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The intricate art of indecision

The new governance: a telling example Of course, in the view of some, the long journeys serve a purpose. Noticing that I was routinely turn...

The new governance: a telling example

Of course, in the view of some, the long journeys serve a purpose. Noticing that I was routinely turning down demands — for transferring officials, for relaxing tender-conditions etc. — an experienced politician remonstrated, ‘‘That minister alone is successful who never says ‘no’, and never does anything. Why not just say, ‘That seems a good idea, I will have it examined,’ and send the damned thing on a journey? Bhaiya, duniya aashaa par zinda rahti hai.’’ Indeed, by this measure, the longer the file takes to move from one obstacle to the next, the more valuable it is. Getting it to the next stop becomes an objective in itself for the fellow. And the fact that he has at last got it over one obstacle will itself rekindle the hope that his project will see the light of day.

But its value in the light of such wisdom apart, its therapeutic value for the long-suffering apart, the endless maze has ruinous consequences:

Growth is impeded.

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Governmental enterprises are disabled. How is BSNL to compete with private telecom players when it takes 19 months to process a tender?

Worst, this sclerotic system has given us a reputation; delays, files, long-winding corridors have come to be associated with India in the minds of others. The reputation has consequences over and above the fact.

The president of Nokia had come over for a discussion the other day. When will you think it worth Nokia’s while to establish manufacturing facilities in India, I asked. India’s telecom market was now growing at a pace that in two-three years’ time establishing production here could well be a serious proposition, he said. But we have to look at many things, he added. What is by their standard a small factory produces 10 million handsets a year, he explained. Some of their factories produce 40 million handsets a year, he pointed out. A single handset has about 400 parts. Eighty of these parts are the size of specks of dust. That means that a factory producing no more than 10 million handsets will be receiving four billion components. You can’t build up inventories of these, he said, not of those specks of dust, for instance. The components have to fly in just in time, and the handsets have to fly out just in time. The slightest delay in an office, a strike in some airport, and the whole chain will come apart.

We don’t have to look farther to see how out of line our processes are with what modern operations require. There is the other fact of life. Percy Barnevik drew attention to it some years ago at a World Economic Forum-CII conference here. You have to stop comparing yourself to India of yesterday, he said. It is no longer sufficient to be better than you were yesterday. You have to be better than rival investment destinations are today. In fact, you have to be better than potential investors think those destinations are liable to be tomorrow. And how good are they today? A single example — the first person account by the president of one of our best companies, Sundram Fastners — will suffice.

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Like many other firms, Sundram Fastners had seen the enormous potential of the Chinese market. They set up an office in China 18 months ago so as to understand at first hand the dynamics of doing business in that country. Soon enough they concluded that exporting from India was not going to work as the cost structures in the two countries were too similar. Six months ago they decided to set up a plant in China to manufacture high tensile fasteners. They commenced a study to determine where they should locate the plant. What happened thereafter is best gleaned from the account that Mr Sampathkumar Moorthy, president of SFL, has been kind enough to set down at my request — how I wish it could be made compulsory reading for every official and minister in India. Do read it.

The experience of Mr Sampathkumar Moorthy

What was amazing was every province was keen on direct investment into their province and there was a competition between various provinces. The central policy of attracting foreign investment seems to have percolated down to the provinces and even to the county level. The aggressiveness with which each county was vying for the investment was very evident. We were given to understand that the evaluation of the provincial officials was made on three main criteria:

How much of foreign direct investment was brought into their province;

What are the employment opportunities generated;

VAT generated by the province.

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It would not be out of place to recall an incident that illustrates the aggressiveness of provinces. In the preliminary stages, when we were with one of our customers in Central China, the local provincial authorities came to know that SFL was visiting this customer and may think of setting up a factory in China. The officials requested for an appointment to meet with us and impress upon us that we should invest in their province even though the entire activities were just in the initial stage. They made a total presentation on why their province was best suited and were ready to take us to show various sites. They also went out of their way to make sure that our stay in that province was comfortable and actually provided us with a car and escort so that we could travel in comfort to the next destination. This just illustrates the proactive approach taken where the officials come searching and trying to meet and attract potential investors.

Once the decision to invest in China was made, an assessment of four provinces and 12 industrial zones was carried out. Everywhere there was enthusiastic response; each zone trying to put its best foot forward. SFL finally zeroed in on the Haiyan Economic Development Zone in Zhejiang province.

The experience in dealing with the officials of the development zone and the county was memorable.

The officials were totally proactive and available all the time. The presentation and negotiations were done by the Vice-Mayor of the county who was personally present and who could be reached anytime even during the late hours. They tried to remove the fear of the unknown which we might have had by assuring us that everything would be taken care of by them.

First, they made it clear that it would be truly single window clearance and they would be responsible for getting all the local as well as central clearances. We just need to sign a memorandum of understanding with them and they would present us with the business license.

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Second, everything connected with infrastructure and requirement of the factory was promised to be made available at the doorstep. Power connection, gas, telecommunications etc would be provided at the factory with no need to apply anywhere else or chase any officials or department.

