PRIVATISATION – INDIAN CONTEXT

INTRODUCTION

Privatisation has been defined and understood in many ways. Essentially, it refers to a process through which the direct involvement of the state or the public sector is reduced through transferring the ownership, control and/or managerial responsibility for government enterprises, functions and activities, fully or partially, to the private sector corporations, individuals or groups of individuals such as employees, customers and citizens, domestic or foreign.

The motives for privatisation could be several, embodying a variety of socio-economic and political objectives such as:

a) fundamental changes in socio-economic and political systems as in Central and Eastern Europe

b) reduction or direct involvement of the state in industry, commerce and services and consequential financial and administrative burden

c) desire to increase efficiency and competition in the economy

d) achieve better balance between public and private sectors

e) attracting foreign capital.

Privatisation can be accomplished in several ways which include the following

a) complete or partial divestiture of equity or assets

b) liquidation, abandonment or return of the assets of nationalised corporations

c) leasing, contracting out or franchising production; distribution, supplies or services with freedom to manage without government interference;

d) establishment of joint venture

e) policy reforms such as liberalisation and deregulation, etc. It may be added that liberalisation, which refers to opening up of any industry to competitive pressures, is a form of privatisation and yet it is possible to liberalise without privatisation too.  

The emotive arguments on whether and what to privatise range from one to the other end of the continuum: “no, nothing” to “yes, almost everything”. Some press for spontaneous privatisation while others argue for a case-by-case approach. It is possible, even in the 1990s, some governments envisage an increased role for public sector in managing the economy, industry, trade and commerce. The issues and dilemmas vary across countries, depending on the text and context. There can be no general formula. Developing countries and countries in transition may benefit from the caution exhorted to by Kornai (1990, p.82).1 The state “is obliged to handle the wealth it was entrusted with carefully until a new owner appears who can guarantee a safer and more efficient guardianship”.

PRIVATISATION IN SOUTH ASIA

Privatisations in South Asia do not necessarily reflect a shift in ideology or a conscious and strategic choice to assign a predominant role for private sector. The privatisation moves were largely a part of the conditionalities of Structural Adjustment Loans (SALs) and/or Sector Adjustment Loans (SECALs). While India and Sri Lanka seem to follow case-by-case approach, Bangladesh and Pakistan adopted a blanket approach of fairly rapid privatisation.

* Advocate, Labour Law & Industrial Relations, Management Consultant.

BANGLADESH

Bangladesh initiated disinvestment way back in 1977. By March 1991, about 290 industrial units – mostly jute and textiles – were disinvested.

Privatisation in Bangladesh usually meant denationalisation and return of enterprises to previous owners without prior preparation (asset valuation, etc.) consultation, consideration (price) or steps towards creation of a congenial climate for viable corporate performance (financial or other restructuring, etc.) (Lorsh, R. 1986).2 The main requirement was that there shall be no retrenchment in the first 12 months after denationalisation. The second requirement was that should there be any retrenchment after one year, one year salary should be paid in lump sum to the affected workers as compensation. The result was obvious: According to a government study carried out under the interim government, as of March 1991, 53 per cent of the disinvested units were closed down or out of production and many of those in operation were doing none too well (See, Sobhan, 1991).3

SRI LANKA

The Government of Sri Lanka committed itself to privatise (rather, “peoplise”, as the Prime Minister Premadasa referred to privatisation) non-viable SOEs and other bodies, maintain a flexible exchange rate and remove restrictions on foreign equity participation except in select few areas. The first phase of privatisation, which was commenced in 1988, resulted in Mitsubishi of Japan acquiring a major share in the United Motors where all employees also received 500 shares each as a gift. (Wijesekara, 1991 )4. The state-owned Sri Lankan Transport Board became a public company. Ironically, as these privatisations got off the ground, the Telecom system was taken over by an SOE.

By 1990, 70 SOEs including 40 Corporations were identified for privatisation. A Public Investment Management Board (PIMB) was set up by the Ministry of Finance to deal with privatisation process.

INDIA

SOEs operate in India at the Central, State and local self or municipality level, in a wide ranging sphere of economic activity. Centra! government owns and runs over 260 SOEs with an investment of over Rs.1,130,000 million while 25 state governments own another 1000 SOEs or so with an investment of about Rs. 300,000 million. It is difficult to estimate how many operate at municipality level. Public sector accounts for over half of total organised sector employment in India and relative to private sector, still it is a “growing sector”, in terms of employment.

Wage levels in public sector, at the lowest rung, are at least one-third above that in private sector. Public sector is in the fore front in affirmative action programmes for socially disadvantaged groups and is known to undertake economic activities on the basis of needs of constituents served/serviced than merely on profit motive. Of late, however, profit criterion is receiving greater emphasis, at least in pronouncements, if not in practice. A variety of controls, cost-plus administered price strategies, multiple goals (including socio-political considerations) misplaced notions about value added and window dressing of corporate accounts make it difficult to make a proper assessment or evaluation about their effectiveness or otherwise.

