Privatisation Policies and Postprivatisation Control...

10.1177/1028315305281264Journal of Studies in International Education Spring 2006Narayana / India ’s Higher Education

Privatisation Policies andPostprivatisation Control Devicesin India’s Higher Education:Evidence From a Regional Study andImplications for Developing Countries

M. R. Narayana

This article focuses on economic analysis of privatisation policies and post-privatisation control devices in India’s higher education. As a case study, the experi-ences of Karnataka State in collegiate education under general higher education areemphasised. A change in public financing, rather than a shift of public ownership andmanagement to private sector, is the most dominant feature of privatisation policies.The impact of privatisation is estimated in terms of fiscal effect, price effect, andeffects on quality, equity, and affordability. To overcome the negative effects ofprivatisation policies, the need for postprivatisation control devices are argued, anda few policy devices are suggested. The Organisation for Economic Cooperation andDevelopment experiences in postprivatisation control devices for manufacturing andinfrastructure privatisation are shown to have relevance for both privatisationand globalisation of higher education services, especially in view of bringing educa-tion services for negotiations under the World Trade Organisation’s General Agree-ment on Trade in Services.

Keywords: privatisation; postprivatisation control devices; globalisation; colle-giate education; Karnataka State; WTO’s GATT

The literature on economic analysis of privatisation is dominated by effi-cient and equity aspects of manufacturing and infrastructure privatisation.1 Forinstance, the Organisation for Economic Cooperation and Development’s(OECD) (2003) approach emphasises the efficiency aspects of privatisation.2

The major lessons from the OECD experiences are broadly related to twoaspects. First, lessons for design and implementation of privatisation policiesand programmes include (a) ensuring transparency and integrity of the process,

46

Journal of Studies in International Education, Vol. 10 No. 1, Spring 2006 46-70DOI: 10.1177/1028315305281264© 2006 Association for Studies in International Education

(b) addressing competition and regulatory issues prior to sale, (c) ensuring thatan effective communication is in place to explain the policy and to address stake-holders’ concerns, (d) limiting restrictions on foreign ownership, (e) staging asale that is driven by commercial considerations, and (f) using postprivatisationcontrol devices judiciously. Second, there is coordination between privatisationand other economic programmes due to complementarity between programmes,such as financial market reforms, labour market reforms, and tradeliberalisation.

Distributional aspects of privatisation are emphasised in Birdsall and Nellis(2003). Analysis of distributive effects of privatisation is highlighted in terms ofdistribution of assets, returns to labour and physical capital, prices and access,and fiscal effects. Three major conclusions are as follows. First, manufacturingprivatisation, which produced and supplied goods in competitive markets, hasnot posed distributional problems, even in poorer countries. Second, the distri-butional impact of infrastructure privatisation, which produced and suppliedservices in competitive markets, is not as bad as popularly thought. Third, gov-ernment can and should do more in their privatisation programmes to maximisepotential distributional gains.

An important gap in the above approaches to privatisation is the neglect ofsocial infrastructure privatisation, such as privatisation of educational servicesor education privatisation. However, Belfield and Levin (2002) have filled thisgap by analysing the causes, consequences, and implications of educationprivatisation from the experiences of select countries in South America (i.e.,Chile and Columbia), North America (i.e., United States) and Europe (i.e., Eng-land, Netherlands, and Czech Republic). The study distinguishes three forms ofeducation privatisation: (a) increasing private provision, (b) raising privatefunding, and (c) enhancing private regulation, decision making, and account-ability. On the demand side, the pressures for privatisation are accounted for inexcess and differentiated demands for education. From the supply side,privatisation is argued to overcome perceived lack of quality and capacity con-straint in the public education system. Furthermore, Belfield and Levin providea framework for evaluating education privatisation in terms of three criteria: (a)freedom of choice to demanders of education, (b) efficiency in resource use, and

Narayana / India’s Higher Education 47

Author’s Note: This article is the modified version of a paper presented at the Indian Council of Social Sci-ence Research-Organisation for Economic Cooperation and Development conference on Privatisation andCorporate Governance of State-Owned Assets, November 27-28, 2003, New Delhi. Grateful thanks aredue to Professor V. R. Panchamukhi (chairman, Indian Council of Social Science Research, New Delhi),Professor Peter Mihalyi (Central European University, Budapest), Mr. Adolfo Di Carluccio (director,Ministere de l’Economie et des Finances, Rome), and other participants of the conference for constructivecomments, and peer reviewers of this journal are thanked for useful suggestions. However, the usual dis-claimer applies.

(c) equity or fairness in access to education opportunities, resources, and out-comes. Evidence for a raise in efficiency implies that “the government sectormay be able to reduce taxes but maintain educational standards” (p. 70). How-ever, the study does not elaborate on the needs and/or experiences ofpostprivatisation control devices.

Thus, analysis of education privatisation policies, as well as postprivatisationcontrol devices, in a developing country such as India is the main objective ofthis article. To single out specific issues, the scope of analysis is restricted to acase study of general collegiate education in India’s Karnataka State.3 AsKarnataka State is one of the fastest reforming states in higher education, itsprivatisation experiences are of special importance and relevance for other statesin India in particular, and developing countries in general, which have compara-ble structures of higher education.4 Furthermore, this article explores the rele-vance and applicability of the OECD framework for postprivatisation controldevices of manufacturing and economic infrastructure privatisation for analysisof postprivatisation control devices for higher education.5 Thus, the analysis inthis article adds India’s experiences to international education and draws lessonsfrom international experiences for higher education privatisation in India andother developing countries.

