Issues in de-nationalisation

Line & Length

The legal principle of 'eminent domain' needs to be inverted

Soon after the Supreme Court ruled that the government could not sell off HPCL and BPCL to privately owned companies, Arun Shourie, the minister for disinvestment, was reported as saying that in India everyone had a veto.

Actually, it is not so much a veto as the ability of well-formed institutions to make the government pause and reflect a bit. Such reflection does no harm at all.

Besides, the Court was only applying the law as it exists, which as given in Section 7 of the nationalisation Act, says that the government can transfer the oil companies only to another government company.

In criticism, it has been said that the court has relied on the preamble to the law. But the preamble and Section 7, if anyone bothers to check the record, are a direct consequence of the way in which the private oil firms are said to have behaved in the past. That is why it is difficult to ignore the security aspect.

Twice before, in 1962 and 1965, India was held to ransom by the oil companies. The records exist in government and should be made public. The Supreme Court should call for them if the government asks for a review of its decision. Perhaps it should call for them anyway so that the issue can be settled once and for all instead of remaining in never-never land.

I have always been opposed, on a variety of grounds, to privatising the oil companies. For one thing, I don't think it makes sense to sell profit-making companies first, never mind the argument that the profits arise from monopolies. The government has so few of them anyway. The real challenge is in selling the duds but no one wants to take that on.

This is partly because credit for the sale will be slow in coming. But governments want instant ovation. Well, I have a suggestion: for every oil company that is sold, why not ask the private bidder to buy 50 duds as well? I know this would amount to a tax on them, but fair is fair. In one shot the taxpayer will be rid of a major drain on government finances.

Second, the public sector oil business isn't just about refineries, it is also about distribution "" and it has been built with the taxes that all of us, and our fathers, have paid. So why transfer all the benefits to a few foreign or Indian shareholders when these companies have been built largely with Indian taxpayers' money?

If the private sector so badly wants to enter the oil business, why doesn't it spend its own money to build the distribution network, which is really what it is after? Why try to get a readymade network? Should it become the taxpayers' responsibility, that too at their cost, to rescue those who have built refining capacity that they cannot distribute?

Third, contrary to the dominant ideology of our time that private is always better, in the case of oil it makes very little difference to the economics of the business whether it is in the public or private sector.

Both behave in the same way because both seek to capitalise on demand inelasticities, natural monopolies in distribution, the huge capital needs of the business, and the need for stable supply contracts. I hope someone can prove to the contrary.

Fourth, yes, there is the problem in India of political control of the oil business. But you have to be very naive to believe that for the energy business politics doesn't matter at all or matters very little in countries where the business is fully private.

There, too, the cost of politics is borne by the taxpayer, except that he doesn't get to know it. After all, when the US refuses to impose a tax on petrol, is it not exactly the same as our governments refusing to raise the prices of kerosene? The consequences are the same, even if the process by which they are arrived at are different.

Having said that, it is possible that the opponents of privatisation may use this ruling to hugely delay the process in respect of other PSUs that need not be in the public sector.

It is necessary, therefore, to devise a new legal principle that would take care of the issue that the Supreme Court has pointed out. For what it is worth, I have the following suggestion to offer. It rests on inverting the key principle that enables governments to acquire private property.

This principle is called the power of 'eminent domain' in the US and it is "the government's right to acquire private property without the property owner's consent. Where private property is needed for a public purpose and the landowner does not voluntarily sell the land, the government may use its eminent domain power to force the property from the owner." The owner is entitled to compensation.

There are thus two aspects to the doctrine or principle. One is that it confers reciprocal rights on both the government and the property owner. The other is that, where the government is concerned, it requires necessity to be shown for it to exercise the right.

The theory has its origins in feudalism in Europe when the sovereign owned everything. Gradually, sovereign ownership was diluted, inasmuch as the rights to (and of) non-sovereign ownership of property were enlarged.

Nevertheless, it was recognised that the government could have legitimate needs for which it needed to acquire private property. But these needs were clearly defined and could be fulfilled only after private owners had been properly compensated. In the US, these notions were put in the Fifth Amendment of the Constitution. The Fourteenth Amendment extended the concept to state governments.

The new legal principle should seek to invoke the necessity for disinvestment, just as necessity is invoked for acquiring private property.

The government should be able to prove that it is necessary to disinvest in nationalised properties because it will serve a larger public purpose and, further, that the right to disinvest should be exercised without consent from the legislature, just as Parliament authorises government to nationalise without consent of the owner, but on the payment of just compensation. The latter is not a problem as long as the price is arrived at after due diligence and proper valuation.

In other words, there is a question of existing law as well as legal principle involved. Both need to be sorted out before disinvestment can proceed smoothly.