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Privatisation Goal: Optimise Impact, Not Revenue

The public sector suffers structural frailty. The ‘owner’ i.e. the government neither has the expertise nor the motivation to run business.

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Over 80% of the large PSUs are struggling, on public largeness and regularly bailed out. The rest, ‘return’ below any yardstick. State owned PSUs fare worse. Of the over 1300, a handful return any profit and nearly INR 4 lakh crore of accumulated losses. 

The public sector suffers structural frailty. The ‘owner’ i.e. the government neither has the expertise nor the motivation to run business.

Deal honestly with public institutions 

The PSUs have been the victims of interference, control, and cronyism. Most are not run as business entities, depreciating value and diminishing outcome. A CAG review says it eloquently, ‘absence of business plan, no production or marketing policies’. There is more, and acute.

Amongst them, it takes a year to recruit. Project location and technology decisions are made in Delhi.  No autonomy and accountability.  Most boards are ineffective. And yet PSUs system has provided the best talent which built the manufacturing industry, carried several others on their shoulders. 

Political executives like ownership. Yet own no responsibility. 

Privatisation will correct the well-intentioned but badly implemented wrongs of the Nehruvian (socialism) model. Populism, bureaucratic overreach devoured the good intention. Interference, meddling, and cronyism buried whatever good it had done. 

‘Privatise’ in policy-making lexicon

Bad ideas are a result of populist mind-set and tend to stick, grow even. It takes loads of courage, political capital, honesty and wisdom to rescript and ‘correct’. The previous governments can be accused of injecting the ‘poison pill’. Air India and MTNL are good examples. There are many more. 

‘Disinvestment’ is so uniquely Indian. Several governments over the last three decades have ‘sold’ stakes; more as a ‘budgetary exercise, to balance books’. Privatisation will be welcomed by the electorate. The resistance will come from the rent seekers. 

A fundamental aspect of privatisation is efficiency improvement. Unlike the bureaucracy the private sector is effective in solving the problem of externalities. Collaboration, negotiation, driven by individual incentives, eventually results in the most efficient solution. 

We need a comprehensive plan from the government to cede control and ‘hand over’ autonomy. 

Privatisation is not abdication of responsibility

Privatisation means a larger role for the government but we must be wary of the advent of the ‘era of government activism’.  The mind-set needs to evolve, capacity need to be built and bureaucracy must ‘accept and adept’ to the new normal. 

The federal government’s role must be to actively coordinate public and private interests by framing rule and implementing. It must coax compliance, exercise authority and enable operation. It must define liability, draw & enforce contracts. Focus on consumer protection & safety and employee rights & wellbeing. 

It must nourish the MSMEs, support the large cooperates. And stop. It must not overreach. A Crux insight on privatization suggests the gains in the utilities sector (electricity and water) have tended to be limited. The Indian experience has been mixed. Privatisation of public services has created impact. However, the experience in pivotal areas likes health & education has been value depreciating, at best. 

History across the world has a lesson

The PM appreciates that business is core to many, and critical policy initiatives. ‘Privatisation’ helps reallocate resources for impactful outcomes. Initiated in Germany in 1957; Margaret Thatcher was bold and made it visible. Chirac of France went further and privatised the banks.

While the PM envisions privatisation he may need to quickly create an enabling framework to drive this initiative. Key will be administrative and judicial reforms. He must protect and empower people who drive privatisation. They must not be hounded, even questioned for the judgement of their actions; if done in good faith. It will energise the bureaucracy and incentivise them to implement the PM’s vision. However the framework must emphasise the ‘credibility of the process’, focus on fairness and transparency, even at the cost of speed. 

The public is forgiving, if the process is credible and fair.

Optimise impact. Not maximise revenue

While several economists will goad the policymakers in getting the ‘best’ deal, the leader in the PM will focus on the ‘optimisation’. The intention of privatisation is not maximising financial revenue but ensuring effective resource mobilisation on one hand, resource utilisation on the other.

His advisors, particularly ‘accountants’ amongst them will pivot on revenue maximisation. PM will do well not to heed to their advice. ‘Reverse auction and bidding war may give the government most revenue, but a better solution will be to select the best suitor. Spectrum sale, the coal auctions turned out to be the ‘winner’s curse’ for most investors. Ultimately the public and the banks are paying for the ‘short sight’.

Policymakers must realise several key stakeholders will be impacted if the entity is ‘sold’ off to the less deserving. Similarly, post privatisation the government will continue to have a stake. Employees are citizens, the indirect tax to the exchequer is critical. Nourishing of the value chain (MSMEs), protection of consumers will be its responsibility, even its duty.

The government’s investments in intrinsic value & economic multipliers like education, infrastructure, Swachh Bharat, technology, health and housing programs are not only economically incremental, but societally exponential. 

Infrastructure creates both social and economic overheads, increasing efficiency and enhancing productivity. In addition, economic growth increases the size of market, which further increases the total demand for goods and services, triggering a virtuous cycle of rapid growth.

Investment in ‘welfare’ is truly transformational; infrastructure investment a huge multiplier. 

Government should govern; not trade

PM’s message is loud. Importantly clear. 

Focus on welfare of the people, leaving the running of the business to people who do it more effectively. However the economy needs more than messaging. Government needs to demonstrate its resolve by creating an enabling ecosystem that enhances both economic and societal value.

In thriving democracies the government is a partner in progress, paving the way, providing the enablers and rewarding those enterprises and support them when (if ever) they fail.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Dr. Vikas Singh

The author is a senior economist, columnist, author and a votary of inclusive development

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