Professional Documents
Culture Documents
INTRODUCTION TO PRIVATISATION
The word privatisation has been receiving much attention in business, government and academic circles on a global platform. This phenomenon of privatisation can be linked to a revolution or boon. Privatisation techniques have already been tried in countries like Great Britain, China, United States, Turkey, Brazil, Mexico, & Japan. In our country to a beginning towards privatisation has been made with the sale of upto 20% of the equity capital of 30 plus select public sector units (psus), first to mutual funds and financial institutions and later to the investing public.
HISTORY
THE history of privatisation is very short-just 10-15 years old to be precise. The real disinvestment started only in 1980s, the word privatisation first made its appearance in late 80s. The credit for inventing the word goes to Peter.F.Drucker, which used the term first in his famous book, the age of discontinuity in 1969. Ten years later, Margaret Thatcher became prime minister of Great Britain and it was she who gave practical shape to privatisation. Later country after country fell in line with the Great Britain in move toward privatisation.
RATIONALE OF PRIVATISATION
According to supporters of privatisation, the rationale for privatisation and disinvestment is as follows:
PERFORMANCE. State-run industries tend to be bureaucratic. a political government may only be motivated to improve a function when its poor performance becomes politically sensitive, and such an improvement can be reversed easily by another regime.
INCREASED EFFICIENCY. Private companies and firms have a greater incentive to produce more goods and services for the sake of reaching a customer base and hence increasing profits. a public organization would not be as productive due to the lack of financing allocated by the entire government's budget that must consider other areas of the economy.
SPECIALIZATION. A private business has the ability to focus all relevant human and financial resources onto specific functions. a state-owned firm does not have the necessary resources to specialize its goods and services as a result of the general products provided to the greatest number of people in the population.
IMPROVEMENTS. Conversely, the government may put off improvements due to political sensitivity and special interestseven in cases of companies that are run well and better serve their customers' needs.
CORRUPTION. A state-monopolized function is prone to corruption; decisions are made primarily for political reasons, personal gain of the decision-maker (i.e. "graft"), rather than economic ones. corruption (or principal-agent issues) in a state-run corporation affects the ongoing asset stream and company performance, whereas any corruption that may occur during the privatization process is a one-time event and does not affect ongoing cash flow or performance of the company.
ACCOUNTABILITY. Managers of privately owned companies are accountable to their owners/shareholders and to the consumer and can only exist and thrive where needs are met. Managers OF PUBLICLY OWNED companies are required to be more accountable to the broader community
and to political "stakeholders". This can reduce their ability to directly and specifically serve the needs of their customers, and can bias investment decisions away from otherwise profitable areas.
CIVIL-LIBERTY CONCERNS. A company controlled by the state may have access to information or assets which may be used against dissidents or any individuals who disagree with their policies.
GOALS. A political government tends to run an industry or company for political goals rather than economic ones.
CAPITAL. Privately held companies can sometimes more easily raise investment capital in the financial markets when such local markets exist and are suitably liquid. While interest rates for private companies are often higher than for government debt, this can serve as a useful constraint to promote efficient investments by private companies, instead of crosssubsidizing them with the overall credit-risk of the country. Investment decisions are then governed by market interest rates. State-owned industries have to compete with demands from other government departments and special interests. In either case, for smaller markets, political risk may add substantially to the cost of capital.
SECURITY. Governments have had the tendency to "bail out" poorly run businesses, often due to the sensitivity of job losses, when economically, it may be better to let the business fold.
LACK OF MARKET DISCIPLINE. Poorly managed state companies are insulated from the same discipline as private companies, which could go bankrupt, have their management removed, or be taken over by competitors. Private companies are also able to take greater risks and then seek bankruptcy protection against creditors if those risks turn sour.
NATURAL MONOPOLIES. The existence of natural monopolies does not mean that these sectors must be state owned.
CONCENTRATION OF WEALTH. Ownership of and profits from successful enterprises tend to be dispersed and diversified -particularly in voucher privatization. The availability of more investment vehicles stimulates capital markets and promotes liquidity and job creation.
POLITICAL INFLUENCE. Nationalized industries are prone to interference from politicians for political or populist reasons. examples include making an industry buy supplies from local producers (when that may be more expensive than buying from abroad), forcing an industry to freeze its prices/fares to satisfy the electorate or control inflation, increasing its staffing to reduce unemployment, or moving its operations to marginal constituencies.
PROFITS. Corporations exist to generate profits for their shareholders. Private companies make a profit by enticing consumers to buy their products in preference to their competitors' (or by increasing primary demand for their products, or by reducing costs). Private corporations typically profit more if they serve the needs of their clients well. Corporations of different sizes may target different market niches in order to focus on marginal groups and satisfy their demand. a company with good corporate governance will therefore be incentivized to meet the needs of its customers efficiently.
