Detailed Report on Privatisation and Disinvestment

8/2/2019 Detailed Report on Privatisation and Disinvestment

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DETAILED REPORT

ON PRIVATISATION

ANDDISINVESTMENT

BY:

RADHIKA, RASHMI, REENA RIDDHIMA

& SHWETHA,


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INTRODUCTION TO PRIVATISATION

The word privatisation has been receiving much attention in business,

government and academic circles on a global platform.

This phenomenon of privatisation can be linked to a revolution or boon.

Privatisation techniques have already been tried in countries like Great Britain,

China, United States, Turkey, Brazil, Mexico, & Japan. In our country to a

beginning towards privatisation has been made with the sale of upto 20% of the

equity capital of 30 plus select public sector units (psus), first to mutual funds

and financial institutions and later to the investing public.

HISTORY

THE history of privatisation is very short-just 10-15 years old to be precise. The

real disinvestment started only in 1980s, the word privatisation first made its

appearance in late 80s. The credit for inventing the word goes to

Peter.F.Drucker, which used the term first in his famous book, the age of

discontinuity in 1969. Ten years later, Margaret Thatcher became prime

minister of Great Britain and it was she who gave practical shape to

privatisation. Later country after country fell in line with the Great Britain in

move toward privatisation.

RATIONALE OF PRIVATISATION

According to supporters of privatisation, the rationale for privatisation and

disinvestment is as follows:


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PERFORMANCE. State-run industries tend to be bureaucratic. a politicalgovernment may only be motivated to improve a function when its poor

performance becomes politically sensitive, and such an improvement can be

reversed easily by another regime.

INCREASED EFFICIENCY. Private companies and firms have a greaterincentive to produce more goods and services for the sake of reaching

a customer base and hence increasing profits. a public organization would

not be as productive due to the lack of financing allocated by the entire

government's budget that must consider other areas of the economy.

SPECIALIZATION. A private business has the ability to focus all relevanthuman and financial resources onto specific functions. a state-owned firm

does not have the necessary resources to specialize its goods and services as

a result of the general products provided to the greatest number of people in

the population.

IMPROVEMENTS. Conversely, the government may put offimprovements due to political sensitivity and special interestseven in

cases of companies that are run well and better serve their customers' needs.

CORRUPTION. A state-monopolized function is prone to corruption;decisions are made primarily for political reasons, personal gain of the

decision-maker (i.e. "graft"), rather than economic ones. corruption

(or principal-agent issues) in a state-run corporation affects the ongoing

asset stream and company performance, whereas any corruption that may

occur during the privatization process is a one-time event and does not affect

ongoing cash flow or performance of the company.

ACCOUNTABILITY. Managers of privately owned companies areaccountable to their owners/shareholders and to the consumer and can only

exist and thrive where needs are met. Managers OF PUBLICLY OWNED

companies are required to be more accountable to the broader community
http://en.wikipedia.org/wiki/Bureaucratichttp://en.wikipedia.org/wiki/Goods_and_serviceshttp://en.wikipedia.org/wiki/Customer_basehttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Departmentalizationhttp://en.wikipedia.org/wiki/Populationhttp://en.wikipedia.org/wiki/Political_corruptionhttp://en.wikipedia.org/wiki/Principal-agenthttp://en.wikipedia.org/wiki/Principal-agenthttp://en.wikipedia.org/wiki/Political_corruptionhttp://en.wikipedia.org/wiki/Populationhttp://en.wikipedia.org/wiki/Departmentalizationhttp://en.wikipedia.org/wiki/Businesshttp://en.wikipedia.org/wiki/Customer_basehttp://en.wikipedia.org/wiki/Goods_and_serviceshttp://en.wikipedia.org/wiki/Bureaucratic


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and to political "stakeholders". This can reduce their ability to directly and

specifically serve the needs of their customers, and can bias investment

decisions away from otherwise profitable areas.

CIVIL-LIBERTY CONCERNS. A company controlled by the state mayhave access to information or assets which may be used against dissidents or

any individuals who disagree with their policies.

GOALS. A political government tends to run an industry or companyfor political goals rather than economic ones.

CAPITAL. Privately held companies can sometimes more easily raiseinvestment capital in the financial markets when such local markets exist

and are suitably liquid. While interest rates for private companies are often

higher than for government debt, this can serve as a useful constraint to

promote efficient investments by private companies, instead of cross-

subsidizing them with the overall credit-risk of the country. Investment

decisions are then governed by market interest rates. State-owned industries

have to compete with demands from other government departments and

special interests. In either case, for smaller markets, political riskmay add

substantially to the cost of capital.

SECURITY. Governments have had the tendency to "bail out" poorly runbusinesses, often due to the sensitivity of job losses, when economically, it

may be better to let the business fold.

LACK OF MARKET DISCIPLINE. Poorly managed state companies areinsulated from the same discipline as private companies, which could go

bankrupt, have their management removed, or be taken over by competitors.

Private companies are also able to take greater risks and then seek

bankruptcy protection against creditors if those risks turn sour.

NATURAL MONOPOLIES. The existence ofnatural monopolies does notmean that these sectors must be state owned.
http://en.wikipedia.org/wiki/Politicalhttp://en.wikipedia.org/wiki/Economichttp://en.wikipedia.org/wiki/Political_riskhttp://en.wikipedia.org/wiki/Natural_monopolieshttp://en.wikipedia.org/wiki/Natural_monopolieshttp://en.wikipedia.org/wiki/Political_riskhttp://en.wikipedia.org/wiki/Economichttp://en.wikipedia.org/wiki/Political


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CONCENTRATION OF WEALTH. Ownership of and profits fromsuccessful enterprises tend to be dispersed and diversified -particularly in

voucher privatization. The availability of more investment vehicles

stimulates capital markets and promotes liquidity and job creation.

POLITICAL INFLUENCE. Nationalized industries are prone tointerference from politicians for political or populist reasons. examples

include making an industry buy supplies from local producers (when that

may be more expensive than buying from abroad), forcing an industry to

freeze its prices/fares to satisfy the electorate or control inflation, increasing

its staffing to reduce unemployment, or moving its operations to marginal

constituencies.

PROFITS. Corporations exist to generate profits for their shareholders.Private companies make a profit by enticing consumers to buy their products

in preference to their competitors' (or by increasing primary demand for their

products, or by reducing costs). Private corporations typically profit more if

they serve the needs of their clients well. Corporations of different sizes may

target different market niches in order to focus on marginal groups and

satisfy their demand. a company with good corporate governance will

therefore be incentivized to meet the needs of its customers efficiently.

