PRIVATIZATION IN INDIA : ISSUES AND

EVIDENCE
T.T.Ram Mohan

Visiting Faculty, Finance and Accounting Area

Indian Institute of Management, Ahmedabad

ABSTRACT

The proposed research is intended to survey the process of privatization in India and
assess its impact on the Indian economy. The central issue we will address is the
impact of privatization that has taken place so far on profitability and performance of
PSUs.

Going beyond this, we will attempt to understand what explains the impact of
privatization on performance. Is it the use of market power by oligopolistic firms
whose pricing power had been constrained under government ownership ? Is
performance bought at the expense of labour through extensive lay-offs so that what
we see is essentially a transfer from workers to shareholders ? Or are we confusing the
impact of privatization with the more generalised impact of deregulation in the
economy, which in itself could spur efficiency ?

The research output will comprise the following:

1. A survey of the literature on privatization, particularly with respect to less

developed countries.
2. A review of the role of the public sector in the Indian economy, and the process
of economic liberalization and privatization in India upto this point.
3. Impact of privatization on firm performance.
4. Explanation for the impact of privatization

5. Assessment of mechanisms of corporate governance in India.

COST AND TIME OVERRUNS IN PUBLIC

SECTOR PROJECTS
Sebastian Morris, Institute of Public Enterprise, Hyderabad, now at the Indian
Institute of Management, Ahmedabad

ABSTRACT
Delays and cost overruns in Public Sector investments can raise the capital-output ratio in
the sector and elsewhere, bringing down the efficacy of investments. Yet there are no
estimates of the delays and cost overruns, and of their opportunity cost. This study arrives
at rough estimates of the delays and cost overruns, and the opportunity cost in terms of
the extra `capital X time' that is used up. Cost overruns (at 80%) and the extra `capital X
time' incurred (about 190%) are very large; even after removing the increase due to
inflation! The reasons for the same are also identified and rated. Factors internal to the
public sector system and Government largely account for the delays and cost overruns:
Poor project design and implementation, inadequate funding of projects, bureaucratic
indecision, and the lack of coordination between enterprises. Appraisal by the
Government very often is devoid of meaning when the emphasis is only on the form of
the project proposal rather than on its content- a tendency quite usual in bureaucracies.
Since the public enterprises particularly those in the core sector have large dealings with
each other, a `vicious circle of delays' has been built up. The politically expedient
tendency to take up large numbers of projects and short fund them all, except those with
the very highest priority, is perhaps the most important factor in delays. The
Government's ad hoc approach in according high priority to certain sectors- oil and
natural gas, and petroleum- while perhaps overcoming the problem in these sectors have
compounded the problem elsewhere, particularly in the infra-structural areas- railways,
coal and steel.

Copy of paper "Cost and Time Overruns in Public Sector Projects", in the Economic and
Political Weekly, Nov.24, 1990, Vol. XXV, No.47,pp.M-154 to M-168.

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GEB (Gujarat State Electricity Board) Reforms:

A Note on Regulatory Strategy and an
Approach to Privatisation
Sebastian Morris

WP No. 99-11-04

November 1999

Indian Institute of Management,Ahmedabad

ABSTRACT

True reform and restructuring of any state electricity board in India would have to
start with the consumers' interest. The agency failure in nearly all SEBs, that has
resulted in enormous leakage of revenue from the system, would have to be
addressed first. This would call for privatisation of distribution, and change in the
institutional mechanism for the administration of the subsidy. The present
mechanism creates opportunities for graft and rents, so that resistance to change
from within the SEB is likely to be large. Rather than the detailed regulatory
mechanisms, which are being pushed by the Central Government and the regulators,
light and price-cap type regulation would suit India better. The potential for market
competition in generation is quite high. A model plan for change is put forward for
the Gujarat State Electricity Board, which is quite general and could easily apply to
other SEBs like Maharastra, Karnataka, Delhi, Tamilnadu, Andhra Pradesh with
significant numbers of bulk consumers. A complete seperation of distribution from
generation is not necessary, nor desirable. The potential of some linked generation
assets with the distribution companies lowers the demand and supply risks, which
are likely to loom large in the initial years of market and price formation. Exisiting
IPP contracts could be extinguished and a method to carry out the same is
suggested. The danger of mounting regulatory risk, either shutting out private power
production, or resulting in massive tariff increases taking place are real. There is an
urgent need to consider measures similar to those suggested in this paper.

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