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Privatisation hits a roadblock

The Cabinet Committee on Divestment's decision to postpone the sell-off of India's public sector undertakings in oil by three months offers a respite from the merciless march of the privatisation juggernaut. This is the right time for a serious, open, debate on a whole gamut of issues: the management of PSUs, their performance vis-a-vis the private sector, and the wisdom of divesting in them, rather than reforming them. The Cabinet should immediately publish a comprehensive White Paper on this.

Instead, it is thinking of speeding up the sale of non-oil PSUs like the Shipping Corporation, Engineers India, State Trading Corporation and National Aluminium. A false alarm is being raised over this year's 'precious' divestment target of Rs 12,000 crores being missed. (It is another matter that India misses its poverty reduction targets by hugely wider margins!)

Divestment Minister Arun Shourie has with characteristic hyperbole accused his Cabinet colleagues of acting at the behest of 'vested interests.' He wants to return to neo-liberal 'reform' 'with the urgency of a man whose hair is on fire.' The government is under pressure to demonstrate its 'commitment' to boosting 'investor confidence' by further liberalising foreign investment in insurance and telecom and allowing foreign airlines to fly domestic routes. This will only compound the original folly!

The decision to postpone oil sell-off was not made not on merits, but on the basis of shifts in power balances. After George Fernandes demanded a 'review' of oil divestment, Shourie got increasingly isolated, although he was backed by powerful corporates like Shell and Reliance. Fernandes won over Messrs Jaswant Singh (allergic to Reliance), Ram Naik, Pramod Mahajan and Shahnawaz Hussain -- and most important, the RSS, to whom he sold the 'security' angle. In the end, what mattered was the RSS, and Fernandes' bid for the Cabinet's number three position.

Power games apart, there is a compelling economic argument for keeping core-sector PSUs public -- in petroleum, major minerals and metals, electricity, and in services such as railways, water supply and sanitation. The public sector is not inherently less efficient than private enterprise; it can be reformed and made more profitable and accountable. It can and should play a pivotal role in directing investment into socially desirable areas. For a developing country like India, with its legacy of unbalanced, uneven development and poverty, the public sector is an irreplaceable instrument.

To start with, it is important to get rid of one basic misconception, namely, that Indian PSUs are typically loss-making, while the private sector is profitable. This is based upon the neo-liberal ideological premise: all that's public is bad and inefficient; all that is private is good and efficient. This voodoo-economics premise flows from dogmatic assumptions about the 'perfect' working of markets. Given today's crisis of global capitalism, it would be laughable for an economist to make this assertion. In fact, 'free-market' policies have produced the biggest recession since the Great Depression of 1929.

In India, more than 200 of the 246 Central PSUs are profitable. The bulk of the chronically loss-making PSUs are units like National Textile Corporation and Scooters India, which were milked dry by private managements, and were nationalised mainly to save jobs. Collectively, the public sector is profitable too. Its profit-after-tax-to-net-worth ratio is a respectable 8 to 10 per cent and the gross-profits-to-capital ratio is 14 to 16 per cent. The PSUs have raised 60 per cent of their capital from their own resources and given the government a whopping 138 per cent return over the past three years.

By contrast, no fewer than three lakh private sector companies lie sick and closed, including 249,630 small-scale industries. This closure has enormous public consequences: about Rs 100,000 crores of bank loans remain unpaid. Many sick PSUs can be revived or profitably sold off. The land owned by NTC mills alone would wipe out their losses. By contrast, most sick private units are dead as dodos.

A case can certainly be made for selling off loss-making PSUs or hotels. But there can be no justification for selling off perfectly profitable, relatively well-managed, technologically sound PSUs, whose efficiency coefficient is 15 per cent higher than the Indian private sector's. Even stronger is the case against selling off the 50 top PSUs which beat the 50 top private companies in profitability. Yet, the government wants to sack these very PSUs -- after undervaluing their true worth, as recorded in numerous cases by the Comptroller and Auditor General (for instance, by a huge Rs 3,300 crores in the very first sale a decade ago).