JOB GAINS. As the economy becomes more efficient, more profits areobtained and no government subsidies and fewer taxes are needed, there will

be more private money available for investments and consumption and moreprofitable and better-paid jobs will be created than in the case of a more

regulated economy.
http://en.wikipedia.org/wiki/Politicianshttp://en.wikipedia.org/wiki/Politicalhttp://en.wikipedia.org/wiki/Populismhttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Constituencyhttp://en.wikipedia.org/wiki/Constituencyhttp://en.wikipedia.org/wiki/Consumerhttp://en.wikipedia.org/w/index.php?title=Primary_demand&action=edit&redlink=1http://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/w/index.php?title=Primary_demand&action=edit&redlink=1http://en.wikipedia.org/wiki/Consumerhttp://en.wikipedia.org/wiki/Constituencyhttp://en.wikipedia.org/wiki/Constituencyhttp://en.wikipedia.org/wiki/Unemploymenthttp://en.wikipedia.org/wiki/Inflationhttp://en.wikipedia.org/wiki/Populismhttp://en.wikipedia.org/wiki/Politicalhttp://en.wikipedia.org/wiki/Politicians


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DISINVESTMENT OF EQUITY IN PSE

THE TABLE BELOW SHOWS DISINVESTMENT OF EQUITY IN PSE

YEAR TARGET

(IN CRORE)

PROCEEDS

(IN CRORE)

97-98 4800 902

98-99 5000 5371

99-00 10000 1860

00-01 10000 1871

01-02 12000 5632

02-03 12000 3348

03-04 14500 15547


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OBSTACLES TO PRIVATIZATION

The literature on transition economies reveals problems encountered in

privatizing state owned enterprises. The following discussion categorizes the

problems into salient, technical, economic, managerial and attitudinal problems.

Salient Problems

Salient problems are critical policy decisions that must be resolved before any

headway with privatization can be made. In looking at the mechanics of

privatization policies, the key issues to be tackled are the speed of privatization,

prioritizing, restructuring and the sale to new owners. The speed of privatization

has been at the centre of the debate on the economic transition because it affects

other aspects of socio-political stability in the region. Rapid privatization results

in a quick transfer of ownership, but the governments need to assure that the

transferred resources are used adequately in order to have a maximum

economic, social and political effect. However, there are severe constraints

faced such as a lack of institutions to facilitate privatization.

The government has to establish some order of priority as well. For instance,

small privatization such as shops and restaurants are privatized first and then

large privatization such as light and heavy manufacturing enterprises. The

experience of the former socialist countries in Central and Eastern Europe

reveals that the privatization of small-scale enterprises was successful while

large-scale enterprises' privatization was slow and difficult. Privatization ofsmall retail shops, service establishments, handicraft shops and small

construction contractors was generally managed quickly and effectively because

the process was decentralized to local administrations and because many

shortcuts were used.

Large scale enterprises were plagued with various problems, such as outdated

technologies and production processes, a huge accumulation of debt, rigid workrules, strong resistance to reorganization and lay-offs, a lack of marketing and


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finance skills and inefficiency in production. All these factors made

privatization of large-scale enterprises difficult and thus various restructuring

activities were conducted to make these enterprises saleable.

Restructuring is important for medium-sized and large industrial enterprises in

order to make them saleable. Some are quite large and must be disaggregated

into separately manageable components and they have to institute clear

operating criteria with incentives for management. The large firms may be

grouped into those that can be sold-off relatively quick and that will be left in

state hands in the first instance. The firms that will be left with the state need to

be allocated to a group to be wound down or to another group of firms in need

of restructuring prior to being privatized.

Technical Problems

According to UNECE [1992, p. 219], At the inception of the transition process,

the former centrally planned economies found themselves literally without

capital markets for two reasons. One was the limited ability of individuals toacquire and hold financial wealth under communism, coupled with the

considerable degree of social protection (in terms of jobs, wages, pensions,

medical care, and others aspects) enjoyed under administrative planning.

The absence of capital markets hindered valuation of state assets. This resulted

in below value sale of assets due to a lack of transparency. Lack of a proper

accounting system also hindered the valuation of net worth and at times, someinternational accounting rules were applied in the state-owned enterprises to

have its profit and loss situation assessed. The initial condition of the enterprises

also affected their privatization. Enterprises with a good financial condition

were able to survive market competition, while those that were in poor financial

condition encountered problems when the market was liberalized, but managers

faced difficulties in restructuring enterprises which were in poor financial

condition during the transition.


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Economic Problems

The economic aim of privatization is improving the efficiency of the existing

assets while protecting their value. To begin with, there is insufficient

indigenous saving available to purchase outright a sizeable portion of state

assets. In some cases, setting up proper financial institutions, such as

independent pension funds, insurance schemes and commercial banks to whom

state liabilities are sold as distinct alternatives to the institutional monopolies in

place can assist in the intermediation. But this cannot be a panacea. In the

absence of widespread experience with such divestment, however, careful

experimentation is warranted both in the methodology of organizing markets

and in phasing the privatization. Without progress in the sphere of monetary and

fiscal institutions, policies and instruments, the advance towards privatization is

likely to run slow.

Managerial Problems

There is also a large array of questions connected with the order in which

privatization, (mainly large enterprises privatization) should be pursued tominimize transition difficulties and avoid delays in getting the economy going

again and obtaining a more efficient utilization of available capital assets.

If privatization is to enhance efficiency and raise revenue, the principal-agent

problems that arise in managing state-owned enterprises need to be minimized.

Many aspects of the problems of managerial abilities and behavior, fostering the

rapid emergence of a competitive environment, and putting in place sufficientlycomprehensive regulatory mechanisms could usefully be considered here.

Those measures designed to induce enterprise management to behave like

private owners remains acute, regardless of ownership. This is true even in

cases where the state retains control and enjoins enterprise management, for

example, through management contracts, to behave as its counterpart in a

privately-owned corporation. It is therefore important to monitor management

and put in place transparent incentive schemes that are likely to induce


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managers to serve according to the instructions of the owners regardless of

whether they are private or public. Accounting information on cost reduction

and relative costs of services supplied by multi-product firms is essential.It is

possible that the inefficiency of state-owned enterprises under central planning

stemmed, at least in part, from incompetence on the part of those running the

firms. One reason for this was that manager was frequently entrusted to political

appointees, but it would be wrong to extend this to all managers. Neither would

it be appropriate to assume that all of the appointed managers are incompetent.

However, few individuals have had experience with proper enterprise

management because planners did not encourage acquisition of an economic or

managerial culture. Such culture cannot be quickly assimilated. Hence years to

come, for better or worse, the transition mainly has to rely on those who formed

the backbone of the old managerial technocracy.