JOB GAINS. As the economy becomes more efficient, more profits are obtained and no government subsidies and fewer taxes are needed, there will be more private money available for investments and consumption and more profitable and better-paid jobs will be created than in the case of a more regulated economy.
YEAR
PROCEEDS (IN CRORE) 902 5371 1860 1871 5632 3348 15547
OBSTACLES TO PRIVATIZATION
The literature on transition economies reveals problems encountered in privatizing state owned enterprises. The following discussion categorizes the problems into salient, technical, economic, managerial and attitudinal problems.
Salient Problems Salient problems are critical policy decisions that must be resolved before any headway with privatization can be made. In looking at the mechanics of privatization policies, the key issues to be tackled are the speed of privatization, prioritizing, restructuring and the sale to new owners. The speed of privatization has been at the centre of the debate on the economic transition because it affects other aspects of socio-political stability in the region. Rapid privatization results in a quick transfer of ownership, but the governments need to assure that the transferred resources are used adequately in order to have a maximum economic, social and political effect. However, there are severe constraints faced such as a lack of institutions to facilitate privatization. The government has to establish some order of priority as well. For instance, small privatization such as shops and restaurants are privatized first and then large privatization such as light and heavy manufacturing enterprises. The experience of the former socialist countries in Central and Eastern Europe reveals that the privatization of small-scale enterprises was successful while large-scale enterprises' privatization was slow and difficult. Privatization of small retail shops, service establishments, handicraft shops and small construction contractors was generally managed quickly and effectively because the process was decentralized to local administrations and because many shortcuts were used. Large scale enterprises were plagued with various problems, such as outdated technologies and production processes, a huge accumulation of debt, rigid work rules, strong resistance to reorganization and lay-offs, a lack of marketing and
finance skills and inefficiency in production. All these factors made privatization of large-scale enterprises difficult and thus various restructuring activities were conducted to make these enterprises saleable. Restructuring is important for medium-sized and large industrial enterprises in order to make them saleable. Some are quite large and must be disaggregated into separately manageable components and they have to institute clear operating criteria with incentives for management. The large firms may be grouped into those that can be sold-off relatively quick and that will be left in state hands in the first instance. The firms that will be left with the state need to be allocated to a group to be wound down or to another group of firms in need of restructuring prior to being privatized.
Technical Problems According to UNECE [1992, p. 219], At the inception of the transition process, the former centrally planned economies found themselves literally without capital markets for two reasons. One was the limited ability of individuals to acquire and hold financial wealth under communism, coupled with the considerable degree of social protection (in terms of jobs, wages, pensions, medical care, and others aspects) enjoyed under administrative planning. The absence of capital markets hindered valuation of state assets. This resulted in below value sale of assets due to a lack of transparency. Lack of a proper accounting system also hindered the valuation of net worth and at times, some international accounting rules were applied in the state-owned enterprises to have its profit and loss situation assessed. The initial condition of the enterprises also affected their privatization. Enterprises with a good financial condition were able to survive market competition, while those that were in poor financial condition encountered problems when the market was liberalized, but managers faced difficulties in restructuring enterprises which were in poor financial condition during the transition.
Economic Problems The economic aim of privatization is improving the efficiency of the existing assets while protecting their value. To begin with, there is insufficient indigenous saving available to purchase outright a sizeable portion of state assets. In some cases, setting up proper financial institutions, such as independent pension funds, insurance schemes and commercial banks to whom state liabilities are sold as distinct alternatives to the institutional monopolies in place can assist in the intermediation. But this cannot be a panacea. In the absence of widespread experience with such divestment, however, careful experimentation is warranted both in the methodology of organizing markets and in phasing the privatization. Without progress in the sphere of monetary and fiscal institutions, policies and instruments, the advance towards privatization is likely to run slow. Managerial Problems There is also a large array of questions connected with the order in which privatization, (mainly large enterprises privatization) should be pursued to minimize transition difficulties and avoid delays in getting the economy going again and obtaining a more efficient utilization of available capital assets. If privatization is to enhance efficiency and raise revenue, the principal-agent problems that arise in managing state-owned enterprises need to be minimized. Many aspects of the problems of managerial abilities and behavior, fostering the rapid emergence of a competitive environment, and putting in place sufficiently comprehensive regulatory mechanisms could usefully be considered here. Those measures designed to induce enterprise management to behave like private owners remains acute, regardless of ownership. This is true even in cases where the state retains control and enjoins enterprise management, for example, through management contracts, to behave as its counterpart in a privately-owned corporation. It is therefore important to monitor management and put in place transparent incentive schemes that are likely to induce
managers to serve according to the instructions of the owners regardless of whether they are private or public. Accounting information on cost reduction and relative costs of services supplied by multi-product firms is essential.It is possible that the inefficiency of state-owned enterprises under central planning stemmed, at least in part, from incompetence on the part of those running the firms. One reason for this was that manager was frequently entrusted to political appointees, but it would be wrong to extend this to all managers. Neither would it be appropriate to assume that all of the appointed managers are incompetent. However, few individuals have had experience with proper enterprise management because planners did not encourage acquisition of an economic or managerial culture. Such culture cannot be quickly assimilated. Hence years to come, for better or worse, the transition mainly has to rely on those who formed the backbone of the old managerial technocracy.
