MTNL, BSNL, Air India: Why govt is bad owner of business

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 [ see 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.

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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 TN Ninan points out in the Business Standard, 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)?

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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.

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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.

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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.

Dispersed shareholding corporations rather than strategic sales

If all PSUs were sold off, the top 500 families of India would likely end up 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 moved 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.

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.