Attitudinal Problems

Some of the most important legacies of the long years of socialist economy areimplanted in the behavior and expectations of economic agents. These concern

consumers preferences, sell-off to foreigners and entrepreneurship and market

entry and exit. The consumers in the transition economies have a low saving

attitude influenced by the past conditions of the socialist experience. There is

little doubt that all transition economy countries have been looking towards a

significant influx of foreign capital, including through the formation of jointventures and outright sale of state-owned to foreign owners. This would furnish

badly needed capital, but also managerial expertise, technology, marketing

skills, an easier entry into established markets, and other benefits. However,

economic sovereignty in the countries in transition matters because the people

complain about selling off to foreigners, especially selling strategic enterprises

to foreigners. The question, then is less whether to sell assets to foreign owners


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as such than in what sectors, to what degree and how will foreign ownership be

regulated.

Conflicts of interests have been especially conspicuous in the privatization

campaign, with managers or bureaucrats privatizing themselves, politicians

involved with privatization also being on company boards, and banks entrusted

with the implementation and supervision of some aspects of privatization

campaign being funnels for the acquisition of property. private sector

investment.

CONDITIONS FOR THE SUCCESS OF PRIVATIZATION

OPERATIONS

The successes and failures of the privatization operations in the ten countries

considered in the study by Bouin and Michalet provide a number of lessons to

bear in mind for a better formulation of privatization programs. Without

claiming to be exhaustive, this reformulation concerns the definition ofprivatization operations, the preparation of programs, and their implementation.

On the basis of this attempt to clarify the relationship among ownership, control

and management, we can now better identify what makes a privatization

operation effective.

(a) A privatization is effective if the private purchaser or contracting party

performs all the functions and activities of the enterprise not explicitly definedby the state. The private agents ability to apply his rationale in the management

of the enterprise depends on the degree of constraint exercised by the regulatory

environment, notably regarding decisions on employment, pricing and

equipment.

With this in view, clear rules of the game need to be defined so that on one

hand, the purchasers objective of maximizing utility can be pursued through

the activity of the privatized enterprise, and on the other, the enterprise is not


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operated to the detriment of the collectivity (competitors, employees,

consumers). The adaptation of the regulatory framework, and hence the attitude

of the state are decisive, as will be seen below.

(b) Effective privatization also implies that the private purchaser should bear

the financial costs associated with the modernization and development of the

enterprise, but also, if they arise, the financial losses. The fundamental

difference between effective privatization and restructuring lies precisely in the

financial commitment of the private shareholders. In the context of restructuring

or privatization through management contracts, the state remains the main

backer of the public enterprise. As a result of a transfer operation or the granting

of a lease, the private agents become financially responsible for the operating

results. Those shareholders who have effective control of the enterprise exercise

continuous pressure on the managers, using both the threat of removing them

and a system of incentives based on results. This reduction of the asymmetry of

the relationship between the hard core of control and the managers has a great

influence on the gains to be expected in the field of economic efficiency.Preparation of privatization programs

The design of the privatization program is vital for two reasons: first, it partly

determines the efficacy of implementation of privatization operations, notably

their duration, and second, it determines the procedures that are to ensure

transparency and hence the irreproachable nature of such operations. It requires

an appropriate institutional framework and the precise selection of the targetenterprises to be privatized.

As far as the institutional framework is concerned, the results recorded by the

countries in our sample are scarcely encouraging in either execution or

transparency. The initial phases of the privatization process in fact generally

turned out to be considerably longer than planned. Apart from eminently

political retarding manoeuvres, the organization of the process came up against


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the technical problems of the administrations lack of preparation and the

inadequacy of the information available on public enterprises. Two approaches

were developed to overcome these constraints, one based on the preparation of a

detailed framework and substantial administrative intervention, the other based

on minimal legal structures and simplified administrative procedures. Analysis

of these two approaches makes it possible to draw certain lessons concerning

the efficiency and transparency desiderata.

(a) Where a detailed approach is adopted (Ghana, Malaysia, Nigeria,

Philippines), the privatization process is not instituted until all the conditions

considered necessary prerequisites are fulfilled in their entirety. As a rule these

conditions are:

i) creation of a privatization body with independent legal status; ii) adoption of

a law or decree specifying the modalities for the transfer of ownership to the

private sector; iii) adoption of provisions concerning in particular any possible

disputes resulting from privatization operations and the situation of the

employees of privatised enterprises; and iv) publication of a list identifying thedifferent actions for each public enterprise (privatization, restructuring, merger,

liquidation, etc.).

Fulfilling all these requirements and in particular the last, which implies

completion of the work of collecting information on public enterprises

considerably delays the launching of the process. What is more, the execution of

the programme is based on a cumbersome administrative apparatus and requiresnumerous interventions by foreign consultancy bodies. The advantage expected

from this approach is the exercise of permanent control over the process (no

backdoor privatizations, availability of information at each stage).

Even the most minutely detailed procedures, however, do not totally eliminate

the lack of transparency where foreign or domestic investors benefit from debt

conversion mechanisms to finance the purchase operations. It also seems

difficult, by means of legal provisions, to prevent political pressure, clientelism


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and corruption in tendering procedures. Similarly, the problem of evaluating the

assets of an enterprise to be privatised, which implicitly involves the more

political -issue of transferring public property to local or foreign private

interests, cannot be dealt with satisfactorily in the course of a general audit of

the public sector.

(b) At the other extreme, the minimalist approach is expected to make it

possible to privatize without the creation of independent administrative bodies,

without an arsenal of legal instruments, without an exhaustive census of public

enterprises. These operations are executed by means of ad hoc procedures.

Some of these elements characterize, among others, the Chilean, Ivoirians,

Jamaican and Tunisian programs. Such a case-by-case approach is supposed to

promote flexibility and rapidity, often to the detriment of perfect transparency.

The discretionary nature of the procedure limits the availability of information.

The list of enterprises privatized and the transaction conditions generally remain

unofficial, fuelling rumours and giving ammunition to the opponents ofprivatization. The effect on potential buyers is likely to be disastrous and the

anticipated advantages of efficiency and flexibility are considerably reduced,

especially if legal actions are instituted as a result of the initial privatization

operations.

(c) Analysis of the facts thus tends to argue against the sharp oppositionbetween the two methods and in favour of a midway approach more likely to

promote the transparency of operations and the fairness of tender procedures

while minimizing the bureaucratization of the process and the delays in

implementation. For this it is necessary to encourage administrative

decentralization for the preparation of dossiers and the technical aspects of the

operations. The example of Jamaica illustrates the advantages inherent in this

approach. The majority of the 40 operations effected in this country were


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conducted directly by the body responsible for the enterprise to be privatized

(ministry, holding company or parent public enterprise). Under these conditions

it does not appear to be essential to have an exhaustive census and audit of the

entire public sector. For certain individual operations, ad hoc procedures under

the responsibility of the prime minister were set up. It would thus appear

preferable to envisage the wholesale privatization of small and medium public

enterprises rather than concentrating on a few large national companies.

Moreover, it should not be forgotten that the privatization of a large number of

small and medium public enterprises may trigger a dynamic accelerating the

entire process of transformation and renovation of the economic system in the

countries considered.

