PPP

With regards to privatizing certain strategic sectors like Defence and Railways- often government maintains the stance that it is technically not "Privatizing" the aforesaid sector(s). This is because the ownership is separated from operations/management. Question is- as an investor, its a natural expectation to find place in ownership (eg- Member of Railway board etc) and to take strategic decisions that will impact his investment and see to it that he gets rich dividends- how can we expect huge investments by industrialists if we deny them a place in ownership?

The question is good. Indeed, that is one issue that is plaguing the privatization of the PSUs and other govt organisations. The output of an organisation depends on two type of interventions.

1. Managerial and policy interventions.

2. Operational interventions, where one can tweak to some extent to make it deliver better.

The second one is basically improving the efficiency, while the former is about policy decisions. Both lead to change in the delivery.

A thumb rule says that, the badly managed and inefficiently run govt organisations can be tweaked to improve upto 30% efficiency by just making changes in the OM. Rest will need policy intervention.

Can you illustrate it with an example sir?

Let’s take the electricity boards.

1. They just don’t collect the money from the customers, upto 30%. This collection doesn’t require policy change. It can be done will effect billing and disconnection drive.

2. How and whom they will purchase the power, and at what tariff they will sell etc are policy decisions!

Now, if i am an investor, i have 2 options:

1. I take over the part 2, make it work better, and for that i charge a commission. I say that, for every extra rupee earned, i will get 50%! This is called NOT privatization! This is called as 'outsourcing the operations (O&M). In this i need to invest a little, but very little, may be for communications drive, more vehicles, more men in the starting for disconnection etc.

2. Now, if i go for other option, where i want the control of the mgmt, that is called as "privatization', where the investor takes stakes by buying the shares! He becomes the owner! Here he is able to change the policies. He invests, takes risk and own up.

The differences between the two are as below:

1. In shareholding, you control the entity, as much as share you have! If you take 51%, the policy is yours! You control the board! Tomorrow you can even decide to sell it off! This is private ownership, thus privatization!!

2. This is called as OM outsourcing, where the private company invests very less and arbitrages on the inefficiency! It makes it efficient and charges for that, normally a part of the extra revenue. This is strictly not privatisation, as the company is still with govt, safe.

“Just by the sheer size of some of our sectors, like say- Railways. The auxiliary sectors like O&M- it still is very lucrative for the private investor” - is that true?

Yes, as much inefficient its run, its lucrative! Because, your whole profit depends on how much improvement you can bring it!! In electricity sector, the loss is revenue is 30%! Imagine he makes it better, and charges 15% as his fees! If the annual demand is say 1000 croes, then earlier only 700 crores will be collected. Now, 300 crores will be additional revenue. So 15% will mean 15 crores! 😊

Okay, but in turn it will be borne out of customer's expenses right? for eg- Management of Railway stations the better services they provide- the profit will be extracted from say- platform tickets them? Perhaps another section will be added to the bill of railway tickets? Isn't the notion of privatization for public means- they'll have to shell out more money?

not customers expense, but, from making the operations efficient. These are called as "O&M tenders".

But you said for every extra rupee earned he gets commission

That is a new ball game! That says, take over, make better services and earn money! Yes, 300 crores will give him 150 crores in which he gets 50% commission! That depends on how much the particular board or agency, allows small improvement without policy support. Both the public and private will bind themselves in an agreement what each will do.

Yes sir, small change from the electricity example. in former- its actually the loss / leakage customer paid it, but it there was siphoning off due to improper metering etc. but in latter case (Railways) its primarily about efficient public service delivery- I may be missing a point here though.

Yes, there is a difference. Railway example is in between. You need policy change too. That needs operations improvement too.

What comes to mind is the toll example sir. is it relevant to our discussion?

Yes, its OM tender. The charges are fixed by the govt.

They transfer the ownership after earning whatever amount they and the govt settled on

yes, BOOT basis. These are different models of private-public partnerships!! 😊 They won’t ask you in-depth!

Another one is where, u invest upfront and then govt pays you back! Eg: roads. They make, and govt pays them back, not thru tool, but a fixed amount every year! Called as annuity!

The sum and substance is:

Private person invests as he has surplus and govt is in deficit. And how govt pays him back is the question!

There are various ways:

1. Give him managerial control

2. Share revenue

3. Allow him to make extra money which was not there earlier (toll)

4. Pay him back in instalments (annuity)