The rest of this article is organised as follows. The second section provides abrief description of the structure and composition of higher education inKarnataka State. The third section analyses the policy attempts and proposals,and effects of privatisation, in Karnataka’s higher education. In the fourth sec-tion, the postprivatisation control devices for improving equity, access,affordability, and quality in the provisioning of higher education services areemphasised. The fifth section concludes with policy implications.

STRUCTURE AND COMPOSITIONOF HIGHER EDUCATION

Higher education includes all types and levels of postsecondary education.Types of higher education include general, technical, medical, and agriculturaleducation. Universities and their affiliated colleges distinguish the levels in eachtype of higher education.

Until 1976, education was in the list of state subjects under the Constitutionof India. Since the 42nd Amendment to the Constitution in 1976, education hasbeen placed under the concurrent list and, hence, both union government andstate governments can formulate policies and programmes for regulation, pro-motion, and development of education, including higher education.

Table 1 presents the number of universities and colleges by types of highereducation and by types of management of institutions in 2000-2001. The num-

48 Journal of Studies in International Education Spring 2006

ber of universities is limited to those with an affiliated college system.6 The datareveal the following three essential features that justify the focus of analysis ongeneral collegiate education in this article.

First, the number of institutions in general education is the highest among thetypes and levels of higher education in the state. For instance, 60% of total uni-versities, 9.52% of total colleges, 75.71% of government colleges, 93.39% ofprivate aided colleges, 61.14% of private unaided colleges, and 40.54% of uni-versity colleges are in general education.

Second, of the total colleges in general higher education (1,122), the share ofthe general degree colleges (924) is highest (82.35%). By management of col-leges, 94.97% of government colleges, 89.85% of private aided colleges,75.92% of private unaided colleges, and 53.33% of university colleges belong togeneral degree colleges.7

Third, the role of the private sector is prominent but presents a contrastbetween agricultural and nonagricultural education. For instance, there is no pri-vate sector participation in agricultural education. Within nonagricultural edu-cation, the pure private sector (i.e., comprising private unaided colleges) is dom-inant in all types of higher education, as it comprises 55.53% of colleges ingeneral education (in particular, 51.19% of total general degree colleges,76.08% of colleges in technical education, 95.45% of colleges in medical educa-tion [allopathic], and 80.95% of colleges under the Indian system of medicine[nonallopathic]). The mixed private sector (i.e., comprising private aided col-leges) shows varying share in all types of higher education, that is, 28.97% ofcolleges in general education (in particular, 31.6% of total general degree col-leges), 7.05% of colleges in technical education, and 11.90% of colleges inIndian system of medicine (nonallopathic). In short, pure private sector com-prises 63.14% of colleges, and mixed private sector comprises 21.56% of col-leges. Or, the contribution of pure and mixed private sector to Karnataka’shigher education accounts for 84.70% of colleges.8

PRIVATISATION POLICIESFOR HIGHER EDUCATION

Privatisation policies have three important dimensions: First, transferringcurrent ownership and management of colleges from the government sector topure private sector and/or mixed private sector; second, shifting from currentpublic financing of government and private colleges to private financing includ-ing private foreign financing, as India is an open economy, or to a mix of public-private financing of government colleges; third, establishing new colleges and/orcontinuing the established colleges under pure or mixed private ownership,


50

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management, and financing. Thus, the growth of private aided and unaided col-leges should be treated as a process of privatisation of higher education.9

Over the years, there have been no proposals to (a) hand over the ownershipand management of government colleges to the private aided or unaided sector,and (b) take over private aided or unaided colleges as government colleges in thestate. On the other hand, all new colleges established since July 1987 have beenpermitted only on a permanent unaided basis. Furthermore, there have beenmany policy measures and proposals to reduce financial support and assistanceto private aided colleges. This implies that changes in public financing issues arerelevant for privatisation of collegiate education in the state.10 Thus, in what fol-lows, the policy measures and proposals for changes in public financing to pri-vate colleges in Karnataka State are focused on.11

The nature of state government or public financing to collegiate education isdifferent between the government colleges and private colleges.12 In the case ofgovernment colleges, all expenditure (i.e., net of students’ fees to the state gov-ernment, however) are met by the state government. In the case of private col-leges, the state government provides maintenance or teaching grants in the formof a percentage reimbursement of salary payments of working teaching andnonteaching staff. These grants are called grants in aid (GIA). A college thatreceives (or does not receive) the GIA is called an aided (or unaided) college.13

The framework for formulation and implementation of GIA policy is pro-vided in GIA codes. The codes specify, among other things, that the GIA is a dis-cretionary grant, as the state government has all rights reserved to it with regardto changing and interpreting the rules and, hence, for extending or withdrawingthe grant. Thus, the GIA cannot be claimed as a matter of right. Furthermore, animportant precondition for the GIA is the availability of funds under the con-cerned heads of expenditure in the state budget.14

The GIA policy has both promotional and regulatory objectives, such as (a)encouraging private enterprise and management in higher education throughprivate-public partnership in financing; (b) regulation of the administration ofaided colleges (e.g., staff recruitment, reservation policy and roaster system inrecruitment, admission of students, and fixing of student fees); (c) reduction oftotal cost of providing education for the state government, especially as com-pared to a hypothetical situation where all the private aided colleges were to beestablished and totally funded as government colleges; (d) equalisation of salaryand service conditions for teaching and nonteaching staff in aided colleges onpar with the staff in government colleges, thereby enabling private college man-agement to attract the best qualified and experienced staff for improving thequality of teaching in the colleges; and (e) reduction in the cost of accessing col-


legiate education by students, as compared to a situation in which the GIA isabsent and the private aided colleges work on the basis of full-cost recovery fromstudents.