Attitudinal Problems Some of the most important legacies of the long years of socialist economy are implanted in the behavior and expectations of economic agents. These concern consumers preferences, sell-off to foreigners and entrepreneurship and market entry and exit. The consumers in the transition economies have a low saving attitude influenced by the past conditions of the socialist experience. There is little doubt that all transition economy countries have been looking towards a significant influx of foreign capital, including through the formation of joint ventures and outright sale of state-owned to foreign owners. This would furnish badly needed capital, but also managerial expertise, technology, marketing skills, an easier entry into established markets, and other benefits. However, economic sovereignty in the countries in transition matters because the people complain about selling off to foreigners, especially selling strategic enterprises to foreigners. The question, then is less whether to sell assets to foreign owners
as such than in what sectors, to what degree and how will foreign ownership be regulated. Conflicts of interests have been especially conspicuous in the privatization campaign, with managers or bureaucrats privatizing themselves, politicians involved with privatization also being on company boards, and banks entrusted with the implementation and supervision of some aspects of privatization campaign being funnels for the acquisition of property. private sector investment.
The successes and failures of the privatization operations in the ten countries considered in the study by Bouin and Michalet provide a number of lessons to bear in mind for a better formulation of privatization programs. Without claiming to be exhaustive, this reformulation concerns the definition of privatization operations, the preparation of programs, and their implementation. On the basis of this attempt to clarify the relationship among ownership, control and management, we can now better identify what makes a privatization operation effective. (a) A privatization is effective if the private purchaser or contracting party performs all the functions and activities of the enterprise not explicitly defined by the state. The private agents ability to apply his rationale in the management of the enterprise depends on the degree of constraint exercised by the regulatory environment, notably regarding decisions on employment, pricing and equipment. With this in view, clear rules of the game need to be defined so that on one hand, the purchasers objective of maximizing utility can be pursued through the activity of the privatized enterprise, and on the other, the enterprise is not
operated to the detriment of the collectivity (competitors, employees, consumers). The adaptation of the regulatory framework, and hence the attitude of the state are decisive, as will be seen below. (b) Effective privatization also implies that the private purchaser should bear the financial costs associated with the modernization and development of the enterprise, but also, if they arise, the financial losses. The fundamental difference between effective privatization and restructuring lies precisely in the financial commitment of the private shareholders. In the context of restructuring or privatization through management contracts, the state remains the main backer of the public enterprise. As a result of a transfer operation or the granting of a lease, the private agents become financially responsible for the operating results. Those shareholders who have effective control of the enterprise exercise continuous pressure on the managers, using both the threat of removing them and a system of incentives based on results. This reduction of the asymmetry of the relationship between the hard core of control and the managers has a great influence on the gains to be expected in the field of economic efficiency. Preparation of privatization programs The design of the privatization program is vital for two reasons: first, it partly determines the efficacy of implementation of privatization operations, notably their duration, and second, it determines the procedures that are to ensure transparency and hence the irreproachable nature of such operations. It requires an appropriate institutional framework and the precise selection of the target enterprises to be privatized.
As far as the institutional framework is concerned, the results recorded by the countries in our sample are scarcely encouraging in either execution or transparency. The initial phases of the privatization process in fact generally turned out to be considerably longer than planned. Apart from eminently political retarding manoeuvres, the organization of the process came up against
the technical problems of the administrations lack of preparation and the inadequacy of the information available on public enterprises. Two approaches were developed to overcome these constraints, one based on the preparation of a detailed framework and substantial administrative intervention, the other based on minimal legal structures and simplified administrative procedures. Analysis of these two approaches makes it possible to draw certain lessons concerning the efficiency and transparency desiderata. (a) Where a detailed approach is adopted (Ghana, Malaysia, Nigeria, Philippines), the privatization process is not instituted until all the conditions considered necessary prerequisites are fulfilled in their entirety. As a rule these conditions are: i) creation of a privatization body with independent legal status; ii) adoption of a law or decree specifying the modalities for the transfer of ownership to the private sector; iii) adoption of provisions concerning in particular any possible disputes resulting from privatization operations and the situation of the employees of privatised enterprises; and iv) publication of a list identifying the different actions for each public enterprise (privatization, restructuring, merger, liquidation, etc.). Fulfilling all these requirements and in particular the last, which implies completion of the work of collecting information on public enterprises considerably delays the launching of the process. What is more, the execution of the programme is based on a cumbersome administrative apparatus and requires numerous interventions by foreign consultancy bodies. The advantage expected from this approach is the exercise of permanent control over the process (no back door privatizations, availability of information at each stage). Even the most minutely detailed procedures, however, do not totally eliminate the lack of transparency where foreign or domestic investors benefit from debt conversion mechanisms to finance the purchase operations. It also seems difficult, by means of legal provisions, to prevent political pressure, clientelism
and corruption in tendering procedures. Similarly, the problem of evaluating the assets of an enterprise to be privatised, which implicitly involves the more political -issue of transferring public property to local or foreign private interests, cannot be dealt with satisfactorily in the course of a general audit of the public sector.