Implementation of privatization programs

In the strict sense, the implementation of privatization programs implies a

choice of technique. However, the interdependence and coherence of reforms

aimed at modernising the economies of the developing world require the

parallel adaptation of the regulatory framework, a basic precondition for theefficacy of these programs.

The wide variety of privatization techniques reflects the diversity of situations

affecting both the privatisable enterprise and the context for the realization of

programs (government objectives, financing constraints, etc.) Indeed, the

developing countries in the reference sample used transfer operations as theprivatization method far more than any other. In view of the major problems of

the early 1980s, this is scarcely surprising, but it must be said that the majority

of developing countries do not offer satisfactory conditions for the successful

realization of such operations.

(a) On the financial side, transfer operations through private sale or public offer

come up against two problems. First, the lack of local buyers with substantial


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financing capacity is obvious. A competitive call for tenders can thus be

envisaged only for the sale of small and medium public enterprises. Second, the

banking and stock market structures are frequently inadequate, limiting the

possibilities for financing transfer operations. By way of example, the limited

success of the public offer for sale of Caribbean Cement a few months after the

successful sale of the National Commercial Bank of Jamaica illustrates the low

absorption capacity of securities markets in certain developing countries.

(b) In estimating the value of privatisable enterprises, the impossibility of

assessing their future profitability - because of changes in the costs of

production, selling prices and markets during and after the liberalization phase-

makes it difficult to determine a precise transfer price. This is a major problem,

as uncertainty concerning the present and future value of the enterprise is a

factor that naturally dissuades potential purchasers.

(c) As regards the control of the privatized enterprises, the transfer operationdoes not in itself constitute a satisfactory option. In the developing countries,

transfers generally involve only a fraction of the capital, the state remaining the

biggest shareholder. This results in a duality in the objectives pursued by the

enterprise (social and political for the state, financial for private investors)

which tends to complicate decision making and the running of the enterprise. In

the particular case of public offers for sale, the dispersion of the capital limitsthe possibilities for controlling the managers of big privatized enterprises.

Transfer should therefore not be automatically preferred over other methods.

The fact that there are several privatization techniques argues in favour of

selection on a case-by-case basis of the most appropriate method in view of the

governments objectives. In this respect, the increased number of operations

combining several methods shows the authorities growing preference for

mixed procedures for the transfer of management and ownership. This approach


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also reflects the specificity of the constraints imposed on each developing

country.

Consideration should be given in particular to two methods hitherto relatively

little used but which have undoubted advantages with respect to the factors

discussed above.

The first is an increase in capital not subscribed by the public shareholder(s).

This has two advantages. First, it mainly benefits the privatized enterprise. The

injection of fresh money by private investors subscribing to the increase in

capital helps to recapitalize the enterprise and finance the modernization

investment necessary for its development. The increase in capital does not

generate revenue for the state, thus limiting the problems associated with the

utilization of the product of transfer, but it is not neutral with respect to public

finances. The private sector, by replacing the authorities in the financing of the

enterprises activities, enables the state to reduce considerably its capital

injections and subsidies aimed at financing investments. Second, financing the

modernization effort gives the private investor a decisive role in the orientationof productive investment and in the operation of the enterprise. This control by

the private investor puts him in a position to estimate the value of the enterprise

and, where appropriate, to formulate takeover proposals for an additional share

of the capital. Private subscription to increase capital thus makes it possible

progressively to dilute state intervention in the management and operation of

the enterprise while favouring the emergence of internal private control.

The second method is the staff buy-out. This has rarely been used in the

countries studied, the main reason being the inability of the banking institutions

to lend the funds necessary for employees to take over their enterprise, even if

they have an attractive plan to offer. The risks run by the banks are fairly

limited, however, since the debt contracted by the employees is against the

assets of their company. The advantage of such a procedure is that it transfers


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control of the enterprise to agents working on a private rationale basis at two

levels: first, the banks select the takeover projects with the best potential risk

profitability ratio, and on the other, the employee-owners form the controlling

nucleus of the enterprise.

Adaptation of the regulatory framework in parallel with privatization operations

is an essential aspect of the process of renovating and modernizing mixed

economies. In the system now being set up, the new paradigms are competition

and private rationale. They impose new criteria for performance evaluation:

competitiveness, economic efficiency and financial profitability.

Having recognized the primacy of market forces, the state should both

encourage their emergence and mitigate their shortcomings. The reinforcement

and protection of competitive practices are crucial for the success of

privatization programs. Competition on product and factor markets is in fact at

once the most powerful incentive for and the most efficient control over privaterationale. What is more, privatization makes existing regulations obsolete. A

process of reregulation is therefore necessary to preserve the conditions for

reaching an economic optimum. Governments that have introduced major

privatization programs cannot ignore these two factors.

Be this as it may, any national privatization strategy has to be defined withrespect to its coherence with the overall orientation of the economic reforms

introduced to renovate mixed economies in the developing countries.

BENEFITS OF PRIVATIZATION

1. Improved Efficiency: The main argument for privatization is that private

companies have a profit incentive to cut costs and be more efficient. If you

work for a government run industry, managers do not usually share in any


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profits. However, a private firm is interested in making profit and so it is more

likely to cut costs and be efficient. Since privatization, companies such as BT,

and British Airways have shown degrees of improved efficiency and higher

profitability.

2. Lack of Political Interference: It is argued governments make poor

economic managers. They are motivated by political pressures rather than sound

economic and business sense. For example a state enterprise may employ

surplus workers which are inefficient. The government may be reluctant to get

rid of the workers because of the negative publicity involved in job losses.

Therefore, state owned enterprises often employ too many workers increasing

inefficiency.

3. Short Term view: A government many think only in terms of next election.

Therefore, they may be unwilling to invest in infrastructure improvements

which will benefit the firm in the long term because they are more concerned

about projects that give a benefit before the election.

4. Shareholders: It is argued that a private firm has pressure from shareholders

to perform efficiently. If the firm is inefficient then the firm could be subject to

a takeover. A state owned firm doesnt have this pressure and so it is easier for

them to be inefficient.

5. Increased Competition: Often privatization of state owned monopolies

occurs alongside deregulation i.e. policies to allow more firms to enter the

industry and increase the competitiveness of the market. It is this increase in

competition that can be the greatest spur to improvements in efficiency. For

example, there is now more competition in telecoms and distribution of gas and

electricity. However, privatization doesnt necessarily increase competition; it


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depends on the nature of the market. E.g. there is no competition in tap water.

There is very little competition within the rail industry.

6. Government will raise revenue from the sale: Selling state owned assets tothe private sector raised significant sums for the UK government in the 1980s.

However, this is a one off benefit. It also means we lose out on future dividends

from the profits of public companies.

