On a global scale, the experience with firms like British Airways and AlItalia has done a lot to persuade . . . → Read More: India’s Privatisation Problem]]> When the UPA came to power, the word privatisation was buried, partly out of deference for the communist parties which were
supporting the UPA. The sale of shares did revive after the UPA-2 commenced [history].

On a global scale, the experience with firms like British Airways and AlItalia has done a lot to persuade people that government is a
terrible owner of firms. As a consequence, even though governments worldwide took up ownership of many financial firms during the global crisis of 2008 and 2009, there was never any question that this `nationalisation’ would be more than temporary. In OECD countries, there is full clarity that even if government gets into a firm when the firm is in trouble (for certain public policy reasons), this ownership must only be temporary and government must get out of this unpleasant state as soon as possible.

Given the lack of commitment to economic reform in the UPA, expectations in India on the question of privatisation have been
low. But the problems of public sector firms are glaringly large and the issue does not go away.

We are all used to Air India being a phenomenally bad use of public money. But as T. N. Ninan points out in the Business Standard today, there are quite a few other such breathtakingly large sinks for public resources. As he says:

…it takes a special kind of government company to lose Rs 8 crore a day, while earning just Rs 10 crore as revenue — and that in the booming field of telecommunications. That’s Mahanagar Telephone Nigam Ltd (MTNL) for you. Its big sister, the Bharat Sanchar Nigam Ltd (BSNL), also loses Rs 8 crore a day, though it earns much more revenue — about Rs 90 crore daily. BSNL blames the jailed former minister A Raja for its troubles, but there must be more to the story. Now the two companies propose to merge; expect an Air India kind of situation, with staff from the two companies battling over pay and seniority many years into the future.

Air India, meanwhile, provides more proof that the government is a lousy shareholder. One minister destroyed the airline. Another now watches while the airline cuts flights because it has exhausted its credit and credibility, and therefore has to pay for fuel in cash. The staff, meanwhile, is not paid incentives that are equal to something like half their monthly salary in most cases — and the government expects this de-motivated staff to fight and regain lost marketshare, to offer service with a smile to passengers.

And what about Prasar Bharati, the once supposedly autonomous broadcaster which is now once again little more than a government department? It employs 38,000 people, and loses Rs 2.5 crore a day, to earn about as much revenue. Someone should ask the obvious question: Why is the government in the business of running phone companies, airlines and news broadcasting when it is losing large dollops of money, when private providers are doing a reasonable job, and when there is no shortage of competition? For that matter, does the government need to make watches (at HMT), cement (at Cement Corporation of India), tyres (at Tyre Corporation of India), or shoes (at Bharat Leather)?

The UPA-2 made a big break with the pessimism by moving forward on selling off Scooters India. The long spell of zero privatisation may come to an end, with the UPA-2 selling off Scooters India.

But how might one view the prospect of government selling off some of the other public sector firms? I think a sound approach to this
question involves three elements.

1. Removing entry barriers

The first piece of the story is that it is essential to remove entry barriers in various fields, which were once dominated by the
public sector. Our poster child in this regard is telecom. Private and foreign firms came into Indian telecom; Indian users of telecom
services were huge beneficiaries. Whether MTNL / BSNL were privatised, as VSNL was, was of second order importance. The most important thing that is required for India to make progress is for government to not get in the way of the private sector.

As an example, Indian banking is a place where there are steep anti-competitive restrictions against private and foreign banks. While
I believe we should have strong rules about ownership and governance for banks (just as we should in critical financial  infrastructure), we should not be blocking the rise of suitable private and foreign banks.  We should not be blocking the long-term decline in importance of PSU banks. Getting out of the way of private and foreign banks is as important, if not more important, as the task of selling PSU banks.

2. Dispersed shareholding corporations rather than strategic sales

If all PSUs were sold off, the top 500 families of India would likely endup controlling all of them. This prospect makes one worry,
about the increased concentration of economic and thus political power. It would be far better if India move towards privatisation by creating dispersed shareholding (e.g. ICICI or HDFC) instead of privatisation through strategic sales (e.g. VSNL).

