Presentation of Country Reports

Country: India

Privatization of State Owned Enterprises in India:

A Case Study of India Tourism Development Corporation Limited (ITDC)

by Ganapati Bhat[1]

Research Fellow

Research & Information System for the Non-Aligne and Other Developing Countries (RIS)

Introduction

The public sector in India was the creation of the Industrial Policy adopted by Pandit Jawaharlal Nehru. Immediately after independence, the Government of India decided to industrialize the country, and took the lead and directly invested in various sectors. Private sector was not in a position to mobilize the kind of capital required to industrialize a vast country like India. Therefore planned development was thought as an alternative to the problem. India adopted a mixed economic development model, partially based on the Soviet model of central planning and resource mobilization. Various sectors were identified for governmental intervention and dominance and also for total control in some of the sectors. Public sector was a panacia, at that time, for mass poverty, inequality, regional imbalance, unemployment and national and social security.

This policy of the Government of India was in the vogue for almost four decades, unchallenged. However, the manner in which these public sector units are run became a major concern for the general public. There was large scale inefficiency, corruption, nepotism, overstaffing and wrong priorities and delay in decision making became the hallmark of Indian public sector. PSUs suffered large losses and government was forced to pump in millions of rupees to keep the PSUs floating. PSUs were considered as a major drain on the public exchequer and a waste of tax payers money. Government was left with little money to spend on basic education, primary health and family welfare. Lack of managerial autonomy, excessive interference, failure of the government in meeting the obligations in time, long delay in project implementation, lack of motivation, indiscipline, undue demand of workers, taking over private sector sick companies are some of the causes for losses in public sector.

The general feeling is that the control has passed over to a small group of politicians and bureaucrats who cannot run the PSUs on the commercial principle, to speak the least. Private sector also developed and showed the capacity and inclination to venture into the areas where they were prohibited earlier.

This paper gives a brief overview of the evolution of Disinvestment Policy in India and the objective of disinvestment as envisaged by the government policy in para 2. In para 3, 4 and 5 the experience of ITDC is presented.

Evolution of Disinvestment Policy

During the early 1990s, the fiscal deficit increased, external debt was heavy and there was inflationary pressure. The collapse of the Soviet Union was one of the most significant psychological blow to the ideological positions of the hardcore votaries of public sector. All these things culminated into the new thinking on the concept, utility and purpose of PSUs and new policy on public sector was announced in 1991.  Various committees like Rangarajan Committee – in April 1993 – recommended measures to disinvest the holdings of the government in the public sector.

In 1996 Government of India appointed a commission under the Chairmanship of Mr. Ramakrishnan to recommend and advise the government on disinvestment. This is the most important Commission whose recommendations are generally accepted by the government. The general recommendations of the Commission are:

(i)  Strategic Group

As per the policy statements of Government, only four industries viz., (i) arms and ammunitions and the allied items of defence equipment, defence aircrafts and warships, (ii) atomic energy, (iii) minerals specified in the schedule to Atomic Energy (Control of Production and use) Order 1953, and (iv) railway transport are the exclusive preserve of the public sector. A perusal of the above list would imply that these industries are important from the national security angle. Thus, it may be more appropriate to term these four industries as “Strategic”. The question of disinvestment in such industries does not arise.

The Disinvestment Commission classified the industry into two categories (a) Core Group (b) Non-Core Group.

(ii)  Core Group

In sectors which are capital or technology intensive, the most prevalent market structure may be an oligopoly. With the entry of private sector into these capital intensive areas, there may be a tendency towards an oligopolistic market structure. Examples are telecom, power generation and transmission or petroleum exploration and refining industries. It has been felt that the presence of the public sector will be necessary for sometime as a countervailing force and prevent concentration of private economic power. At the same time a proper regulatory mechanism should be put in place in order to regulate industries particularly in a non-competitive market for protecting interests of consumers.

In addition, it may be appropriate to look at basic industries with extensive and dispersed forward linkages. In some of these sectors, PSUs have a considerable market presence and the private sector is yet to mature fully. Hence it may be desirable to continue public sector presence in these basic industries till such time that the market becomes fully competitive.