ARGUMENT AGAINST PRIVATIZATION

Some of the important argument against privatization are as follows:

1. The public sector has been developed with certain nobleobjectives and privatization means discarding them in one stroke.

2. privatization will encourage concentration of economic power tothe common detriment.

3. If privatization results in the substitution of the monopoly power ofthe public enterprises by the monopoly power of private enterprises

it will be very dangerous.

4. Privatization many a times results in the acquisition of nationalfirms by foreign firms.

5. Privatization of profitable enterprises, including potentiallyprofitable, means foregoing future streams of income for the

government.

6. Privatization of strategic and vital sectors is against nationalinterests.

7. There are well managed and ill managed firms both in the publicand private sectors. It is not the sector that matters, but the quality

and commitment of the management.

8.The capital markets of developing countries are not developedenough for efficiently carrying out privatization.


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9. Privatization in many instances is a half-hearted measure andtherefore it is not properly carried out, with the result that the

expected results may not be achieved.

10. In many instances, there are vested interests behind privatization

and it amounts to deceiving the nation. The UNDPs Human

Development Report 1993 observes that in many countries

privatization often has been a garage sale to favoured individuals and

groups.

SINS AND PITFALLS OF PRIVATIZATION

1. Lack of proper strategy: An important reason for failure ofprivatization is absence of a proper strategy or norms regarding the

industries/units to be privatized, the method of privatization, extent

of divestment, selection of buyer/investor etc.

2. Ambiguity of objectives: The real objective of privatization isanother problem. It is for raising revenue? Is it for making theenterprise competitive? If there are multiple objectives, what is the

priority list?

3. Connivance: sometimes politicians have hidden objectives behindprivatization. The UNDP report cited above points out that in too

many cases it has taken place for the wrong reason, under the

wrong conditions and in the wrong way.

4. Wrong timing: Many privatization schemes could not get a goodprice because of the wrong timing. A good price can be obtained if

privatization is done when the performance, market capitalization

and the industry prospects are good. It is pointed out the maruti

could have got a good price had it been privatized when the goings

were good.


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5. Lack of political consensus: privatization is a political process too.As there are opposing views regarding privatization, there are

likely to have some opposition to privatization. The privatization

BALCO is a case in point. The government shall try to make clear

the need for and objectives of privatization and shall try to make

clear the need for and objectives of privatization and shall bring

about as broad a consensus is possible.

6. Wrong labour strategies: most public enterprise have surpluslabour getting rid of which is essential for success of the enterprise.

But, to overcome labour resistance to privatization, often

unrealistic promises are given that the labour will not be affected

by privatization. A more open and realistic handling of the labour

is needed for making privatization meaningful. Prospects of

retraining and redeployment of the labour are yet to be properly

explored in countries like India.

7. Lack of political will: privatization is not carried out in real earnestand properly because of lack of political will and/or vested

interests. For example, some ministers oppose privatization of

enterprises under their ministry and some politicians oppose

privatization of undertakings in their constituencies or states.

8. Poor financial strategies: many privatizations are carried out with agood financial strategy.

9. Wrong environment: mere transfer of ownership does not helpimprove the performance of an enterprise. Where the market

functions poorly and enterprises are still vulnerable to arbitrary

government edicts, transferring ownership to the private sector is

unlikely to achieve much.

10.Prevalence of monopoly elements: if privatization results in theconversion of a public sector monopoly to a private sector


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monopoly, privatization may not produce much beneficial effects;

it could even worsen the situation.

11.Problem of cultural change: improvement of performance of anenterprise after the privatization will depend, inter alia, on bringing

about a change in the work culture and the total enterprise culture.

This is no easy task.

Privatization /Disinvestment in India

The policy of the government on disinvestment has evolved over a period of

time. A brief account of it has been given below

Initial phase

The disinvestment policy as enunciated by the Chandrashekhar Government in

the Interim budget 1991-92 was to divest up to 20% of the government equity

in selected PSEs in favor of public sector institutional investors .The objective

of the policy was stated to be broad based equity improve management enhance

availability of resources for these PSEs and yields resources for the exchequer.

The industrial policy statement of 24th

july 1991 stated that the government

would divest part of its holdings in selected PSEs but did not place any cap on

the extent of investment. not did it restrict disinvestment in favor of any

particular class of investors. The objective for disinvestment was stated to be to

provide further market discipline to the performance of public enterprises.

However the budget speech 1991-1992 reinstated the cap of 20% for

disinvestment and the eligible investors universe was again modified to consist

of mutual funds and investment institutions in the public sector and the

investment in these firms. The objectives too were modifies the objectives


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being: to raise recourses, encourage wider public participation and to promote

greater accountability

In 1993 government of India set up a planning commission on disinvestment in

PSEs under the chairmanship of C Rangarajan.

The common minimum programme of the united Front Government : 1996

sought to carefully examine the public sector non core strategic areas to set up

disinvestment related matters ; to take and implement decisions to disinvest in a

transparent manner and to ensure job security opportunities for retaining and

redeployment. No disinvestment objective was however mentioned in the policystatement.

Pursuant to the above policy of the united front government a disinvestment

commission was formed in 1996 .It made recommendations on 58 PSE. The

recommendations made a shift from public offerings to strategic/trade sales with

transfer of management.

The Second Phase

In its first budgetary pronouncement (1998-99) the new government decided to

bring down government shareholdings in the PSUs to 26% in the generality of

cases (thus facilitating ownership changes, saw as recommended by the

disinvestment commission ).It however stated that the government would retain

majority holdings in PSEs involving strategic considerations and that theinterest of the workers would be protected in all cases. The policy for 1999-

2000 as enunciated by the government in the budget speech was to strengthen

strategic PSU privatize non strategic PSUs through gradual disinvestment or

strategic sale and devise viable rehabilitation strategies for week units .A

highlights of the policy was that the expression privatization was used for the

first time.


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Strategic and Non Strategic Classification: on 16 march 1999 the government

classified the pulic sector into strategic and non strategic areas for the purpose

of disinvestment.

It was decided that the strategic sector enterprises would be those in the areas of

arms and ammunitions and the allied items of defiance equipment defense air

crafts and warships of radiation and radio isotopes to agriculture medicine and

non strategic industries) and railway transport all other public sector enterprises

were to be considered non strategic .for the non strategic PSE it was decided

that the reduction of the government stake to 26% would not be automatic and

the manner and the pace of doing so would be worked out on a case to case

basis .Decision in regard to the percentage of disinvestment i.e government

stake going Whether the industrial sector requires the presence of the public

sector as a contra ailing force to prevent concentration of power in private hands

and whether the industrial sector requires a proper regulatory mechanism to

protect the consumer interests before public sector enterprises are privatized.