Generally, in the world, the public sector has not performed badly-except in countries where governments have themselves failed. During the Golden Age of Capitalism, the West's most sustained 40 years of growth and prosperity, the public sector accounted for 40 per cent or more of GDP. Even in the US, the West's most private economy, certain infrastructure activities have always been public -- eg: electricity (60 per cent). In Europe, PSUs compete successfully with private companies in fields like banking, automobiles, construction, and oil/gas. In the 'Asian Miracle' economies, it is the state's role, not the market's, that explains fast growth: indeed, economist Robert Wade famously called his book on East Asia, Governing the Market.

Public services in industrial societies run along non-American models are distinctly superior to those in 'free-market' America. Britain and France are now discovering the virtues of re-nationalising the railways, water and telecom. Public-funded Airbus Industrie has stood its ground against Boeing, not the private McDonnell-Douglas.

The argument for keeping PSUs public applies with special force to India's oil companies, including ONGC, Oil India, BPCL, HPCL, and Indian Oil -- incidentally, the first Indian company to make it to the Fortune 500 list. Oil is a strategically vital, fast-depleting raw material, control over which is critical to economic and political power. Oil has triggered dozens of wars and conflicts -- has anyone heard of a 'chocolate war'? -- including most recently, Suez, the Gulf War, and the New Great Game being played from the Caspian, through Afghanistan, to the Gulf. The US' plans to invade Iraq are inseparable from its oil insecurity. The Rand Corporation recently described Saudi Arabia, the world's largest oil producer, as the 'kernel of evil.' This has impelled America's powerful oil companies -- called the 'Seven Sisters' (the title of Anthony Sampson's classic book on US-dominated international oil oligopolies) -- to gain direct access to Iraq's reserves.

The 'Seven Sisters' cartel (much older than much-maligned OPEC) has fixed prices, rigged contracts and physically liquidated potential rivals/opponents -- in Italy (which tried to establish an indigenous oil industry bypassing US majors), in Argentina and Kuwait (where the UK and US have fought wars), in Nigeria (where oil interests killed indigenous activist Ken Saro-Wiwa), in Burma (where forced labour is used to build a pipeline), and in Afghanistan (where Unocol almost succeeded in getting the US to recognise the Taliban regime).

India is one of the few countries of the world to have created a broad-based indigenous petroleum capacity -- against the global cartel's resistance. Thanks to Jawaharlal Nehru and K D Malaviya's establishment of ONGC, India could produce hundreds of millions of tonnes of oil which, the Seven Sisters had repeatedly declared, did not exist in exploitable quantities! But for Bombay High's discovery by ONGC, the Indian economy would have collapsed under the oil convulsions of a quarter-century ago. Indigenous oil has saved India the equivalent of three times the cumulative FDI flow! It is precisely because of oil's importance that India's policymakers -- then inspired by a long-term vision -- nationalised Burmah-Shell, Esso and Caltex after the 1965 and 1971 wars, during which they proved uncooperative. They also created the Oil Coordination Committee, cross-subsidised the Oil Pool, and promoted conservation.

The NDA wants to liquidate the gains from all these painstaking efforts of 45 years. There is, can be, no economic rationale for this. Our oil companies are competitive by international standards. For instance, BPCL, HPCL and Indian Oil have respectively beaten Shell, Esso and Caltex hollow in the sale of lubricants, which was unfairly thrust on them at their own retail outlets. ONGC has won international contracts against MNCs. India's governments have milked public oil companies to finance profligacy, paying them a fifth of the international crude price, interfering with their day-to-day working, and forcing them to sell oilfields discovered by them (eg: Ravva, Mukta and Panna) to private companies.

The NDA wants to liquidate the oil PSUs altogether. This is a thoroughly misconceived policy, the kind that led former World Bank chief economist and Nobel Laureate Joseph Stiglitz to term privatisation 'robberisation.' This must be stopped. PSUs in the core sector must be reformed and granted full autonomy. It is also vital that their employees acquire a high stake in them -- literally, through share-ownership. The Indian citizen has invested huge amounts in the PSUs. They must repay him/her. Selling the PSUs off is absurd -- indeed, obscene, when the objective is to create a bonanza for private tycoons and sell the family silver to pay the butler -- finance the government's revenue deficit.

Praful Bidwai begins a column that will discuss politics, the political economy, environment and development.

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