(b) At the other extreme, the minimalist approach is expected to make it possible to privatize without the creation of independent administrative bodies, without an arsenal of legal instruments, without an exhaustive census of public enterprises. These operations are executed by means of ad hoc procedures. Some of these elements characterize, among others, the Chilean, Ivoirians, Jamaican and Tunisian programs. Such a case-by-case approach is supposed to promote flexibility and rapidity, often to the detriment of perfect transparency. The discretionary nature of the procedure limits the availability of information. The list of enterprises privatized and the transaction conditions generally remain unofficial, fuelling rumours and giving ammunition to the opponents of privatization. The effect on potential buyers is likely to be disastrous and the anticipated advantages of efficiency and flexibility are considerably reduced, especially if legal actions are instituted as a result of the initial privatization operations.
(c) Analysis of the facts thus tends to argue against the sharp opposition between the two methods and in favour of a midway approach more likely to promote the transparency of operations and the fairness of tender procedures while minimizing the bureaucratization of the process and the delays in implementation. For this it is necessary to encourage administrative decentralization for the preparation of dossiers and the technical aspects of the operations. The example of Jamaica illustrates the advantages inherent in this approach. The majority of the 40 operations effected in this country were
conducted directly by the body responsible for the enterprise to be privatized (ministry, holding company or parent public enterprise). Under these conditions it does not appear to be essential to have an exhaustive census and audit of the entire public sector. For certain individual operations, ad hoc procedures under the responsibility of the prime minister were set up. It would thus appear preferable to envisage the wholesale privatization of small and medium public enterprises rather than concentrating on a few large national companies. Moreover, it should not be forgotten that the privatization of a large number of small and medium public enterprises may trigger a dynamic accelerating the entire process of transformation and renovation of the economic system in the countries considered. Implementation of privatization programs In the strict sense, the implementation of privatization programs implies a choice of technique. However, the interdependence and coherence of reforms aimed at modernising the economies of the developing world require the parallel adaptation of the regulatory framework, a basic precondition for the efficacy of these programs.
The wide variety of privatization techniques reflects the diversity of situations affecting both the privatisable enterprise and the context for the realization of programs (government objectives, financing constraints, etc.) Indeed, the
developing countries in the reference sample used transfer operations as the privatization method far more than any other. In view of the major problems of the early 1980s, this is scarcely surprising, but it must be said that the majority of developing countries do not offer satisfactory conditions for the successful realization of such operations.
(a) On the financial side, transfer operations through private sale or public offer come up against two problems. First, the lack of local buyers with substantial
financing capacity is obvious. A competitive call for tenders can thus be envisaged only for the sale of small and medium public enterprises. Second, the banking and stock market structures are frequently inadequate, limiting the possibilities for financing transfer operations. By way of example, the limited success of the public offer for sale of Caribbean Cement a few months after the successful sale of the National Commercial Bank of Jamaica illustrates the low absorption capacity of securities markets in certain developing countries.
(b) In estimating the value of privatisable enterprises, the impossibility of assessing their future profitability - because of changes in the costs of production, selling prices and markets during and after the liberalization phasemakes it difficult to determine a precise transfer price. This is a major problem, as uncertainty concerning the present and future value of the enterprise is a factor that naturally dissuades potential purchasers.
