[A-List] India: privatisation mania

["Michael Keaney" <michael.keaney@xxxxxx>]

States add impetus to Indian privatization
By Indrajit Basu
Asia Times, December 3 2002

KOLKATA - India's divestment minister Arun Shourie is not the only official
in India facing problems with divestment. So, too, does Chandrababu Naidu,
the chief minister of the state of Andhra Pradesh, one of the country's most
progressive. While Shourie, though, has been struggling over the past four
months to obtain consensus among a few bickering but important ministers
within his Bharatiya Janata Party, to make his divestment plans go through,
Naidu faces flak for carrying out privatization too aggressively.

India's divestment story is strange. Ever since August, the divestment
minister, along with the country's prime minister, Atal Bihari Vajpayee, his
deputy, and the finance minister, have been trying hard to get the critical
assent of three other ministers - defense, oil, and coal and mines - to
proceed with the divestment of the federal government's stake in state-owned
companies. While publicly all the dissenting ministers have said that they
supported the country's divestment policies, they continue to pose hurdles,
which has resulted in little federal divestment activity in the past few
months.

But even as the federal government dithers over divestment, a few states,
such as Andhra Pradesh (AP), Karnataka, Punjab and Rajasthan are going ahead
with their own divestment plans. And that is making quite a few other states
follow suit.

Progress to date
Andhra Pradesh, the first state to kick off its divestment process, has
divided its program into two phases. The first phase, which started this
year, has already raised over US$31 million through the sale of five
companies owned by the state. In the second phase spanning four years from
next year, AP plans to raise another $31 million.

Following AP's successes, three other states, Punjab, Karnataka and
Rajasthan, have initiated their own divestment program, though they have not
progressed as far as AP.

For instance, after AP, Karnataka is the most aggressive state on
divestment. Until March 2002, of the 85 companies owned by the state, 39 had
shown losses worth a total of $74 million. Karnataka, which also plans to
carry out divestment in phases, has identified 20 companies that are to be
sold or shut down, and in the second phase another 19 will be selected.
"Soon Karnataka will have just two types of state-owned companies; those
that have been divested, or those that have been shut down," said S M
Krishna, the state's chief minister.

The third state that has taken up divestment aggressively is Punjab.
According to its chief minister Amrinder Singh, the state is already in a
debt trap and cannot afford to run 65 of the 74-odd companies under its
fold. These 65 companies have accumulated losses close to $300 million.
Punjab has set up a separate directorate of divestment and has already
identified six companies for "fast track" divestment.

Similarly, Rajasthan has taken its first step. Through a committee set up
last year, the state has identified 18 companies, which are expected to go
to the block soon.

In four other states, Tamil Nadu, Uttar Pradesh, Himachal Pradesh and Madhya
Pradesh, some concrete steps, like the setting up of a divestment
commissions, have been taken. Then, there is a third category of states,
like Assam, Goa, Kerala, Maharashtra and Manipur, which have started
thinking about divestment, but haven't yet started acting.

And finally, there is the fourth category of states, Haryana, Gujarat,
Delhi, Orissa and West Bengal, where one or two stray sales have taken place
recently, but no comprehensive program has been put in place.

According to India's divestment ministry, at an all-India level, of the
835-odd enterprises in 19 Indian states, in which the state governments (and
not the federal government) have either majority stakes or controlling
interests, 240 have been identified for divestment or closure. And, of these
240 companies, 121 have already begun the process - already 25 companies
have seen divestment and 67 have been shut down.

A significant feature of India's state-level divestment is that contrary to
"non-economic" logic - like the country's security issues and the creation
of monopolies - that the three federal ministers have cited in justifying
their reservations on federal divestment, pure financial logic dictates
divestment by the Indian state governments.

For instance, the aggregate losses of the companies (about 40 of them) that
continue to be owned by the state of AP are over $410 million, and AP will
need to pump in $49 million a year for the next six years to stop them from
going under. Clearly for AP, which runs a deficit budget - excess spending
over revenues - of $1.5 billion a year, funding sick companies is a luxury
that it can ill afford.

Pradeep Baijal, an official in the disinvestment ministry, says that sooner
or later financial compulsion will force almost all states to embrace
disinvestment. For companies owned by states are a bigger drain on the
states' finances than they are on the federal government's finances. For
instance, the 835 companies that are owned by state governments have
investments of $35 billion. Of these 337 are loosing money heavily - with
aggregate losses of over $4 billion until March 2002, and 166 are shut owing
to some problem or other.

Moreover, even as state government-owned companies are sucking in cash, the
finances of the states are worsening. For instance, the aggregate deficit of
state governments rose from $4.58 billion in 1994 to close to $20 billion in
fiscal year 2001-02. "Most cannot afford these units any longer," said
Baijal, adding, "The realization that divestment is the way out cuts across
the governments of most Indian states."

Reports suggest that state level divestment has drawn an encouraging
response from buyers, including bidding from foreign companies as well as
multinationals such as Unilever Group and Proctor and Gamble. For instance,
about 50 bidders reportedly came forward to take a slice of the five
companies that AP sold off in its first phase. And Punjab Tractors - a farm
equipment maker, the first company that the Punjab government plans to put
on the block, has already attracted bidding interest from foreign companies
such as US-based John Deere, France's Renault and the Dutch major New
Holland Tractors.

Clearly, despite the contraction of the federal government's much-publicized
divestment plans, India's privatization process is continuing at state
levels: it's now up to the buyers, both local and foreign, to respond.