Nerve Endings Firing Away

Ever since the economic reforms of 1991 kicked off in India, the economy has been moving towards a more liberalized market economy with heavy privatization of the public sector. Attuned with the new public management theories, the government is eagerly seeking to divest major public sector undertakings (PSU). Some 31 PSUs have been successfully put on the block, and equity with a face value of Rs.835 crore ($185 million) has been sold for as much as Rs.11, 350 crore ($2522 million).

In line with the disinvestment policies undertaken by the government, the 288-room Airport Centaur near Mumbai’s domestic airport was sold by the Hotel Corporation of India to Batra Hospitality, belonging to A L Batra, for Rs.83 crore ($18.4 million) in June 2002. The government reported that a sum of Rs.2.43 billion realized from the sale of three Hotel Corporation of India properties would be transferred to Air-India to bolster its balance sheet, thus enabling the national airline to maintain competitive status in the market. Further, the minister of divestment, Mr.Arun Shourie said that the Government has decided to set up a Disinvestment Proceeds Fund for financing fresh employment opportunities and investment and for retirement of public debt. Among all this glory expectations, the twist occurred when Batra sold off the hotel property in Mumbai to the Sahara group for Rs.115 crore ($25.5 million), raking in a 35% return in a timeframe of four months.

This sparked off a huge debate and seemingly lent credence to the disinvestment protestors’ logic that the valuation procedures used by the government were rendered redundant and did not account for the true market value of the PSU. Moreover, the process used to select the beneficiaries that bought the PSU also was subject to question under grounds of corruption and equity. Reports of rigging were leveled against the Department of Divestment, which naturally were vehemently rejected by the government. In their defense they cited that there were 12 potential bidders who had expressed an interest in procuring the government stake in Centaur, of which 11 dropped out and the Batra Group was asked to re-bid from its earlier offer of Rs.65 crore ($14.4 million). Anti-divestment organizations tout the equity issue claiming that the practice of selling PSUs affects the employment opportunities of lower castes negatively (a major policy issue debated in India currently) and selectively promoting the interests of the elites.

The Disinvestment Ministry says that there is no bar to the successful bidder parting with the property. Then the question of compliance in addition to correct estimation of valuation has to be raised since the government has stands to lose out on a significant opportunity cost. The compliance issue begets the question that why any clause that prompts the buyer to stay in the relevant business for a pre-determined period, not inserted in the sale agreement.

The rushed action towards divestment and privatization to overcome the seriously lagging reform in order to overcome budgetary deficits has proven to be an implementation problem rather than a policy problem. But this sudden transition to privatization, as shown aptly by the Centaur Hotel case, has drawn criticism from opponents who say “public flotation are more equitable and less likely to lead to closings and layoffs at the acquired company” (Source: Capital Market). This issue thus, is a question of balancing budgetary deficits with sale of PSUs in order to fund other government programs. But in typical Wildavsky-ian tradition, budgetary issues are not impervious from politics. The issues of implementation, equity and political pressure still render the path to smooth privatization thorny.

Oops! This isn’t my class bulletin board…but what the heck! Has this issue been resolved yet?