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The privatization stakes

Published in The Week, September, 6th, 1992

Stunningly new technologies and vastly different geopolitical realities punctuate life in the nervous nineties. Small wonder then that concepts and philosophies are being turned inside out. 'Dependence', 'neo-colonialism' and 'control of the commanding heights of the economy' have fallen by the wayside in the rush towards the global village. The new realities and, indeed, the new buzzwords today are, among others, globalization, market-friendliness and privatization.

The privatization debate has raged in virtually every country for some years now. It was however Margaret Thatcher who elevated the concept into a new dimension. Commencing 1979, the British government propelled its domestic economy into an ever-widening embrace of private enterprise. So much so that today even prison security in Britain is in private hands.

A review of the experience of other countries in this regard clearly indicates that the basic nature of the privatization debate has undergone a major shift. Today, the major question is no longer on the need or necessity for privatization but the pace and mechanics of privatization that should be adopted. In fact, the issue is linked inextricably to the process of economic transformation.

Many countries are currently converting their economies from state dominance to market-based models. Ultimately, the global economic upheaval can be traced to a single, perhaps even simple, phenomenon - the expectation of an increasingly democratic global population of a better quality of life. As Valtr Komarek, a leading Czech economist argues, the dramatic economic changes being implemented in the Czech and Slovak republics were hardly "undertaken so people would live worse than under communism". Though Komarek himself is a gradualist, preferring a slow march towards a market economy, he is quite clear that the end result of any economic transformation must be to improve the lot of the masses.

Interestingly, the gradualist school of thought insists that the route to economic strength is via a sort of New Deal (a la the American New Deal of the thirties) in which public spending is channeled into infrastructure especially construction, while at the same time the human costs (unemployment, food shortage, etc.) are minimized. Meanwhile, the pace of transition is slow but steady and spread over five to ten years.

The opposing school of thought espouses a shock therapy in which radical reforms are launched simultaneously in a compressed time frame, virtually overnight. The rationale for an accelerated timetable, according to the shock therapists, is that unless restructuring is launched decisively, the opportunity cost of the existing system will continue to mount thereby making the process of macro-economic stabilization and growth even more complex, difficult and time-consuming.

Since privatization is a component of economic restructuring, the shock therapy versus gradualist debate has important repercussions on it. An nowhere is it better illustrated than in eastern Europe, which presents a fascinating scenario replete with hyper inflation, multitudinous foreign exchange rates, massive inflows of foreign investment, legal tangles, political uncertainty and, of course, widespread violence.

Adherents of both schools of thought can be found in every country in eastern Europe. But the overall consensus appears to be towards a quick march to freer markets. The sudden evaporation of the huge former Soviet market literally pulled the rug from under most of its former satellites. Suddenly, top-heavy state industries found themselves without orders or customers. Not surprisingly, the pressure for change was intense and immediate. As Minister Vaclav Klaus of the Czech and Slovak republics is fond of reiterating, "when you drive through mud you do not slow down".

Poland is a showcase for shock therapy especially with respect to privatization. Compared to the industrialized west, the scope and the scale of privatization in Poland and the rest of eastern Europe are indeed mind-boggling. When the British government embarked on its privatization program, the private sector already accounted for a substantial chunk of the domestic economy. The east European governments, on the other hand, are wrestling with the problem of transferring almost the entire economy to the private sector - something that has not been attempted before anywhere in the world.

The size of the privatization effort in Poland is best illustrated by the fact that by 1990, 17,000 retail outlets were privatized and around 3,000 state-owned industrial enterprises were candidates for privatization. The exercise is monstrously complicated by the fact that corporatization hardly exists, property rights and financial institutions are conspicuous by their absence and domestic savings are pitifully small almost throughout eastern Europe. Given the circumstances, Poland, under the advice of Harvard professor Jeffery Sachs, opted for shock therapy and rapid privatization. The economic objective of this strategy was to improve the efficiency of enterprises and create efficient capital markets. Politically, the challenge was to carry the economic program through with broad social approval.

In some instances, public sector undertakings have proven to be more profitable than private sector companies. Generally, however, the experience around the world has been that the private sector displays a higher level of accountability, productivity and profitability. Privatization seeks to harness these factors.

The objective of any privatization program, therefore, is firstly to improve productivity and secondly to redefine property rights within an economy by providing opportunities for more and more people to own financial and other assets.

However, large sections of the population, both at home and abroad, are ambivalent about privatization. A survey conducted by the Institute of Economics, Warsaw, in 1990 illustrates this dramatically. In Poland, there is widespread acceptance of the need for privatization. Yet, only 55 per cent of the workers polled expressed a desire to buy shares in their own enterprise. Most workers tended to prefer the status quo viz. Working in a state-owned enterprise. Even more surprisingly, only 37 per cent of the directors preferred to work in a private enterprise. Regarding the pace of privatization, while only 4.5 per cent of the managers felt that there was no need for privatization, every third Pole was-opposed to the sale of companies to foreigners.

Analyzing the survey results, Dr Marek Kozak of the Institute of Economics of the Polish Academy of Sciences expressed the view that "there is no doubt that the common opinion is that the government is the most interested group as far as the privatization program is concerned. Also, it is interesting to note, although employees seem to perceive themselves as not much interested in privatization (except for Solidarity members), many of them expect to benefit from it".

In India, privatization has a long way to go. First, even the need for such a drastic restructuring has not been clearly clarified to the people at large. Seminars and conferences expound the virtues of restructuring and privatization. But the common man is still completely in the dark. No attempt has as yet been made to explain in simple terms the indisputable link between privatization and productivity, profits, investment and employment. Instead, many political leaders are still shadow-boxing with the ideological ghosts - MNCs, foreign takeovers, colonialism, exploitation, etc. - of a bygone era.

To add to the misconceptions, the government has apparently not clearly made up its mind on the entire privatization issue. The political leadership is still blowing hot and cold on privatization. The partial disinvestment of PSU shares has reinforced the perception that it is the government that stands most to gain from privatization. The Rs. 3,000 crore that has purportedly been raised from this tentative step is evidently going towards shoring the Centre's finances. The effect of this disinvestment is thus likely to be delayed and minimal.

The huge savings that millions of Indians have accumulated represent a unique financial resource base for the country. And to employ this resource productively for all-round economic development, there is no other choice but to get serious about devising a privatization program.

Privatization is a highly technical business that cannot be left to the bureaucrats. The framing of policies and plans that are designed to dilute the role of the public sector requires expertise from economists, management professionals, lawyers, financial analysts and bankers. What is needed therefore is a team of experts drawn from these disciplines. In the case of utilities and services, especially telecom and power, foreign expertise is needed.

Since there are many ongoing privatization programs around the world, we can study them and adapt our own program accordingly. For example, the case of the water utilities in the UK, which ended up with more shareholders than customers, can bring home to us the deficiencies of 'atomization' of ownership. And apart from the technicalities involved, there is a vital necessity to educate the public that privatization is not tantamount to selling the family silver.

The government's approach at present is mired in contradictions- even though the results of comparable programs elsewhere are highly promising. The leadership must move ahead quickly and comprehensively. Besides, let us not forget that India's access to multi lateral funding is largely dictated by the pace and performance of the reform process. Both IMF and IBRD are increasingly switching from conventional project-based lending to policy-based lending.

True, privatization is no panacea. But it is an important part of the new economic vehicle that will transport us into prosperity. As developments in the former communist utopias have shown, we too will have to privatize…or perish.

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V.K.Madhav Mohan - The Leader : Mentoring Services, Mentoring Workshops, Mentoring products- Articles / Audio / Video/ Posters, Lectures