Nifty99000 100%

Sensex99000 100%

Article rating: 5.0
Article rating: 4.5
Article rating: 5.0
Article rating: No rating
Article rating: No rating
Article rating: 3.0
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: No rating
Article rating: 4.3
Article rating: No rating
Article rating: 3.8


Policy clarity needed to allay fears over privatisation

Author: IANS/Wednesday, May 16, 2018/Categories: Government

Policy clarity needed to allay fears over privatisation

By Taponeel Mukherjee

Public opinion on privatisation ranges from proponents who say it increases efficiency to opponents to fear it will lead to higher charges. As we evaluate potential policies regarding privatisation in India, it would be useful to look at the specific asset and policy features that can help create an efficient privatisation process.

The type of asset being privatised needs careful evaluation regarding the competitiveness of its industry. Assets held by public sector firms in India range from those that operate in highly regulated markets tending towards monopolies to those that are in more competitive sectors.

For starters, it would be prudent to privatise assets in competitive industries. The competition will mean that the pricing of the service delivered will be primarily determined by market forces, thereby reducing the fear that prices will go up disproportionately for the public. A relatively competitive environment for pricing also ensures that the asset buyers have the incentive to innovate to deliver value and create profits for themselves. 

Another point that deserves attention is that certain assets, specifically within infrastructure, are better suited to privatisation than others. In a study titled "The Lessons of Long-Term Privatisations: Why Chicago Got It Wrong and Indiana Got It Right", Aaron M. Renn lists the features that make an asset a better privatisation candidate.

Two of the features that merit discussion are the "tangible capital" asset feature and the degree of "overdetermined form" feature.

An asset is better suited to privatisation when its primary value is incumbent upon its "tangible capital", as opposed to what Renn describes as "intangible economic rights". Every asset will have some degree of "intangible economic rights" associated with it, but those assets that have less of the intangible rights are more suited for privatisation.

As Renn correctly points out, an airport is more of a tangible asset that is better suited to privatisation than, say, parking rights around cities. A "tangible capital" asset is more straightforward to value, thereby leading to a consensus regarding privatisation value.

Assets with a high degree of "overdetermined form" also make for better privatisation candidates. A high degree of "overdetermined form" means merely assets built for a specific purpose with little or no optionality to change their use. Such assets are better privatisation candidates since their use is clearly defined, and the alternative opportunity costs are low or non-existent.

A clearly defined purpose is essential for framing policies around valuation to avoid any future debate regarding historical estimates. For example, a toll road can be used only as a toll road since it is a distinctive asset as opposed to a building that can potentially have multiple uses such as retail, hospitality and office purposes. An asset with various uses is more challenging to value leading to possible complications further down the road. 

It is also vital to use sales proceeds from privatisation to create new assets and not to finance government consumption expenditure, as such use may lead to potential sub-optimal use of the money. To elaborate, it is essential that the policy clearly defines cash usage from the privatisation sales proceeds.

In an ideal scenario in an infrastructure deficit country such as India, the prime focus of asset privatisation must be to use the sales proceeds to create new assets - and they must be in the same sector as the privatised asset. So, airport privatisation must be used to expand airport infrastructure. Discipline around cash flow management will be critical for the privatisation policy to deliver results.

Fears around privatisation emanate from unfortunate experiences of the past. A clearly defined policy that lays out the capital use from the sales proceeds to create infrastructure in India will help allay fears around privatisation. It is important to realise that non-tax revenues from privatisation can be a catalyst for world-class infrastructure. 

Print Rate this article:
No rating

Number of views (242)/Comments (0)

rajyashree guha


Other posts by IANS
Contact author

Leave a comment

Add comment



Ask the Finapolis.

I'm not a robot
Dharmendra Satpathy
Col. Sanjeev Govila (retd)
Hum Fauji Investments
The Finapolis' expert answers your queries on investments, taxation and personal finance. Want advice? Submit your Question above
Want to Invest



The technical studies / analysis discussed here can be at odds with our fundamental views / analysis. The information and views presented in this report are prepared by Karvy Consultants Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Consultants nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies is required to disclose his/her individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Consultants Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures or other derivatives related to such securities.

Subscribe For Free

Get the e-paper free