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How Should Companies Be Privatized? The Case of VSNL

By Rajeev Mantri

Outlook magazine is carrying a cover story this week alleging irregularities in the privatization of VSNL under the NDA administration. The magazine has splashed the picture of Dr Arun Shourie, who was Disinvestment Minister in the NDA administration, with the caption “Arun Shourie’s Gift to the Tatas.”

I was very critical of this piece on Twitter and the writer of the story, Outlook assistant editor Saikat Datta asked me whether I would put together a blog post putting forth my views on the topic.

Mr Datta says at the beginning of the article, taking issue with the way in which the privatization was handled by the administration:

It gave away for Rs 1,439 crore a strategic public sector undertaking (PSU) flush with cash reserves, a monopoly over international and STD calls, infrastructure worth hundreds of crore and over 1,200 acres of land. Of this, 773.13 acres was surplus (a land bank meant for future expansion) and at least 387 acres should have come back to the government and the rest to earlier shareholders.

However, neither Arun Shourie as the disinvestment minister nor Pradip Baijal as secretary in the same ministry were paying much attention to this huge land bank circa 2002. The book value (when VSNL procured the land in the ’80s) of this 773 acres, distributed in Delhi’s prime Greater Kailash area and Chhattarpur, Pune, Calcutta and Chennai, was Rs 17.72 lakh.

Disinvestment, if defined as the strategic sale and transfer of management control of government-owned companies, is always a contentious issue. There are powerful political groups who believe it is important for the government to operate all types of companies in myriad industries, and are fundamentally and ideologically opposed to privatization, while others doubt the motives and intentions of those who would execute such a policy.

Simply put, privatization is a political minefield because those who benefit from it are a highly fragmented group while those who lose because of it are a highly consolidated and unified group.

The Outlook article then goes on to detail its allegations of how the Disinvestment Ministry showed favours to the Tata Group. Dr Shourie has responded to these in detail, pointing out factual inaccuracies (such as the canard that post-privatization VSNL had a monopoly over national and international calling) in Outlook’s claims and emphasizing how VSNL minority Shareholder’s rights were accommodated (given that it was a public company listed in India and the US) by providing it a National Long Distance licence without Entry Fee to offset the annulment of its licence monopoly on International Long Distance calling. Of course, an individual Shareholder’s rights and an entity’s contractual and property rights are a minor detail and don’t seem to interest Outlook.

It is also worthwhile referring to Pradip Baijal’s book on India’s disinvestment experience, Disinvestment In India : I Lose, You Gain. In the book, Mr Baijal calls the VSNL case an “ideal privatization:”

There are many principles of doing a good privatization deal. A public monopoly is much better than a private monopoly, the company being privatized should have a shareholding, so that the market could also evaluate the share price along with the valuers, the best in the market should be encouraged to bid, the deal should be in the favour of neither the seller nor the buyer – it should be in the public interest. All these parameters of a successful privatization were achieved in this case through a very tortuous process. VSNL was a challenging privatization.

Clearly, neither Dr Shourie nor Mr Baijal seem to have taken the matter lightly, as Outlook insinuates. Specifically on the issue of VSNL’s land bank, Mr Baijal writes:

Then came the ticklish issue of 770 acres of surplus land. The solution – separate the surplus land from VSNL. Also the sale proceeds of such land would go to the government as per pre-sale share structure.

Mr Baijal records in his book that the government obtained a per-share price for VSNL at 11 times earnings compared to pre-privatization market placements at a multiple of 6. In plain English, this means the government obtained a hefty premium when divesting VSNL. The Tata Group beat Reliance Industries in a closely contested bid for VSNL, and the land assets owned by VSNL had been ring-fenced from the sale of the VSNL’s core business of telecommunications.

Immediately after privatizing the company, international call rates fell dramatically due the dismantling of the monopoly enjoyed by VSNL, falling by over 90% over the next 4 years. This fact flies in the face of Outlook’s insinuation that the Tatas were given VSNL as a “monopoly”. Monopolies raise prices charged to consumers, they don’t cut them. In fact, it will be accurate to say that Outlook has published a blatant lie.

It should also be noted that the Tatas are yet to earn even one paisa from the surplus land owned by VSNL. Essentially, the issue of how the land assets, which has been ring-fenced and the government’s ownership protected, should be de-merged is yet to be resolved. As Dr Shourie notes in his reply to Outlook, the DoT is still considering how this should be done. Hence, Outlook’s headline proclaiming the “gift” to Tatas is misleading at the very least and malicious and libelous at worst.