Perhaps there is a need to understand the root causes of the political patronage system that public sector seem to have promoted in proper historical context. While there is no dearth of efforts to look into the casual factors of public sector performance, there has always been a certain lack of political will to run even the enterprises which are expressly commercial and industrial as commercial and industrial enterprises. It is hard to label public sector as inefficient and private sector as efficient. Yet, blurred accountability bred counterproductive work culture (by work culture we do not mean worker culture atone) and a spoils system of private gains to compound the problems of public sector.

The image of private sector may not be any better. Even so, the expectations of public from private sector will be and indeed are different from that of private sector. If for nothing else, at least for this reason, for the public and public policy makers public sector performance became a truly “taxing” problem warranting a second look. Even government, particularly several state governments, found it increasingly beyond their means to sustain the survival particularly of non-performing units. The external debt problem provided the last straw, making the government to swallow the bitter pill. The privatisation programme and public sector reform in India and other developing countries should be seen against such background too.

The privatisation programme in India, compared to most other developing countries in the region and elsewhere is rather slow, gradual, cautious and less overt. Earlier moves in late 1980s to privatise a scooter plant (Scooters India Limited at Lucknow) in the central sphere and a cement plant at Dalla in the state sphere – both located in the state of Uttar Pradesh – had to be rescinded and reversed respectively due to stiff opposition mainly from trade unions. In contrast, there are a few instances of some state governments being able to transfer controlling interest (in terms of majority shareholding) and management without much ado. Such cases include the transfer of Allwyn Nissan Limited (ANL) in Andhra Pradesh to Mahindra & Mahindra Limited, and that of Orissa Ferro Chrome Limited in Orissa to Tatas. In the case of ANL, the private sector company agreed to avoid both retrenchment and reduction in benefits (See, Reddy, 1992 pp.173-184 for a case study of ANL).5

By and large, the privatisation programme in India has been perhaps as a matter of deliberate strategy, diluted to take the route of deregulation and disinvestment. Following structural adjustment reforms introduced in mid-1991, apart from delicensing many industries and easing of restrictions on the so-called monopolies, several industries were taken off Schedule A category (Schedule A category industries were meant to be owned and developed exclusively in the pubic sector) and private sector – domestic and foreign – participation is now being allowed significantly in several core sector industries. The most significant development in this regard relates to energy sector “where the country is vulnerable to external shocks (oil) and to domestic supply bottlenecks (power)” and where large scale infusions of private foreign capita! are most feasible. (EIU, 1992 b, p.6).6

Even in the sphere of transport and finance also deregulation already opened up immense possibilities for private sector initiative. Bus transport is being either partly denationalised or opened up for private participation. Private airlines are allowed in ports, private berths have been allowed since long, but now proposals to allow private sector to own and/or manage berths and/or other port facilities are being vigorously pursued (IIPM, 1992)7. In the financial sector, government is considering the proposal to allow Indian private sector to re-enter into commercial banking and allowed foreign investors to operate in stock exchange with certain restrictions. The stock scam (involving over US $ 175 million) and high price earnings ratios (in some cases over 30), among others, however, seem to still make potential foreign private investors somewhat hesitant.

Twenty percent of the shares of select SOEs in the Central sphere (i.e. owned by Central Government) are being considered for divestment. Already nearly 10 per cent of the shares in the companies were divested in two instalments over less than two years. As elsewhere, there were problems with pricing of shares when the first instalment of shares were off loaded to public and private mutual funds at apparently low prices which were followed by almost instantaneous back to back buying and sudden spurt in the concerned share prices.

More importantly, the new policy allows 51 per cent foreign shares of equity (as against 40 per cent earlier). As a result, Suzuki of Japan has already become the majority share holder with a controlling interest of 51 per cent equity in the public sector 4-wheeler auto plant, Maruti Udyog Limited. In the private sector, at least a dozen companies, including Proctor & Gamble, Asea Brown Boveri and Cadbury, have taken advantage to acquire majority share holding. A spate of joint ventures with foreign participation have already been approved, among others, in the energy (oil and power) sector.