Table 2 presents the relative share of general higher education (i.e., universityand higher education [U&HE]) and on GIA to collegiate education within thestate’s budget in 2002-2003. First, share of revenue (or current) expenditure onU&HE constitutes only about 2.4% of the total revenue expenditure of the state.Second, share of capital expenditure (or investment) on U&HE constitutes onlyabout 0.1% of the total capital expenditure of the state. Third, share of revenueexpenditure on U&HE is about 13% of the total revenue expenditure on generaleducation. Fourth, revenue expenditure constitutes about 99% of the totalexpenditure on U&HE. Fifth, share of GIA to collegiate education constitutesabout 50% of total revenue expenditure on U&HE. Sixth, GIA to collegiate edu-cation as a percentage of total revenue deficit of the state government is about7%. And seventh, share of expenditure on U&HE in the net state domesticproduct (at factor cost and current prices) is only about 0.5%.

Select indicators of level of GIA to collegiate education are presented inTable 3. It is apparent that of all the types of private aided colleges, the generaldegree colleges constitute the largest number, composing about 90% of totalnumber of colleges, 96% of total enrolment of students, 97% of total budgetaryallocation, and rupees (Rs) 8.1 (or US$0.17) million of GIA per college. How-ever, in terms of GIA per student, general degree colleges stand next to thecolleges of education.

From the viewpoint of the state government, the justifications for reduction inGIA to collegiate education include (a) lack of budgetary resources to meet theexisting needs of GIA, (b) switching budgetary expenditure from higher educa-tion to meet the increasing needs of resources for establishment and expansionof school education in backward areas, (c) presumption that the aided collegesare financially strong enough to mobilise their own resources, and (d) reductionof budgetary subsidies to higher education and to achieve the fiscal objectives(e.g., targeted reduction in revenue deficit) of the medium-term fiscal plan.15

Thus, over the years, the GIA to collegiate education has been reduced by the fol-lowing measures. First, all the private degree colleges established after June 1,1987 have been started on permanently non-GIA basis. Second, since 1990-1991, no new courses have been brought under GIA, and since 1993-1994, therehas been a ban on filling vacant positions of nonteaching staff. Third, a largenumber of teaching posts has remained vacant for several years and is beinggradually converted into unaided posts. The resultant savings are reallocated tomeet the increasing cost of GIA, especially due to implementation of revised pay


scales in effect from January 1, 1996. Fourth, closure of traditional courses inaided colleges where the enrolment of total students in a course was fewer than40 students and/or where the workload for the teaching staff was not full. Thestaff of such closed courses had been transferred or deployed to other aidedcolleges where the workload existed, or to newly established governmentcolleges.

In addition, further reduction in GIA is anticipated under the following newproposals of the state government.16 First, no new colleges are to be broughtunder the GIA codes. Second, GIA is to be phased out step by step for currentlyaided institutions over the next 5 years by stopping GIA for 10-year-old collegesin urban areas and for 15-year-old colleges in rural areas. This is called exit pol-icy. Third, the savings of resources through exit policy are to be redeployed tobring new schools on GIA.17

IMPLICATIONS OF THEPRIVATISATION POLICIES

Select implications of proposed privatisation policies (i.e., exit policy) forhigher education on growth of pure private sector, price of education services,budget deficit, access and affordability, and quality of higher education areanalysed below.


Table 2 Public Expenditure on General Higher Education and CollegiateEducation in Karnataka State, 2002-2003

2002-2003Indicator of Budgetary Allocation (Revised Estimate)

Revenue expenditure on university and higher education (U&HE)as a percentage of total revenue expenditure of the state government 2.39

Capital expenditure on U&HE as a percentage of total capitalexpenditure of the state government 0.09

Revenue expenditure on U&HE as a percentage of total revenueexpenditure on general education 13.87

Percentage share of revenue expenditure in total expenditure on U&HE 99.48Percentage share of grants in aid (GIA) in total revenue expenditure

on U&HE 49.82GIA to collegiate education as a percentage of revenue deficit of the

state government 7.14Expenditure on U&HE as a percentage of net state domestic product 0.48

Source: Computed by using the basic data in Government of Karnataka (2003a, 2004).

54

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Growth of the Pure Private SectorA quick glance at the location pattern and duration of GIA by type of colleges

in Table 4 shows the following implications of the exit policy. (a) Of the 292 gen-eral degree colleges, 253 colleges (87%) are located in urban areas. In the sameway, all the aided colleges in education, law, and fine arts are located in urbanareas. Thus, the exit policy for rural colleges is applicable only for generaldegree colleges. (b) If the proposed exit policy is implemented, 78% of urbangeneral degree colleges, 64% of rural general degree colleges, 75% of lawdegree colleges, 68% of colleges of education, and 100% of fine arts collegeswill be out of GIA immediately, as they have been receiving grants for 10 yearsin urban areas and 15 years in rural areas. (c) At the end of the next 5 years from2003, another 31 colleges in urban areas and 13 colleges in rural areas will be outof the GIA policy. Thus, the cumulative total number of colleges to be out of GIAin 2008 will be 98.63% of general degree colleges, 100% of law degree colleges,and 96% of the colleges of education. Or, 98.46% of 325 private aided collegeswill be out of GIA policy by 2008 and, hence, contribute to higher growth of pureprivate sector.