Third, to remove all environmental constraints, provision for disposing of the sewage directly into the central sewage system was promised by the county. Effluent which would be generated in the process of our manufacture would be collected and taken to the central effluent plant to be treated and disposed so that SFL had to do nothing. The distance from the factory to the central treatment plant is three kilometres but the entire work of laying the pipelines was agreed to be executed by the county.

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Fourth, they were very flexible in the discussions and used the discretionary powers available with them. While guideline rules were given by Centre and some of them could not be changed, discretions at the county level were negotiated so that we could get the best deal. For example, the VAT refund, which was promised as 100% for the first year and 70% for the second and 50% for the third year, could be renegotiated to 100% for the first and second year and 70% for the third year. Land which is purchased by the county, was negotiated and finally using their discretionary powers was offered to SFL at 50% of acquisition rates.

Fifth, all services were committed. Power was guaranteed and we were asked not to install any power-generating sets. Labour would be provided by the county at standardised rates. All in all, we were spared the anxiety of talking to various departments. We just had to fill up forms which were given by the county officials and give them back. On completion of this, the development zone was responsible for all processes and obtaining all clearances whether at the Central or at province level and the business license would be handed to SFL to start the activities.

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Finally, the development zone and the county went out of the way to make sure that we felt comfortable in working with them. Not only the total arrangements of transporting us, arranging local sight-seeing wherever required, throwing a banquet in our honour were organised, they made sure that all relevant officials were present for the final signing ceremony. During the final signing ceremony the Vice Mayor and the Mayor of the county, the Vice Mayor of Jiaxing City, Member of Standing Committee of all China Federation of Industry and Commerce, Division Chief of China Centre for Business Cooperation and Coordination etc., participated. In addition, all relevant heads of department at the county level be it the Fire Chief, Police Chief, Land Chief, Environment Chief, everyone of them were present. All of them had the same assurances to offer — that we should not have any problem. If there were anything to be sorted out, they asked us to get in touch with them and they would sort out the matter.

So looking back, what started out as a journey into an unknown land with fears in mind — how the environment would be, whether it would be wise to invest, whether it would be successful — we came back totally assured. The officials were behind us and all the unknowns would be taken care of by them and our job would be just to set up the factory and start production. The entire journey was truly a memorable one, which at the end left us confident of setting up a factory in a distant land and being successful.

That is the treatment that an investor gets in China. Unless the investor sees that he is going to get a better treatment here than in China or Southeast Asia, he will go there. The moral is simple. Granting permissions can only be the first step. The things we keep debating endlessly — raising the cap on foreign equity, granting some tax benefits etc. — can only be a beginning. These are things the investor takes for granted — for they are available to him in every investment destination. We have to actively woo the investor.

There is another feature of the present administrative system that has to be got over — one that those outside the structure do not get to see often. The maze dulls the sharpest of minds. It changes the very idea of what ‘‘work’’ is. Many a civil servant, when he has sent the file to the next stop, feels that he has done ‘‘work’’. Ever so often, I am reminded of Vinoba’s quip, ‘‘Hamaare yahan baat hi kaa kaam hai, kaam ki baat nahin.’’ A system conditioned in this way, seldom throws up creative solutions. We still have individuals in the civil service who are outstanding by every standard. But the system chisels every creative impulse out of them.

Consider a simple fixation that I have had to contend with for four years — the fixation that, were government holding in a company to fall below 51%, the government would lose control of that ‘‘strategic asset’’. Contrast this dread with what private industrial houses do as routine — they control companies with 26% equity, often with less. Reliance acquired BSES a while ago. Soon after they acquired the company, the Reliance management sought and received the shareholders’ consent to amend the Articles of Association. The new Article that the shareholders approved provided that, so long as the Reliance Group of companies and/or its associates, and/or its subsidiary companies hold 26% or more of the paid-up voting equity share capital of BSES and are the single largest shareholder of the company, Reliance shall have the right to appoint the majority of the Directors on the Board, that Reliance shall have the right to appoint the Chairman and Vice Chairman of the Board, that Reliance shall have the right to ‘‘exercise control over the company’’ as defined in the Companies Act.

Similarly, it is routine practice for our companies that issue ADRs and GDRs in international markets to vest voting rights for those shares in the Board of Directors of the Issuer Company. Studying the prospectus of the GDRs of Reliance Energy, for instance, I find that it states explicitly that those acquiring GDRs shall have no voting rights, that they shall vote as directed by the Board of Directors, or assign the proxy vote to a Director of Reliance Energy, or vote in the same manner as the shareholders the Board designates.

Three things strike one. The devices are completely within the law. They are simple as can be. And, third, the company is confident that it can retain effective control over management by these elementary changes. Surely, if the object is to retain control, the government can do so in the same way. The point is that the system almost never throws up even such simple solutions. Indeed, when an idea is suggested, the first reaction is what management experts refer to as IRI — the Instant Rejection Instinct. ‘‘Sir, Law Ministry may have an objection… Sir, Company Affairs… Sir, SEBI…’’

When the consequences are so obvious, when they are so debilitating, why do such practices, why do such attitudes persist?

To be concluded

Based on the author’s address at the India Today Conclave

The writer is Union Minister for Disinvestment, Communications and Information Technology

PART I- Rules, rules! A republic chained by rules

PART III- When the best becomes the enemy of the good

First published on: 19-03-2004 at 00:00 IST
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