By this analysis, such industries may be classified as “core” and public sector disinvestment be limited to a maximum of 49%. However, it may be noted that the composition of “core” industries may change over a period of time as further private investments make the market fully competitive and PSUs may not be required to play a special role. In addition, it is expected that a proper regulatory mechanism would be in place to protect the interest of consumers. The question of disinvesting beyond 49% may be considered at that time.

(iii)   Non-Core Group

Over the last four decades, private sector investments have grown considerably in many industries. The presence of a large number of players including matured private sector players, and the forces of competition in these industries have made these markets fully contestable. These would ensure that the consumer’s interests are well protected. It can therefore be concluded that the initial objectives of the public sector in such industries have been met. Further investments in such industries will be driven more by demand – supply imbalances and Public investment may no longer be necessary. It may be useful to categorize such industries as non-core. The existing public sector in these industries may not have any unique or special responsibilities. Therefore, it would be desirable to disinvest upto 74% or more in such cases.

Criteria for Disinvestment

As a general principle the Commission recommends that where appropriate, PSUs should be restructured before disinvestment in order to enhance enterprise and the intrinsic share values. Given the rapidly changing economic scenario, it is possible that some PSUs may already have initiated such changes. In some other cases it is possible that the extent of restructuring required may be minimal.

Based on the above principles and specific analysis of PSUs, the Commission’s recommendations for disinvestment will be based on the following considerations:

v    Extent of Restructuring required and the potential for improving share values;

v    The permissible extent of disinvestment with reference to the classification of industry as core or non-core;

v    The size of the company and the phasing of disinvestment;

v    Equity fund raising programme of the concerned PSU;

v    Categorization of the Industry as High, Medium or Low Potential;

v    Alternative modalities of disinvestment

Government has accepted these recommendations and has set out the agenda for privatization.  The Primary objectives for privatizing the PSEs are, therefore, as follows:

v    Releasing the large amount of public resources locked up in non-strategic PSEs, for redeployment in areas that are much higher on the social priority, such as, basic health, family welfare, primary education and social and essential infrastructure;

v    Stemming further outflow of these scarce public resources for sustaining the unviable non-strategic PSEs;

v    Reducing the public debt that is threatening to assume unmanageable proportions;

v    Transferring the commercial risk, to which the taxpayers’ money locked up in the public sector is exposed, to the private sector wherever the private sector is willing and able to step in – the money that is deployed in the PSEs is really public money and is exposed to an entirely avoidable and needless risk, in most cases;

v    Releasing other tangible and intangible resources, such as, large manpower currently locked up in managing the PSEs, and their time and energy, for redeployment in high priority social sectors that are short of such resources;

The other benefits expected to be derived from privatization are:

v    Disinvestment would expose the privatized companies to market discipline, thereby forcing them to become more efficient and survive on their own financial and economic strength or cease. They would be able to respond to the market forces much faster and cater to their business needs in a more professional manner. It would also facilitate in freeing the PSEs from Government control and introduction of corporate governance in the privatized companies.

v    Disinvestment would result in wider distribution of wealth through offering of shares of privatized companies to small investors and employees.

v    Disinvestment would have a beneficial effect on the capital market; the increase in floating stock would give the market more depth and liquidity, give investors easier exit options, help in establishing more accurate benchmarks for valuation and pricing, and facilitate raising of funds by the privatized companies for their projects or expansion, in future.

v    Opening up the public sector to appropriate private investment would increase economic activity and have an overall beneficial effect on the economy, employment and tax revenues in the medium to long term.

v    In many areas, e.g., the telecom sector, the end of public sector monopoly would bring relief to consumers by way of more choices, and cheaper and better quality of products and services – as has already started happening.

A Case Study of Disinvestment Experiences of India Tourism Development Corporation (ITDC)

With a view to developing tourism in the country, the Government of India set up two separate undertakings namely India Tourism Transport Undertaking Ltd.  and India Tourism Corporation Ltd. Subsequently these were amalgamated in 1966 and India Tourism Development Corporation Ltd. (ITDC) was formed. The main activities of ITDC were:

v    Construction, management and marketing of hotels and restaurants;

v    Provision of shopping facilities in the form of duty/tax free shops;

v    Provision of tourist transport facilities.

