What is India's Privatisation Policy?

Prajapati Trivedi The debate on privatisation in India has been more ideological than pragmatic; more dogmatic than analytical and more bureaucratic than technocratic. This study attempts to piece together various policy pronouncements and publicly available documents on this subject to outline what appears to be the prevalent approach to privatisation.
DOES India have a 'privatisation policy'? If so, what is it? The answers to these questions w i l l depend on who is giving the answers. Typically, majority of the highly placed policy-makers in the government tend to deny the very existence of a privatisation policy. Whereas, critics and most employees of the Indian public sector see manifestations of privatisation policy everywhere. The only thing comm o n between these two groups is that neither has a really clear picture of the overall privatisation policy. The debate on the privatisation policy merely assumes the existence of such a policy. Most writers take one aspect of this policy and examine it under a magnifying glass. Unfortunately, this kind of scrutiny is not very useful because it ignores the big picture. The linkages between policies are very important in analysing the effectiveness of individual policies. For example, one cannot fully debate the merits of the 'disinvestment' policy, 'Memorandum of Understanding ( M O U ) ' and the policy of 'restructuring sick public: sector undertakings (PSUs)' without knowing how they fit the big picture. The entire bleme for this low level of debate on privatisation cannot be put at the doorstep of the critics alone. By tolerating an absence of a written statement on the privatisation policy, the government has not helped the cause of promoting a better understanding of its public enterprise policy, to put it mildly. The fact of the matter is that the seem ingly contradctory statements emerging from the highest echelons of policy-makers has made it impossible for most people to believe in the existence of a coherent privatisation policy. The purpose of this article is to piece together.various policy pronouncements and publicly available documents on this subject to outline what appears to be India's approach to the issue of privatisation. This article neither criticises the policy nor tries to defend it. Rather, the goal is to understand the broad contours of India's public enterprise policy. As mentioned earlier, there is no written policy statement but the government's actions imply the existence of a definite pattern. This implicit privatisation policy in India appears to have three dements. They are like the three legs of a delicately balanced three-legged table and determine the stability and success of the entire policy. For all these reasons the government seems to have hesitated in using the term privatisation. This has had two consequences. First, it has disarmed the government's critics and prevented the government from wasting time in defending its rhetoric The Indian government went ahead quietly with disinvestment and other policies which fall under the general category of privatisation but never called this process a privatisation effort. This strategy allowed the government to successfully focus on individual aspects, which are very difficult to implement under the best of circumstances and do not need to be further complicated by a rhetorical match. In retrospect, this strategy appears to have been a wise idea for facilitating the implementation. Second, lack of agreement on the meaning and scope of the word privatisation had led to conflicting pronouncements by some top policy-makers on this subject. On many occasions, some of them have sad that India is ready for privatisation or is going ahead with privatisation. Why did they use the 'P' word when others in the government were carefully avoiding it? One can think of two reasons. First, while other words could indeed be substituted for the term 'privatisation' as far as the discussion in India was concerned, the international donors and investors wanted to hear the 'P' word. In the prevailing international milieu, to talk of the 'reform' of the public sector is considered as a reaffirmation of the status quo. Therefore, those policymakers who are under pressure to placate the international community and attract additional investment tend to use the 'P' word mainly more as a marketing tool rather than a serious statement of policy. In addition, since there is no explicit agreement on not using the 'P' word, many policy-makers who are on the periphery of power interpreted the actions of the governmait as a tacit approval of privatisation as a public policy and say no reason not to call spade a spade.

I Avoiding the 'P' Word

The most confusing aspect of India's privatisation policy is the absence of an agreed name for it. Different people refer to it in different ways. In fact, the entire policy is usually given the name which is appropriate for describing only one aspect of the entire policy. For example, often 'Disinvestment of PSUs' 'Closure of sick PSUs' or 'liberalisation' are used as name tags for the whole policy. However, if you look at the policy closely, you can see the reasons why the term 'privatisationpolicy' has never been used in the Indian context. First, the term 'privatisation' encompasses a large arena. Any rolling back of the government's involvement in economy can be called privatisation. Therefore, using the term privatisation can create all kinds of i m aginary anxieties. Second, the most common connoation of the word privatisation is selling public assetslike the sale of British Telecom in Britain. This option involving the sale of assets was clearly not at the forefront of the Indian government's implicit privatisation plan. At least, the government d i d not want to create the impression of emphasising the sale of public assets as a foundation for its policy toward public enterprises, therefore; it eschewed the use of the term privatisation to describe itsefforts in this area. Finally, without question, privatisation is an ideologically loaded word and in a poor country like ours, an unpalatable word. As my friend Paul Rosentien-Rodan used to remind me constantly: "As long as the majority of the people are poor, their ideology shall prevail" This implies that in a poor country the sale of public assets does not have the same impact as it does in a developed economy like that of Britain. In India, any privatisation is likely to create new owners only among the relatively rich sections of the society. Thus, the vasl majority of the poor are likely to view any transfer of ownership of assets with scepticism.

