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The US treasury market reaches breaking point

The US treasury market reaches breaking point

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Skip Navigation LinksHome :: Back Issues :: Half-hearted privatization

September 2000

Half-hearted privatization


After the BJP-led coalition came to power last year, prime minister Vajpayee set up a new department of disinvestment and placed a young, telegenic lawyer, Arun Jaitley in charge.




       
Air India:a target for Virgin or British Airways?

The first state company, Modern Foods, was sold to a Unilever subsidiary early this year and the government announced that Air India and Indian Airlines, the international and national carriers, would be privatized. The markets were enthused.
Soon after, cracks began to show. Ram Naik, a BJP government, argued that the petroleum and oil companies (under his charge) were strategic industries and should stay under government control. The sale of shares in Indian Oil Corporation, India's biggest oil company, which had been scheduled for March, was shelved. Another minister, Manohar Joshi, opposed divestment of the government's shares in Maruti, India's biggest car company and a joint venture with Suzuki. The telecom minister, Ram Vilas Paswan, has reportedly put his foot down over further divestment in MTNL and VSNL, the telecom monopolies.
A much-anticipated cabinet meeting on June 23 cleared the sale of around 19 companies and approved the sale of 14 others, but Maruti, IOC, VSNL and MTNL were not on the list. Says Shanti Ekambaram, vice president at Kotak Mahindra Capital, a Goldman Sachs affiliate: "There are certainly no crown jewels there." Naina Lall, senior vice president, investment banking, Morgan Stanley, adds: "A large part of India's old economy is under government ownership and needs restructuring. That cannot happen unless the government goes below 51% in the big oil, gas and telecom companies."
Stonewalling by obstructive ministries has clearly ruled out any big ticket privatization for now. Pradip Baijal, secretary in the Department of Disinvestment, says that the government does not think the petroleum companies are strategic but in any event, they can only be privatized after two years when the administered price mechanism, a cross-subsidy method, will be abolished.
The government has, in principle, decided to go down to 26% in non-strategic state companies (excluding defence, atomic energy and the railways), he adds. But it will use its discretion in cases where the presence of the public sector is required as a countervailing power to private monopolies or where the regulatory mechanism is not good enough. "The government could retain a golden share for a short transitional period," he says.
The government's strategy seems to be largely guided by political expediency. It shuns the suggestion that an independent statutory panel be vested with chalking a strategy to reform state companies and ready them for the market.
Neighbouring Sri Lanka, which set up a public enterprise reform commission, has privatized its state-owned airline and telecom companies in recent years. Pakistan is reportedly pushing ahead with the privatization of state banks. In India over the last seven years the government sold shares in 40 companies, mostly minority stakes apart from Modern Foods. It has raised Rs182.8 billion, just over a third of the Rs610 million it has spent on public sector companies during the same period.
Few of the big investment banks were in the race when the government invited bids for global advisers recently. HSBC says it withdrew when it was undercut for a fee that was so low that, according to Euan MacDonald, head of investment banking, it "makes this an uneconomic business to be in." He adds: "An enormous amount of effort and time goes into this process and it makes sense only if the transactions are big." HSBC was reportedly told it had the mandate for ITDC, a hotel company, last year but eventually did not get it. Warburg Dillon Read short-listed buyers for IPCL, but the government put off a decision. Goldman Sachs and CSFB had the IOC mandate but the deal has been put off several times.
Morgan Stanley is the adviser to the Air India (AI) sale, ANZ - which sold Modern Foods - will advise Indian Airlines (IA), and Jardine Fleming has invited expressions of interest for Balco, an aluminum company.
International airlines such as Virgin and British Airways are likely to be in the race for Air India and a few Indian companies including the Tatas are reportedly keen on Indian Airlines. Both airlines are hugely overstaffed and will test the government's resolve to privatize. Says Baijal, "There will be tricky labour and political issues involved. But privatization in any country is a long and treacherous process." Arun Shourie, the new minister for disinvestment who took over from Jaitley in late July, says the bind of public finances will eventually push privatization through.
The longer the government delays the sales, the more money it will stand to lose. Private players are eating into the market share of Indian Airlines, Maruti, VSNL and MTNL. The share price of profitable oil and gas companies such as IOC and Bharat Petroleum are languishing while the loss-making companies bleed more tax-payer money.






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