Even the Tatas did not anticipate the severe competition in the market that ensued, says Mr Baijal in the book. Given these facts, is it reasonable to state that the Tatas got VSNL for a song because of incompetence on part of Mr Baijal and Dr Shourie?

The problem is Outlook has only consulted the government’s lawyers and accountants as part of its “investigation” and perusal of a “mountain of documents” to publish this latest breaking-news story.

As part of the due diligence for the story, Outlook could have also talked to an equity analyst at a brokerage firm covering the publicly-listed company to ask them how the acquisition has worked for Tatas – maybe that would have thrown some light on how lucrative a deal it was for the acquirer.

Entrepreneurs and business managers know what havoc a 90% drop in product pricing because of stiff competition can cause. It’s safe to say that Tata Group would have faced a serious management challenge to make the VSNL investment work.

Later in the chapter on VSNL, Mr Baijal opines:

VSNL’s balance sheet and share price movement shows that Tatas have been struggling to make this investment profitable, the government has lost taxes and BSNL has lost connectivity charges.  Perhaps an accountant would say that we could have earned more than 10 times the revenue if we had privatized VSNL as a monopoly and the other stakeholders, including the government, also would have continued to make huge profits.

Who is the gainer then and why did we privatize? The answer is not difficult to find and that is why the title of this chapter  highlights this as a perfect privatization. The biggest gainer of this privatization has been the consumer as with the withdrawal of a public company and a monopoly from the network, it was easy to increase the forces of competition. A public sector incumbent would never have allowed this process to go on smoothly.

What used to be the case in the telecommunications sector, is very much the case today in India’s coal and railways industry. Both these key sectors are government-owned monopolies – but they don’t have to be. All of us are paying higher prices for myriad goods and services because Coal India Limited is the only coal company in a nation with the world’s 5th largest coal reserves, and the Indian Railways enjoys a monopoly on railroad transportation in the world’s 2nd fastest growing economy.

Don’t have reliable power supply in your town or fed up keeping up with rising prices of everyday commodities? Chances are this is being caused at least in part by these two government monopolies.

We celebrate when the Indian Railways show a “profit” or Coal India has a record IPO. We shouldn’t because these companies are prospering at our expense, and are an “invisible” but substantial drain on the performance of our economy.

The Outlook article quotes at length from then Attorney-General Milon Banerjee’s Legal Opinion and the CAG report [PDF] on the VSNL transaction. The government’s lawyer or accountant would naturally find fault with what was done in the VSNL case – it is to be expected, because as Mr Baijal notes, it did cause a “loss” of revenue. Those institutions are correct, since their job is to watch out for the government’s interest. They do not speak for consumer interest, for the interest of the Indian citizen who is using those services.

For citizens, the VSNL privatization worked very well. Many Indians have relatives or friends in the US and other countries. Remember when the calling rates were over Rs 100 per minute in the 1990s? Since the monopolist VSNL was privatized and competition introduced, costs have collapsed to Rs 7 per minute – and we haven’t even adjusted for inflation.

The Government of India is not making huge profits and has “lost” revenue, but you and I can talk to our friends and relatives at a much lower rate. Remember in the 1990s when Internet access was sold by the hour and cost tens of thousands of rupees for a few hundred hours? That was a government monopoly making a “profit”.

Imagine what this entails for the coal and railways sector, and the cost each of us is paying for the gross inefficiency entailed by the unnecessarily monopolistic nature of these sectors. It takes very strong political resolve to privatize such monopolies because it involves upsetting entrenched special interest groups who benefit from the monopoly – and Disinvestment Minister Arun Shourie was able to do this work because of the political backing provided by Prime Minister AB Vajpayee, who held back the Swadeshis within his own party and made economic liberalization his mission. In fact, AB Vajpayee made Connectivity via telecommunications a cornerstone of his government’s agenda and the privatization of VSNL was a key component to achieve that target.

In 1991, Finance Minister Manmohan Singh too was able to liberalize the economy because of the political backing provided by Prime Minister Narasimha Rao.

