ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Privatising PSUs

You have argued in your editorial “Why Kill the Golden Goose?” (14 November 2009) against share sale of profit-making public sector undertakings (PSUs). The primary purpose of privatisation is always to place management control in private hands for better efficiency. Even though both public and private sectors have agency problems (agent acting against the interest of the principal), in the public sector it is acute. This is because in satisfying multiple objectives, public sector chief executive officers (CEOs) are able to trade off one interest against another and finally have their way, often satisfying only their self-interest and sacrificing public interest. Of course, translating efficiency gains garnered by private management into public interest by way of lower prices and better quality has to be done by proper regulation, which is no small task. This is because of the pervasive information asymmetry present between the regulated and the regulator, whereby the regulated entities can fool the regulator.

A share sale of a token 10% or so, without ceding management control is purely for fiscal reasons, and is not the best way to do it. For improvement in efficiency, the private sector should have 51% shares and management control. For monopolies, profit and efficiency are not coterminous. An inefficient firm can still make profits, like the oil PSUs did during times of high prices of their outputs. Similarly, a loss-making firm need not be inefficient, as the transport corporations in Tamil Nadu or the Mumbai suburban electric system can vouch. Their prices are abysmally low. That is why Prime Minister Manmohan Singh said, “Profitmaking PSUs in competitive segments will not be privatised” (emphasis added).

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