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Privatisation as Panacea

March 2005

The present phase of globalisation is based on Washington Consensus, which was defined by John Williamson in 1990. This consensus was arrived at among the U.S. Treasury Department, the IMF, the World Bank and the Inter-American Development Bank. Later, the GATT and, its successor, the WTO, came to share in this consensus. Joseph Stiglitz, a Nobel laureate, underlined that “It was a consensus formulated between 15th street and 19th street in Washington.” As is known, the U.S. Treasury Department is situated on the 15th street while international organisations like IMF are located on the 19th street. The countries that were supposed to act in accordance with the Washington Consensus had no say in its formulation.

Privatisation was one of the ten key elements that constituted the Washington Consensus. Obviously, it rejected the activist role of the state. The existing public sector undertakings were to be disposed of to private buyers. The previous BJP-led NDA government in India appointed a minister for disinvestment, whose only job (like a court receiver} was to sell off state assets by hook or by crook. It was contended that market forces would allocate resources and carry on production with utmost efficiency and the incidence of corruption would be reduced to zero because there would be no scope for political and bureaucratic interference. Moreover, state exchequer would no longer be saddled with rising deficits resulting from losses in public sector companies. People at large would benefit because they would not be taxed to meet the growing deficits.

Votaries of privatisation assume that private sector is more efficient than the public sector. Our historical experience does not testify to this. Had private sector been more efficient, we would not have witnessed high incidence of sickness in industries like sugar, jute, cotton textiles, mining, and engineering industry. Private owners never cared for their modernisation needs.

There was a time when the activist role of the state was stressed in order to protect the citizens and help them secure education, employment opportunities, medical facilities and goods and services to meet their basic needs. The U.S. Declaration of Independence on July 4, 1776 underlined the need of the institution of government to secure for people the rights to life, liberty and the pursuit of happiness. What a travesty it is that the inheritor of this legacy, the government of the U.S.A. is now supporting privatisation so that governments of developing countries abdicate their responsibility of protecting their people and leaving them at the mercy of market forces. It has ignored the experiences of the Great Depression when the market failure brought immense misery to people at large not only in America but all over the world in varying measures!

Even the recent experiences suggest that private sector, given the opportunity has high propensity to indulge in corruption and unethical practices. Acts of corporate frauds and illegal machinations have been widely reported even in the U.S.A. and other developed countries. Giant corporations like Enron, WorldCom, Tyco, Marsh & McLennam and Parmalat have been exposed as thoroughly corrupt and adept at cheating both public at large and state exchequer. This is testified by no less a constitutional authority than the Attorney General of the New York State, Eliot Spitzer. According to a report, he has termed the Wall Street business model formulated in the previous decade as very narrow in approach and always conflicting with the best interests of the clients. Stock analysts “worked hand in glove with investment banking operations of brokerage houses to defraud the investing public.” It is now known to all that a “reputed” firm of auditors helped Enron defraud the investors as well as customers.

It is being touted in India that the government should withdraw from producing and distributing electricity, supplying water, constructing roads and looking after sanitation facilities because they can be handled more efficiently by the private sector. Past experiences do not support this contention. Let us go into the construction of railways in India. They were constructed by private companies under certain terms and conditions (known as Old Guarantee System initially and New Guarantee System after some modifications) and they indulged in investing extravagantly so that they could get rid of their surplus capital and fleece India as much as possible. Any undergraduate textbook on India’s economic history can throw light on this.

Our government quite often relies on private sector to finance, build and operate roads, airports, container ports and bridges, and recover costs along with handsome returns on its investment. The generally adopted “build-operate-transfer” (BOT) agreement leads to show an inflated amount as investment so that it controls the facility for much longer than actually required. In this bureaucrats and politicians help, of course, after lining their pockets.

It was much trumpeted that once electricity distributions was privatised in Delhi, the incidence of power theft would drastically go down, maintenance would improve and load shedding would become a thing of the past. Nothing of this sort has happened. The extent of corruption among the staff has not gone down nor are the employees better behaved and prompt in attending to complaints. Power theft has not appreciably declined. Moreover, incidents of unbelievably inflated bills are being sent harass the consumers and extort money from them. It is strange that Delhi government did not look at the experience of California where Enron indulged in manipulation and fraud to fleece the consumers.

One trustworthy study has this to say: “There is little logic, other things such as good planning and management being equal, to the supposition that the private sector can deliver electricity to the public at a lower cost, given that private financing is generally more costly than government financing and private profit must be reflected in user rates. Private companies always aim to push rates up and rate wars among competitors cause financial distress in any industry, as has been evident in telecommunication and air travel.” Further, “The notion that the private sector can run everything more efficiently than government was creeping into even the national-security arena. Joseph Stiglitz…explains the trend only half-jokingly: “Why not privatise the making of atom bombs – or at least the processing of the uranium that goes into atomic bombs?”” It is a perturbing piece of news that Delhi government has made up its mind to privatise the business of water supply to Vivendi, a foreign company. Degremont, a subsidiary of the French multinational, Suez, has been entrusted with a 50-million-euro design-build-and-operate drinking water production in Sonia Vihar. After completion, it will supply water to 30 lakh people, largely in South Delhi. Water will come from Tehri Dam. It is interesting to that “Vivendi’s Onyx, which specialises in waste management, was awarded the contract to manage garbage and street litter in Chennai…. The company is paid $13,700 a day to collect and dispose of garbage in three key areas in the city. Its sister organisation, Vivendi Water, was given the contract to manage the water services in the city. This is an economy where many have to live on less than $1 a day.”

There are studies showing that privatisation of water supply has invariably led to higher charges and pushing the poor in great hardship.

Those who regard privatisation as a panacea must not forget that once the country starts its journey on the path of privatisation, it cannot go back and it must face the social, economic and political consequences resulting from it.


Girish Mishra,