Britain
It was in the 1980’s that under Mrs. Margaret Thatcher’s leadership as Prime Minister of Britain that the word “Privatization” was coined to describe privatization of ownership of British Nationalized Industries.  Although several countries in the developed and developing world have endeavoured to emulate Mrs. Thatcher’s footsteps, not many have been successful in emulating the sophistication and subtlety of the “process” adopted by Britain.  Notably, no nationalized industries were sold to or acquired by any other British or Multinational Companies-unlike “Strategic Sale” a la Shourie model in India.  The whole process brought about a revolution in Britain’s popular capitalism where citizens of all professions and creeds bought shares in the new national enterprises, which gave up their garb of nationalized industries.  The success of the whole process was also followed by improved market prices of shares of privatized national enterprises most of whom continued to be managed by the erstwhile Boards of Directors of the nationalized undertakings.  And yet, even in Britain, there is today a new wave of disillusionment about privatization of some of the public utilities.  Those of us who were in UK during the month of June, 2002 witnessed this new phenomenon of the virtual re-nationalization of British Rail.

While Nationalization is a dirty word in Whitehall, no amount of obfuscatory accounting or circumlocutions from ministers can disguise the fact that the railways are back in public ownership under New Labour.  The Government has already coughed up 300 m pounds to buy out Rail track shareholders and set up a new non-for-profit company-Network Rail, to take its place.  But it was not until the last week of June 2002 those nation’s Railway assets really started shifting from private to public hands.  Transport Minister Alastair Darling told the House of Commons upto 8bn pounds of new money would be available to cover project over runs and rapidly inflating maintenance costs for Net Work Rail.  Another 9bn pounds worth of Network Rail’s borrowing will be underwritten by the state via the strategic rail authority headed by Alistair Morton.  In total, a package of 21bn of taxpayers’ money is being mobilized.  But the re-nationalization should not be viewed as a step back, but a step forward.

There are three main reasons why the government’s plans are sensible.  The most obvious, is that Railtrack simply did not deliver.  Privatization did not bring more efficient, more profitable railways. Better services did not routinely materialize and safety appeared to be compromised by the profit motive. Paradoxically the disciplines of private ownership saw Railtrack Directors arguing for bigger state subsidies - an unsustainable proposition.  Second is the shock that the global financial system is experiencing.  These appeared to have been produced by a culture driven by greed and over inflated corporate ambition.  The result has been falling stockmarkets and a growing public scepticism of the efficacy of privatization to promote enterprise.  The third reason why Network Rail is sensible is that centreleft governments need credible alternative economic models to those offered by their rightwing political rivals.  Here Network Rails can be seen as an evolution in New Labour’s thinking under leadership of Prime Minister Tony Blair who has been advocating Public Private partnership, though this has not worked well in part privatization of London’s underground and partial sale of the nation’s air traffic control system.

The Network Rail is an example of breaking the mould of thinking in Disinvestment.  Network Rail might be under government control, but it will raise money on the private markets.  Meanwhile the railway service has definitely improved.  I traveled from Reading to Paddington and back on 9th July 2002 to attend Sir Peter Parker’s (one of the most brilliant chairman of British Rail) funeral service at, St. Martin in the Fields and the journey to and fro was dead on time.  To me, this was a reminder of efficiency of nationalized British Rail in pre- privatization era.

France
The experience in France though quite different from that in Britain - has also its lessons. Lionel Jospin, the former prime minister of France who saw his Socialist Party trounced in last month’s legislative elections, was so nervous about the word “privatization” that he insisted on renaming the privatization commission as the deliberately opaque Commission for Shareholding and Transfers.

France’s victorious rightwing politicians are almost as fearful.  In public statements, they prefer the anodyne term “opening of capital” to “privatization” and they barely mentioned the subject in the campaigning that led to their election triumph on Sunday 16 June 2002. For many French voters, the word “privatization” conjures up images of rampant Anglo-American capitalism and the sale of France’s heritage to foreigners.