(c) As regards the control of the privatized enterprises, the transfer operation does not in itself constitute a satisfactory option. In the developing countries, transfers generally involve only a fraction of the capital, the state remaining the biggest shareholder. This results in a duality in the objectives pursued by the enterprise (social and political for the state, financial for private investors) which tends to complicate decision making and the running of the enterprise. In the particular case of public offers for sale, the dispersion of the capital limits the possibilities for controlling the managers of big privatized enterprises. Transfer should therefore not be automatically preferred over other methods. The fact that there are several privatization techniques argues in favour of selection on a case-by-case basis of the most appropriate method in view of the governments objectives. In this respect, the increased number of operations combining several methods shows the authorities growing preference for mixed procedures for the transfer of management and ownership. This approach
also reflects the specificity of the constraints imposed on each developing country. Consideration should be given in particular to two methods hitherto relatively little used but which have undoubted advantages with respect to the factors discussed above. The first is an increase in capital not subscribed by the public shareholder(s). This has two advantages. First, it mainly benefits the privatized enterprise. The injection of fresh money by private investors subscribing to the increase in capital helps to recapitalize the enterprise and finance the modernization investment necessary for its development. The increase in capital does not generate revenue for the state, thus limiting the problems associated with the utilization of the product of transfer, but it is not neutral with respect to public finances. The private sector, by replacing the authorities in the financing of the enterprises activities, enables the state to reduce considerably its capital injections and subsidies aimed at financing investments. Second, financing the modernization effort gives the private investor a decisive role in the orientation of productive investment and in the operation of the enterprise. This control by the private investor puts him in a position to estimate the value of the enterprise and, where appropriate, to formulate takeover proposals for an additional share of the capital. Private subscription to increase capital thus makes it possible progressively to dilute state intervention in the management and operation of the enterprise while favouring the emergence of internal private control.
The second method is the staff buy-out. This has rarely been used in the countries studied, the main reason being the inability of the banking institutions to lend the funds necessary for employees to take over their enterprise, even if they have an attractive plan to offer. The risks run by the banks are fairly limited, however, since the debt contracted by the employees is against the assets of their company. The advantage of such a procedure is that it transfers
control of the enterprise to agents working on a private rationale basis at two levels: first, the banks select the takeover projects with the best potential risk profitability ratio, and on the other, the employee-owners form the controlling nucleus of the enterprise.
Adaptation of the regulatory framework in parallel with privatization operations is an essential aspect of the process of renovating and modernizing mixed economies. In the system now being set up, the new paradigms are competition and private rationale. They impose new criteria for performance evaluation: competitiveness, economic efficiency and financial profitability.
Having recognized the primacy of market forces, the state should both encourage their emergence and mitigate their shortcomings. The reinforcement and protection of competitive practices are crucial for the success of privatization programs. Competition on product and factor markets is in fact at once the most powerful incentive for and the most efficient control over private rationale. What is more, privatization makes existing regulations obsolete. A process of reregulation is therefore necessary to preserve the conditions for reaching an economic optimum. Governments that have introduced major privatization programs cannot ignore these two factors.
Be this as it may, any national privatization strategy has to be defined with respect to its coherence with the overall orientation of the economic reforms introduced to renovate mixed economies in the developing countries. BENEFITS OF PRIVATIZATION 1. Improved Efficiency: The main argument for privatization is that private companies have a profit incentive to cut costs and be more efficient. If you work for a government run industry, managers do not usually share in any
profits. However, a private firm is interested in making profit and so it is more likely to cut costs and be efficient. Since privatization, companies such as BT, and British Airways have shown degrees of improved efficiency and higher profitability. 2. Lack of Political Interference: It is argued governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense. For example a state enterprise may employ surplus workers which are inefficient. The government may be reluctant to get rid of the workers because of the negative publicity involved in job losses. Therefore, state owned enterprises often employ too many workers increasing inefficiency. 3. Short Term view: A government many think only in terms of next election. Therefore, they may be unwilling to invest in infrastructure improvements which will benefit the firm in the long term because they are more concerned about projects that give a benefit before the election. 4. Shareholders: It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover. A state owned firm doesnt have this pressure and so it is easier for them to be inefficient. 5. Increased Competition: Often privatization of state owned monopolies occurs alongside deregulation i.e. policies to allow more firms to enter the industry and increase the competitiveness of the market. It is this increase in competition that can be the greatest spur to improvements in efficiency. For example, there is now more competition in telecoms and distribution of gas and electricity. However, privatization doesnt necessarily increase competition; it
depends on the nature of the market. E.g. there is no competition in tap water. There is very little competition within the rail industry. 6. Government will raise revenue from the sale: Selling state owned assets to the private sector raised significant sums for the UK government in the 1980s. However, this is a one off benefit. It also means we lose out on future dividends from the profits of public companies.
the public enterprises by the monopoly power of private enterprises it will be very dangerous.
4. Privatization many a times results in the acquisition of national
interests.
7. There are well managed and ill managed firms both in the public
and private sectors. It is not the sector that matters, but the quality and commitment of the management.
8. The capital markets of developing countries are not developed
therefore it is not properly carried out, with the result that the expected results may not be achieved. 10. In many instances, there are vested interests behind privatization and it amounts to deceiving the nation. The UNDPs Human Development Report 1993 observes that in many countries privatization often has been a garage sale to favoured individuals and groups.
