What does privatization accomplish ?

Privatisation is the best way to resuscitate and rebuild weakened SLPEs.

Privatisation :

* Stops loss-making SLPEs from adding to government debt;

* Depoliticises SLPEs, remove governmental pressures for over-manning and the sub-optimal use of resources;

* Gives new owners a strong incentive to turn around failing SLPEs into successful businesses;

* Gives new businesses access to investment capital that government cannot provide;

* Raises more money for government through taxing former SLPEs;

* Expands an enterprise and an industry, in the long run creating more jobs and generating wealth for the country.

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How do we know it works ?

Privatisation is the great economic success story of the past 20 years, over which thousands of crores in government assets have been transferred to the private sector in more than 150 countries around the world. Experts, from every continent, credit privatization with reducing government debt and rebuilding both large and small industries, turning them from loss-makers into profitable, tax-paying enterprises.

Sometimes experts argue over the best way to privatize, but virtually all of them agree that privatization works, and is an economic necessity for most countries.

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Privatisation brought the United Kingdom from being nearly bankrupt in 1980 to its re-emergence as a world economic leader. Privatisation brought similar benefits to the vast majority of countries ranging from Eastern Europe to Africa to South Asia and South America. Fewer than a dozen countries have avoided privatization, and they are the world's most embarrassing economic failures - North Korea, Cuba, etc.

It works in rich countries like Britain and Saudi Arabia. It works in poorer countries like Tanzania and Sri Lanka. It works in the 'North', in Poland and Germany, and in the 'South' in Chile, Zambia and Bangladesh. It works in so-called 'socialist countries' like China, and so-called 'capitalist' countries like Singapore. Location or relative wealth, or literacy, or infrastructure do not matter - privatization works everywhere.

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Where has it worked in India ?

While India has been slow to privatise overall, there are still considerable success stories, some here in Andhra Pradesh. The former Mahindra-Nissan LC vehicle factory in Zaheerabad was privatised in the 1990s, becoming Mahindra&Mahindra. Under government management it lost money, and only produced four or five vehicles per day. After privatization it now produces more than 50 vehicles a day, and its turnover increased from Rs. 60 crores per year before privatisation to more than Rs. 240 crores now. Government did not have the resources to invest enough to let the company grow so fast - only the private sector could do that.

But capital investment and productivity is not the entire story. The company's private owners invested heavily in their own workforce. Salaries have increased by 150%, and workers are given training to keep upgrading their skills. Bonuses are commonplace and particularly hard-working and intelligent workers are sometimes given two promotions at once - there are no government-style waiting periods because the private sector bases its promotions and benefits on efficiency. Unions, management and workers collaborate closely, because they each know that more efficiency equals higher profits, allowing the company to pay more and provide better conditions for its workforce. Privatisation means cooperation, and everyone shares in the improvements that they make together.
 

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We're certainly not interested in selling national assets such as our priceless historical buildings, our many tourist attractions, or the Salar Jung Museum. But for enterprises and industries, yes indeed, private ownership is best. Businessmen, and businesswomen, have the investment money, the skills and the incentives to make a difference where government cannot.

Enterprises need to be efficient and competitive or they lose money, and the government cannot afford to subsidise such losses. And governments anywhere are not very good at running businesses. Whether the private owner is an individual, or a corporation with thousands of shareholders, peoples' own money is at stake, so they have a strong incentive to work night and day to ensure that their enterprise becomes successful and profitable. Government lacks those incentives, so government-managed enterprises fail to perform across the world.

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  Isn't it Immoral for Government to abandon these SLPEs?

There is nothing moral or immoral about manufacturing sugar, or weaving cloth or generating electricity. But there is something very wrong about doing a bad job and making other people pay for your mistakes. Government wants everyone to have the best services at the lowest possible prices, and since government is bad at running businesses, that job can only be accomplished by the private sector. Privatisation is government's responsibility, because nothing else can give you the services, the quality and the savings you deserve.

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   How does privatization change enterprises ?

Ultimately, privatization gives new life to an ailing SLPE. But initially, privatisation changes three things -- incentives, priorities and access.

* No one worries about economizing when they spend government money, but everyone worries about spending his or her own private money. So private owners and their employees have a stronger incentive to make their own enterprise succeed;

* Bureaucrats' top concerns are obeying elected leaders, keeping peace with the unions, and other concerns which are essential in government. But these are not the main priorities of business. The priorities of business are cot-efficiency, competition, and satisfying the customers. So, compared to businesses, SLPEs often suffer from interference or neglect. For private owners, the economic success of their enterprise is their top priority;

* Even when a SLPE is well-managed, cash-poor governments cannot give it the investment capital it needs for new equipment and staff-training. Private owners have better access to investment money to help the business grow.