If stock markets rise, Jean Pierre Raffarin, the Prime Minister appointed on 17 June, 2002 by President Jacques Chirac and Francis Mer, his finance minister, are likely to launch a fresh round of modest disinvestment. But this will again be disinvestment a la |French model where the commanding heights of the economy will remain in State ownership like Electricite de France, Gaz de France, France Telecom, SNCF, Paris Metro-RER, etc. etc.

Privatization, is a tempting source of income for a Government that will find it hard to bring the budget close to balance in accordance with the eurozone’s stability and growth path.  Tension is growing between Germany and France over the French budget deficit, which could be exacerbated by Mr. Chirac’s promise of a 5 percent cut in income tax this year.  In other words, “cash” may be welcome but not transfer of “control”.

Mr. Mer, former head of the European steel group Arcelor, is being urged on by business leaders who say privatization will boost French competitiveness and contribute to long overdue reforms of the centralized French state.  Mr. Mer, appointed as minister in the interim government that followed Mr. Chirac’s re-election to the presidency in May, has already summoned all the main state enterprise chief to discuss future strategy on privatization.

With five years in power ahead of it, the new government is in a strong position to face down any trade union objections, especially during the “honeymoon period” at the start of its mandate.  It may help that the French Communist party, which rejects privatization but reluctantly participated in the Jospin government, is now weaker than at any time since the Second World War.

French citizens, for all their superficial distrust of global capitalism and attachment to state owned services such as EdF, may prove willing in practice to countenance and indeed personally support - privatization. Nearly 900,000 individuals applied to buy shares of ASF when the hitherto obscure motorway operator was given an initial public offering in March.  More than 80 percent of the employees bought stock.

Among quoted companies, the first asset sales could come from the state’s investments in Thales, the defence electronics company, Credit Lyonnais, the bank, and Air France-if only because the three companies have resisted the general market downturn and their shares are in demand.  The majority stake in France Telecom is the most valuable of the Government’s listed holdings and there is a possibility that the government may have to increase it stake in a rights issue. 

EdF, Europe’s largest electricity company and by any measure one of the biggest businesses in France, is the great privatization prize.  It is estimated to be worth €50 bn - €80 bn and therefore represents most of the value of French State assets with any chance of being sold in the next five years.  The company’s Managers believe partial privatization is a possibility so that EdF – whose domestic market is being opened to competition under pressure from the European Commission – can raise more capital to finance European and International expansion.  EdF’s last capital increase was in 1982.

So great are the financial and legal obstacles to a quick privatization of EdF that a report requested by Mr. Chirac and published in May, 2002 by a rightwing think-tank Foundation Concorde suggested a modest initial phase in which only 10 per cent would be sold in the market.  The state would keep 51 percent and other stake would be held by special funds in order to finance pensions, nuclear safety and the claims of local electricity networks. 

No one has dared to raise the prospect of selling SNCF the state railways or the Paris Metro.  The UK’s recent experience with Rail Privatization has made such ideas seem more far – fetched.  Meanwhile, Paris has the pride of place in their Metro-cum-RER in Europe.

India
The author who met the Comptroller & Auditor General of India as well as Permanent Secretary of the Ministry of Public Enterprises & Heavy Industry in the last few days says he could not lay his hands on any serious evaluation of India’s disinvestment exercise undertaken over the last 10 years.  In fact his frustration to find out how much of the paid up equity capital of Central Public Enterprises has been sold which seem to have increased from Rs.53, 000 crores in 1991-92 to Rs.82, 400 crores in 1999-2000 is one example of  the lack of any serious evaluation attempted so far .  The figure of Rs.1000 crores which now floats around is again not reliable as the government is provided funds for both equity and loan to these enterprises over the years and any reliable calculation must also take into account the price factor. 

