Rational expectations

And given that Modern’s acquisition is part of Lever’s strategy of getting bigger in the daily foods segment, it’s apparent that Lever will invest large amounts of money and time in Modern. Modern’s network of delivering perishables to 65 per cent of the bread-consuming population in 110 cities across the country, for example, is clearly great news for Lever which hopes to sell readymade `rotis’ directly to housewives every day Lever, for instance, is selling its Annapurna `atta’ in just around 15 cities and the `rotis’ in just a few right now.

Lever’s success in turning around Modern will be an important milestone in Disinvestment Minister Arun Jaitley’s calendar, for he will then use this to convince everyone that privatisation is good for the firm, its workers and the country. Lever estimates it could take a year or so for Modern to once again start breaking even, and thena few more to make the most of Modern’s somewhat rusty marketing network. To cite the most obvious example of how run-down Modern’s marketing department is, the firm spends under half a per cent of its turnover on advertising, as compared to Lever’s budget of between 6 and 7 per cent. Little wonder that few remember Modern’s breads as compared to the recall for, say, Harvest Gold’s products in North India.

All this is the upside of the Lever buyout. Jaitley, of course, would do well to pay attention to the ill-effects of poor government policies and strategies for privatisation so far. In the case of Modern Foods, for instance, in February 1997, when the Disinvestment Commission first recommended sale of the entire government equity, Modern Foods was making profits. In 1996-97, it declared a profit of Rs 9.3 crore on sales of Rs 163 crore. Clearly this was a good time to sell, and get a good price.

This, of course, didn’t happen. The Mumbai unit of Modern, also its most profitable, saw the worst declinein performance, with workers more concerned about the voluntary separation which would be given. The next year, profits fell to Rs 4.8 crore, and that too on higher sales of Rs 178 crore. In 1998-99, sales plummetted, and the company formally went into the red it made losses of Rs 6.9 crore. Production of bread fell from 1,912 lakh standard loaves in 1997-98 to 1,561 lakh. It doesn’t take a rocket scientist to figure out that Lever would have paid more than Rs 105 crore if it bought Modern when it was in the pink of health. Multiply this potential loss across the 24 PSUs which the Disinvestment Commission recommended a strategic sale for, and you realise just how much revenue the government is losing because of its pathetic implementation.

This is obviously something Jaitley would do well to pay heed to. The government, for instance, announced a few days ago that it plans to sell Indian Airlines to a strategic partner, but it’s not clear how successful this will be, given IA’s huge assets, massive losses,and its social commitment of flying to every major city and state capital. For instance, it is certain that there will be huge delays in the privatisation when ministers realise that the new IA will not be flying to their bailiwicks.

Ex-finance secretary Vijay Kelkar, who headed a panel on IA, in fact, had come up with a road map, of infusing capital into IA, bringing costs of aviation fuel to global levels, the government compensating IA for grounding its A-320 fleet and for flying uneconomic routes. Once this was done, and IA was more profitable, or made less losses, a profitable sale could be made. All this, however, has now been abandoned, with the government just stating that IA will be sold off within the next 14 months. With no clear road map, and a completely disinterested staff, it’s likely IA will make more losses, and the government will then realise a lower value for it. None of this, of course, matters if the government’s prime objective in its announcements is aimed at just getting goodpublicity for its reforms zeal. Right now, it looks that way.