5. Lack of political consensus: privatization is a political process too. As there are opposing views regarding privatization, there are likely to have some opposition to privatization. The privatization BALCO is a case in point. The government shall try to make clear the need for and objectives of privatization and shall try to make clear the need for and objectives of privatization and shall bring about as broad a consensus is possible. 6. Wrong labour strategies: most public enterprise have surplus labour getting rid of which is essential for success of the enterprise. But, to overcome labour resistance to privatization, often unrealistic promises are given that the labour will not be affected by privatization. A more open and realistic handling of the labour is needed for making privatization meaningful. Prospects of retraining and redeployment of the labour are yet to be properly explored in countries like India. 7. Lack of political will: privatization is not carried out in real earnest and properly because of lack of political will and/or vested interests. For example, some ministers oppose privatization of enterprises under their ministry and some politicians oppose privatization of undertakings in their constituencies or states. 8. Poor financial strategies: many privatizations are carried out with a good financial strategy. 9. Wrong environment: mere transfer of ownership does not help improve the performance of an enterprise. Where the market functions poorly and enterprises are still vulnerable to arbitrary government edicts, transferring ownership to the private sector is unlikely to achieve much. 10.Prevalence of monopoly elements: if privatization results in the conversion of a public sector monopoly to a private sector
monopoly, privatization may not produce much beneficial effects; it could even worsen the situation. 11.Problem of cultural change: improvement of performance of an enterprise after the privatization will depend, inter alia, on bringing about a change in the work culture and the total enterprise culture. This is no easy task.
being: to raise recourses, encourage wider public participation and to promote greater accountability In 1993 government of India set up a planning commission on disinvestment in PSEs under the chairmanship of C Rangarajan. The common minimum programme of the united Front Government : 1996 sought to carefully examine the public sector non core strategic areas to set up disinvestment related matters ; to take and implement decisions to disinvest in a transparent manner and to ensure job security opportunities for retaining and redeployment. No disinvestment objective was however mentioned in the policy statement. Pursuant to the above policy of the united front government a disinvestment commission was formed in 1996 .It made recommendations on 58 PSE. The recommendations made a shift from public offerings to strategic/trade sales with transfer of management. The Second Phase In its first budgetary pronouncement (1998-99) the new government decided to bring down government shareholdings in the PSUs to 26% in the generality of cases (thus facilitating ownership changes, saw as recommended by the disinvestment commission ).It however stated that the government would retain majority holdings in PSEs involving strategic considerations and that the interest of the workers would be protected in all cases. The policy for 19992000 as enunciated by the government in the budget speech was to strengthen strategic PSU privatize non strategic PSUs through gradual disinvestment or strategic sale and devise viable rehabilitation strategies for week units .A highlights of the policy was that the expression privatization was used for the first time.
Strategic and Non Strategic Classification: on 16 march 1999 the government classified the pulic sector into strategic and non strategic areas for the purpose of disinvestment. It was decided that the strategic sector enterprises would be those in the areas of arms and ammunitions and the allied items of defiance equipment defense air crafts and warships of radiation and radio isotopes to agriculture medicine and non strategic industries) and railway transport all other public sector enterprises were to be considered non strategic .for the non strategic PSE it was decided that the reduction of the government stake to 26% would not be automatic and the manner and the pace of doing so would be worked out on a case to case basis .Decision in regard to the percentage of disinvestment i.e government stake going Whether the industrial sector requires the presence of the public sector as a contra ailing force to prevent concentration of power in private hands and whether the industrial sector requires a proper regulatory mechanism to protect the consumer interests before public sector enterprises are privatized. The highlights of the policy for the year 2000-01 were that for the first time the Government made the statement that it was prepared to reduce the stake in the non strategic PSEs even before 26% if necessary that there would be increase emphasis on strategic sales and that the entire proceeds from disinvestments would be deployed in social sector restructuring of PSEs and retirement of public debt. Rangarajan Committee The recommendations of the report of the committee on the Disinvestment of Shares in PSEs(Rangarajan committee),submitted in April 1993 emphasized the need for substantial disinvestment .The committee suggested that the percentage of equality to be divested could be up to 49% for industries explicitly reserved for the public sector. It recommended that in exceptional cases such an
