The Centaur sell-off scam: Saying no to 'robberisation'

The hotel is sold to him for Rs 153 crores, with public sector banks providing the bulk of the money. Meanwhile, the property's minimum (reserve) price is lowered by a hefty 59 percent. Yet, the buyer fails to come up with the money on time. He's given repeated extensions.

Within just four months, he's offered a 50 percent premium. And now he's about to sell the hotel, according to the Business Standard, for a humongous Rs 370 crores -- a premium of 142 percent!

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There could be no smoother and more unscrupulous way of quickly making Rs 217 crores -- at public expense!

This isn't fiction, but the substance of a report by the Comptroller and Auditor General of India (CAG) on the sale of Mumbai's Juhu Centaur, originally owned by an Air-India subsidiary.

The owner is Mr Ajit Kerkar, a former Tata director and promoter-owner of Tulip Hospitality. The Minister concerned is Mr Arun Shourie, an ardent advocate of privatisation, known for his U-turn from exposing business houses to becoming their apologist.

The CAG report is a scathing indictment of the procedure of selling the Centaur to a "strategic partner." It questions the assumptions underlying privatisation. The first is that the hotel was making losses. In reality, it had been making profits until the privatisation decision in 1998! Ironically, its "financial condition deteriorated after the disinvestment process started ."

Secondly, says the CAG, there was no competitive bidding, but a "sweetheart" deal with a lone bidder. "[C]ompetition cannot be relied upon to emerge unless positive steps are taken to encourage bidders to come forward." The Disinvestment Ministry made "inadequate efforts" to mitigate risks in a limited-competition scenario.

This is not all. Because of "inadequate" scrutiny of the bidder's financial strength, the Ministry relaxed several conditions of sale. This "cannot be viewed as a good practice."

Even worse, "repeated extensions and relaxations were allowed ." The process violated all market-based principles cited to justify privatisation of public sector undertakings (PSUs) -- including transparency and competition.

The CAG is equally critical of the way the Centaur's sister hotel, at Mumbai airport, was sold for Rs 83 crores -- to a single bidder. The "assumptions made during [its] valuation … were not consistent with the practice followed." Four months on, the hotel was re-sold at a 35 percent premium!

These comments of a high statutory authority -- one whose integrity remains relatively unsullied -- must be treated with the utmost seriousness. It won't do for Mr Shourie pompously to offer to face an inquiry by any agency the Prime Minister or Finance Minister chooses. (Since when has an accused acquired the right to name the judge?)

The CAG's report should logically trigger a parliamentary inquiry and legal prosecution.

The Centaur sell-off scam confirms one's worst fears about the ideology and wisdom of privatisation. Perhaps its sleaziest aspect is the method most favoured by the BJP -- sale to a "strategic partner."

"Strategic" sales are so indistinguishable from racketeering in most countries that former World Bank chief economist Joseph Stiglitz calls them "robberisation." They also have especially harmful consequences for employees.

India's first "strategic sale"was Modern Food Industries Ltd. This is a sordid story. In 2000, MFIL was sold to Hindustan Lever, a subsidiary of the transnational Unilever, for Rs 149.5 crores. Disinvestment Minister Arun Jaitley boasted that MFIL's takeover is "a success story."

Many MPs, including Dr Manmohan Singh, questioned the valuation of MFIL assets, especially the 450,000 square metres of prime land which it owned in big cities. The government assured them that HLL would abide by certain conditions and was not free to dispose of land nor sack any of the 2,037 workers.

These conditions were thoroughly violated. According to the MFIL employees' union, the labour force has shrunk by about two-thirds. A majority of MFIL's 21 units lie closed. HLL isn't making bread, but outsourcing it to sweatshops.

HLL has indulged in shameless "asset stripping." It has sold 8,000 square metres of land in Bangalore and is about to sell 20,000 more in Faridabad. It now claims that "there is no precondition regarding

the sale of any of the assets of MFIL." Equity transfer to it was "unconditional and purely commercial."

Clearly, Modern Foods is a terrible first example. But it won't be the last. Asset stripping and job losses are reported from other "strategic sale" cases like VSNL, IPCL, CMC, and Balco (sold to Sterlite/Vedanta).

Besides evaluating India's sorry experience with privatisation, we must learn lessons from other countries too. India has so far divested Central-PSU equity equivalent to about 3-4 percent of GDP. Britain and Australia have divested more, including in railways, urban transport, water, and healthcare. The US is moving in that direction. Russia has carried the process the furthest.

By contrast, many Western European countries and Japan have been restrained and given professional autonomy to PSUs to modernise, acquire technology, and revive themselves.

The Anglo-American and Russian experiences have been disastrous. Public services have collapsed and their private replacements proved unaffordable. British rail, water, and medical services, once a source of pride, are in a ramshackle state -- and amongst Europe's most expensive.

But countries like France, Germany, Sweden and Japan, which have nurtured the public sector, have kept services going efficiently.

In India, we must be extremely cautious about privatisation. There is no case for privatising profitable, well-managed PSUs in the core sector. Loss-making units can be selectively divested in ways that don't produce monopolies and cartels.

But we must not embrace the ideology that whatever's public is inefficient and whatever's private is good. Reforming PSUs, not privatisation, is the rational way forward.

Praful Bidwai is an eminent Indian columnist.