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   How does privatization change whole economies ?

Privatisation can make poor economies richer, increasing development far beyond the immediate sectors being privatized. Basically,

* It reduces the economically-crippling government debt;

* It turns loss-making, tax-eating SLPEs into profitable, tax-paying businesses, giving government more money to spend on infrastructure, schools and hospitals;

* It provides goods and services more efficiently than under government management, generally resulting in better service and lower prices to consumers;

* It expands services using access to investment capital, so that electricity and other necessities are available to more people;

* It makes better-trained young employees, building up a national talent-pool which attracts more investment to Andhra Pradesh in many new and different sectors;

* Over time, it spreads share-ownership, letting more and more ordinary families share in corporate profits and build their own wealth;

* It convinces potential partners that Andhra Pradesh is a good place in which the invest their money, creating newer and bigger industries and more jobs.

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      But isn't it Government's Fault that SLPEs are under-funded and ailing?

Certainly. And government itself is under-funded and ailing because for so very many years it kept attempting to run enterprises which it could not manage efficiently. Privatisation means that we stop compounding earlier mistakes, learn from our errors, and set ourselves on the path to economic strength

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  But Can't the Chief Minister Crack the Whip and make these SLPEs perform?

Presidents and Prime Ministers in more than 150 different countries could not get their bureaucrats to run SLPEs efficiently. Over 50 years, governments have tried everything from incentives to threats and nothing worked. They tried communism, fascism, command economies, mixed economies and everything else. Government cannot run businesses as effectively as the private sector does. So it is asking too much of any Chief Minster to succeed where the rest of the world has failed.

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Worker buy-outs almost always fail. First of all, workers rarely own or can borrow sufficient money to buy the enterprise, much less to replace antiquated machinery. And they tend to be inexperienced in those areas in which businessmen specialise - borrowing money, issuing shares, insuring their company and marketing their products. Entrepreneurship is an unusual and demanding skill, and most workers - indeed most human beings - do not have that skill. So turning a company over to its workforce is often the cruelest strategy, because then the company dies a slow, lingering death as workers struggle to do something beyond their capabilities.

The same can be said of privatising companies to the current crop of cooperatives. Today these tend to be public sector enterprises, which have most of the shortcomings of other SLPEs. Of course, if cooperatives were converted into Mutually Aided Co-operative Societies and developed a proven track-record of commercial success, then they might well be equipped to rescue a former government-owned company.

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 Can we save our SLPEs by restricting foreign competition?

Yes, and you would not appreciate the results. Everybody produces one thing - we are teachers who produce education, or workers who produce products, or shopkeepers who bring up the goods we need. But everybody consumes many things every week - food, clothes, soap, cosmetics, electricity, television programmes and more. Sensibly, we consumers want the most for our money, so we encourage efficiency by purchasing the best products and services at the most affordable prices.

Everytime that government bans an imported good, or slaps a tax on an imported good to make it more expensive, it encourages inefficiency in one sector or another. If we create special taxes for foreign sugar, or foreign cloth, or foreign toys, we make consumers pay more, and make consumers subsidize the inefficiency of domestic companies that are not working as efficiently as they could. If you try that for one commodity, you penalise people who consume that Indian consumers will pay far too much for shoddy goods and the country as a whole will grow poorer and poorer without the improving effect of competition.

Instead, our lagging industries need to learn to compete, and that is not too difficult. Already India's finished garments and IT services and other products are appreciated the world over for quality, efficiency and competitive costs. Globalisation, in the form of World Trade Organisation reforms, are designed to lower foreign tariffs which were originally designed to protect their own inefficient producers from Indian competition. So markets. Where our productivity is strong, the new global trade rules will let us conquer foreign markets. Where our productivity is weak, we need to invest more, harder, and become more efficient at what we do. Considering that overseas Indians are among the most successful and best-respected business communities the world over, we clearly have the talent to succeed right here at home.

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Absolutely! And the sooner the better! Andhra Pradesh's government-owned enterprises have so far accumulated losses of RS. 1,894 crores. Those losses have to be paid for - either by your taxes today, or by future taxes to be paid by your children or grandchildren over generations to come. After only 54 years as a sovereign nation, we are mortgaging our children's future - to money-lenders. Only privatisation can halt this process.

Instead we need to stop our government-owned enterprises from bleeding us dry. And as government starts to save money, it will have more money to invest in better roads, in education, in better medical care and the other services we need. Also, as privatised companies become efficient and profitable, they will start paying taxes instead of consuming taxes, so they will help our state grow stronger.

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 Which SLPEs Should Be Privatised?

Our government should stop trying to compete with the private sector. Let our businessmen and businesswomen excel at providing goods and services, and let government do what it does best - governing.