ITDC has 26 hotel chains all over the country and the hotels range from luxury hotels to economy class. Duty free shops are the lucrative business of ITDC contributing to 35% to 40% of its profits. The capital structure of ITDC was Rs.67.5 crores of equity share capital with tangible networth of Rs.1480 crores. ITDC suffered heavy losses from 1999-2001. The Hotel Division of ITDC made a cumulative loss of Rs. 105 crores. In some of the hotels loss exceeded sales. Apart from the earlier mentioned reasons for failure of PSUs the major reasons for the miserable performance of ITDC are: (i) Heavy Employee Cost: Employee cost in ITDC are significantly higher than its competitors. This is because of the presence of ITDC in various travel related operations like tourism and travel which employ significant number of staff. Secondly implementation of Fifth Pay Commission Report has increased the salaries of the employees. (ii) Lack of leadership at the top: ITDC continued to work without a full time Chairman and Managing Director for last many years. The parent ministry i.e. Ministry of Tourism, Government of India did not take any decision and appointed suitable person in this crisis-ridden time period. As a result bureaucrats went on holding additional charges causing enormous delay in taking any business decision. (iii) Thirdly the talk of disinvestment was there in the air for a decade. This was a great demotivating factor for the employees who were working in the ITDC. There was lots of despondency which lead to lack of proper upkeep and maintenance of the hotel leading to a bad name for the entire organization which had a spiraling effect in the form of little occupancy in the hotels. The hospitality industry was also on the down turn and ITDC hotels suffered heavy losses. The Government of India decided to disinvest in ITDC hotels.

Disinvestment Commission recommended thus:

 “On the other hand, public sector as a whole does not have to play a role in providing hospitality services in metro locations where the private sector has established adequate presence in the market. In non-metro and other locations where the private sector hotels are yet to establish a presence, the public sector may be better suited to play the role of a facilitator rather than direct provider of services.

On these considerations, the Commission recommended that the ITDC should be suitably restructured in terms of its operations for the purpose of disinvestment. The restructuring proposed is as follows:

1.    In respect of the hotels situated in prime locations like Delhi and Bangalore, they may be handed over to established hotel chains through a competitive bidding process to run on long term structured contract on lease-cum-management basis. This will mainly take care of the problems of transfer of property in case of lease hold lands on which the hotels are situated. It would be ideal if a tripartite agreement between ITDC, trade unions and the concerned parties is concluded in each case to take care of the interests of the labour. The terms of contract and procedure for competitive bidding may be determined by the Standing Empowered Group (SEG; comprising of Cabinet Secretary, Secretaries of the Ministry of Fiance, Department of Public Enterprises, Administrative Ministry of the PSU alongwith the CEO of the concerned PSU) with the help of financial Advisers and Consultants. The contract could have up-front fee and annual fee with an in-built indexation for annual revisions. Such fees should be significantly higher than the current level of profits of each of the hotels. The realisation on account of the up-front fees and annual fees will accrue to Government in the form of taxes and dividends.

2.    Other hotels may be demerged into separate corporate identities. Shares will be issued in these companies to Government and other shareholders, if any, in exchange for ITDC Shares. The disinvestment in the new companies will be through sale of 100% Government share holding in them. The SEG may again carry out this process with the help of Financial Advisers for proper valuation and terms of competitive bidding.

3.    ITDC may continue to operate the business of duty free shops and travel and tours business subject to the viability of the operations. This should be decided by the Board of Directors of the Company.”

