Privatisation on hold

The lack of executive accountability to Parliament in the matter of privatisation of public sector units, besides being constitutionally incorrect, is disastrous from the point of view of economic policy.

ON September 16, the Supreme Court delivered a landmark verdict. It stripped the executive of its self-assumed autonomy in the areas of disinvestment and privatisation. The Court has in essence ruled that any enterprise created under or transferred to public ownership by Parliament cannot be privatised without parliamentary approval. This, in itself, was a major ruling, given the fact that Parliament had been bypassed repeatedly in the course of the accelerated privatisation programme adopted by the NDA government in recent times.

But the judgment went much further. It provided a definition of public ownership that cannot be violated without parliamentary approval and the definition has far-reaching implications. The case in question related to the disinvestment of shares in oil majors Hindustan Petroleum Corporation Limited (HPCL) and Bharat Petroleum Corporation Limited (BPCL). These units were acquired in the early 1970s by Acts of Parliament that expressly stated that the activities in which they were involved (especially the distribution and marketing of petroleum products) needed to be brought under the aegis of the state. They must, therefore, vest with government companies or units in which the government had a majority stakeholding and exercised managerial control.

The proposed disinvestments of the two oil retail majors - involving the sale of 34.01 per cent of equity in HPCL to a strategic partner which would be offered managerial control and the sale through the market of 35 per cent of public equity in BPCL - violated both these requirements set by the parliamentary Act acquiring them. The government's equity stake would have fallen well below 51 per cent given the pre-existing shareholding structure, and there would be an explicit or implicit transfer of managerial control. Given that possibility, their sale without parliamentary approval and revision of the Acts concerned was an obvious legal violation.

But, according to a reading of the judgment by the constitutional expert Rajeev Dhawan, in the course of restraining the sale of HPCL and BPCL the two-Judge Bench went further. It suggested that a process in which a company is set up by the government as an "instrument of service", even if not through a specific Act, and explicitly provided grants through the government's budget meets the "technical requirement of parliamentary approval". Therefore, in such cases too, parliamentary approval for reducing the government's stake or transferring managerial control to the private sector should be required.

The highest court's opinion is clear. If Parliament had either explicitly or implicitly approved of a particular unit being run as a government company, then Parliament's approval is needed for changing the status of the company and handing over control to the private sector. Thus, the HPCL/BPCL judgment completely deprives the government of the right to bypass Parliament implicitly provided by earlier judgments. Those judgments had accepted the view that disinvestment and/or `strategic sale' (involving the transfer of managerial control to an entity acquiring a minority block of shares) were matters of public policy to be left to the executive to decide upon. In fact, one immediate consequence, which has angered Disinvestment Minister Arun Shourie, is that the judgment challenges the validity of many if not all acts of disinvestment and privatisation undertaken under the reform strategy pursued since 1991.

But beyond issues of constitutional correctness, the new judgment is an important milestone also because experience indicates that absolving the executive of accountability to Parliament has been disastrous from the point of view of economic policy. Originally, privatisation was seen as just one of many initiatives needed to restructure the public sector, and was to be restricted to loss-making units that are best divested. Over time, however, not only has privatisation been made the sole means of public sector restructuring, but it has also been presented as the best option in the case of virtually every public unit.

Depending on the particular spokesperson who has defended privatisation, its role has been variously presented as (i) ensuring the exit of the government from areas in which it must not exist, since it is prone to inefficiently managing those assets; (ii) unburdening the government of units that are a drain on the exchequer and contribute to a fiscal crisis of the state; and (iii) garnering "revenues" that can be used to (a) reduce the fiscal deficit as is being demanded by international finance and its representative, the IMF; (b) retire government debt and improve the government's finances in the medium term; or (c) meet the much-needed social expenditures which the government is hard put to finance.

THE view that the government should not have been present in most areas it entered has a two-fold ideological thrust. It presumes that the private sector should be pre-eminent and the government should undertake an economic activity only when the private sector for one reason or another is unwilling to enter. It also assumes, contrary to the evidence provided by many a public enterprise, that public sector units would by definition be inefficient. The latter assumption allows losses suffered by public units for reasons completely unrelated to efficiency to be attributed to inefficient functioning.

