The government’s initiative to privatise state-owned firms in the coming years, is one of the most ambitious proposals to emerge from India’s recently announced Union budget. This is a significant step forward in India’s reform efforts to achieve long-term, sustainable development.
“The government will be less active in the business of business,” as Prime Minister Narendra Modi recently said, asset monetization and privatisation would empower Indian people, improve India’s infrastructure, and increase economic performance. Many countries have embarked on a privatisation journey since the 1980s.
Proponents of such an agenda argue that it improves the efficiency and competitiveness of businesses and industries, thereby benefiting customers. On the other hand, critics claim that privatisation will result in job losses and, in some cases, increased public costs. There is no one size fits all approach to privatisation.
However, there have been numerous success stories in other countries that show how privatisation benefits long-term growth and survival of companies as well as the economy, and the Indian government should be commended for its strategy. Prior to its privatisation, Japan’s national railway system, Japanese National Railways (JNR), was losing money, which began in 1987.
The business was ultimately divided into six regional passenger rail companies and one freight rail company (known as the ‘JR companies’) as a result of this initiative. JNR’s privatisation is generally considered a success more than three decades later. The majority of Japan’s railway network is not subsidised by the government, and fares have remained relatively unchanged.
The three top regional JR operators were profitable prior to the COVID-19 pandemic. After privatisation, railway companies have been able to evaluate their capital spending and business growth strategies, with many Japanese railway companies growing into new fields such as real estate, supermarkets, and hotels.
Asset recycling is another example of privatization’s benefits, the government sells existing infrastructure assets to the private sector and invests the proceeds in new ventures or long-term investment funds. This is especially critical as countries around the world try to recover from the pandemic.
India recently announced a national asset monetization pipeline to help pay for much-needed infrastructure and social programmes. Take Australia, for example, which has long been a pioneer in asset recycling. The federal government offered substantial additional incentives for state governments, in order to reinvest asset disposal proceeds in new projects as part of the country’s asset-recycling initiative, and aided in the launch of a number of major projects totalling over a 15 billion in new infrastructure investment, including the Sydney Metro train project.
Asset privatisation has also been used by Australian state governments to achieve long-term balance sheet stability and debt relief. When the New South Wales state government sold 51 percent of its stake in the WestConnex toll road in Sydney, CPP Investments was part of a group that bought a piece of it.
The sale netted the government a 9.3 billion, with 7 billion going to a new long-term state investment fund, to pay down debt and fund community programmes and facilities projects. The state government of New South Wales is now looking to sell its remaining interest in WestConnex, with the proceeds going into the state’s investment fund and allowing for potential infrastructure projects, that will help the state recover faster after the pandemic.
As previously mentioned, many people are concerned that privatisation would result in job losses. Various study studies from the last 20 years have shown that corporate restructuring exercises after privatisation resulted in job losses at first. However, once privatisation plans were fully enforced, new entrants to these markets boosted labour demand and, as a result, overall unemployment was reduced.
Privatization means that companies are more competitive, providing an atmosphere where they can expand, invest, and create jobs well into the future, by allowing the private sector to take over the heavy lifting, raise new capital, and improve business performance.
Another argument against privatisation is that customers would have to bear higher prices. However, privatisation is often followed by market deregulation, which results in price reductions due to increased market competition. The telecom deregulation that many countries have implemented is a good example. After several years of negotiations, the government of Hong Kong completely liberalised the telecom industry in 2003.
Customers saved over 3 billion on foreign calls within the first few years of deregulation, according to estimates. Hong Kong’s telecom industry is now one of the most dynamic in the world. It delivered some of the world’s most competitive mobile service contracts in 2020, according to the International Telecommunication Union.
