Making privatisation deliver

Privatisation is about getting more resources, and about increasing efficiency, right? Well, as Planning Commission Deputy Chairman Montek Singh Ahluwalia pointed out at an NCAER seminar on private-public-participation in the infrastructure sector, the government could always mop up more money, and at lower rates, than the private sector could—when this is done through cess, the amount is even free! So, the real issue, as Ahluwalia pointed out, is about increased efficiency, and therefore lower costs for users.

The record here, however, is mixed. In telecom, which is universally recognised as a great success, regulatory oversight (ironically, when regulators use the term, they imply under-their-watchful-eye!) has allowed telcos to earn profits of a few hundred per cent in the long-distance telephony market. Of course, the reason why no one is complaining is that, in the past, when public sector firms ran everything, tariffs were even higher and the service was inefficient.

Similarly, in the ports sector, which is generally held up as a shining example of things working out well, private firms are making a killing, thanks to a combination of curious government policy and regulators who don’t wish to rock the boat. The tariff notification of the Tariff Authority on Major Ports (TAMP) for the Nhava Sheva International Container Terminal (NSICT) in July last year is an eye-opener in this regard.

With an operating income of Rs 379 crore in 2004-05, the order tells us, and an operating cost of Rs 167 crore, the operator’s making a 56 per cent profit margin. Given the equity base of Rs 353 crore, the operator’s making a cool 60 per cent return on equity by a rough-and-ready method of dividing the profit by the equity. According to the order, this profit “indicate(s) an average additional surplus (above the 20 per cent on equity as allowed by the law) of 29 per cent ... this amounts to Rs 473.42 crore for the period 2000-01 to 2004-05”. What follows is even more interesting.

Since the earlier order that fixed tariffs was based on the traffic and income projections made by NSICT—it’s because the traffic projections were exceeded that the excess income got generated—the regulator says “our earlier Order of 2000 specifically states ... at the time of next review, the undue benefit will be set off against the future tariff”. So far, so good.

The regulator then says something quite curious: “The revised guidelines for tariff fixation recently announced by the Ministry, however, require only 50% of such benefit/loss accrued to be set off in the next tariff revision cycle (if the projections vary from the actuals by more than 20%)”. So, the NSICT gets to keep Rs 236 crore.

Another interesting feature in the NSICT case is that the royalty it pays to the port, Rs 46 crore in 2004-05, is considered a cost. This is extremely important in the current context since the new bids that are being made for ports (indeed, the same applies to airports like the Delhi and Mumbai ones) are all on the basis of revenue shares. So, if a bidder wins a bid after promising to share 45 per cent of his revenue, this revenue share in turn gets built into the cost and all that happens is that users get to pay vastly higher tariffs!

The good news here is that, in March last year, the ministry of shipping said the revenue share would not be allowed as a pass through — that is, if you’ve promised a very high revenue share to the government, that’s your funeral. And funeral it will be if you have to share half your returns of, say 16 per cent, with the government —essentially, the model works only if you’re able to generate very high sales (or very high traffic over the projections, to use the NSICT example) so that there is an excess earning that is made which you can split with the government. In which case, getting firms to bid on the basis of revenue share is asking for trouble since this either leads to higher tariffs or the firms going bust.

The rider that came with this order, however, is that it did not apply to contracts finalised before July 29, 2003—in these cases, a large part of the revenue share was allowed as a pass through. The exception, it appears, was done since two ports, Chennai and Tuticorin, could not meet their revenue share obligations—in which case, there is every reason to believe the exceptions can be made again. In the case of telecom, for instance, they were made in the form of New Telecom Policy 1999 the first time, and the second time, in 2003, when obligations worth Rs 5,000 crore to set up 100,000 village public telephones were written off for fixed-line service providers.

In a nutshell, for privatisation to work, for the common citizen, both the government and the regulators need to be extra vigilant. So far, the evidence suggests this is not the case. In the case of the DVB privatisation, for instance, the Delhi government’s consultants estimated that, in 2004-05, Rs 191 crore of capital expenditure would be required and this would rise to Rs 214 crore the next year—as against this, the privatised firms spent Rs 1,642 crore in 2004-05 and projected Rs 2,926 crore for 2005-06—each Rs 100 crore of extra investment raises consumer tariffs by around 0.5 per cent, so you can imagine the havoc created.

Either the Delhi government and its consultants got it horribly wrong, or BSES and Tata-owned firms are taking us for a huge ride. None of which is designed to instil any great confidence in the process.