New Delhi: India’s Narendra Modi government can take a leaf out of former British Prime Minister Margaret Thatcher and the privatisation of companies like defence major BAE Systems to carry forward its disinvestment plans for state-owned companies that are profitable.

The Economic Survey 2020-21, presented to the Parliament of India today, devotes the entire Chapter 9 to privatisation and wealth creation, cites the example of the United Kingdom’s experience with BAE Systems Plc as a model for disinvestment.

Among the Indian state-run companies listed for disinvestment are national carrier Air India and its subsidiaries for which the government initiated a fresh disinvestment process earlier this week, Civil Aviation ministry-owned Pawan Hans Limited, apart from defence PSU BEML Limited, Shipping Ministry’s Kamarajar Port Limited, Shipping Corporation of India and Container Corporation of India Limited.

The Economic Survey also list 11 of the 13 defence public sector undertakings of India are profitable entities.

The Narendra Modi government had given ‘in-principle’ approval for the disinvestment from these state-owned companies and corporations between 2016 and 2019.

“The experience of the UK (United Kingdom) under the leadership of Ms. Margaret Thatcher is particularly noteworthy in this context,” the Economic Survey noted and went on to explain how the then British Prime Minister had achieved privatisation in some of the major state-run companies, including BAE Systems.

Here is what the Economic Survey said in the British model under Thatcher:

“The British privatisation programme started in 1980 under the stewardship of Margaret Thatcher. In the initial phase (1979-81), the focus was on privatising already profitable entities to raise revenues and thus reduce public-sector borrowing like in British Aerospace and Cable & Wireless.

“In the next phase (1982-86), focus shifted to privatising core utilities and the government sold off Jaguar, British Telecom, the remainder of Cable & Wireless and British Aerospace, Britoil and British Gas. In the most aggressive phase (1987-91), British Steel, British Petroleum, Rolls Royce, British Airways, water and electricity were sold.

“The dominant method was through an initial public offering (IPO) of all or a portion of company shares. British Aerospace was privatised in 1981 with an IPO of 52 per cent of its shares, with remaining shares unloaded in later years.

“The British Telecom (BT) IPO in 1984 was a mass share offering, and more than two million citizens participated in the largest share offering in world history to that date. The OECD (2003: 24) called the BT privatisation “the harbinger of the launch of large scale privatisations” internationally. In subsequent years, the British government proceeded with large public share offerings in British Gas, British Steel, electric utilities, and other companies.

“A second privatisation method is a direct sale or trade sale, which involves the sale of a company to an existing private company through negotiations or competitive bidding. For example, the British government sold Rover automobiles and Royal Ordnance to British Aerospace.

“Other privatisations through direct sale included British Shipbuilders, Sealink Ferries, and The Tote. A third privatisation method is an employee or management buyout. Britain’s National Freight Corporation was sold to company employees in 1982, and London’s bus services were sold to company managers and employees in 1994.

“In most cases, British privatisations went hand-in-hand with reforms of regulatory structures. The government understood that privatisation should be combined with open competition when possible.

“British Telecom, for example, was split from the post office and set up as an arms-length government corporation before shares were sold to the public. Then, over time, the government opened BT up to competition.

“The British government opened up intercity bus services to competition beginning in 1980. That move was followed by the privatisation of state-owned bus lines, such as National Express.

“Numerous British seaports were privatised during the 1980s, and the government also reformed labour union laws that had stifled performance in the industry.

“Florio (2004) in his extensive research on UK privatisation has found that the divestiture benefited shareholders and employee (especially managers), small impact on firms and other employees. Sector specific studies (Affuso, Angeriz, & Pollitt, 2009) found that privatisation in train companies in UK was associated with increased efficiency. Parker (2004) found that the privatisation facilitated creation of competitive market.”

Survey’s Conclusions

The key document on India’s economic situation concluded that a comparative analysis of the before-after performance of 11 Central Public Sector Enterprises (CPSEs) that had undergone strategic disinvestment from 1999-2000 to 2003-04 reveals that net worth, net profit, return on assets (ROA), return on equity (ROE), gross revenue, net profit margin, sales growth and gross profit per employee of the privatised CPSEs, on an average, have improved significantly in the post privatisation period compared to the peer firms.

The ROA and net profit margin turned around from negative to positive surpassing that of the peer firms which indicates that privatised CPSEs have been able to generate more wealth from the same resources.

The analysis clearly affirms that disinvestment (through the strategic sale) of CPSEs unlocks their potential of these enterprises to create wealth evinced by the improved performance after privatisation.

Aggressive disinvestment should be undertaken to bring in higher profitability, promote efficiency, increase competitiveness and to promote professionalism in management in the selected CPSEs for which the Cabinet has given in-principle approval.