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     Why Are Our SLPEs in Trouble?

Andhra Pradesh's SLPEs suffer problems for a variety of reasons, and they vary from company to company. But in general :

* Many are over-manned. Politicians and civil servants urged SLPEs to hire more people than needed, creating unrealistic jobs at the expense of the taxpayers;

* Many are under-managed. Government is less good than businessmen at ensuring efficiency, thwarting petty theft, and generally running a business properly;

* Many are under-capitalised. Our cash-poor government lacks money to buy new equipment and retrain workers, so SLPEs often cannot compete in the market.

* Some were badly designed and should never have been built in the first place. Usually these were 'gifts' from the central government or from foreign governments, and since nobody's government is very good at designing and running businesses, these never worked properly.

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 Why Do Our SLPEs Need Privatisation?

Because there is not other solution. Government cannot afford to keep subsidizing their losses. Even where SLPEs are profitable, government cannot invest enough money for them to expand, to create more jobs, and to spread their services to more and more citizens. It is pointless to argue that government should simply do a better job managing these SLPEs - government has neither the money, the skills nor the right incentives. Even in rich countries, government is bad at running businesses, and that is why wealthy nations like Saudi Arabia, Germany and Britain have privatized SLPEs - to let businessmen do the job properly.

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Most always, yes. When government privatizes, it scrutinizes prospective buyers to make sure that they have the money and the skills to run the business successfully. Government is more interested in seeing a SLPEs survive and grow, than in the amount of money paid by the buyers. Government wants to ensure that well-financed buyers, experienced in their various sectors, have requisite skill, finance and incentive to make a SLPE grow. So for the vast number of SLPEs, here and around the world, privatization has led to increased economic strength.

And in the even rarer cases where privatized enterprises fail, the government at least achieved the objective of stopping costly subsidies and slowing the growth of national debt.

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   Why Privatise Profitable SLPEs ?

Privatisation works for profit-making and loss-making SLPEs alike. Governments privatize profit-making SLPEs for three reasons:

* Governments get money from the sale of the SLPE which they can be better utilised elsewhere, retiring debt or building infrastructure;

* Profit-making SLPEs, once privatized, tend to grow even bigger with increased access to investment and skills. This increases employment and boosts tax revenues for government;

* Growing larger and more efficient, the privatized enterprise can often provide goods and services at even lower costs than before.

Profit-making SLPEs generally provide governments with small amounts of profit, especially considering the value of the assets. Government could often make more money by putting investment more in SLPE in a bank account than it gets by way of profits from SLPEs. This means that the assets are not being used efficiently. When the company is privatized and made to run efficiently, profits increase and so does the tax paid to government.

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 Does Privatisation Create or Destroy Jobs?

World Bank experts have studied privatizations around the world and found that, in the vast majority, employment increased - not decreased. This is not hard to understand - think how long it used to take for a new phone line before private operation were allowed in telecom sector and how long a new electrical connection takes even now. Andhra Pradesh has great demand for good services at affordable prices, so there is plenty of room for industrial expansion. That will require competent, hard-working competitive people.

When SLPEs are dramatically over-staffed, there is a short-term reduction in employment. That is only natural, since the enterprise needs to become efficient and profitable before it can start growing. But private-sector owners have invested their life-savings in their enterprise, and they have strong incentives to make it grow.

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 Is Privatisation a Donors' Conspiracy?

Hardly, Privatisation has worked so well, in so many countries, that we would be foolish not to participate in this highly successful economic strategy.

Today, Andhra Pradesh competes with states across India fro the domestic and foreign investment that all states need in order to grow. When potential investors look at South Asia, we want Andhra Pradesh to be their first choice. Privatisation offers them investment opportunities, attracting needed capital to Andhra Pradesh. Privatisation also means better services and facilities for everyone, reassuring investors that our state is a good home for their business. It is a policy where everybody wins.

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  Are Foreigners Buying Up India?

When a foreigner invests in India, his company comes under Indian laws, made by the Indian government, elected by Indian voters. He cannot, even physically, uproot a farm or a hotel or a factory and haul it overseas, nor would government allow it. When an investor selects a foreign location as a home for his money, he embarks on a lifelong partnership which benefits both himself and the place in which he invests. That is why we need to make Andhra Pradesh attractive to potential partners.

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 Won't Foreign Investment Let Foreigners Take Jobs from Us?

Not at all. When a SLPE is sold to foreign investors, they often temporarily bring in technical experts to revitalize that industry. And at the same time they train local people to replace those foreign experts as soon as possible. This makes economic sense for the owners, since it is less costly to hire a locally-based expert than to bring one from abroad.