It’s to these politically-difficult policy decisions and implementation that we owe our recent economic success. Since 2004, Prime Minister Manmohan Singh has had no backing from Sonia Gandhi, and the liberalization process has come to a standstill. Prime Minister Manmohan Singh’s government has also succeeded in redefining Disinvestment to mean Monetization.

Finally, we should evaluate whether the CAG report on the issue should be treated as gospel. As noted earlier, the government’s accountant would rather have that VSNL should have continued like Coal India and Indian Railways today – maximize “profit” for the Government, which is basically ripping off Indian citizens and consumers and hijacking the economy’s productivity gains.

Coal India and Indian Railways are government-created monopolies short-changing every single Indian consumer. They “profit” because the government doesn’t allow anybody else to take them on. They are like the student who comes first in a class of one person!

The CAG report on the recent telecom scam has received widespread attention and the political Opposition has used it to put the UPA administration on the back foot – but revenue maximization does not serve the consumer’s interest. Because of the government’s revenue-maximization policies, broadband Internet access and 3G have been priced out of the reach of most Indian consumers. Is this in the national interest?

The positive externality to the nation and the economy of widespread, cheap Internet and telephony connectivity is incalculable, and far exceeds the “loss” caused to the “national exchequer”. That’s what the government’s accountant, the CAG, won’t tell you.

Arun Shourie and Pradip Baijal were votaries of market competition and watched out for consumer interest while being in government. This was their “fault,  is effectively what Outlook’s analysis implies. Unfortunately, entrepreneurs and votaries of the free market are viewed with suspicion in India even today and motives are ascribed to their actions – something which Mr Baijal hinted at in an interview.

Outlook says in conclusion:

Tatas made the money, the nation remains shortchanged.

You decide – has “the nation” been shortchanged? What does ubiquitous, cheap telephone and Internet connectivity mean to Indians? Is making money a crime – all indications are the Tatas have earned the money the made (we’d have to talk to an analyst tracking the VSNL stock to be sure they have actually made any substantial money), given how competitive the industry became after their acquisition of VSNL?

Don’t Outlook and its publishers seek to make money by selling their magazine? Why make it sound like a sin?

The tone and tenor of the article written by Mr Datta is insinuative, sensationalized and provocative when it ascribes sinister motives to Tata Group and the NDA’s Disinvestment Ministry, and as I’ve tried to document, their thesis is quite baseless. Last year, Outlook earned our respect by being the only mainstream media outlet to report extensively on the Radia Tapes episode. It is disappointing to see this standard of journalism from the same team.

Sadly, for all the celebratory notions we have of how great our entrepreneurship spirit is, leading Indian news magazines like Outlook seem to bat for the government’s interest, not for consumers and citizens, and seems to consider legitimately earned profit to be a dirty word, just like India’s first Prime Minister.

We all know where that landed us.

UPDATE: Before writing this post, on a debate that ensued on Twitter, I made certain comments about the quality of India’s higher education system and the quality of liberals arts training offered at universities. These comments were not directed at any individual or institution, I was referring to the state of higher education in India in general.  It should in no way be construed as a personal attack on any individual. I have the deepest respect for India’s journalists (including all those at Outlook, who as I noted above were instrumental in ensuring a wide audience came to know about the Radia Tapes episode), most of whom have rendered yeoman’s service as the Fourth Pillar of our democracy.

UPDATE 2: Saikat Datta has responded to this post here. This blog’s reply to Mr Datta’s response is here.

6 Responses to How Should Companies Be Privatized? The Case of VSNL

  1. Rahul Anand March 19, 2011 at 5:47 pm #

    brilliant…loved the details with which you have explained each and every fallacy of the article…hope the magazine gets some knowledgeable economist on board rather than journos who can write provocative stuff

  2. Parth Sheth March 19, 2011 at 6:48 pm #

    Brilliant, brilliant…. The outlook article is one of the worst pieces of journalism this year.

  3. Surya March 21, 2011 at 8:47 am #

    Simply brilliant. Very well constructed arguments.

  4. Hitendra March 21, 2011 at 9:59 am #

    Brilliant article. It seems outlook made a great mistake this time. Shourie can never be compromised. And he is a tough fighter. I don’t how much Outlook was paid to publish such a stupid item, but will never succeed.

  5. Ragu Kattinakere March 23, 2011 at 12:24 am #

    Datta could not tell me in few sentences there was a scan. Simple, when there is none, it takes pages to cook up one! And you have superbly explained it to us.


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