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Pranab Kumar Mukherjee
(1982-1985, Feb 2009-May 2009, May 2009-Continuing)

Pranab Kumar Mukherjee is a prominent leader of India National Congress. He has...
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FY 2009-10: The Debate of Disinvestment: Part 2

India Infoline News Service / 10:15 am , Jul 16, 2009

Let us understand the background and the debates relating to the disinvestment policy.

Debates

The main arguments being used in favour of disinvestment are:

  1. Most of the public sector companies are loss-making and are a burden on public funds.
  2. Since the government is corrupt, the public sector companies are also corruptly managed.
  3. In the hands of the private sector, the public sector companies would be run more efficiently.

As pointed out by experts, if the government sells the asset that provides income or profit equal to or more than the prevailing interest on government securities, then the government would lose future income by selling it. On the other hand, from the private sectors point of view,it makes no sense to purchase an asset unless it provides at least a rate of return equal to the rate of interest on government securities,because that is where the private investor could otherwise put the money. This means that for such sales to occur, either

  1. The private sector must believe that it is capable of generating more profits than the public sector.
  2. The asset must be undervalued so that the actual rate of return for the private buyer turns out to be higher, which really means that the State exchequer has lost the money.

According to experts, whatever be the technique, to think that sale of PSU shares is the only method of reform, reflects a closed mind. Treating process of disinvestment as revenue in budgets creates pressure in selling,apart from being fiscal imprudence; the capital proceeds could be used to consolidate and revitalise Navratnas. Critics point out that, the whole disinvestments programme has been carried out by the government in a hasty, unplanned and hesitant way. As a result, the public sector equity has been sold for a fraction of what it could actually fetch.However this is only one part of the story.

The entire manner in which the proceeds from the disinvestments have been used is also being debated. The government has used these proceeds to offset the shortfalls in revenue receipts and thus reduce the fiscal deficit which it was required to do as a part of the IMF stabilization programme. The disinvestments of governments proceeds in profitable public sector enterprises and using the proceeds for current consumption needs amounts to frittering away of valuable public assets.

The correct policy would have been to allow the public sector themselves to use the resources they generate via this programme.This would have helped them to revitalize and expand their activities .The present policy has deprived the government of future yield from these enterprises.

Case

The Case of Centaur Hotel
The controversy over the privatisation and the attempted resale of Centaur Hotel, located near Mumbai''s airport at Santa Cruz, has highlighted the flawed manner in which public sector undertakings are valued before being put up for sale.

The manner in which Batra Hospitality Private Limited had sought to sell the hotel and its properties to the Sahara Group after acquiring these from the public sector Hotel Corporation of India, a wholly owned subsidiary of Air-India, is certain to have wide-ranging political ramifications.

The attempted resale of Centaur Hotel was rather contentious not only on account of the fact that the hotel and the properties attached to it were first purchased by Batra Hospitality for a sum of Rs 83 crore (Rs830 million) and was being sought to be sold four months later for Rs115 crore (Rs 1.15 billion) - a handsome hike of 35 per cent (Rs 32crore or Rs 320 million) on the original sale price.

The Centaur Hotel near Mumbai airport has been built on 30,000 square metres of prime land owned by the Airports Authority of India. The hotel has nearly 300 rooms, five restaurants and three banquet halls.Batra Hospitality picked up the hotel together with six flats owned by the hotel in Mumbai, and the dealership of a petrol pump located across the road from the hotel. Even before the resale of the properties to the Sahara India Group was formally announced on October 10, the petrol pump had become the source of an unseemly tussle between the new owners of Centaur Hotel and Indian Oil Corporation, the largest public sector oil company in the country. The entire episode, throws up a host of questions relating to the manner in which assets of public sector undertakings - especially land and real estate are valued before such assets are put for sale

Coming to the broader question of privatization itself, it is important to realize that privatization is not a solution for all the problems being faced by the public sector. Hastily conceived and executed, it could achieve very little. According to Human Development Report 1993, newly privatised companies need to operate in an Enterprise Culture for thereto be any real progress. Indeed, changing this culture by providing adequate training for new entrepreneurs, for example, or ensuring a competitive environment is probably more significant than changing ownership. And if the company is still a monopoly after privatization,as often in the case with utilities, it must be subject to suitable controls otherwise inefficiencies and monopoly power will merely be transferred to the private sector, with the costs being borne by the consumer.

Or monopolistic exploitation by efficient private owners replaces the inefficiencies of public ownership. As is obvious, the poor underdeveloped countries, have limited capacity to manage the privatization process, difficulty in finding suitable buyers for enterprises and ensuring that resources are distributed in an equitable way. The HDR also cautions that since building a suitable framework of institutions and regulations takes time, so privatization should not be rushed even if there pressure from the financial institutions. Infact the HDR (HUMAN DEVELOPMENT REPORT, UNDP) 1993 has argued that in many cases privatization has taken place for the wrong reasons, under the wrong conditions and in the wrong way. In this context, the report points out seven sins of privatization.

The reason is that the fall in profitability was in the case of enterprises operating in a competitive environment while improvement in profitability was in the case of enterprises operating in a monopoly environment. Employment levels dropped following disinvestment, but because voluntary retirement schemes were in operation, it is difficult to attribute the fall to disinvestment as such.

Criticisms of disinvestment in India

  • Poor performance of disinvestment in India
  • Poor Management
  • Lack of environment creation
  • Delay tactics
  • Selfish interests
  • Some PSUs were not worth (Bharat Leather Corporation, Scooters India Ltd)
  • Unproductive use of disinvestment proceeds
  • Disinvestment and Unemployment
  • Profit hungry private sector
  • Lower value of realization
  • Privatization leads to concentration of wealth

Analysis
The debate and the case study indicates that there are many complicated economic, political and legal issues such as

Debate on the Sale Profitable vs. Unprofitable Enterprises, debate on the sale of Large or Small Firms, Investment decisions before Disinvestment and Investment requirement from the private participants post disinvestment, management of Public Enterprises Debt, categorizing the Social Assets and economic assets of the PSU?s, probable environmental concerns.

The debate of Disinvestment Part 3 >>