The highlights of the policy for the year 2000-01 were that for the first time the

Government made the statement that it was prepared to reduce the stake in the

non strategic PSEs even before 26% if necessary that there would be increase

emphasis on strategic sales and that the entire proceeds from disinvestments

would be deployed in social sector restructuring of PSEs and retirement of

public debt.

Rangarajan Committee

The recommendations of the report of the committee on the Disinvestment of

Shares in PSEs(Rangarajan committee),submitted in April 1993 emphasized the

need for substantial disinvestment .The committee suggested that the percentage

of equality to be divested could be up to 49% for industries explicitly reserved

for the public sector. It recommended that in exceptional cases such an


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enterprise which had a dominant market share or where separate identity had to

be maintained for strategic reasons the target public ownership level should be

kept at 26% that is disinvestment should take place to the extent of 74% .In all

other cases it recommended 100% disinvestment of Government stake

.Holdings of 51%or more equity by the government was recommended only for

6 schedule industries namely

coal and lignite mineral oils, arms, ammunitions and defense equipment,atomic energy ,radioactive minerals and railway transport

Other important recommendations of that committee include the following

1. The biggest method for disinvestment id offering shares to the generalpublic at a fixed price through a general prospecting. However since

these shares have not been traded so far on the stock exchange, it was

very difficult to decide the fixed rate at which they should be offered

to the public. Once a reasonable time had elapsed and a normal trading

atmosphere established in the market this indeed would be the best

method. Till then the auction method with wide participation may be

adopted.

2. Instead of year wise target of disinvestment a clear action plan shouldbe evolved.

3.

Disinvestment shall be in all stages and sales shall be staggered so asto get the best possible price

4. A number of steps need to be undertake for efficiency carrying outprivatization .these may include corporatization of the public

enterprises, restructuring of finance with a proper debt equity gearing

and on independent regulatory commission for the concerned sector if

necessary


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5. A scheme of preferential offer of shares to workers and employeesmay be devised.

6. 10% of the proceeds of the privatization may be set apart for lendingto the public sector enterprises on occasional terms for meeting their

expansion and rationalization needs.

Disinvestment commission

In pursuance of the Common Minimum Program of the United Front

Government of India constituted a public sector disinvestment

commission on 23 august 1996 with the broad terms of reference

1. To draw a comprehensive overall disinvestment programs within5-10 years for the PSUs referred to my the core group.

2. To determine the extent of disinvestment in each of the publicsector enterprises.

3. To priority the PSU referred to by the core group in terms ofoverall disinvestment porgramme.

4. To recommend the preferred models of disinvestment( domestic,capital markets, auction, private sale to identify investors) for each

of the PSU funding requirement and the market conditions.

5. To supervise the overall sale proceeds and to take decisions oninstrument ,pricing timing as appropriate.

6. To select the financial advisor for the specified PSU to facilitatedisinvestment process.

7. To ensure that appropriate measures are taken during thedisinvestment process to protect the interest of the affected

employees including encouraging employees participation in the

sale process.


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8. to monitor the progress of the disinvestment process and to takenecessary measures and report periodically to the government ton

such progress.

9. To assist the government to create public awareness of thegovernments disinvestment policies and programs with a view to

developing a commitment by the people.

10.To recommend a mix between primary and secondarydisinvestment taking into account governments objective, the

relevant PSUs funding requirement and the market conditions.

11.To give wide publicity of the disinvestment proposal so that thereis large public participation in the shareholdings of the enterprise

and

12.To advise the government on possible capital restructuring of theenterprises by marginal investment if required so as to ensure

enhanced realization through disinvestment.

The commission has recommended disinvestment at various levels for a number

of PSUs ( eg MFIL,GAIL,MTNL,CONCOR,PHL,ET&T,HVOC,HCIL)

Strategic sale in various proportions has been recommended for many

enterprises like

BALCO,ITI,HTL,KIOCL,ITDC,BRPL,MFL,HCL,SCI,EIL,EPIL,HPL,IBP,NE

PA,HZL,PPCL)

For several enterprises namely ONGC,MOIL,OIL,RITES,PGCL,NTPC,NCL

,NHPC)

The commission has advocated no disinvestment for the present.

Progress


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The privatization process began in India 1991-92 with sale of minority stakes in

some PSUs from 1999-2000 onwards the focus shifted to strategic sale .

UPA GOVERNMENT POLICY:

The communist parties with whose support the united Progressive alliance

Government was formed in may 2004 have tried to control the progress of

privatization. The statement of the Common minimum Program (CMP) made

by the government has proposed a case by case approach towards privatization.

It has been stated the government generally against privatsation of profit

making public sector undertakings .it was also decided to windup the ministry

of Disinvestment.

The policy reforms however had set the stage for privatization .For instance

even if the government will shy away from privatization of the banking sector it

is likely to take place by rapid growth of existing private sector banks

establishment of private sector banks and expansion of business of foreign

banks.

Disinvestments through Public Offers-Highlights

CPSEs constitute 21.17% and 21.56% of the total market capitalisation ofcompanies listed at BSE and NSE respectively (as on 31 January 2012)

The CPSE with the highest market capitalisation is Oil & Natural GasCorp.Ltd. at Rs. 2,36,003 crore (BSE) and Rs. 2,36,174 core (NSE) (as on 31

January 2012)

VSNL was the first CPSE to be divested by way of a Public Offer in 1999-00


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ONGC Public Offer in 2003-04 has been the largest CPSE FPO, raising Rs.10,542 crore

Coal India Public Offer in 2010-11 has been the largest CPSE IPO, raisingRs. 15,199 crore

The maximum number of applications received in a PSU IPO/FPO since2003-04 was in CIL (15.96 lakhs)

Total disinvestments proceeds from CPSE Public Offers in the CurrentFinancial Year is Rs. 1144.55 crore (as on 8 February 2012)

CASE STUDY ON DISINVESTMENT-BALCO

In February 2001, the Government of India (GoI) struck its first disinvestment deal in the

fiscal 2000-01. It approved the sale of its 51% stake in aluminium major, Bharat Aluminium

Co Ltd (Balco) to Sterlite Industries Ltd. (SIL), for Rs. 551.5 crores. Balco was a profit

making public sector company under the Ministry of Mines (MoM).

In 2000, it had a turnover of Rs.898 crores and a profit after tax of Rs. 56 crores. Balco had

two working units - an integrated Aluminium complex situated at Korba in Chhattisgarh and

the second at Bidhanbag in West Bengal equipped to produce only on downstream facilities.

Balco had a total workforce of 7,000.The employees union launched an indefinite strike

protesting against the Balco sell out.

After a protracted battle, an agreement was reached between the Balco management and the

union. With this agreement, the Balco disinvestment saga was put to rest.But, with the

employees not completely satisfied with the terms and conditions laid down in the agreement,the future of Balco did not seem to be very promising.