And when very large companies invest in Andhra Pradesh, Telugu employees move up the corporate ladder and find that their skills are needed in other countries too. Take one look at the salaries commanded by top Indian IT experts in California - foreign workers have more reason to be scared of us than we have to be scared of them!

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 Can We Protect Consumers From Capitalists?

Government has a very real responsibility to act as a referee, protecting both the consumer and the investor, especially regarding utilities.

Generally competition removes most of the need for consumer protection. Tens of thousands of people sell shoes or paan or biscuits, so if we don't like one product we can shift to another. In these cases, the government has labour laws and tax laws and food inspectors, all of which are important. But mostly, every time we spend a rupee we vote in an economic election, and the companies that please us most tend to win.

It is different with utilities. We can hardly have ten competing electrical lines and ten sets of water-pipes connected to every house and office. So here, in particular, government needs to act as a referee. Government needs to protect the utilities consumer from unwarranted price increases, and to make sure that the investor uses some of this profits to expand services, as promised in his contract. But government also needs to protect the investor, ensuring that the government fulfills its own side of the bargain. Every country in the world which has privatised utilities makes sure that this job is undertaken by a special regulatory office with the full power and authority to protect consumers and investors alike.

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 What is Government's Role After Privatisation?

In the case of utilities, government remains involved forever, with its regulator ensuring fair-play for both consumers and investors.

In the case of other SLPEs, after privatization they are governed by the same state and national laws and regulations affecting similar business throughout Andhra Pradesh. So the PED's responsibilities end after a SLPE is privatized, but once the SLPE becomes a private company, it operates under the same labour laws, tax laws, environmental regulations, etc., as any other private firm.

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What Are the Procedures for Privatisation?

The Government of Andhra Pradesh uses a simple, transparent and straightforward procedure for privatizations that is accepted as best-practice by financial authorities, governments and investors around the world.

In brief, the Public Enterprise Department (PED) uses local and foreign business experts to analyse and evaluate a PSE. Then it invites PSEs invites bids while giving a detailed Information Memorandum, explaining what is for sale and on what terms from the prospective bidder Bids are invited in two parts (1) technical and commercial (2) price bids. Technical and Commercial evaluation eliminates potential bidders who lack the experience and/or the capital to run the business effectively. Price Bids are then opened in public, in front of all bidders who are qualified on technical and commercial evaluation. Since all bidders are by then certified as competent, the contract is awarded to the highest bidder.

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  How Can Privatisation Be Made Transparent?

Privatisations are made transparent in three ways :

* By opening financial bids in public, there is no question about how much is offered by each bidding company;

* By choosing the winning bid from bidders qualified in technical and commercial evaluation, based on financial criteria, the selection system is virtually automatic.

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 How Do We Know What a PSEs is Worth?

Estimating the value of anything is at best an educated guess. Ultimately, a PSE or a car or a sack of rice is worth no more than someone else is willing to pay for it. In privatizations, sale price is affected by many factors, including the state of the global economy, the reputation of the country and the state selling the PSE, and competition - in other words, investment opportunities on offer elsewhere.

In evaluation our PSEs, the DPE uses the best expertise possible, usually combining the advice of foreign advisers expert in their specific industrial sectors, together with to-level Indian expertise. In general, if the bids are all for roughly the same amount, it means that the evaluators were accurate in assessing what the private sector is prepared to pay.

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 Are Some PSEs Beyond Rescue?

Undoubtedly so, but fortunately they are fare. But since government is never very effective in running businesses, it takes businessmen to determine when a PSE is unable to survive. This is ascertained in two ways. First, it can be discovered when the DPE brings in private sector experts to assess and evaluate the PSE. Or it can be determined in the bidding process. If, for example, all competent bidders wanted to deploy the PSEs assets in another type of business activity, it would be fairly clear that the PSE has problems which cannot be overcome. In that case, Andhra's economy benefits by letting new owners use the assets to start a different kind of business.

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 Isn't Privatisation Painful?

From the moment we are born, almost all change is difficult. Nobody really enjoys change. And we would be lying if we said that privatisation is easy. It is not. Some workers lose jobs, particularly in the short-run. All workers are initially uneasy, facing new owners and new ways of working together. Changing the habits of a lifetime always entails some uncertainty and discomfort. But it must be done in order for our economy to grow, and for our children to be freed from debt and allowed to enjoy greater opportunities.

Government is very concerned about these changes, and wants to make the transition process as smooth as possible for everyone. So it offers the most generous VRS scheme affordable, and world experts credit Andhra Pradesh with designing the best retraining programmes for the unfortunate few who need new skills for a new career in the private sector. Building a strong new economy is not going to be easy, and government is determined to help at every step. The results will be worth the effort.

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