How not to Privatise

For those labouring under the illusion; that Mr Narasmiha Rao is really serious about liberalising the Indian economy, a look at the proposed privatisation of Indian Iron and Steel Co (IISCO) will prove sobering. Staggering under accumulated losses of Rs 750 crore, the public sector company cannot raise the Rs 6,500 crore needed for its modernisation. So the government has offered to sell 51 per cent of its equity to private parties that can modernise the plant.Bids closed at the end of January. There were only

two bidders, Mukand steel and Usha Rectifier, and of these, the latter is a small company with a dubious track record. The Tatas dropped out at the last minute but were never serious. The Mittals, who have a multinationals steel empire spanning Indonesia, Trinidad and Mexico, dropped out the bidding earlier. Why does a steel plant which was once among the prize jewels of Indian industry find hardly any takers?

The answer is that the government is not privatising steel, it is simply privatising the illusion that 35,000 workers at IISCO have work to do. One of the conditions attached to the sale is that the inflated workforce will be kept intact. Annual production at IISCE is only 0.4 million tonnes of steel, which means the output per worker is barely 12 tonnes per year. By contrast, it is around 1,000 tonnes per year at the Mittals plant in Mexico. After modernisation and expansion, worker productivity at IISCO could rise to 33 tonnes per year, still far too low to ever be globally competitive.

SUCCESSFUL TAKEOVERS: Listen to what Mr Mittal head of the Mittal group has to say. He has taken over sick public sector plants in Trinidad and Mexico and turned them round. Both plants export almost their entire output, and hence are internationally competitive. He is now acquiring 1.2 million tonnes of steel capacity in the USA from Bethlehem Steel, which was once the second biggest steel producer in the world.

Mr Mittal says that in Mexico he found that the steel plant, with a rated capacity of 3 million tonnes, had around 2,200 workers. These were far too many, and so his first condition for takeover was that the workforce should be slashed to 1,100. This was agreed to by the Mexican government. The deal went through, and the plant has now doubled its capacity utilisation and got out of the red.

In the USA Bethlehem Steel has shut down 1.2 million tonnes of steel capacity, which once employed 2,600 workers. In the deal being clinched, Mr Mittal will take over the assets and restart production. He will hire perhaps 1,100 workers, less than half the original number. So why, he asks, should he be asked to hire 35,000 workers in India? How on earth can such a plant ever be competitive? The sad answer is that the Indian government is not thinking of competitiveness, it simply wants to get rid of a labour problem.

There are two possible consequences of this sort of privatisation. One is that the new owner will be a crook who milks the unit dry, makes black money while the going is good, and then quits the scene. The second is that the new owner will make an honest effort to tackle over manning, probably fail, and go bust himself. If I was a shareholder of Mukand Steel. (Which will probably get the contract) I would sell my shares immediately. The weight of the inflated workforce at IISCO could be enough to sink Mukand.

HUMAN PROBLEM: I am told by my many critics that I am hardhearted and cannot see the human problem involved in mass retrenchment. It seems to me that I can see the human problem and my critics can\’t. In IISCO, the human problems is that the masses remain mired in poverty because thousands of crores of scarce resources are diverted to keep the labour aristocracy happy. The Socialists of old laboured under the illusion that by creating high-wage islands in the public sector, somehow, all workers would ultimately benefit. This theory has been exploded as a myth, but still many people feel that retrenchment or wage cuts re not the answer. Having created the labour aristocracy, they wish to maintain the aristocrats in the style they have become accustomed to, even if everybody knows that the aristocrats are surplus.

The government wishes to finesse the problem through golden handshakes. Providing such huge terminal benefits to 500,000 surplus government workers will cost a whopping Rs. 10,000 crore. This means, of course, that the government won\’t have enough cash left to provide additional rural jobs to the really poor and needy.

A labour aristocracy with high wages is justifiable if its productivity is high enough. Indeed, liberalisation aims at crating an economy where more and more workers attain high levels of productivity and are rewarded with higher wages unrelated to productivity. In these circumstances, high wages become a burden borne by the rest of society, mainly the poor.

Dr. Man Mohan Singh says from time to time that socialism cannot be built on waste and inefficiency. But apparently, he thinks IISCO can.

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