Balco - Profile

Balco, incorporated in 1965, was closely associated with the growth of the Indian Aluminium

industry. Balco played a pivotal role in making aluminium a leading metal with myriad uses

ranging from household, industrial to strategic defence and aerospace applications. Balco was

vertically integrated from sourcing of bauxite from its captive mines, refining and smelting to

aluminium production and a variety of semi finished products.


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Balco had contributed significantly as a primary aluminium producer, providing sustenance

to vital industries. Balco was a supplier of special aluminium alloys to the nation's

intermediate range ballistic missile, Agni and surface to surface missile, Prithvi. The GoI held

100% stake in Balco.In 2000, the GoI announced to divest 51% stake in Balco to a long-term

strategic partner.

Stage I: The Tug of War

In mid 2000, leading domestic players like the Aditya Birla group company-Hindalco Ltd,

SIL and the global major, Alcoa, expressed their interest to acquire 51% controlling stake in

Balco. They had to verify the financial and operating performances of Balco before putting in

a financial bid for purchasing the 51% equity on offer.

Once the financial bids were received, majority stake in the company would pass on to the

highest bidder. An inter-ministerial group (IMG)1 was constituted to oversee the

disinvestment process. In late 2000, the group visited the Balco plant (Korba) to get a first-

hand impression of the plant and its facilities, its operation and the mood of the employees

prior to disinvestment.

The Balco disinvestment was mired in controversy right from the day it was announced. The

employees' union of Balco put up a stiff resistance to the disinvestment process. The union

alleged that the MoM was adopting coercive means to complete the process.

In a memorandum to the Prime Minister, A.B. Vajpayee, the union alleged that the MoM was

'behaving like a guilty conscious culprit' and resorted to enforcing Section 144 in and around

the Balco plant even before the Committee of IMG arrived. "Although the situation did not

warrant it, the GovernmenT of Madhya Pradesh had deputed thousands of policemen in plain

clothes and uniform to terrorize the employees and facilitate the IMG Committee members'

visit to the plant to achieve their motive. Today, the workers of the PSU are more worriedabout their survival and protection of their service conditions subsequent to the

disinvestment," the union said.

The union cited that Balco was a profit-making company and had a huge capital base of about

Rs. 500 crores. It was the only public sector enterprise that had paid its 50% equity, i.e., Rs.

244 crores to the exchequer. The government should not jeopardise the future of the workers

by disinvesting it. Government officials, however, pointed out that in the late 1990s, only


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50% of Balco's profits had been on account of operating margins while the other half was due

to interest earned on fixed deposits.

The GoI further said that Balco was under threat as the company was running on outdated

technology and was making profits only because aluminium prices in international market

were ruling high. A downturn in prices would again take the company to the state of sickness

from which it had recovered in 1988-89. The GoI stand was that it was better to sell the

company when it was earning profits to get a good deal.

The GoI said that the cash reserve of Rs 437 crore accumulated by Balco by giving less

dividend to the government was too little for the modernization of the company. According to

government estimates, a total of Rs 4,000 crore would be required for the modernization and

expansion of the company and it could be infused only by bringing in a strategic partner.

Stage II: The Controversy Deepens

The deal between the GoI and SIL had attracted considerable flak mainly from the

Opposition. There was a niggling doubt over the deal, which seemed to be a reflection of the

lack of transparency. The GoI said that the bids were valued by four different

methods.However, the value arrived at by these bids was not disclosed. Again, the reserve

price was not disclosed nor the value of the bids by Hindalco and Alcoa and whether they

were higher or lower than the reserve price.

On 23 February 2001, Hindu Businessline wrote, "It is entirely understandable, indeed even

necessary, that an element of secrecy is maintained when the bidding process is on. But once

it is finished, and the government's decision has been communicated, it would have been

better to have disclosed all the facts. Thus, the Government has lost an opportunity to lay

down new norms of transparency for similar big-ticket disinvestments."

In a bid to placate the Opposition in Parliament, the GoI decided to defer the signing of Balco

sale papers till a debate took place in both the houses of the Parliament (Lok Sabha and Rajya

Sabha). Meanwhile, the tug of war continued unabated between the GoI and the Opposition.

Both Houses of Parliament, reiterated their demand that no assets of the company be

transferred till it was discussed threadbare and okayed. Shourie, however, maintained that

there was nothing wrong with the valuation.

Meanwhile, in another significant development, Chhatisgarh Chief Minister Ajit Jogi (Jogi)


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accused the GoI of indulging in 'underhand dealings' to the tune of Rs 100 crore to sell off

51% stake in Balco to SIL and alleged the Prime Minister's Office (PMO) was also involved

in 'irregularities.'"Some functionaries in PMO are said to have received kickbacks to the tune

of Rs 100 crore for divestment of Government's equity in Balco at a throw away price. The

deal was like loot of Chhattisgarh in a day-light robbery," Jogi alleged.

Stage III: The Debate

Meanwhile, the Opposition demanded a Joint Parliamentary Committee (JPC) probe into the

Balco deal. The GoI rejected the demand for a JPC probe leading to a walkout by the entire

Opposition in the Rajya Sabha. Shourie tried to convince the Opposition that the GoI had got

a good price on the transaction, and that the deal was above board and urged them not to

create hurdles in its path. Most members, however, alleged that the deal had been

manipulated at some level in the government.

Towards the end of the seven-hour debate, the Opposition staged a walkout after its leader

Manmohan Singh (Congress I) asked Shourie to reconsider the demand for setting up a small

JPC to go into the Balco deal to ensure its transparency and vindicate GoI. However, Shourie

dismissed the need for a JPC probe and emphasized that an assessment by the Comptroller

and Auditor General (CAG) would be sufficient. The CAG's findings could be taken up for

scrutiny and discussion by Parliament, he said.

However, the Opposition remained adamant and charged the GoI of selling the Balco shares

'for a song.' The Opposition was of the view that various calculations had put the worth of the

company at over Rs 2,900 crore as against the disinvestment price of Rs 551 crore agreed to

by the GoI. Terming Balco's valuation as faulty, the Opposition said, Balco's captive power

plant alone could fetch Rs 1050 crore and demanded that the cost detail analysis be laid in the

House. They questioned the manner of evaluation undertaken by the GoI. Defending the

valuation method, Shourie said, "The appropriate method for valuation of a going concern

was the method of discounted cash flow.

After it was followed, the government, for abundant caution, had also asked the advisors to

assess the value of the company by two other universally recognised methods. For 51% of the

equity, the advisors placed the valuation through discounted cash flow method at Rs 332-507

crore; through the comparable valuation method at Rs 299-464 crore and through the balance

sheet method at Rs 305-348 crore." Shourie further said, "Only the government approved


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valuers did the job. A screening committee of Balco selected PV Rao and Co through

competitive bidding for valuing the land and buildings, and plant and machinery. The mines

were valued by experts from the Indian Bureau of Mines. The value of the assets was placed

around Rs 1,072 crore, 51% cent of which would be around Rs 547 crore."

