'Turning copper into gold'

'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.