enterprise which had a dominant market share or where separate identity had to be maintained for strategic reasons the target public ownership level should be kept at 26% that is disinvestment should take place to the extent of 74% .In all other cases it recommended 100% disinvestment of Government stake .Holdings of 51%or more equity by the government was recommended only for 6 schedule industries namely coal and lignite mineral oils, arms, ammunitions and defense equipment ,atomic energy ,radioactive minerals and railway transport Other important recommendations of that committee include the following 1. The biggest method for disinvestment id offering shares to the general public at a fixed price through a general prospecting. However since these shares have not been traded so far on the stock exchange, it was very difficult to decide the fixed rate at which they should be offered to the public. Once a reasonable time had elapsed and a normal trading atmosphere established in the market this indeed would be the best method. Till then the auction method with wide participation may be adopted. 2. Instead of year wise target of disinvestment a clear action plan should be evolved. 3. Disinvestment shall be in all stages and sales shall be staggered so as to get the best possible price 4. A number of steps need to be undertake for efficiency carrying out privatization .these may include corporatization of the public enterprises, restructuring of finance with a proper debt equity gearing and on independent regulatory commission for the concerned sector if necessary
5. A scheme of preferential offer of shares to workers and employees may be devised. 6. 10% of the proceeds of the privatization may be set apart for lending to the public sector enterprises on occasional terms for meeting their expansion and rationalization needs. Disinvestment commission In pursuance of the Common Minimum Program of the United Front Government of India constituted a public sector disinvestment commission on 23 august 1996 with the broad terms of reference 1. To draw a comprehensive overall disinvestment programs within 5-10 years for the PSUs referred to my the core group. 2. To determine the extent of disinvestment in each of the public sector enterprises. 3. To priority the PSU referred to by the core group in terms of overall disinvestment porgramme. 4. To recommend the preferred models of disinvestment( domestic ,capital markets, auction, private sale to identify investors) for each of the PSU funding requirement and the market conditions. 5. To supervise the overall sale proceeds and to take decisions on instrument ,pricing timing as appropriate. 6. To select the financial advisor for the specified PSU to facilitate disinvestment process. 7. To ensure that appropriate measures are taken during the disinvestment process to protect the interest of the affected employees including encouraging employees participation in the sale process.
8. to monitor the progress of the disinvestment process and to take necessary measures and report periodically to the government ton such progress. 9. To assist the government to create public awareness of the governments disinvestment policies and programs with a view to developing a commitment by the people. 10.To recommend a mix between primary and secondary disinvestment taking into account governments objective, the relevant PSUs funding requirement and the market conditions. 11.To give wide publicity of the disinvestment proposal so that there is large public participation in the shareholdings of the enterprise and 12.To advise the government on possible capital restructuring of the enterprises by marginal investment if required so as to ensure enhanced realization through disinvestment. The commission has recommended disinvestment at various levels for a number of PSUs ( eg MFIL,GAIL,MTNL,CONCOR,PHL,ET&T,HVOC,HCIL) Strategic sale in various proportions has been recommended for many enterprises like BALCO,ITI,HTL,KIOCL,ITDC,BRPL,MFL,HCL,SCI,EIL,EPIL,HPL,IBP,NE PA,HZL,PPCL) For several enterprises namely ONGC,MOIL,OIL,RITES,PGCL,NTPC,NCL ,NHPC) The commission has advocated no disinvestment for the present.
Progress
The privatization process began in India 1991-92 with sale of minority stakes in some PSUs from 1999-2000 onwards the focus shifted to strategic sale .
UPA GOVERNMENT POLICY: The communist parties with whose support the united Progressive alliance Government was formed in may 2004 have tried to control the progress of privatization. The statement of the Common minimum Program (CMP) made by the government has proposed a case by case approach towards privatization. It has been stated the government generally against privatsation of profit making public sector undertakings .it was also decided to windup the ministry of Disinvestment. The policy reforms however had set the stage for privatization .For instance even if the government will shy away from privatization of the banking sector it is likely to take place by rapid growth of existing private sector banks establishment of private sector banks and expansion of business of foreign banks.
CPSEs constitute 21.17% and 21.56% of the total market capitalisation of companies listed at BSE and NSE respectively (as on 31 January 2012)
The CPSE with the highest market capitalisation is Oil & Natural Gas Corp.Ltd. at Rs. 2,36,003 crore (BSE) and Rs. 2,36,174 core (NSE) (as on 31 January 2012)
VSNL was the first CPSE to be divested by way of a Public Offer in 1999-00
ONGC Public Offer in 2003-04 has been the largest CPSE FPO, raising Rs. 10,542 crore
Coal India Public Offer in 2010-11 has been the largest CPSE IPO, raising Rs. 15,199 crore
The maximum number of applications received in a PSU IPO/FPO since 2003-04 was in CIL (15.96 lakhs)
Total disinvestments proceeds from CPSE Public Offers in the Current Financial Year is Rs. 1144.55 crore (as on 8 February 2012)
Balco - Profile
Balco, incorporated in 1965, was closely associated with the growth of the Indian Aluminium industry. Balco played a pivotal role in making aluminium a leading metal with myriad uses ranging from household, industrial to strategic defence and aerospace applications. Balco was vertically integrated from sourcing of bauxite from its captive mines, refining and smelting to aluminium production and a variety of semi finished products.
Balco had contributed significantly as a primary aluminium producer, providing sustenance to vital industries. Balco was a supplier of special aluminium alloys to the nation's intermediate range ballistic missile, Agni and surface to surface missile, Prithvi. The GoI held 100% stake in Balco.In 2000, the GoI announced to divest 51% stake in Balco to a long-term strategic partner.