Fiscal EffectIn terms of current levels of GIA as given in Table 3, the total resource saving

to the state government from the exit policy is equal to Rs 2,093.05 (orUS$43.36) million, or 85.88% of total GIA to collegiate education in 2002-2003. This saving constitutes about 6.12% of the revenue deficit (revised esti-mate) of the state government.

Price EffectAn increase in fee is inevitable to recover, among others, the expenditure on

staff salary due to withdrawal of GIA under the exit policy. The fee escalationwill have to be equivalent, on an average, to the per capita grant to the colleges,as shown in Table 3. Supposing that all students pay the total fee, the total feecollections would have constituted 4.84% of GIA in 2002-2003. Thus, for totalcost recovery on account of withdrawal of GIA to general degree colleges, thetotal fee per student should have been increased by a minimum of 21 times morethan the total fee charged in 2002-2003.18

Effects on Access and AffordabilityA steep rise in student fee raises many issues relating to access to and

affordability of higher education, especially for poor but merited students in all


56

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castes and communities. Although (a) education loans from commercial banks,and (b) scholarships, free studentship, and other forms of transfer paymentsfrom the government and colleges are often argued as mechanisms to offsetincreased cost due to fee hike, the extent of availability and accessibility of theseresources for all students and the feasibility of families taking such loans are notascertained.19

Aided colleges have been the major source of accessing higher education inbasic sciences, humanities, and social sciences. In the recent past, there has beena decline in enrolment in collegiate education, especially in basic science educa-tion, in the state. The decline is explained by many factors, such as poor qualityand relevance of degree education and overemphasis on professional education,especially information technology and management courses. Hence, any steepincrease in student fee may have a negative impact in terms of a raise in currentdropout or decline in future enrolment of students due to nonaffordability.

Effects on QualityAn impact of reduction in GIA on the quality of collegiate education may be

felt in more than a few ways. First, if the nonfunded GIA posts are not to be filledby private management, other things being equal, it would result in a higherstudent-teacher ratio and reduced quantity and quality of teacher time per stu-dent. Second, over time, nonfunded GIA courses may be closed, especially if theprevailing pattern of declining enrolment is continued. Third, if a college hasonly aided courses, gradual elimination of GIA posts shall eventually lead to clo-sure of the colleges. Fourth, if the college management makes alternativeappointments against the nonfunded GIA posts, the appointment may not carrysalary and perks that are equivalent to persons on GIA posts. Hence, the best oftalent may not be attracted to the teaching profession, and heavy turnover ofteaching staff may be inevitable.20

Nondiscriminatory EffectsAlthough the proposed GIA policy is discriminatory in regard to location of

colleges and duration of GIA to the colleges, it does not differentiate (a) betweensubjects in a course or courses in a college, (b) between colleges located in back-ward and forward areas, (c) between colleges in terms of the composition of stu-dents who are female, scheduled castes and tribes, and other backward commu-nities, (d) between colleges in terms of having professional and vocationalcourses and traditional (i.e., non–market oriented, culture promoting and pro-


tecting) courses. Furthermore, for lack of information on finances of the privateaided colleges, the proposed GIA policy does not discriminate between finan-cially strong and weak colleges. Consequently, the proposed privatisation poli-cies will have indiscriminate effects on both efficiency and equity in collegiateeducation in the state.

NEED FOR POSTPRIVATISATIONCONTROL DEVICES

It is gratifying to note that there are several built-in postprivitisatoion controldevices in the proposed privatisation policies. For instance, colleges to bebrought under exit policy (a) shall not reduce the salary and allowances of exist-ing staff and fee exemptions and concessions for socially vulnerable andbackward communities (e.g., students belonging to scheduled castes andtribes), (b) shall have opportunities to levy higher fees, and (c) shall be subject torecruitment of teaching and nonteaching staff as per the qualifications pre-scribed by the government. Nevertheless, there is a need for greater and widerpostprivatisation control devices to safeguard quality, access, affordability, andequity, and regulate cost and price in higher education. These devices are sug-gested below.

Devices to Safeguard Quality and Improve RelevanceThree important institutional mechanisms for monitoring and regulation of

the quality of collegiate education may be mentioned.21 First, grant and with-drawal of affiliation to colleges by state universities as per the State UniversitiesAct 2000 (Government of Karnataka, 2001b). Second, assessment and accredi-tation by the National Assessment and Accreditation Council (NAAC). Third,International Organization for Standardization (ISO) 9000 for educational insti-tutions is considered. If NAAC’s accreditation is made compulsory for all col-leges, it shall go a long way in professional improvement of quality of highereducation, along with mandatory affiliation requirements.

An important determinant of relevance of collegiate education is the prescrip-tion of curricula for courses. At present, the universities fix the curriculum fortheir colleges. Thus, colleges lack autonomy in designing their own curriculaaccording to the particular needs of students and areas within the universities. Tobring in innovations, dynamism, and improve relevance, colleges should seek,and universities must offer, academic autonomy. Furthermore, autonomy iscostly. Hence, academic autonomy should go along with financial autonomy forfixing college-specific student fee and other sources of resource mobilisation.