Even ignoring the fact that prejudices of this kind should never be allowed to influence policy, this particular ideological frame should drive the management of the public sector only if supported by a representative majority. Clearly, the post-judgment "confession" by the government and the private sector-controlled media that requiring parliamentary approval for privatisation amounts to dumping the policy, indicates that nobody believes that such a majority, let alone a consensus on the issue, exists. Advocates of reform who contend that there is now consensus around it are obviously not willing to subject that view to a democratic test.

On the other hand, the view that privatisation is justified since it garners revenues to deal with various kinds of fiscal problems of the government is just plain wrong. Any private entity acquiring a stake in a public sector unit has the choice of using the same resources to invest in government bonds that carry no risk whatsoever, since they carry a sovereign guarantee. Thus, the minimum return expected from an investment is the interest rate applicable to government bonds. If, therefore, a private investor chooses to invest in equity instead, he/she would expect not just a margin above the going interest rate on government bonds, but also a premium to cover the risk associated with choosing this option.

In sum, unless expectations are that the purchase of public equity would yield much higher returns than those offered by government bonds, no private investor would choose to invest in such equity. If that be the case, disinvestment cannot be rationally resorted to since it would involve a net loss of revenues for the government. If resources from disinvestment are used by the government to retire public debt, revenues are lower since the assets sold are capable of yielding a much higher return than the interest that was being paid on the debt being retired. On the other hand, if disinvestment is opted for as a substitute for borrowing in order to finance additional expenditures, the revenue lost as a result of disinvestment would be greater than the interest payment saved through reduced borrowing.

The only instance where privatisation of potentially or actually profitable assets can be defended is when it is presumed that the government is incapable of running a unit as well as the private sector and, therefore, incapable of earning the higher potential return. But that argument is also irrational, since there are many areas, from national security to poverty alleviation, where the government must perform since they cannot be privatised. If the government is seen as capable of delivering on those fronts, there is no reason why it cannot be reformed to deliver in spheres of production, which for a variety of reasons were seen as areas in which public presence was a must.

Unfortunately, specious arguments of this kind have been used by the executive to proceed with privatising some of the most profitable public sector units. What is more, this process of sale of public assets has involved prices that are patently unreasonably low. In the controversies surrounding the privatisation of units varying from Modern Foods to Balco, technical experts have been at pains to point out that the price received by the government for its equity was a fraction of that warranted by the value of the underlying assets. Evidence on the prices of land, mining rights and assets like captive power plants was provided to advance this case.

The executive has at all times chosen to dismiss this view by referring to specious arguments involving accounting principles, stock market prices and discounted present values. Even when Centaur Hotel, Mumbai, which the government had sold for Rs.83 crores was resold four months later by the original buyer for Rs.115 crores, the validity of the argument that either because of its desperation to sell or for other reasons the government was undervaluing public assets was dismissed. To top it all, in order to attract buyers and make successful its accelerated privatisation programme, the executive decided to resort to "strategic sales" wherein the purchase of a minority stake at basement bargain prices was adequate to acquire managerial control. As the VSNL experience illustrated, such control can provide the private buyer access to resources that made the investment more than lucrative. In this case the Tata group, which purchased the strategic stake in VSNL, tapped the cash reserves of the company to expand Tata Teleservices, a telecom start-up it controlled.

Besides extra-economic reasons, the only explanation for this misuse of executive power made possible by the lack of parliamentary accountability, is the, once-for-all `benefit' of garnering resources to finance the budget. Having partly eroded its own tax base by providing tax concessions and under international pressure to curtail the fiscal deficit, the government had chosen to rely on the short-term strategy of privatisation to finance its additional expenditures. Not surprisingly, in the aftermath of the HPCL/BPCL judgment, Finance Ministry officials rushed to the press to declare that it would not be allowed to affect the level of the fiscal deficit in financial year 2003-04. This was an admission that resources from privatisation are a form of budgetary finance.

The budget for 2003-04 had provided for Rs.13,200 crores as "revenues" from privatisation. Only a fraction of that sum has been mobilised in the first six months of the fiscal year. How the required substitute resources would be found is not clear. But that should bother only the government. From the point of view of the ordinary citizen, the Supreme Court has done the country well by putting on hold the wanton misuse of executive power in pursuit of the wholly irrational strategy of privatisation.