II Privatisation Matrix
It is one of the axioms of public poicy that the more open and transparent you make i t , the less interesting it gets. In

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December 1991, the government of India placed a document on the table of the parliament outlining the government's thinking in the area of public enterprise policy. This document was entitled Monograph on the Performance Status of Central Public Sector Enterprises (referred to as Monograph hereafter) and was prepared by the department of pubic enterprises, government of India. It is a unique document of great historical importance. No body can fully participate in the debate on the privatisation policy in India without understanding and appreciating the thinking behind this document. U n fortunately, however, this document has thus far not become part of the privatisation debate in our country. This section is, perhaps, the first attempt to unravel the logic of this crucial document. To understand the policy behind this document, we need to understand the implicit conceptual framework. The root cause for the interest in the privatisation option is the perceived inefficiency of public enterprises. For better or worse, the efficiency of public enterprises is usually measured with the help of financial profitability. Some people have condemned the public sector as inefficient because its profitability is lower compared to that of the private sector. This indictment often provides fuel for privatisation. However, such broad sweeping generalisations about public enterprises usually leads to a great deal of controversy and debate. The public sector protagonists argue that these figures arc too aggregative and for coned interpretation these figures ought to exclude those sick enterprises which were acquired from the private sector. Their adversaries also argue that these figures are too aggregative but they suggest that these figures ought to exclude the profitable o i l sector. The result of these arguments has been a debating match which has stood drawn out for ever. Both sides have claimed victory and seem to have left the lay person totally confused. Unfortunately, this confusion has also stymied efforts to effectively deal with the losses in the public sector. Most public policy prescriptions seem to be influenced by one group or the other. Those who believe that financial returns from public sector are poor tend to go all out for privatisation. Others find redeeming value in the public sector in spile of the poor financial returns and defend its continued existence as such. In short, the debate on privatisation has been more ideological than pragmatic; more dogmatic than analytical and more bureaucratic than technocratic Tb move away from the ideological approach one has to begin by a closer examination of the nature of losses in the

public sector. If one were to suggest that the public sector in India consists of a wide variety of public enterprises, it would be considered a self-evident proposition and hence, a redundant statement. Yet, most people seem to ignore the fact that the various losses associated w i t h the public enterprises are also quite different from each other. If the objective of the public policy is to find a solution to these varied losses, then it is imperative that we have a clear understanding of the various losses. Otherwise, we may prescribe a single medicine to cure many different types of ailments and thus may not succeed in our ultimate goal of greater resource mobilisation from the public sector. The main objective of the Monograph is to provide a disaggregative picture of the Indian public sector. To do this it develops a very useful taxonomy of public enterprise losses. Unfortunately, the Monograph tails to elaborate the taxonomy and this may explain why it has not played an important role in the privatisation debate in our country. In the rest of this section we w i l l make an attempt to understand the rationale behind the taxonomy presented in this Monograph. Our discussion w l l be divided into two parts. First we examine the t h e o r e t i c a l framework that seems to have formed the backbone for this policy and then look at its empirical counterpart. The Monog-aph starts by presenting the broad profile of the Indian public sector as reproduced in Table I. It then finds the classification of public enterprises between profit-making and loss-making categories too broad for a meaningful policy discussion. Therefore, it goes on to suggest that the losses in the public sector may be classified along four dimensions. In what follows we first examine each of these dimensions separately and then put them together to shed light on the nature of the real problem and options outlined in the Monograph. To start with, one has to distinguish between the losses that are being made by

public enterprises in competitive industries versus losses of those in the noncompetitive (monopolistic) industries. The distinction is straightforward and requires no further ebboration.