Regulation of Cost and PriceAll colleges (i.e., autonomous and nonautonomous colleges) in pure and

mixed private sector should ensure transparency in all receipts. The receiptsinclude differential fee income for professional and nonprofessional courses,endowments, charity, philanthropy, and alumni associations (i.e., donationsafter graduation) and consultancy. Furthermore, accountability for all expendi-ture for development of the colleges and improvements in delivery of their edu-cational services should be ensured.

The future planning for higher education should aim at making all-out effortsby all stakeholders (i.e., the state government, affiliating university, and collegemanagement) for interinstitutional collaboration (e.g., between colleges anduniversity located within the same area) to avoid creating parallel facilities and,thereby, promoting network of personnel and institutions for long-run reductionin the total social cost of providing collegiate education in an area. Thus, consol-idation and cooperative sharing of facilities should guide the future quantitativeexpansion of private higher education.

There is a need for a selective GIA policy in order to minimise the transitionaland terminal costs of privatisation of higher education. Some elements of such apolicy restructuring may include the following. First, prioritisation and target-ing of reduction in budgetary subsidy is essential. For instance, GIA should notbe cut for courses that have little or no market or employment orientation or thataim at preserving and fostering the culture, encouraging learning, and teachingand researching in subjects of culture and civilisation of the society. This point isalso endorsed in Government of India (2000). Second, area-specific instrumentsfor reduction in subsidies must be evolved. For instance, GIA should not be cutto colleges that are located in backward and rural areas and in which large num-bers of students come from poor families, especially women, and scheduledcastes and tribes students.

The Supreme Court judgment on October 31, 2002, in the T. M. A. Pai Foundationand others versus State of Karnataka and others case (Writ Petition [Civil] 317 of1993) has three major implications for the regulatory powers of the state governmenton admission and fee fixation policy for private institutions in higher professionaleducation. First,

the State government or the university may not be entitled to interfere with the right toadmit students, so long as the admission to the unaided educational institutions is on atransparent basis and the merit is adequately taken of.

Second, “fees to be charged by unaided institutions cannot be regulated but no insti-tution should charge capitation fee.” Third, “appropriate machinery can be devised


by the state or university to ensure that no capitation fee is charged and there is noprofiteering, though a reasonable surplus for the furtherance of education is permis-sible.” In essence, the judgment calls for deregulation of both admissions and fees inunaided professional colleges.

Subsequently, the bench of five judges of the Supreme Court is constituted toclarify doubts and/or anomalies (Writ Petition [Civil] No. 350 of 1993) Thisbench gave the judgment on August 14, 2003, which included the followingimportant provisions. First, each institution must have the freedom to fix its ownfee structure, taking into consideration the need to generate funds to run theinstitution and to provide facilities necessary for the benefit of the students. Sec-ond, the respective state government–concerned authority shall set up, in eachstate, a multimember committee headed by a retired high court judge who shallbe nominated by the chief justice of India. Each institution must get approval ofthis committee on the fee to be charged. Third, the respective state governmentsdo appoint a permanent committee to ensure fairness and transparency in theconduct of entrance tests for admission of students to their professionalcourses.22

The above public decontrol on admissions and fee fixation is applicable toprofessional higher education in India. In the same way, there is a need for a legalframework to ensure transparency in admission of students and fixation of col-lege special fees in nonprofessional education. Such a legal framework is themost important postprivatisation control device for regulation of cost and priceand for implementing affordable prices.

Need for Community ParticipationThere is a need for greater and active involvement of local people, industry,

and old students in developing and auditing the performance of the private col-leges. In fact, these are the potential community sources for mobilising financialresources for future development of the colleges through endowments, philan-thropy, and alumni associations (i.e., donations after graduation). To tap thesesources of resources, effective mechanisms for participation of and coordinationwith industry, old students, and local people must be developed by the colleges.Such of those colleges that excel in these sources of resource mobilisationshould be provided with financial incentives (e.g., a certain percentage ofmatching grants) by the union or state government. In addition, the role of char-ity of religious institutions (e.g., temples under the Endowment Act) should berecognised. If permissible, the limits to charity under the Endowment Actshould be increased, subject to the condition that increased charity must be spentonly on improving educational institutions.


Need for a Competition PolicyIndia is a founding member of the World Trade Organisation (WTO) since

January 1995. The General Agreement on Trade in Services (GATS), a frame-work for transparent, nondiscriminatory, and rule-based international trading ofservices, includes education services. Under the WTO (1998) classification ofservices, education services include primary, secondary, higher, adult, and othereducation services. GATS defines services trade as occurring through four pos-sible modes of supply: Mode 1 (cross-border supply, e.g., virtual university andonline degree programme), Mode 2 (consumption abroad, e.g., Indian studentsstudying abroad), Mode 3 (commercial presence, e.g., local branch campusesand twinning arrangements), and Mode 4 (movement of natural persons, e.g.,temporary movement of teaching staff to foreign countries). A new round of ser-vices negotiations including education services was launched in January 2000.Consequently, proposals from the United States on higher education serviceshave already been submitted to India. At present, India’s schedule of specificcommitments (i.e., sectoral or horizontal schedules of commitments) under theGATS does not include any of the education services (Government of India,2004). However, if commitments are given in future, they would imply a need fora competition policy for higher education in India, as a postglobalisation controldevice, to enhance and strengthen their global competitiveness due to (a) theopportunities for enhancing export of education services from India to theUnited States and (b) challenges of import competition from the United States toproducers and providers of education services in India.

