privatisation was to expand the sectors where the firms could be sold. The term “strategic” was frequently used to describe those state-owned enterprises (SOEs) that the government intended to retain control over the long term
. But progressively the definition of "strategic" became tighter, such that the number of state owned enterprises (SOE's) could be expanded even more. Eventually, the term "strategic" only applied to the nuclear, defense and railway sector.
Finally, the restrictions on the buyers also progressively declined. Initially the auction of shares was restricted to public financial institutions that over time were expected to offload them to private investors. By 1996 equity was offered to foreign institutional investors.
Aftermath and its Pertinence Today
Privatisation has led to Central Public Sector Enterprises (CPSEs) generating more wealth from the same resources, given these companies turned around the return on assets and profit margins from negative to positive after going private, according an analysis which is part of the survey.
As a case in point, the survey noted that recent approval of strategic disinvestment in Bharat Petroleum Corporation Ltd (BPCL) led to an increase in value of shareholders’ equity of the oil marketing company by Rs 33,000 crore when compared to its peer Hindustan Petroleum Corporation Ltd (HPCL).
The approval was granted in November last year for strategic disinvestment of government’s shareholding of 53.29% in BPCL.The survey analysed the before-after performance of 11 CPSEs that had undergone strategic disinvestment from 1999-2000 to 2003-04. These CPSEs were compared with their peers in the same industry group,
and found that these firms, on an average, performed better post-privatisation than their peers in terms of their net worth, net profit, return on assets (RoA), return on equity (RoE), gross revenue, net profit margin, sales growth and gross profit per employee.
On the parameter of net worth, the analysis found that the net worth of privatised firms increased from Rs 700 crore before privatisation to Rs 2,992 crore after privatisation, signalling significant improvement in financial health and increased wealth creation for the shareholders.
“Difference in difference (DiD) analysis attributes an increase of Rs 1,040.38 crore in net worth due to privatisation,” the survey said.
Similarly, the net profit of privatised firms increased from Rs 100 crore before privatisation to `555 after privatisation compared to the peer firms and the DiD analysis attributed an increase of `300.27 crore in net profit due to privatisation.
“On an average, the RoE of privatised firms increased from 9.6% before privatisation to 18.3% after privatisation, reflecting increase in firm’s efficiency at generating profits from every unit of shareholders’ equity. For the average peer group,
the increase in RoE over pre privatisation period was 7.8%. DiD analysis attributes an increase of 0.89% in RoE due to privatisation,” the survey said.
Sources: Illustrated by Pranav Mohan Sharma, REUTERS, The Economic Times.