EDITORIALS & ARTICLES
Does Privatization of Public Enterprise Serve the Public Interest?
The privatisation of the public sector, including banks, has been part of the wish list of economic reformers since 1991 but it is now being pursued with vigour and has high priority with extremely ambitious targets.
Government is planning to privatize public enterprise
- Economic contraction: The highest ever contraction in the economy took place in 2020 which resulted in rise in unemployment, incomes for growing numbers are falling, bank non-performing assets (NPAs) may be ballooning, and the fiscal deficit is rising.
- Financially sick enterprises: Their difficulties can be traced to ministerial micromanagement especially in enterprises with a direct consumer interface.
- Obsolete technology in enterprises: There is the category of enterprises which have been sick for a long time as their technology, plants and machinery are obsolete and their managerial and human resources have atrophied.
- Bureaucratic management: The organizations are run by bureaucrats who may not have knowledge of running an enterprise or knowledge of the industry trends and practices.
- Lack of autonomy: These enterprises lack freedom and flexibility as they are subject to the control of the politicians and bureaucrats.
- Delayed decisions: A file may have to pass through many officials for approval before a decision can be taken and by the time a decision is taken, the business environment might have undergone considerable changes.
- No clear-cut price policy: Certain organizations follow a cost plus price policy, some administered pricing, a few dual pricing followed by those adopting association pricing.
Concerns associated with privatization of public enterprise
- Lack of strong private enterprise in India: The number of Indian private firms which can buy out public sector firms are very few.
- Creation of social unrest: The public enterprises provide for reservations in recruitment and with privatisation, this would end and unnecessarily generate social unrest.
- No Welfare State: The concept of welfare state may get defeated with the Privatization of economy because the private sector would not care about the society as its main objective is to earn profits.
- Less Social Development: The Government or Public sector companies keep doing social work simultaneously nut the privatization will result in fewer funds for society because private companies have no obligation to do social work.
- Long Term Risk: Risk of short term gains is prominent in private companies and there are decisions to start ventures which result in short term benefits but may not be good for long term.
- Less Transparency: The private companies are less transparent than government offices, and this reduced transparency paired with a drive for profit can be a breeding ground for corruption.
Significance of privatization of public enterprise
- Restoring values of existing enterprises: The introduction of private management through privatisation or induction of a strategic partner is the best way to restore value of these enterprises.
- Improvement in efficiency of enterprises: It is believed the privatization is aimed:
- To limit the scope for political interference in decision making;
- To increase managerial incentives by making managers responsible to shareholders who will monitor their performance better than governments; and
- To impose the financial discipline of private capital markets
- Development of domestic capital markets: It leads to a reduction in public sector deficits, especially if the government can dispose of loss-making enterprises.
- It may disarm public sector trade unions that are abusing a monopoly position.
- Tax Reductions and Job Creation: By providing public services more efficiently and at a lower cost by privatizing them, governments can lower the taxes they impose on residents.
- Acceleration of technological progress: Since private companies have to compete in fierce markets, they are often required to invent new technologies and products in order to stay competitive in the long run.
Road ahead
- Working towards debt-free management: The public enterprise should ideally be made debt free and a new management should have freedom permitted under the law in personnel management to get investor interest.
- The Government could reduce its stake further and get more money as valuation rises.
- Calibrated divestment to get maximum value: The Government can continue to reduce its shareholding by offloading shares and even reducing its stake to less than 51% while remaining the promoter and being in control.
- Timely support to managements of enterprises: The managements may be given longer and stabler tenures, greater flexibility to achieve outcomes, and more confidence to take well-considered commercial risks.
- It would be better for India entering a higher growth trajectory with an increase in investment rates which have been falling, than in using their scarce resources for taking over government enterprises with no real value addition to the economy in the near term.
- Proper project appraisal: It is common to observe that many projects are announced without any sort of appraisal of the need and viability of the project.
- It should be ensured that before any project is taken up for implementation, there is a thorough appraisal of the viability of the project from the technical, economic, social, and commercial point of view.
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