Transparency
At the broadest possible level, public enterprise losses can also be divided into two categoriesexplicit losses and i m p l i cit losses. (a) Explicit losses: They show up as such in the financial statements of public enterprises and imply that the public enterprise is draining the resources at the disposal of the national exchequer. (b) Implicit losses: These losses do not show up in the financial statemems of an enterprise. They represent the difference between the 'potential' profits versus the 'actual' profits. In other words, a profitable public enterprise may be incurring implicit losses because it is not delivering profits at its potential level. Just because an enterprise is making profits, the questions regarding its true potential are often ignored. However, from the point of view of the national exchequer, a rupee lost as an explicit loss is the same as a rupee lost as an implicit loss. The total explicit loss incurred by the public sector for the year 1988-89 was Rs 1906.51 crore. This should be compared with the possibility of having additional resources worth of Rs 4218.42 crore, even if a modest improvement of 5 per cent in the efficiency in the public enterprise were to take place. The latter figure represents the implicit loss mentioned above. Clearly, no public policy can afford to ignore this category of implicit losses and focus only on the more easily understood explicit losses. Legitimacy The other dimension which can be used for classifying losses concerns the 'degree of legitimacy' of losses. The public sector losses in this respect can be classified in-

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to improve the performance of enterprises in different edls different kinds of policy prescriptions would be required
Data

The strength of the Monograph lies in the fact that it has evaluated all 244 central public enterprises on the four dimensions discussed in the previous section. Those of us who have done empirical research, as opposed to merely doing theoretical work, appreciate the challenges of finding empirical counterparts to the theoretical constructs. The Monograph, however, manages to overcome these challenges in a pragmatic way. Tables 2 and 3 reproduce the data presented in the Monograph w i t h minor modifications Together, these tables proride the number of public enterprises that belong to each cell of the privatisation matrix in Figure 1. However, two things should be noted about the way the Monograph defines the four dimensions for empirical analysis. First, the implicit lossmakers are defined as those public enterprises which are making profits but the Ratio of Net Profit to Capital Employed is below 8 per cent. Clearly, this is neither the only way to define i m p l a t loss-makers nor the best way to do so. Yet it is a pracTABLE 3: TAXONOMY OF PROFIT-MAKING PUBLIC ENTERPRISES

to two categorieslegitimate losses and illegitimate losses. (a) Legitimate losses: These can be directly attributed to social (non-commercial) objectives that are being served by a public enterprise. For example, some portion of the losses of the Delhi Transport Corporation (DTC) arise due to a lower price being charged for the tickets and, therefore, they would fall under this category. (b) Illegitimate losses: These losses arise purely due to inefficiencies of the public enterprise. Hence, their existence is not justified. More often than not, people club these illegitimate losses with the legitimate ones to justify their poo performance. Turnaround Potential

where it is difficult to change the present status and hence, these losses are likely to continue as long as the enterprise remains in the public sector. The losses that exist in the real world are a combination of these four major dimensions. If we put all these dimensions together, as we have done in Figure 1, we get 16 cells. A l l public enterprises, not only in India but anywhere in the world, can be put into one of these 16 cells, where each cell represents a very different category of public enterprise. It is clear that

Source: Monograph on the Performance Status of Caural Public Sector Enterprises, Department of Public Enterprises, Government of India, December 1991.

TABLE 2: TAXONOMY OF A L L CENTRAL PUBLIC ENTERPRISES

(a) Reversible losses (i e, where turnaround is possibleTP): These losses an said to exist where it is possible to eliminate them by either improving efficiency or by choosing another instrument of public policy other than public enterprise to deal w i t h the root cause of the losses, (b) Irreversible losses (i e, where turnaround is impossibleTI): These are cases

Sourer. Monograph on the Performance Status of Centra/ Public Sector Enterprises, Deparment of Public Enterprises, Government of India, December 1991.

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tical and feasible definition which one can accept t i l l it is improved u p o n . In addit i o n , the Monograph uses the term 'social obligations and externalities' as a proxy for 'legitimate causes for losses'. This is a better term for depicting the t h i r d dimension of the privatisation matrix which distinguishes between the legitimate versus illegitimate reasons for losses. Finally, it is worth noting that the M o n o g r a p h does not deal explicitly w i t h the f o u r t h dimension of the privatisation matrix. It lists all the 77 public enterprises that belong to cell numbers 9 and 13, that is those enterprises that are operating in the competitive sector, are making explicit losses and whose losses ate illegitimate (low social obligations). In addition to listing them in the Monograph, a brief SWOT (strength, weakness, opportunities and threats) analysts is done for each of the 77 enterprises. Whether they can be turned around or not is left to the decision of the Bureau of Industrial and Financial Restructuring ( B I F R ) and the parliament. For those enterprises in these cells that cannot be turned around, privatisation, closure or sale of assets may be the only options but they certainly cannot be a panacea for all the problems of public enterprises. This is precisely what John Kenneth Galbraith had in m i n d when he made the following comment in a recent article. There is no overriding rule as to privatisation by which anyone or any country should be guided. There is no substitute for careful case-by-case thought, painful as that may be. Far easier is the oratory laying down broad, if sadly unplausible, principles. Some have spoken of a broad, transforming move to private enterprise I am hopeful and indeed optimistic enough to believe that it instead wilt be a thoughtful adjustment to a particular circumstance While a full-fledged discussion of each of the 16 categories in the privatisation m a t r i x is beyond the scope of this paper and deserves a separate treatment, some comments on the case-by-case approach may be illuminating for policy-makers and sobering for ideologues on both sides of the privatisation debates. (Table 4 gives examples of public enterprises belonging to the different cells of the privatisation matrix.) If one had to arrange each of the 16 cells in Figure 1 in an ascending order of d i f f i c u l t y involved in the privatisation of enterprises, one w o u l d f i n d cell number 13 at the top of this list. Even the most diehard supporters of the public enterprise concept w o u l d agree that enterprises belonging to cell number 13 ought to be the first ones to be put on the chopping block. The enterprises in this cell are those that are making explicit losses, cannot be

