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PSUs no match for private sector

T N Ninan | August 02, 2003

When an industry or sector is opened up to private investment, how long does it take a new private sector challenger to overtake the erstwhile public sector monopoly? About 10 years, it would seem.

The most obvious proof is in civil aviation, where Jet Airways in the space of a decade has caught up with Indian Airlines, 40 years its senior.

Another example comes from the mutual fund business, where there are now three private sector operators that almost rival the bifurcated Unit Trust of India in size, and where UTI -- once the Big Bull of the market -- now handles barely 20 per cent of the managed funds in the country.

That story is about to be repeated in insurance, where competition is very new. This year, the private sector infants will do about 20 per cent of the new business that LIC will manage, up from 10 per cent last year.

And though LIC has a 45-year lead, it isn't difficult to look ahead to a situation where LIC's lead will have been whittled away.

The story in telecom and oil marketing is similar, but with differences in detail. In telecom, the new private sector competition has come mainly in mobile services, where the challengers were not at a disadvantage against a legacy player.

But even if you take all the telecom sectors together, though BSNL is putting up a game fight, it is not inconceivable that the private sector players will account for nearly half the market in another five years.

In oil marketing, meanwhile, there is as yet no private sector entry. But it is a safe guess that (if and) when two of the three existing companies are privatised and get management inputs from companies like Reliance or Shell, they will provide a sharper edge to the competition against Indian Oil.

The one sector where the private sector challengers are not taking over is banking, perhaps because of regulatory restrictions (on opening branches, for instance). The public sector banks still dominate, and no one expects that to change in the foreseeable future.

Post-merger, ICICI Bank has emerged as a possible challenger to State Bank of India, but that is because of the advantage of an inherited term-lending business. Where the private sector players have stolen a march is in all the new lines of activity: credit cards, automated tellers, telephone and Internet banking, and premium banking services.

There is no reason why the public sector giants could not have taken a lead here, but their managements were short-sighted, and they were held back by their unions. In fact, the chairman of the State Bank of India was arguing vehemently in the late 1980s that India did not need ATMs.

Tell that to customers today, and they will look at you as though you've escaped from Michael Crichton's Lost World. Indeed, SBI started off on the wrong foot when it came to credit cards too, and got it right only when it tied up with General Electric.

It's easy to conclude from this that the private sector has won its argument with the public sector. But even if you were to stop short of that conclusive statement, what is evident is that competition makes a difference.

The old monopolies were simply not consumer-focused, and were forced to re-think their attitudes when competitors appeared on the scene. LIC began accepting policy premia at any branch, Indian Oil smarted up its sales outlets, Indian Airlines cabin crew began to smile, and so on.

Now the new small private ports are giving the larger government-owned ports a run for their money, so the giants are being forced to cut port charges.

Why is it that, despite the disadvantage of size and the weaknesses of start-up operations, it is the new guys who in most cases have had the extra trick up their sleeve?

Either the public sector firms were hobbled by their parent ministries (Indian Airlines, for instance, has simply not been allowed to expand its fleet), or they were headless, or they were not technologically forward-looking, or they couldn't anticipate consumer trends.

So they have been playing catch-up even while being market leaders. But despite their best efforts, it would seem that the lead time they have on their leadership is no more than a decade.

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