'Turning copper into gold'

Todd Callahan, Senior Technical Advisor, PT Jasa Cita, Jakarta

India's Privatization Ministry, since its establishment in December 1999, has made remarkable progress, completing over 30 divestments in an environment that has not always been friendly to privatization. Arun Shourie, India's hard-charging Minister for Disinvestment, deserves much of the credit for this progress. Below are excerpts from his interview about India's privatization experience.

Question: India has approximately 240 state owned enterprises and another 1000-plus companies at the state government level. Why is privatization of these companies important to India?

Answer: State owned enterprises (SOEs) contribute over one sixth of the value added in manufacturing while in mining, electric power, petroleum, rail and air transport and banking and insurance, they have a dominant share in sectoral GDP. It is not the business of government to be in business, except where it is necessary to protect strategic interests.

Simultaneously, we need to re-focus attention on the social sectors of the economy. Privatization insulates the government from the commercial risk of running non-strategic enterprises, without adversely affecting the services being provided to consumers.

It achieves the much-desired separation between regulation and production of goods and services and makes available additional resources to government. It also enables efficiency enhancement in the existing SOEs through the induction of private capital and management. These are necessary steps for rapid economic growth.

Out of 234 SOEs owned by the federal government, 111 are loss- making companies. In aggregate the dividend paid by these 234 the dividend received, to keep them going.

What are the primary obstacles that you have encountered during your tenure as Minister of Disinvestment? How do you deal with the interest groups?

Poorly documented property rights of SOEs present major obstacles and delay the privatization process. There is considerable ignorance about India and its potential amongst international investors who suffer from biases. Domestic investors are so unused to assuming long-term risk that they are wary of buying into SOEs, which require considerable capital commitments.

The loss of employment after privatization is a continuing concern of employees. Similarly, consumers are concerned that private monopolies may replace public sector monopolies without adequate regulation. These are apprehensions, which are bound to arise unless allayed authoritatively.

Concern was voiced that the proceeds of privatization would get frittered away unless specifically identified for projects.

How do you sell the features and benefits of privatization in a country where state owned enterprises have long been the norm? What do you tell a skeptical public?

It is not the consuming public which is skeptical of privatization, but the problem is with those who benefit from the system of public enterprise. Fortunately, even for this group, the unsustainability and non-competitiveness of many of the SOEs is clear. Poor financials, unpaid wages and mounting liabilities are often the best indicators for convincing the erstwhile vested interests that the party is over.

Workers are frequently against privatization because they believe it leads to job losses. What can be done to reassure unions and ordinary workers?

While much is made of the likely adverse impact of privatization on employment, over the last ten years there was a net reduction in employment in SOEs owned by the Federal Government from a level of 2.179 million employees in 1991-1992 to a level of 1.742 million in 2000-2001. This was before the program of privatization started in the year 2000.

Employment is under threat from unstructured and unsustainable SOEs far more than from efficient private enterprise. Over the same period, the private sector added around 1 million jobs. Privatization cannot be associated with the loss of employment. In fact privatization will open new job opportunities, especially in the service and ancillary sectors, through the better use of the privatized assets.

You have completed some two dozen transactions and plan to sell US$2.5 billion in state assets in the year to March 31, 2003, despite frequent debates in Parliament and even challenges to your plans in the courts. How do you hope to accomplish this?

We are trying to standardize our procedures and minimize discretion so that fresh thinking is not required for each case. However, privatization is a political process and public debate is a reflection of unresolved issues. The more we debate, the more we resolve such issues and the sooner we can get ahead. Privatization will get off the front pages, but not just yet.

You have been accused of selling India's national patrimony. How do you respond to your critics?

The company continues to be in business and its valuations increase. Thus, we convert copper into gold. It has to be remembered that India's CPSUs are crown jewels, but their value can only be realized, once they are privatized, giving much higher returns, often as high as 60 times, to the tax-payer, who owns these assets.

You have been commended for your commitment to transparency in the bidding Process. Has that helped to minimize allegations of impropriety?

We have completed 34 cases of privatization so far. All these transactions will be subjected to independent audit by none other than the Comptroller & Auditor General of India. We have also been helped by our transparent procedure, which involves consultation and consensual decision-making at every stage. All this has ensured that the process is fine-tuned to the needs of transparency, administrative simplicity, non-discretionary decision-making and efficiency.

Speaking about the IMF and loan agreements with borrowing countries, you once made the point that individual governments frequently need to do more to communicate the rationale of privatization and other policy commitments to their own people. Can you elaborate?

No government can abdicate the responsibility for economic reform to some other institution. In this context we have to accept that economic reform is rarely costless. There are people who lose from economic reform just as there are people who gain. Successful reform requires that there be more gainers than losers. The problem is that the winners emerge only over the medium term. The losers, however, are quickly able to identify the potential loss of the unfair advantages enjoyed by them so far and organize anti-reform pressure.

Governments pursuing privatization can choose from a menu of options. What type of privatization do you favor?

Given the lack of exposure of foreign capital markets to SOEs and the limited capacity of the domestic markets, we have found that strategic sale to an investor, identified through international, open competitive bidding gets the best realizations and reduces uncertainty in the minds of the employees. However, we are not ideologically committed to a particular type of transaction. We adapt the instrument to suit the profile of the company and the level of investor interest.