Relevance of OECD Instruments ofPostprivatisation Control Devices

OECD’s (2003) postprivatisation control devices refer to

provisions and arrangements that governments have put in place at the time of sale inorder to retain some degree of control over the privatized state-owned enterprises, andto protect the newly privatised companies from the rigours of the competition for corpo-rate control. (p. 106)

The instruments of these devices are summarized in Table 5.The golden shares and stable code of shareholders’ instruments are relevant

and applicable for India’s higher education to protect domestic private collegesfrom hostile takeovers and to preserve the domestic ownership structure of theprivate colleges, in an era of global privatisation of higher education. In the sameway, OECD’s approach of retaining a controlling interest is of relevance and



Table 5 The Organization for Economic Cooperation and Development’s(OECD) Instruments of Postprivatisation Control Devices

Three major instruments of postprivatisation control are golden shares, stable core of share-holders, and retention of controlling stake as opposed to full privatisation. To quote theOECD (2003):

Golden Shares provide governments with special powers and veto rights in the fully orpartially privatized companies, and have served governments as a means of protectingthe newly privatized company from hostile takeovers on national security or on publicpolicy grounds, where this has been deemed to be necessary.

However, the instrument

can act as an impediment to improved efficiency, in that they can potentially serve as avehicle for government intervention in company decisions, and undermine effectivefunctioning of the market for corporate control. For this reason their adoption canpotentially create investor uncertainty, and generally is not favoured by the markets. (p.107)

Under the stable core of shareholders approach,

the ownership structure of the privatised company includes a stable core of sharehold-ers made up of a group of national investors (such as banks,allied industrial groups,fam-ilies) with whom a significant stake in the privatized company is placed.These investorsare then required to retain their shareholding for a specific period of time,and they actjointly in exercising control over the company. The intent is to create a stable core ofshareholders in order to provide the company with stable governance during the earlyyears after its privatisation and thus protect it from hostile takeover bids. . . . The use ofa stable core of shareholders may give rise to corporate governance problems. . . .More specifically: (i) They can tie up the core shareholders’ assets in cross-shareholdings and as a result capital may not be employed in the most productivemanner. (ii) Management power is entrenched and the approach tends to protectthe interests of the core shareholders at the expense of improved corporate efficiencyand, hence interests of other investors. (iii) Is not transparent and tends to inhibit theemergence and functioning of the market for corporate control. (pp. 111-113)

An attempt to “privitise a minority stake in the company, while remaining committed toretaining public ownership and control over the long-term as a means of protecting nationalor public interest,” is called retaining a controlling interest approach. In this partialprivitisation approach,“the intent is to sell a minority stake in the company to improve its per-formance through the infusion of private equity and management,but there are no immediateplans to relinquish control.” The main drawbacks of the approach are as follows. First, “if thestructure of governance and incentives are left unchanged, the full benefits of improved effi-ciency are not likely to be realised.” Second,the approach “does not sever the link to the gov-ernment and as a result the government tends to remain exposed to risk,especially where theactivity embodies public interest considerations” (pp. 114-115).

applicability for the entire discussion on the postprivatisation control devicesfor collegiate education in Karnataka State. Thus, OECD experiences are of rele-vance for designing implementable postprivatisation control devices in India’shigher education.23

CONCLUSIONS AND IMPLICATIONSThis article has analysed the privatisation policies and postprivatisation control

devices for higher education in India. Based on a regional study of collegiate educa-tion under general higher education, policy measures in the 1990s and current pro-posals for privatisation are analysed and their quantitative effects are estimated.Postprivatisation control devices are proposed, with special reference to relevanceand applicability of the OECD instruments. The major conclusions and policyimplications are as follows.

• The contribution of pure private sector and mixed private sector is dominant in all typesof higher education, except in agricultural education.

• Privatisation of higher education is identified in terms of management, ownership, andfinancing aspects. However, only the financing aspect (i.e., new colleges to be estab-lished, or existing colleges to be continued, under the exclusive private ownership, man-agement, and financing) is relevant for analysis of privatisation policies for highereducation.

• The reduction in budgetary support in the 1990s and current proposals to gradually phaseout public financing to private sector education have enhanced the process of educationprivatisation. The effects are estimated in terms of fiscal effect, price effect, effects onaccess and affordability, effect on quality, and nondiscriminatory effects. Except for pos-itive fiscal effects, the effects of privatisation are found to be mixed or negative. Thus,postprivatisation control devices are relevant to safeguard quality, access, affordability,and equity in higher education.

• OCED’s instruments of postprivatisation control devices in the form of golden shares,stable code of shareholders, and retaining a controlling interest are found to be relevantand applicable to protect domestic private sector education from hostile takeovers and topreserve the domestic ownership structure in an era of global privatisation of highereducation.

Specific postprivatisation control devices, proposed for India’s higher education pol-icy, are as follows:

• Mandatory accreditation of all private colleges for improving quality of theirprovisioning of services.

• Area-based planning for interinstitutional networking and utilisation of resources forreduction in cost of provisioning of services by public and private sector educationinstitutions.


• Privatisation policies should not be applied to courses that are culture promoting andprotecting and that have no market orientation in higher education.

• Autonomy for private colleges should be granted to improve relevance of education withbuilt-in safeguards and transparency in regard to fixation of student fees, staff serviceconditions, and admission of students.

• Transparency of all receipts and accountability of all expenditure should be ensured inall private sector institutions.

• A competition policy should be evolved to prepare the private sector colleges in the faceof global competition under WTO regime.

• OECD instruments for postprivatisation control devices should be given a try in thedesign and implementation of postprivatisation control devices.