The term “achievement” of India’s Disinvestment policy also seems to include transfer of cash reserves of the public enterprises like VSNL as well as of STC, MMTC who are yet to be disinvested.  Even dividends paid along with taxes paid on dividends are also added to this “achievement” figure!  Here are other “puzzles” in this whole exercise. While BALCO, CMC and others are treated as “sold” after 51 % or more of their equity were disposed, there are others like VSNL, Hindustan Zinc, IPCL who are treated as “sold” after only 25 to 26 percent of their equity were sold to the new private sector owners.

No wonder, there is widespread mystique about the scope and purpose of India’s disinvestment.  The basis on which the target of disinvesting Rs.66, 500 crores was set for 1991-2002 against paid up capital of these enterprises of around Rs. 80,000 crores is far from clear.  Nor is it clear whether reducing fiscal deficit is the only “purpose” of the whole exercise although this seems to be the case.  Should not India’s tax to GDP ratio be improved from paltry 9.6 percent (even Pakistan’s ratio is 12-13 percent) to at least 20 percent achieved by most Asian countries – not to mention 40 percent achieved by most Western European countries? Should not the country’s debt be repaid – the interest on which eats away 5 percent of GDP in our annual central budget.  It does not pay a country like India to blindly follow the leadership of developed countries in some areas ignoring other areas equally critical.

While most of the disinvestments prior to April 2000 has been in the sale of minority shareholding to usher in a new regime of popular capitalism in India which included employee share ownership scheme, the disinvestment in the last two years have achieved organized sale of public enterprises to private family owned and promoted companies like Reliance, Tatas, Sterlite, Levers, etc. –even though this would inevitably lead to creation of monopolies and duopolies.  The concept of Public-private competition, which could effectively ensure both “efficiency” and “welfare”, was obviously not considered relevant.  Wherever disinvestment has been largely indirect through public sector mutual fund like UTI  -it is not clear whether these institutions have offloaded the shares in the secondary market.  The question is particularly, relevant in the context of UTI’s recent debacle.  The timing of the recent sale-particularly since October 2000 - when India’s capital market witnessed a serious recession is also another contentious issue.  The present author is a Director of a leading UK merchant bank-cum-mutual fund Dresdner Kleinwort Benson (India) Fund where the India Fund scrips experienced steady downward movement from $ 12 a unit to $ 8 a unit from October 2000 to December 2001.  It is believed that the Navratna company =-VSNL’s shares were sold only at Rs.205 in February 2002 although its shares had touched Rs.750 per share not so long ago.

Unfortunately, neither the Disinvestment Department nor the Disinvestment Commission’s personnel have had any previous experience of privatization work in some of the developed and developing countries where this has been a success although several Indians had this exposure.  Experiences in several countries have also underlined the need for close coordination of Public Enterprise Reform with Disinvestment – so that Privatization of Management can progress with Privatization of Ownership in a coordinated manner.  Equally, both forward and backward integration of Disinvestment policy, which should include downsizing and modernization of Bureaucracy along with strengthening of capital market in India, should have been kept in view.

There is a singular lack of “strategy” in our disinvestment exercise.  Formulation of “strategy” would thus appear to be urgent.  Particularly so, as some of India’s most successful corporate enterprises are still in the public sector. The “strategy” which emerged in several advanced countries is the “strategy” of Public - Private competition, which can ensure both “efficiency” and “welfare”.  Some of the world’s largest public enterprise like Japan’s NTT, France’s Electricite de France, Italy’s ENI continue to operate side by side with equally large number of efficient Private Enterprises in these countries.  In China, opening of special economic zones of Guangdon and Fijians providing free entry of private investors with inflow of FDI helped the process of privatization enormously, even though no share holding of 400,000 public enterprises has so far been disinvested.  Although General Motors was anxious to acquire a portion of Alfa Romeo when it offered “disinvestment” of a portion of its shares, the Italian Government ensured that it was Fiat who struck the deal.  In Britain where disinvestment made strides in the erstwhile nationalized industries with some of the privatized entities like British Airways emerging as a highly competitive airlines in the world, the debate on modalities of disinvesting the London Underground Railways is still unfinished.  What has now emerged in Britain with Network Rail is an experience, which India can overlook only at its own peril.