NOT BY PRIVATISATION ALONE

I would, however, propose that the case of privatisation could be considered from the view point that encouraging it could bolster the performance of even the public sector as it happened in the UK. As Bishop and Kay (1988)8 observe, “The most significant aspect of the (privatisation) performance has been the change in the culture of the public sector and private companies. New management has challenged the previous culture. Privatisation symbolised the government’s determination to take seriously the need to instill commercial spirit in public sector. In contrast to the actions, if not intentions, they would neither interfere in managerial decisions, nor intervene to prevent bankruptcy. More radically, if the commercial spirit could be achieved outside of public ownership, the government was prepared to transfer its business to the private sector. This created an expectation of change (often ahead of any changes actually taking place) which has made effective management at all levels considerably easier.” Similar change of heart is seen in most parts of the world. The current debate on privatisation made most governments and unions, among others, focus attention on strategies to improve the performance of public sector itself.

The return to private sector initiative seems to be based on a negative vote arising out of disaffection with public sector performance and structural adjustment pressures. What is needed is a positive orientation and effort to create an enabling environment for enterprise and economy to flourish without undue fetters.

The familiar argument in South Asia concerns the need to free or privatise the private sector first. The liberalisation and the attendant changes in macro-economic policies were supposed to be directed at freeing private enterprise and initiative- It is, however, not enough if the regulations are eased. A deregulated economy can do with a downsized bureaucracy to take the reform process to its logical completion. The climate should be congenial for risk taking. Therefore, employers ask for easing not only entry, but also exit. It is the latter which creates vexing problems for public policy makers in balancing the economic needs of an enterprise with social and economic security of affected persons. While employment stability could go a long way in promoting labour-management cooperation, artificial props may lead to avoidable distortions, particularly if they are not temporary.

In Bangladesh, during 1982-83, several jute mills were privatised. By 1990,30 mills were privatised, leaving 38 in the public sector under Bangladesh Jute Mills Corporation (BJMC). The denationalisation was pursued without much preparation. With the result, more often than not, mills were returned to previous owners without any financial consideration, stock taking (of assets and liabilities), restructuring (of products/processes/ finances/organisation/ labour, etc) or modernisation. Most privatised mills starved for new working capital, not to speak of capital investment and the inevitable result was either closure/suspension of operations of the denationalised units, leading to fresh clamouring for renationalising several of them by late 1980s (See also : Lorsh, 1986).9

In India, though private investment has been deregulated through delicensing in many cases, there are a variety of ways in which government can determine the viability of private investment. Tariff barriers, price and distribution controls, need for prior approvals for closure, layoff and retrenchment, etc., are considered to inhibit private investment. In Pakistan, only one of the 35 companies licensed to set up private shipping lines has actually been set up. The licensees complain that in the absence of official shipping policy it is too risky to make the required investments (EIU, 1992d. p.34).10

The attitudes of private investors also need a change. Average pretax profit in Indian private sector companies is around 20 per cent against a mere four percent in South Korea (World Bank, 1991)11 While labour productivity lagged behind in the 1950s and 1960s, by 1980s, while labour productivity picked up, capital productivity began to lag behind. Modernisation of Indian industry has become not only capital intensive, but also cost intensive (See, Ahluwalia, 1985).12

Privatisation entailed legal changes in almost all countries. For instance, in India, the Companies Act, Monopolies & Restrictive Trade Practices Act, and the Sick Industries Companies Act, and the statutes of autonomous corporations, etc. were amended to remove legal hurdles necessary to give effect to the policy changes. The long awaited labour law changes, however, remain elusive.

INDUSTRIAL RELATIONS LEGISLATION IMPEDE RESTRUCTURING

So far our industrial relations legislation particularly Industrial Disputes Act has come in the way of undertaking structural adjustments relating to various factors of production particularly workers. This is one area which foreign investors still feel is discouraging. That is why even now flow of foreign investment is not up to the desired level. Again this has come in the way of larger employment generation in the corporate sector for no industrial undertaking would like to appoint persons on their rolls then get saddled with them for all time to come in the absence of flexibility to adjust their numbers based on their requirement. This has encouraged companies utilizing the services of contractors rather than employing work force on their own. That certainly is not in the best interest of the working class.

OVER PROTECTIVE LABOUR LEGISLATION AND STRUCTURAL ADJUSTMENTS

The present labour laws are not conducive to achieving this objective. The required conditions for structural adjustments by laying off workers, resorting to retrenchment or closure of a unit is never forthcoming. What is more, our laws being what they are, it is not possible at present to take disciplinary action against errant workers. All these years, the labour laws sought to protect the interest of workers even at the cost of the economy and the very workplaces they work for. The law only ensures rights of workers without giving equal emphasis on their duties. This has helped neither employees nor employers. Rather, it has led us into a typically low productivity economy. The consequent fall-outs are low return on capital employed, resource crunch, high costs and reduced competitiveness. There is, therefore, an urgent need to reorient the labour policy in harmony with the objectives of the industrial policy and more particularly keeping in view the imperatives of globalisation of the Indian economy. Accordingly, the success of the new industrial policy would depend on the healthy labour relations scenario which unfortunately does not exist at present and does not give sufficient inducement to foreign investors for they know that once they have employed certain persons in their units for some work, they will not be allowed to dispenses with their services in the absence of requisite permission from the authorities. If we have to achieve maximum advantage from the new policy initiatives it is necessary that a suitable labour policy is framed which is in the long term interest of labour, and more particularly of the economy.