• Best practices of postprivatisation control devices of other countries should be exploredfor design and implementation of alternative policy devices.

This article is based on the Indian experiences. However, the framework, results,and implications of this article are applicable for other developing countries with acomparable structure of higher education. Such applications shall provide alterna-tive evidences (either supporting or confronting) for the effects of higher educationprivatisation and instruments of postpritivisation control devices in other developingcountries. Accordingly, the generality or specialty of Indian experiences can beempirically established.

NOTES

1. In general, privatisation refers to “transfer of a function, activity, ororganisation from the public to the private sector” (Cajucom, 2003). Or“privatisation is the transfer of activities, assets and responsibilities fromgovernment/public institutions and organizations to private individuals andagencies” (Belfield & Levin, 2002, p. 19).

2. Other important aspects covered in the book include the policy objectivesof privatisation, empirical evidence on effects of privatisation, and privatisationmethods. The objectives of privatisation include fiscal objectives (e.g., reduc-tion in deficit and debt), attraction of investment, improvement of corporate effi-ciency and performance, introduction of competition, and promotion of capitalmarkets. The empirical evidence on the effects of privatisation is focused onimprovements in corporate efficiency and performance, development of capitalmarkets, reduction in government deficits and debt, and on employment andlabour conditions (i.e., working conditions and terms of labour). The mostimportant methods of privatisation include public offerings, trade sales, mixedsales and management, and employee buyouts.

3. Agenda for higher educational reforms in Karnataka is elaborated in Gov-ernment of Karnataka (2002).


4. It might be added here that privatisation issues in the Indian economy ingeneral, and in the education sector in particular, have become prominent withthe start of structural adjustment programmes (SAP) under the national- andstate-level economic reforms in July 1991. That is marketisation (i.e., changingthe structure of incentives and institutions such that reliance on market isincreased or the role of state is reduced) and privatisation (i.e., shifting resourcesfrom government sector to private sector activities) through liberalisation mea-sures. Overall, the major objectives of the reforms include rapid growth ofincome and productive employment, increased consumers’ gains from choice,and exposing producers to competition, both domestically and internationally.For an excellent introduction to India’s economic reforms, see, for instance,Joshi (1998).

5. It might be added here that the Organisation for Economic Cooperationand Development (1990) has brought out a detailed analysis of changes in publicand private financing and control of higher education in their member countries,but privatisation of higher education is nowhere referred to and, hence, no refer-ence is made to postprivatisation devices.

6. Hence, universities in distance education (e.g., Karnataka State OpenUniversity), special universities for promotion of language and culture (e.g.,Humpi Kannada University), deemed universities (e.g., National Institutes ofMental Health and Neuro-Sciences and Manipal Academy of Higher Education)and institutes of higher learning and research (e.g., Indian Institute of Scienceand Indian Institute of Management) are excluded from the scope of this article.

7. Courses offered in general degree colleges are many and diversified, aselaborated in Narayana (2002a). For instance, the undergraduate courses includetraditional courses (i.e., bachelor of arts, bachelor of science, and bachelor ofcommerce) and professional courses (e.g., bachelor of computer applicationsand bachelor of business management). The professional courses include voca-tional subjects (e.g., industrial chemistry, industrial microbiology, foreign tradeand practice, and functional English/communicative English). The postgraduatecourses include traditional courses (e.g., master of arts, master of science, andmaster of commerce) and professional and management courses (e.g., master ofbusiness administration and master of computer applications).

8. Alternative ways of classifying the private sector in higher education areevident, for instance, in Tilak (1991) and Williams (1996). Tilak classifiesprivatisation into four categories: (a) extreme privatisation (total or pure privateinstitutions), (b) strong privatisation (full cost recovery), (c) moderate privatisation(partial cost recovery), and (d) pseudoprivatisation (government-aided privatesector). Williams provides six versions of privatisation: (a) universities run ascompletely commercial organisations, (b) universities as non–profit makingtrusts, publicly owned universities receiving a significant part of their incomefrom (c) student fees and (d) from other private sources through consultancywork and letting out other facilities for public sector use, (e) publicly owned uni-versities or universities with trust status contracting out the provision of subsid-


iary services to private agencies, and (f) publicly owned and financed universi-ties receiving and allocating their resources on the basis of market criteria.

9. Tilak (1999, p. 120) points out three forms of privatisation of higher edu-cation in India. First, privatisation of the system through an increased number ofprivate institutions and a stagnant number and declining proportion of publicinstitutions. Second, actual privatisation of existing public sector institutions ofhigher learning through transfer of management from government to privatetrusts. Third, privatisation of the institutions through increased private financ-ing, more fashionably referred to as cost recovery. These forms of privatisationat the national level coincide with the above dimensions of privatisation.

10. This aspect of privatisation is relevant in international context. Forinstance, Tooley (2001) argues that

interest in the private education sector—in developed as well as developing countries—is moti-vated by . . . the need to restrain public expenditure, in order to reduce budget deficits and externaldebts, and the consequent need to find alternative sources of funds for education. (p. 30)

11. Another important attempt to introduce privatisation in higher educationis a proposal to establish private universities in the state, based on the PrivateUniversities (Establishment and Regulation) Bill, 1995. The bill is detailed inhttp://interboardap.nic.in/htmlweb/pvt_uni-bill.htm. As this article is focusedon privatisation in collegiate education, privatisation of university education isnot elaborated.