turned around in the public sector, have no social objectives to j u s t i f y some of their losses and they are in a competitive industry. Perhaps, the Cycle Corporation of India and r a t i o n a l Textile Corporation might fall under this category. On the other hand, cell number 4 represents a much tougher case Enterprises belonging to this cell are monopolistic, making explicit profits but implicit losses, some of these losses are for legitimate social objectives but the performance of these enterprises can be turned around while they continue to remain in the public secotr. O i l and Natural Gas Commission ( O N G C ) may be a good example of this category. It has hardly any competition, it makes explcit profits but one cannot argue that O N G C has exhausted all avenues for cost economies. Certainly, many of its objectives are noncommercial in nature For examples, it runs a large number of research centres and borrows funds on behalf of the government in the international market, to name just two of them. Finally there is no reason why O N G C cannot improve its performance while remaining in the public sector. Given these facts, it is not clear that an e n t e r prise like O N G C ought to be privatised in a hurry. Another .generalisation that emerges

out of this matrix relates to the fact that, except, perhaps, for cell 13, a good performance evaluation exercise w i l l have to be a necessary precursor to the design of appropriate policy response for enterprises in all other cells. It is only after such an exercise, that real costs and benefits of various alternatives will become transparent Further, to f i n d out whether privatisation has yielded the expected benefits, one must have an evaluation methodology in place Only in cases where the sole objective of privatisation is increased financial profits w i t h o u t concern for any other trade offs, we need not worry about any other evaluation methodology but the conventional accounting profits. However, any reasonable observer of privatisation trends would 3gree that very few countries have gone for privatisation that would only promote unbridled profiteering. A n y privatisation effort without a proper ex-ante evaluation methodology may be termed a ' b l i n d ' privatisation. Because; after the privatisation the government will have no clue regarding the real impact of privatisation. It is little wonder that not a single rigorous study of the impact of a major privatisation effort exists. Most of the 'evidence in regard to the impact of privatisation is anecdotal.

TABLE 4: TAXONOMY OF CENTRAL PUBLIC ENTERPRISES

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Even in terns of sequencing, enterprises in ceil number 13 ought to be disposed of first. In all piobability, they are likely to be smaller enterprises which will be easier to handle technically as well as politically. Nigel A d a m , former editor of Londonbased monthly Business, recently summarised the general perception when he said: The jury is still out on the success of the UK privatisation experiment... The big utilities like British Gas and British Telecom have generated respectable profits since becoming privatised but this is largely because they stilt hold monopolies in their markets. Telecom has improved its services, but the industry regulator appointed by the government to keep an eye on standards, believes thai services and prices could be even more favourable to the consumer. It is to eliminate such confusion after the fact that one needs to have a performance evaluation system in place before privatisation. The current policy of memorandum of understanding (MOU)* in India is precisely such a system. It has lead to an intensive case-by-case discussion on the performance determinants for those enterprise covered by such a system. It is only through such a rigorous exercise that one will be able to properly categorise entet prises into the 16 cells of the privatisation matrix. It is in this sense that a system like M O U is both a necessary pre-condition as well as a complementary policy for a successful and pragmatic privatisation effort in any country. Finally, a is only sound common sense to spruce up one's wares before hawking them off. Do not we clean up and paint our house before selling? Do not we wash our car before showing it to prospective buyers? Then, why not spruce up the performance of public enterprises before privatising them. This way, we w i l l get a much better price. The only question is how to improve the performance of public enterprises before privatising them. To get the answer, let me again quote at length from the most recent writings of John Kenneth Galbraith, the distinguished economist who predicted the convergence of capitalism and socialism way before it became fashionable to do so: The disaster of public ownership in much of Latin America, as also in the case of older industry in Europe and elsewhere, is that performance is irrelevant or largely so... there is indication that if a corporation is large enough, it does not matter who is the ultimate owner of its shares. It can be owned by the government or, with little difference, by scattered and anonymous investors. What matter is that the management of enterprise have full right of derision and be f u l y accountable for performance...