50% of Balco's profits had been on account of operating margins while the other half was due to interest earned on fixed deposits. The GoI further said that Balco was under threat as the company was running on outdated technology and was making profits only because aluminium prices in international market were ruling high. A downturn in prices would again take the company to the state of sickness from which it had recovered in 1988-89. The GoI stand was that it was better to sell the company when it was earning profits to get a good deal. The GoI said that the cash reserve of Rs 437 crore accumulated by Balco by giving less dividend to the government was too little for the modernization of the company. According to government estimates, a total of Rs 4,000 crore would be required for the modernization and expansion of the company and it could be infused only by bringing in a strategic partner.
accused the GoI of indulging in 'underhand dealings' to the tune of Rs 100 crore to sell off 51% stake in Balco to SIL and alleged the Prime Minister's Office (PMO) was also involved in 'irregularities.'"Some functionaries in PMO are said to have received kickbacks to the tune of Rs 100 crore for divestment of Government's equity in Balco at a throw away price. The deal was like loot of Chhattisgarh in a day-light robbery," Jogi alleged.
valuers did the job. A screening committee of Balco selected PV Rao and Co through competitive bidding for valuing the land and buildings, and plant and machinery. The mines were valued by experts from the Indian Bureau of Mines. The value of the assets was placed around Rs 1,072 crore, 51% cent of which would be around Rs 547 crore."
workers, their families and management inside and outside the Balco plant at Korba, so that they do not suffer physical harm of any kind." The Parliament witnessed heated exchanges between Opposition and ruling party with the Opposition questioning the GoI's propriety in moving the Supreme Court without taking the Chattisgarh State into confidence. Countering the Opposition charges, Shourie said the Centre had received 'alarming reports' that water and electricity to the Balco plant would be cut and the managerial staff would not be allowed to enter the state. He added that the issue had turned into a law and order problem after an ambulance was burnt and a CISF van damaged by activists.
General Secretary, AITUC, "Mr. Jogi promised us his full backing, but ditched us at the eleventh hour. He went back on his words, perhaps due to orders from his party high command. This is highly unethical. The INTUC taking a cue from Mr. Jogi suddenly developed cold feet and more or less forced the issue." Mr. Jogi's suddenly withdrawing support to the striking workers had raised many eyebrows. Some of the workers did not see it just as political opportunism but a definite indication that some underhand deal had taken place. "We cannot say for certain about who took money to clear the disinvestment deal in the first place. But we are certain that Mr. Jogi's hands are not clean now. A deal has definitely been struck between the Chattisgarh Chief Minister and Sterlite Industries. Otherwise, there is no reason for him to withdraw his support to the striking workers overnight," the workers alleged. Singh said that the fight against the agreement would continue if there was any injustice. He commented, "The first thing on our agenda right now is to get the Central Government to provide a counter guarantee to the agreement that we had signed with the management. Although the new owners have said that there is no question of involving the Central Government now, we will still try our best." As per the union's demand, GoI should provide a guarantee of Rs. 25 lakhs per employee if the management went back on its commitment not to tamper with their service conditions or retrench them. The AITUC General Secretary also said, "The management also promised not to transfer any employee for one year. But after that, there were free to do as they wanted. This was a dangerous move." Commenting on the transfer, he further said, "As regards transfer, the only place that the workers of Balco at korba can be transferred to is Bidanbagh in West Bengal. They cannot transfer any worker of Balco to any of their other group companies. If they do, then we won't keep quiet. Lets see if they are vindictive or not."
CONCLUSION
Privatization is an inevitable historical reaction to the indiscriminate expansion of the state sector and the associated problems. Even in the communist countries it became a vital measure of economic rejuvenation. The society may benefit from privatization in several ways. It would help reduce the fiscal burden of the state by relieving it of the losses of the
SOEs and reducing the size of the bureaucracy; enable the government to mop up funds; result in better management of the enterprises; encourage entrepreneurship; and, help accelerate the pace of economic development as it attracts more resources from the private sector for development. Privatization may increase the number of workers and common man who are shareholders and this could make the enterprises subject to more public vigilance. Government may confront several obstacles to privatization. Trade unions and political parties may oppose privatization. In developing counties, the relatively undeveloped capital markets sometimes make it difficult for government to sell shares. Another problem is that Governments usually want to sell the least profitable enterprises, those that the private sector is not willing to buy at a price acceptable to the Government. Privatization will be successful only if certain conditions are satisfied the policy should be very clear and there should be proper privatization strategies. Equally important are the commitment and political boldness on the part of the government. Privatization was a very important aspect of the economic reforms in India. The privatization, however has got a set back because of the influence of the leftist parties on the UPA government which came to power in may 2004.