12. It might be added that in addition to state government grants, the eligiblecolleges (e.g., permanently affiliated colleges) are provided with developmentgrants by the Government of India through the University Grants Commission.In general, these grants are for capital expenditure purposes, including construc-tion of buildings, purchase of equipment, and books and journals for library. Atpresent, 332 colleges are recipients of the Commission’s grants.

13. Aided colleges need not have only aided courses. In fact, many of theaided colleges do have many unaided courses (e.g., professional courses such asbachelor of business management) and subjects (e.g., electronics), as they arenot eligible for grants in aid (GIA). This implies that development of unaidedcourses in private aided colleges is contributory for growth of pure private sectoreducation.

14. A detailed description of GIA policy and codes is given in Narayana(1999).

15. For instance, the Approach Paper to Subsidies in Karnataka (Governmentof Karnataka, 1997) recognises that there exists a relationship between budget-ary expenditure on and subsidies to different levels of general education in thestate in the following terms:

The Higher Education involved considerable subsidisation by Government in our country. This isnot justified because the benefits accrued to an insignificant proportion of the population irrespec-tive of whether the beneficiaries have the capacity to pay for the services or not. It is therefore


highly inequitable. Further, Higher Education is both costly and improves the skills and employ-ability and income earning capacity of the beneficiaries. Therefore, the beneficiaries should pay forsuch higher education. However, in case of poor students availing the facility, open subsidies byway of freeships, scholarships etc may be provided.

For economic estimation and analysis of budgetary subsidies to higher education inKarnataka State with special reference to the collegiate education, see, for instance,Narayana (2001a, 2001b).

16. These proposals are recommended in the discussion paper by the Com-mittee under the Chairmanship of the Additional Chief Secretary, constituted bythe Government of Karnataka in January, 2003.

17. In fact, these proposals have already been translated into policy state-ments. For instance, the Medium Term Fiscal Plan for Karnataka 2003-04 to2006-07 (Government of Karnataka, 2003b) states that

a clear policy prescription is being worked out. . . . The approach will be to freeze GIA at currentlevels in all secondary and higher education institutions immediately, and the savings therefromused for enhanced allocations and quality improvement in government institutions. Thereafter,over the near term, provide for phase out of GIA to higher education. (p. 25)

18. This is in contrast with the upper limit set in the Approach Paper to Subsi-dies in Karnataka (Government of Karnataka, 1997):

to aim at revising upwards the fees and other payments for higher education in such a way that atleast 75 to 80% of the cost of services are recovered in the long run which can be attempted inphases. (pp. 26-27)

19. Narayana (2002b) offers evidence on the impact of student loans onreducing budgetary subsidies to collegiate education in the state. He finds thatthe maximum fee collectable from a student as a percentage of estimated subsidyper student in government (or private aided) colleges is only 4.85% (or 2.83).The evidence clearly implied that fee collections effected so far have not contrib-uted to a sizable share of total subsidy to collegiate education in the state. Alter-natively, if the budgetary subsidy is to be entirely financed by student fees, theamount of fee revision should have been gigantic. Consequently, student feerevision as a single instrument may not be an appropriate instrument for totalreduction of the budgetary subsidy to collegiate general education in the state.

20. However, empirical evidence on the impact of reduction in GIA on stu-dent performance in private aided colleges is mixed, as is evident in Narayana(2000, 2001c).

21. Quality of collegiate education may be related to three interrelated agentswithin the colleges: first, quality of students admitted or enrolled in courses; sec-ond, quality of working teaching and nonteaching staff; third, quality of physi-cal infrastructure for teaching and learning processes.

22. A copy of these judgements is available from http://www.juris.nic.in/sc/qrpdisp.asp.


23. Postprivatisation control devices for the education sector are not specificfor India. In fact, their relevance is evident in the education sector of other devel-oped and developing countries, such as New Zealand in Woodfield and Gunby(2003) and for People’s Republic of China in Yuan (2003). Woodfield andGunby focus on the postmarketisation experiences and public control devices inschool education:

Proposals for market-based school reforms seek to expand household choices of where childrenshould be schooled. . . . From 1991, however, pupils were permitted to enrol in the school of theirchoice but were no longer guaranteed a place in their local school. Schools had to accept all appli-cants unless operating at capacity. Enrolment schemes emerged, with capacity-constrainedschools having rights of choice among applicants. Although the marketization of educationinvolved significant changes, central authorities continued to retain a major role in determiningteacher employment contracts, approving school charters, and maintaining educational standards.Capital works continued to be the province of the Ministry of Education (MoE), which also deter-mined the national curriculum and significant changes therein which accompanied the governmentreforms. (pp. 863-864)

On the other hand, Yuan notes the postprivatisation control and promotional roles ofthe government in terms of balance between government control and institutionalautonomy. These roles include (a) approval of the establishment of the private insti-tution; (b) favourable financial policies, such as specific encouraging funds; rentingor selling land, public assets; favourable taxation policy; encouragement of dona-tions; loans from government banks; and permission of reasonable economic returnsof educational investments; (c) assessment of educational quality and accreditationof programs and degrees; and (d) strengthening the governance and management ofprivate institutions including coordination between private sector and governmentalagencies.

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ABOUT THE AUTHOR

M. R. Narayana is a professor of economics at the Institute for Social and Eco-nomic Change in Bangalore, India. He holds a Ph.D. from the University ofTsukuba, Japan. He specialises in the areas of India’s reforms in higher educationwith reference to privatisation and globalisation and financing of higher educationwith a focus on public subsidies and student loan schemes.


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