FORMAL SEPARATION POLICY NOT AGAINST WORKERS INTEREST

There are people who view the exit policy to be against the interests of the working class. This is not so, for in the absence of a formal exit policy industrial units do get closed clandestinely with the result the fate of workers is sealed. They are neither employed nor unemployed and continue to live in the mist of uncertainty. They also do not get the benefits to which they would have been entitled if there was a formal separation policy.

STRUCTURAL ADJUSTMENTS AND SAFETY NET

Though the Government has taken the initiative to set up a National Renewal Fund for providing compensation to workers rendered surplus as a result of industrial restructuring and provided sufficient funds for the purpose, no worker will be able to draw solace from the fund in the absence of a formal exit policy and procedure thereunder, unless it has become terminally sick and the Board of Industrial and Financial Reconstruction allows it to wind up the company after a reference to it. This surely does not protect the interest of workers to the extent It is proclaimed. Rather a very insignificant percentage of workers get benefited out of this. With a view to protecting the benefits eligible to the workers and at the same time permitting industrial undertakings to get thinner, it will only be appropriate to have a formal policy for industrial restructuring.

NEED FOR LINKAGE OF WAGE – PRODUCTIVITY

Another important area which needs to be given serious attention is the pockets of high wage islands developing around low wage level because of the industrial dearness allowance policy. There is no linkage between productivity and dearness allowance. Unless a linkage is established, it will only lead to cost-push inflation and will not be in the interest of workers.

NEED FOR DEPOLITICISATION OF TRADE UNION MOVEMENT

There is an urgent need for unity in leadership by eliminating the menace of multiplicity of trade unions and by ensuring depoliticisation of the workers movement. In this context, it is suggested that:

i) there should be a law for recognising a bargaining Agent/bargaining Council in each industry and

ii) the words “political interest of its members” in sub-section 1 of Section 16 of the Trade Union Act should interest of its members’. Consequential amendments in the other subsections of this Section should also be carried out.

NEED FOR A RE-LOOK AT LABOUR LEGISLATION

What is needed in this context is to have a detailed look at the entire legislative framework pertaining to workers and trade unions. We should be clear in our mind as to the objectives that we intend to achieve and how we propose to do that. Certainly the objective is to ensure employment growth and greater well-being of workers and their families.

But are the existing legislative framework and the structure of bargaining conducive to achieving these objectives? The experience show that it has not been so. On the contrary, the workers’ movement in India has been far from healthy and beneficial for the workers and the industry. Multiplicity of trade unions and inter-union rivalry have been acting against the interest of the workers and productivity and what is worse, have resulted in the spread of industrial sickness.

REFERENCES

1 Kornai, J. 1990. The Road to a Free Economy, Shifting from a Social System : The Example of Hungary”. New York: Norton and Company

2 Lorsh, K.1986 “Privatisation in Bangladesh”, Boston: Kennedy School of Government, Harvard University

3 Sobhan, R. 1991. “An Industrial Strategy for Industrial Policy: Redirecting the Industrial Development of Bangladesh in the 1990s”, The Bangladesh Development Studies, Vol. XIX, Nos. 1 & 2, Mar-June, pp. 201-215

4 Wijesekara, Nalin. 1992. “Sri Lanka”, Asia Pacific Review, 1991-92. Essex : The World of Information. p.211

5 Reddy, T.V. 1992. “Public Enterprise Reform and Privatisation”, New Delhi: Himalaya Publishing House

6 EIU. 1992b. “India: Report 4 of 1992.” London: EIU

7 IIPM (Indian Institute of Port Management). “National Seminar on Port Privatisation : Press Clippings on Port Privatisation”. Calcutta : IIPM

8 Bishop, M. and J. Kay. 1988. “Does Privatisation Work: Lessons from the U.K.” London: London Business School

9 Lorsh, K.1986 “Privatisation in Bangladesh”, Boston: Kennedy School of Government, Harvard University

10 EIU. 1992b. “Pakistan: Country Report 4 of 1992.” London: EIU

11 Fallon, P.R. and R.E.B. Lucas. 1991. ” The Impact of Changes in Job Security Regulations in India and Zimbabwe”. The World Bank Economic Review, Vol. 5, No.3, pp 395-413.

12 Ahluwalia, I.J. 1985. “Industrial Growth in India : Stagnation Since the Mid-Sixties.” Delhi: Oxford University Press