Stage IV: Post Sell Out Drama

After the sell out of Balco, Jogi continued to fire his salvo and demanded a parliamentary

probe into the deal. Jogi alleged that the company was sold at a tenth of its actual value. He

said, "In a deal in which property worth Rs.5,000 crore to Rs.6,000 crore (Rs.50 to 60 billion)

is being sold for just Rs.551 crore (Rs.5.51 billion), the circumstances speak for themselves."

In an interview published in a national daily, The Indian Express, Jogi alleged, "You are

talking of transparency. But your transparency is such that even the chief minister of the state

did not know that this company is being sold.

They did not take anyone into confidence. The entire deal was struck surreptitiously." "Arun

Shourie is telling lies. He is a liar. Let him give even a single example when he consulted me,

when he contacted me on Balco," Jogi charged in the interview. Demanding a probe by a

joint parliamentary committee (JPC), Jogi said, "Whenever such kinds of scams take place, it

is not done in the presence of witnesses. Since big money and big people are involved, it

should be probed." Contending that the deal took place 'without taking the people into

confidence,' Jogi said his government was ready to purchase the company for the same

amount that had been paid by SIL. "It is a question of fighting for the people's right,

especially for the tribals of Chhatisgarh," he asserted.

Meanwhile, Jogi started instigating the employees to go on strike, and encouraged them not

to let the managers run the plant. On March 3, 2001, the employees launched an indefinite

strike. The agitation by the employees brought the operations of the plant to a standstill.

Apart from productivity loss, there were apprehensions that the employees would resort to

damaging the plant facilities.

The GoI moved the Supreme Court to prevent the state government from disrupting the work

at the Balco (Korba) plant. The Supreme Court restrained the Chattisgarh government from

disrupting supply of water, electricity and food to the Balco plant or township at Korba. In its

order, the division bench of the apex court said, "The state of Chattisgarh, and chief secretary

and the director general of police in particular, are directed to afford full protection to the


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workers, their families and management inside and outside the Balco plant at Korba, so that

they do not suffer physical harm of any kind."

The Parliament witnessed heated exchanges between Opposition and ruling party with the

Opposition questioning the GoI's propriety in moving the Supreme Court without taking the

Chattisgarh State into confidence. Countering the Opposition charges, Shourie said the

Centre had received 'alarming reports' that water and electricity to the Balco plant would be

cut and the managerial staff would not be allowed to enter the state. He added that the issue

had turned into a law and order problem after an ambulance was burnt and a CISF van

damaged by activists.

All's (Not) Well That Ends Well

The workers were not happy with the agreement and dubbed it as 'a face saving' exercise. 'We

could have very easily bargained for a better deal if only we had negotiated earlier. Our

bargaining powers got considerably reduced when the management realized that we were

cracking under pressure' the workers said. The union leaders had to give to the pressure,

which increased when Jogi who had so long vowed to revoke the deal, backed out. This was

followed by the Supreme Court order asking the workers to consider two months wages as

advance.

The workers felt that all the twenty-five points of the agreement were not exactly in their

favor. The management assured that there would be no retrenchments, not just for one year,

as stated earlier, but till retirement.

They would also continue to enjoy all the existing benefits that were due to them as public

sector employees. The wage agreements would be discussed with the representative unions in

three months time and a new package of wages could then be introduced.

However, the management turned down the worker's demand to have the agreement counter

guaranteed by the GoI. The management was also free to make transfers. Many workers felt

that 2002 would see mass transfers of all the 'troublesome' workers who spearheaded the

strike.

Trade unions affiliated to the Left Parties expressed their strong displeasure at the manner in

which the deal was rushed through. They blamed Jogi for the workers plight and said that had

he kept up his support, they would not have ended their strike.Said Harinath Singh (Singh),


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General Secretary, AITUC, "Mr. Jogi promised us his full backing, but ditched us at the

eleventh hour. He went back on his words, perhaps due to orders from his party high

command. This is highly unethical. The INTUC taking a cue from Mr. Jogi suddenly

developed cold feet and more or less forced the issue." Mr. Jogi's suddenly withdrawing

support to the striking workers had raised many eyebrows.

Some of the workers did not see it just as political opportunism but a definite indication that

some underhand deal had taken place. "We cannot say for certain about who took money to

clear the disinvestment deal in the first place. But we are certain that Mr. Jogi's hands are not

clean now. A deal has definitely been struck between the Chattisgarh Chief Minister and

Sterlite Industries. Otherwise, there is no reason for him to withdraw his support to the

striking workers overnight," the workers alleged.

Singh said that the fight against the agreement would continue if there was any injustice. He

commented, "The first thing on our agenda right now is to get the Central Government to

provide a counter guarantee to the agreement that we had signed with the management.

Although the new owners have said that there is no question of involving the Central

Government now, we will still try our best." As per the union's demand, GoI should provide a

guarantee of Rs. 25 lakhs per employee if the management went back on its commitment not

to tamper with their service conditions or retrench them.

The AITUC General Secretary also said, "The management also promised not to transfer any

employee for one year. But after that, there were free to do as they wanted. This was a

dangerous move." Commenting on the transfer, he further said, "As regards transfer, the only

place that the workers of Balco at korba can be transferred to is Bidanbagh in West Bengal.

They cannot transfer any worker of Balco to any of their other group companies. If they do,

then we won't keep quiet. Lets see if they are vindictive or not."

CONCLUSION

Privatization is an inevitable historical reaction to the indiscriminate expansion of the state

sector and the associated problems. Even in the communist countries it became a vital

measure of economic rejuvenation. The society may benefit from privatization in several

ways. It would help reduce the fiscal burden of the state by relieving it of the losses of the


37/37

SOEs and reducing the size of the bureaucracy; enable the government to mop up funds;

result in better management of the enterprises; encourage entrepreneurship; and, help

accelerate the pace of economic development as it attracts more resources from the private

sector for development. Privatization may increase the number of workers and common man

who are shareholders and this could make the enterprises subject to more public vigilance.

Government may confront several obstacles to privatization. Trade unions and political

parties may oppose privatization. In developing counties, the relatively undeveloped capital

markets sometimes make it difficult for government to sell shares. Another problem is that

Governments usually want to sell the least profitable enterprises, those that the private sector

is not willing to buy at a price acceptable to the Government. Privatization will be successful

only if certain conditions are satisfied the policy should be very clear and there should be

proper privatization strategies. Equally important are the commitment and political boldness

on the part of the government. Privatization was a very important aspect of the economic

reforms in India. The privatization, however has got a set back because of the influence of the

leftist parties on the UPA government which came to power in may 2004.

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Detailed Report on Privatisation and Disinvestment

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