T N Ninan: Creating new winners

Twenty and more years ago, the mantra was: If the government or public sector cannot get the job done, hand it over to the private sector. And who is to argue that this approach has not worked? We only have to look at the private airlines, phone companies, private banks (or at least some of them), and the post-privatisation record of the metals companies (aluminium, copper and zinc) to accept the broad conclusion that in open competition the public sector comes off a poor second-best, and that the consumer is best served when private players are allowed entry. This is so even when private companies have not excelled in the quality of their service (like the phone companies), or if many of the airlines have gone belly up (that should be taken as proof of a competitive market).

This fairly straightforward narrative has now changed. Because the flip side of the story about bankrupt government-owned banks is private borrowers. As the figures for the banks’ non-performing assets climb remorselessly from one miserable quarter to the next, and as the requirement of additional capital needed by banks soars to quite simply impossible levels, India’s private sector must surely have questions to answer. However impecunious the government-run power distribution companies may be, and however much bankrupt companies like Air India may have borrowed, they are not the reason for the banks’ troubles. Everyone knows that, at the end of the day, the government will pick up the tab and the banks’ money is safe. The problematic debt is private debt. And it is not just the communists who note that if the banks are in trouble, it is not primarily because of farm loan write-offs.

You could argue that business is inherently risky, the upheavals in many markets over the past decade were not anticipated, and the perils of getting into long-gestation infrastructure projects were not fully understood. All of that would be acceptable as explanation if other questions did not intrude. People accused of grossly over-invoicing imports related to domestic projects argue in defence that their costs were the lowest; but that only raises questions about what others with higher costs were doing — were they creaming off even more? Those who bagged bank funds for highway projects on the basis of vastly inflated capital costs have similar questions to answer. Note also that the airlines say our airport charges are among the highest in the world; is that too on account of inflated project costs?

If we assume significant private corporate failure in all these areas, what are the implications for the future — especially (but not only ) for making infrastructure investment happen? If the nature of our political funding means that adverse selection remains a high risk, we can no longer argue simplistically that, if the government or public sector can’t do the job, call in the private sector. Which government banker will have the courage today to lend to a private highway project? What is the safety of the funds given for a power project if its power purchase contract is not worth the paper it is written on? Can the people bidding today to be chosen as long-term strategic partners for high-tech defence projects be trusted to deliver planes, missiles and tanks when the time comes — or will we simply have the grim joy of reading future reports by the Comptroller and Auditor General?

We need alternatives to the Air India kind of story in the public sector, and they exist. Especially if we can’t steer clear of mountebanks when choosing private sector entities for major projects, the essential challenge is to replicate the strong public entities created in the past, which (for a while at least) set performance benchmarks: Entities like National Thermal Power Corporation, Delhi Metro Rail Corporation, Indian Dairy Corporation/Gujarat Cooperative Milk Marketing Federation and of course the Indian Space Research Organisation. If in decades past we could find the people capable of setting up such strong public institutions, surely we can to do it today.

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