{"id":5358,"date":"2020-01-03T14:45:56","date_gmt":"2020-01-03T09:15:56","guid":{"rendered":"https:\/\/triumphias.com\/blog\/?p=5358"},"modified":"2020-01-03T14:45:56","modified_gmt":"2020-01-03T09:15:56","slug":"privatisation-of-public-sector-undertakings","status":"publish","type":"post","link":"https:\/\/triumphias.com\/blog\/privatisation-of-public-sector-undertakings\/","title":{"rendered":"Privatisation of public sector undertakings"},"content":{"rendered":"<p><strong>Relevance: Mains: G.S paper III: Economy<\/strong><\/p>\n<p><strong>Context:<\/strong><\/p>\n<ul>\n<li>There seem to be broadly three positions with respect to the privatisation of public sector undertakings (PSUs).<br \/>\n\u2022 The left position is \u201cPSU is family silver and should not be sold irrespective of its performance\u201d.<br \/>\n\u2022 The divergent stand is that \u201cbusiness is not the business of government\u201d, which found resonance in the United Kingdom, and, of late, in India. There is also the third position: Why privatise profit-making PSUs?<br \/>\n\u2022 Why do you sell the family silver? Bharat Petroleum Corporation Limited (BPCL) which is making handsome profits, comes under this category.<\/li>\n<\/ul>\n<p><strong>Case of loss-making units<\/strong><\/p>\n<ul>\n<li>Loss-making PSUs certainly merit privatisation \u2014 but no one would buy them with their huge debt and employee liabilities.<br \/>\n\u2022 The government may even have to pay the buyer, as it happened in the case of the Delhi Discom privatisation.<br \/>\n\u2022 Even then it may be worth it, since privatisation will stop fiscal flows to these PSUs.<br \/>\n\u2022 Alternatively, there is the exit route through the new Insolvency and Bankruptcy Code.<br \/>\n\u2022 Privatisation is not a default option; rather, it is resorted to only out of extreme necessity.<br \/>\n\u2022 As World Bank consultants said on the Delhi Discom privatisation: \u201cPrivatization is resorted not just when the firm makes losses, but only when the physical performance is so bad that the PSU becomes a political embarrassment to the Government.\u201d<br \/>\n\u2022 This may explain the hesitation to privatise some of the largest loss-making PSUs \u2014 Air India, the BSNL and MTNL \u2014 as the embarrassment threshold may not have been reached as yet.<\/li>\n<\/ul>\n<p><strong>Meeting fiscal targets<\/strong><\/p>\n<ul>\n<li>The Finance Minister\u2019s disinvestment target of a little over a lakh of crores for the current fiscal has to be met.<br \/>\n\u2022 It is this fiscal requirement that now drives privatisation. Let us revisit the question: Should profit-making PSUs be privatised?<br \/>\n\u2022 It is good to remember what former Prime Minister Manmohan Singh once said on the issue. He made the assurance that the government would not \u201cprivatise profit making PSUs working in competitive environments\u201d.<br \/>\n\u2022 That is, if the output price is a competitive price and you still make a profit, then you are efficient and the need to privatise does not arise.<\/li>\n<\/ul>\n<p><strong>Abolishing monopoly background:<\/strong><\/p>\n<ul>\n<li>The case now being the monopoly cartel of the oil majors, BPCL, Indian Oil Corporation Limited and Hindustan Petroleum Corporation Limited \u2014 with the autonomy given being used for monopoly pricing, then your profit is no longer an index of your efficiency.<br \/>\n\u2022 In that case, privatisation will still bring in benefits of the efficient operation of private sector through reduced costs.<br \/>\n\u2022 Examples of PSUs that made monopoly profits and still inefficient were Coal India and Indian Airlines (IA). For IA, there was poor punctuality, high staff-to-plane ratio, high operating costs and overall customer indifference.<\/li>\n<\/ul>\n<p><strong>Scope for improvement:<\/strong><\/p>\n<ul>\n<li>The BPCL is not inefficient but its privatisation still offers scope for improvement.<br \/>\n\u2022 When a company such as this has never faced any serious competition, it is impossible to even discuss the issue of efficiency or inefficiency.<br \/>\n\u2022 There is no comparable firm in the private sector to benchmark it with.<br \/>\n\u2022 However if one looks at just about any public sector company in India, it is impossible to argue that the BPCL can be an exception.<br \/>\n\u2022 Over the years, the financial performance of oil marketing companies has undergone a bureaucratic process called \u201cadministrative price mechanism\u201d.<br \/>\n\u2022 All one can say is that the oil PSUs have been allowed to make profit; if one can use The Economist\u2019s phrase again, they can be called \u201callotted millionaires\u201d.<br \/>\n\u2022 On the non-financial performance side, it would be difficult for the BPCL to show what innovations it has implemented over the years either in marketing or refinery operations.<\/li>\n<\/ul>\n<p><strong>Accompanied by competition<\/strong><\/p>\n<ul>\n<li>There is no point in converting a public monopoly to a private monopoly; it will only result in inefficiency being replaced by private profits.<br \/>\n\u2022 Privatisation must be accompanied by competition in the post-privatised scenario.<br \/>\n\u2022 However, the government will face a dilemma.<br \/>\n\u2022 If you want a high price, you must allow a monopoly situation post-privatisation, and if you want competition and low price for consumers, you must be content with a modest sale price, as the post-privatisation valuation of the firm critically depends on the market structure post-privatisation.<br \/>\n\u2022 If that is to be competitive, other PSU national oil companies such as the IOC and HPCL should also be privatised.<br \/>\n\u2022 There is also no issue of national security for downstream oil firms. Oil marketing companies, even if they are not in the public sector, can be made to own strategic petroleum reserves as in most of Europe and by the government itself as in the U.S.<br \/>\n\u2022 Thus privatising the BPCL does not compromise India\u2019s national security.<br \/>\n\u2022 Similarly, LPG and kerosene subsidies can be handled by direct benefit transfer, which is already in vogue in the case of LPG.<br \/>\n\u2022 There is an argument advanced in the case of the BPCL: that the government paid about \u20b9622 crore in today\u2019s money to acquire it, while it now has a market value of around \u20b985,000-1,15,000 crore.<br \/>\n\u2022 How did \u20b9622 crore balloon into this amount even after the time value of money adjustment?<\/li>\n<\/ul>\n<p><strong>Conclusion:<\/strong><\/p>\n<ul>\n<li>After all, in the interim period of many years, the firm would have invested, out of retained profits, and also generated further monopoly profits for dividends which explains its increased value.<br \/>\n\u2022 This is not by its virtue of being a PSU. The BPCL is not a golden goose. It may be an ATM.<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Relevance: Mains: G.S paper III: Economy Context: There seem to be broadly three positions with respect to the privatisation of<\/p>\n","protected":false},"author":1,"featured_media":3299,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[123,42,43],"tags":[392],"class_list":["post-5358","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-current-affairs","category-general-studies-iii-technology-economic-development-bio-diversity-environment-security-and-disaster-management","category-indian-economy","tag-union-public-service-commission-upsc"],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/5358","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/comments?post=5358"}],"version-history":[{"count":1,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/5358\/revisions"}],"predecessor-version":[{"id":5359,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/posts\/5358\/revisions\/5359"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/media\/3299"}],"wp:attachment":[{"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/media?parent=5358"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/categories?post=5358"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/triumphias.com\/blog\/wp-json\/wp\/v2\/tags?post=5358"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}