Ever since the Vajpayee government ceded ownership of a handful of public sector undertakings (PSUs) to private buyers in 2001-02 and attracted scathing criticism for its pricing and choice of buyers, most Indian governments have pussy-footed around the concept of PSU disinvestment. The disinvestment programme over the last fifteen years has largely centred around dribbling minority stakes in PSUs into the market without the Government really ceding control, inconsequential stake sales through the ETF route or left-pocket-to-right-pocket transfers between PSUs that serve little purpose outside of numerically meeting disinvestment targets.
It is therefore quite reformist of the NDA regime in its second term, to revive the idea of genuine disinvestment through strategic sales of its majority stakes in profitable PSUs to private buyers. The Cabinet Committee on Economic Affairs has approved five PSUs – BPCL, Shipping Corporation of India, Container Corporation, Tehri Hydro Development Corporation and North Eastern Electric Power Corporation – for strategic sales this week. Of these, while the last two are proposed to be sold to NTPC, the government has indicated its willingness to give up management control along with majority equity stakes in BPCL, Shipping Corporation and Concor. The move is already seeing predictable rumblings of protest from PSU insiders who are likening the disinvestment of profit-making PSUs to the ‘sale of family silver’ and flagging the risk of cronyism.
But the Centre should stick to its guns with its view that the ‘government has no business being in business’. While government presence may be a necessary evil in strategic sectors such a defence or oil exploration, there’s really no call for it to be running fuel retailing outlets, building ships or running container freight operations. Government presence in such non-strategic sectors not only distorts competitive dynamics for private players, it also results in consumers and taxpayers bearing the brunt of inefficient PSU operations. While strategic sale deals in the past have seen a few mis-steps, they’ve also yielded convincing success stories like Hindustan Zinc’s, which has seen a hundred-fold increase in its profits on the back of a six-fold expansion in capacities, since its takeover by Vedanta in 2002.
To allay concerns of cronyism, the strategic sale process needs to be transparent with a minimum reserve price that does justice to the valuable assets being auctioned off. A third-party valuation of every PSU’s assets and a minimum number of bidders (say five), should be necessary pre-conditions to going ahead with each sale. It is also necessary for the Centre to recognise that, when it cedes majority equity in profit-making entities it is effectively giving up substantial future rights over these firms’ earnings and dividend payouts which result in a substantial opportunity cost to the exchequer.
To offset this, it would be best to sequester the substantial sums raised from such strategic sales from the Union Budget, so that they aren’t frittered away in interest or salary payouts but are reinvested prudently in long-term infrastructure assets that can yield enduring returns to the economy. The Government of India already has a readymade sovereign wealth vehicle in the form of the professionally managed National Investment and Infrastructure Fund, into which it can redirect these disinvestment proceeds.
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Published on November 22, 2019