ITDC’s hotels strong points were that it was an established name in India. It was operating a chain of hotels in different locations as compared to some players in the hotel industry. Secondly, the ITDC owned properties in prime locations all over the country. Given the scarcity of prime locations this was a major strength of ITDC. Thirdly, tourism is one industry which was expected to grow in India. However, ITDC had major weaknesses. They are: (i) ITDC’s presence in all segments in hotel industry i.e. luxury, budget, and economy had weakened its image in business circles. Secondly, ITDC had a huge employee cost. Even if you acknowlege that the hotel industry is a labour intensive one there was over staffing in ITDC hotels. Thirdly, ITDC was run as an extension of Tourism Ministry without having its full-fledged Board of Directors or with full time Chairman and Managing Director. It had no flexibility of decision making in relation to business decision as well as decisions relating to employee compensation.

Problems faced while disinvesting ITDC Hotels

There was a broad consensus across the political spectrum that government had no business to be in hotel industry. However, there was lot of resistance when actually the Disinvestment Ministry, which was created by the present government exclusively to disinvest/privatize the state-owned companies actually started the process of disinvesting ITDC hotels. The management and the bureaucracy at various levels tried to spoil the sport. Subtle resistance from civil servants to surrender their control over the milch cow, severe magnitude of the task of privatization was a major stumbling block. Compared to these, perhaps it could be said, that there was not much resistance from labour even though there were some token protests. The workers had reconciled to the fact that hotels will be privatized. They were worried about the delay in the process of privatization because it was hurting them most. Government had assured the workers and the share holders agreement was well publicized and it contained the clauses for protection of existing labour. There were other irritants like most of the hotels under disinvestment were not having title deed i.e. they had no clear ownership of the land on which the hotels were built. And those hotels which were on lease hold land were almost on a rent free basis. Most of the hotels had neither  completion certificate nor fire safety certificate which are mandatory for any private building. There were long standing litigation about lease of land with the local governments and also with the sister departments of Government of India. In most of the cases the past records were almost not in existence. These were cited as the reasons for not going ahead with disinvestment! Apart from this there were lot of ideological criticism from various corner on the entire idea of privatizing the public property. The much quoted “Selling the family’s silver to pay the butler” was used to defeat the arguments for privatization. It was an extremely difficult political decision to take. At the same time, the timing of the disinvestment of hotels came when the world tourism industry was at its lowest after 9/11.

Process of Disinvestment of ITDC Hotels

The disinvestment department was established by the present government which is headed by a minister of cabinet rank. It has come out with more detailed guideline and procedure for disinvestment. Global advisers were selected and appointed to advise the government on the procedure and evaluation of the disinvestment. Valuers were appointed to advise the government on value of each of the properties of ITDC. The hotels were demerged in smaller companies and most of the hotels were put on auction.  Discounted cash flow method was used to value the property and government fixed a reserve price based on these valuations. They were sold as going concerns. As it is mentioned earlier the government decided to sell off all the hotels except the Ashok Hotel at New Delhi and Ashok Hotel at Bangalore which was leased to an establish chain of hotels on management contract. Except one hotel at Delhi which is being converted into an office and another hotel at Delhi which is kept by the government for security reasons, the rest of the hotels were put on sale. As on today, 19 hotels are sold, four more are yet to be sold. The details are as under:

INDIA TOURISM DEVELOPMENT CORPORATION LTD.

Concluding Remarks

A passionate debate is razing in India at present and no day passes without vehement criticism against and forceful support for disinvestment in the media and in Parliament. The economic slow down has shadowed the efforts of the government which is trying to convince the general public about the urgency of disinvestment. People have started questioning whether privatization is a means or an end in itself. The recent scandals in the private sectors world over has made the public to question the decision making process in the private sector as well.

ITDC disinvestment is a success story of privatization in India. Government is breathing a sigh of relief, that it has got rid off the burden of running the hotels. The change in the policy of the Government of India reflects the change in time world over. From a partially controlled and centrally planned economy, India is slowly emerging into the market economy. The role of the state is being re-defined based on the altered realities. This process is slow and tidy because India is an open society, largest functional democracy in the world. We have fearless press and opinion-making television journalism. Any government in power has to go by the consensus route for economic reforms in India and building consensus is never easy.

[1] Deputy Secretary, Research and Information System for the Non-Aligned and Other Developing Countries (RIS), New Delhi.