This issue also links nicely to the problem of corruption. A country where spectrum auctions can take place while requiring bids to
be placed in 45 minutes is a country where auctions that sell off PSUs could be rigged. It is, hence, far better to setup a steady drip
whereby 0.1% of the shares of a PSU are sold every day into the pre-opening call auction at NSE and BSE, so that 25% is sold every year. Such a procedure comprehensively eliminates the problems of government process in the sale of shares. The government would merely put out an advertisement, before the story began, saying that over the next 250 days, it will sell 0.1% of this firm on every single day into the NSE and BSE call auctions.

Alongside this sale of shares, government would need to take interest in establishing good quality corporate governance structures
for these companies, which are transiting out of government control into becoming dispersed shareholding corporations.

Even in the case of Scooters India, suppose government decided to sell off its ownership of 95.38% within 100 days. It is better to do
this without bringing any investment banker into the picture, by selling 0.9538% into the call auction for every day in the coming 100 days, after making a public announcement to this effect. Alongside this, government would need to setup a good quality board and then allow ordinary corporate governance procedures to work.

3. GDP growth, not proceeds

Every now and then, these discussions get stuck on the issue of how government can maximise the proceeds from selling off (say) Scooters India. This is the wrong end of the puzzle. The really important story is about how the labour and capital that’s blocked inside Scooters India can turn into greater output. Once that’s done, government collects the NPV of future taxation that this productive enterprise will generate.

The focus should be on getting assets out of public control, while avoiding the corruption or political complexity of strategic sales. As
long as these are achieved, the magnitude of the proceeds is not of great importance.

There are three interesting aspects to the . . . → Read More: Consequences of Air India Being a Zombie Airline]]> Air India has got itself into serious trouble, and private airlines are also doing badly. The CMIE report on air transport for August 2009 shows a bad picture for the airline industry: from the quarter ended June 2007 onwards, in each quarter, the PAT margin was negative.

There are three interesting aspects to the present situation. The first is about the role of the State. Flying by plane is a private good and not a public good. Seats in a plane are rival and excludable. I fly in a plane, I benefit. There is, hence, no role for government to be in this area. Governments in good countries do not run airlines. The right thing to do is to privatise Air India as soon as possible, without trying to engage in a government-led restructuring. In an auction, if the highest bid is a negative number, government should pay this to get the company out of public ownership.

The next point is the cost of a bailout. NHAI highways cost roughly Rs.5 crore per kilometre. Hence, if government puts Rs.5,000 crore into Air India, this comes at the opportunity cost of 1000 km of four-lane highways.

The most interesting dimension, and one that has not been widely noticed in India, is the impact of Air India upon the woes of the aviation industry. Air India today is a `zombie airline’: a firm which should be dead but isn’t only because it is artificially propped up by the government. (The phrase `zombie firms’ or `zombie banks’ originates in the experience of Japan in the late 1980s).

If market forces were allowed to work, then Air India would go into liquidation. This would lead to somewhat higher prices for air travel since competition would be reduced. In addition, it would lead to somewhat lower prices for staff (since erstwhile Air India staff would be looking for jobs) and somewhat lower prices for planes (since erstwhile Air India aircraft would be available for purchase or lease).

Other firms in the industry would thus obtain somewhat higher revenues and face somewhat lower costs.

Conversely, when a government steps in to create a zombie firm in an industry, it damages profitability and investment amongst the healthy firms of that industry. If this process goes on for a while, then otherwise healthy firms in an industry will become sick. This was the experience in Japan, when the `zombie firms’ supported by the government led to sickness spreading amongst other firms and led to a extended period of reduced private corporate investment.

In summary, one reason why the private airline industry as a whole is in the doldrums is that Air India is being artificially kept alive.