Public Sector Investment in 1997 following three categories of costs associated with transforming the Indian public sector. First, a part of these resources w i l l be used to pay for the costs associated with the closure of enterprises declared as terminally sick by BIFR. These costs would primarily include expenses relating to voluntary retirement schemes. Second, another part of the revenues would be used for restructuring those enterprises which are on the verge of becoming chronically sick but are as yet not beyond redemption. These enterprises will be given extra infusion of capital after insuring that a management accountability system based on M O U s is in place. Without the M O U system being in place, there is risk that these enterprises may not make the most effective use of the additional resources given to them. Finally, a big part of the money raised from disinvestment w i l l be used for retraining of the workers displaced or affected as a result of the closure and internal restructuring involving downsizing. While it is fair to say that the major goal of disinvesting up to 20 per cent of PSU shares is resource mobilisation, there is bound to be some positive impact on accountability of public enterprises as well. Once the shares of the public enter prises are quoted in the stock market these enterprises w i l l be under increased scrutiny from a commercial perspective In addition, there is also the possibility of using prices of the shares as one of the indicators in the M O U s for these enterprises. Ultimately, the hope of the top policy-makers appears to be that in about

It is for this reason that the new Industrial Policy Resolution of 1991 declares that all public enterprises in India except for the ones that are being referred to BIFR w i l l sign a M O U w i t h the government. The objective of the M O U policy is to give managers complete autonomy for day-to-day operations but hold them accountable for results at the end of the year for performance. This point is also stressed by the Monograph which implies that the M O U policy and policy of 'reorganising and restructuring' of 77 public enterprises arc complementary strategies.

Ill
Disinvestment Policy
In the previous two Motions we have explored ;he rationale for the policy towards the 77 chronically sick public enterprises and the M O U policy. In this section we w i l l try to explore the possble rationale for the 'disinvestment' policy and its interrelationship with the other two policies Contrary to popular perception, the majority of investment in the public sector yields a positive rate of return. In fact, 85.5 per cent of the Rs 99,315 crore invested in the central government owned public enterprises yields a positive rate of return and only 14.5 per cent of the investment is loss making. Most of the 77 enterprises identified for reference to B I F R account for this 14.5 per cent lossmaking investmentt The overall objective of the disinvestment policy is to raise resources from w i t h i n the public sector for meeting the

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five to seven years, the entire p o r t f o l i o of the central government public enterprises w o u l d consist of healthy, viable enterprises which w o u l d be symbol of pride and achievement and not a symbol of ridicule. Figure 2 shows how the current p o r t f o l i o containing 85.5 per cent profitable and 14.5 per cent unprofitable enterprises is sought to be transformed i n t o a healthy p o r t f o l i o of financially, sound public enterprises by using funds generated f r o m w i t h i n the public sector via disinvestment or surplus generation on current operations. CONCLUDING COMMENTS O u r attempt to discover India's policy towards privatisation leads us to the following conclusions: (1) In India the emphasis is on improving the performance of p u b i c enterprises. Privatisation in the conventional sense of the word is only one of the many options and the preference continues to be to treat it as a policy of last resort. W h i c h is a big progress compared to a few years back when the 'P' word was unthinkable not o n l y in public but also in private. (2) If the performance of the public enterprises under the central government enterprises can be improved by installing a management accountability system through M O U s , then those enterprises will continue to exist w i t h i n the public sector. (3) For those sick enterprises which are in the competitive sector, w i t h no social objective and very little hope of being turned around, closure or sale of assets w i l l be considered as an o p t i o n of the last resort. (4) For those enterprises which are on the margin, i e, they are drifting toward sickness but are not beyond redemption, efforts w i l l be made to nurse them back to health by restructuring them. (5) There will be a massive requirement of resources to accomplish these tasks and these resources w i l l be raised from w i t h i n the public sector by disinvesting up to 20 per cent of shares in the healthy public enterprises. Disinvestment w i l l not only support t h e pruning and restructuring of the public sector but will contribute toward increased accountability of existing public enterprises.

Note
[The author is grateful to Alfred Schipke for helpful comments on an earlier draft. Conclusions arc based on information available till June 1992 and The author alone is responsible for any errors of omission or commission.] * For further details on this policy, see: Trivedi. Prajapati, A Critique of Public Enterprise Policy, International Management Publish ers, Nov Delhi. 1992.

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