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Home > Business > Columnists > Guest Column > Subir Gokarn


Selling the sell-off

February 03, 2003

The decision taken by the cabinet committee on divestment last week on the mode of divesting its stake in Bharat Petroleum Corporation Ltd represents a landmark in the history of the process.

For the first time, the government has decided to forgo the control premium that a strategic sale would fetch and, instead, allow the subscribers to the public offer of equity to garner that premium.

In doing this, it has put aside the fiscal compulsion to maximise revenues from divestments and dealt squarely with a significant source of resistance to the idea of privatisation.

Properly handled, this should pave the way for relatively smoother big-ticket sell-offs in the future.

To understand resistance to privatisation, it is necessary to look at the process from the perspective of the various stakeholders.

In previous analyses, I have tended to focus on three groups, whose interests are potentially threatened by selling public enterprises -- the bureaucracy, the workforce in the enterprises and very importantly, the states in which these enterprises have large establishments employing many thousands of people.

The argument was simple: if you want to move ahead on privatisation, you have to use the proceeds from the sale to appease these sources of resistance.

Perhaps the bureaucracy can be handled in other ways, but the other two could only be handled by direct financial means -- a 'buy-out.'

In recent times, I have come to perceive a fourth and extremely powerful source of discontentment with privatisation -- the public at large, for want of a better characterisation.

Many reasonable people ask the question: why should the government be selling off profitable public enterprises?

This apparent sense of public disquiet has clearly found political expression with the Congress repeatedly asking this question.

By tapping into what might be a widespread sense of discomfort, the Opposition could well extract a significant political dividend.

The recent success of the ministry of divestments is commendable, but one has to recognise its limitations. I would make a sharp distinction between the 'technical' and 'political' dimensions of the privatisation process.

The former includes issues of valuation, bidding, conditionalities and so on, all of which are of primary concern to the seller and buyer. It is on this front that the ministry has succeeded. It has given the entire process a stamp of transparency and rectitude and has therefore taken it out of the political domain.

The occasional controversy, such as the one surrounding the airport Centaur hotel in Mumbai, still crops up, but, on the whole, there is no question that the nuts and bolts procedure of privatisation is now well-entrenched.

However, the political dimension, within which the public disquiet squarely sits, is another matter. The need for privatising even profitable public enterprises has to be effectively communicated to the people.

I would assess the attempts to do this so far as being spotty and sporadic. If the government believes it is doing the right thing from the viewpoint of national interest, then it must make every effort to communicate to the public how the national interest is served by privatisation.

Repeated public squabbling amongst ministers and ruling party politicians only serves to stoke the discomfort. The bottom line is that the government has to launch an extensive process of public communication to explain the benefits from privatisation.

This process will be significantly reinforced by some other actions, however. There is nothing like a bit of financial stimulus to drive the message home. This is where the public offer of shares as a means of privatisation comes in.

I have no compelling explanation for the public sentiment that I have described. Perhaps it has to do with a perception that the public sector has been an important generator of the middle-class.

Perhaps it has to do with a fundamental distrust of the private sector, particularly in a monopoly situation. It doesn't really matter. As the saying goes, every man has his price, individually or collectively.

The antagonism that people have towards the process will be diluted by the simple fact that they too can make money from it.

By choosing the public offer route, the government is communicating several things. It is saying that public enterprises really belong to the people, not the government.

It is abandoning the position that has so far dominated the process -- that it must divest to fill budgetary gaps.

It is showing its willingness to let the public extract whatever control premium a strategic investor is willing to pay by giving them the shares to sell back to him if they want to.

In a nutshell, it is telling the people: this is your company and you have the power to decide whether you want to cede control to anyone.

This is empowerment in the best sense of the term and it will go a long way in assuaging public feelings about privatisation.

Now that the ball is rolling, perhaps, it is time to bring another stakeholder into the picture.

State governments have played a potentially spoiling role in the process.

The government of Chhattisgarh fought the transfer of control in Balco and the government of Orissa seems to have made it a prestige issue to stop the privatisation of Nalco.

There is a simple way to deal with this and set a precedent, which will influence the future responses of state governments.

A portion of the proceeds from every sale can be set aside for distribution to the various states involved, distributed proportionately on the basis of assets, employees or any other reasonable criterion.

Nothing stops the prime minister from announcing special grants every time he visits a state.

Why should these grants not be tied to the willingness of the state government to cooperate with the privatisation process and make the transition of ownership as smooth as possible?

It might even pay, although this would admittedly be quite risky, to make the transfer in the form of equity, because the value of the control premium will be related to the ease of the transition.

A more cooperative state can potentially make more money when it sells off its shares.

In a very fundamental sense, the sale of public assets can never be justified by narrow, short-term or partisan objectives. The act represents a redefinition of the role of the state as a custodian of the country's economic interests.

It reflects a perception that there are adequate checks and balances to allow business to be done by businesspersons, that public interests are neither threatened nor compromised by the profit motive.

Thus far, successive governments in India have fought shy of treating the process with the profundity that it deserves. The BPCL decision could well be the watershed.

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