Under a big bang approach to privatization announced in the Union Budget for 2021-22, the Finance Minister, Nirmala Sitharaman has divided the Central Public Sector Undertakings (CPSUs) in two broad categories viz. “strategic” and “non-strategic”. Whereas, the former is broken up into 4 sub-groups viz. atomic energy, space and defense; transport and telecommunications; power, petroleum, coal and other minerals; banking, insurance and financial services, the latter includes all other sectors such as hotel and tourist services, industrial and consumer goods, trading and marketing and so on.
As per the plan, all PSUs in non-strategic sector will be privatized. All loss making enterprises in this category will be closed. In the strategic sector too, the Government will be open to privatization with the caveat that at least one undertaking (and a maximum of 4) will be retained in the public sector.
When, seen in the backdrop of the Union Government having made an indiscriminate entry in almost every conceivable business activity including areas such as ‘hotel and tourist services’ where it had no business to be present in the very first place, any initiative aimed at exiting from all of these is welcome. This has the potential to unlock value and generate huge revenue because of the high valuation that the real estate and properties – many of these in prime locations – under these PSUs command.
As regards strategic sector, though the Government does not rule out privatization, the caveat of retaining a maximum of 4 undertakings in the public sector can defeat the purpose. For instance, currently there are around 12 oil PSUs ranging from upstream oil producers like ONGC and OIL to downstream oil refining and fuel marketing firms IOC, BPCL and HPCL to gas transporter GAIL India Ltd and engineering firm Engineers India Ltd. These 12 could be consolidated into 4 behemoths through a process of merger and amalgamation leaving no space for privatization whatsoever.
Why does the government want to put this caveat? What does it fear from? Sans this, will it compromise national interest?
In the above example, consider an extreme scenario, in which there is not even one PSU and the entire oil and gas space is occupied by private enterprises. Are we to infer that this will compromise India’s energy security? If this were to be the case, then, why not reserve this sector exclusively for PSU? Why allow even one private company? This line of argument is bizarre.
For ensuring security in strategic items, the critical requirement is to have a minimum number of companies to ensure there is adequate competition and supplies in the market. Who those firms are – whether owned by private promoters or government – should not matter. In the 70s and 80s of the last century, when India needed to develop these sectors and private sector was unwilling to come, it made eminent sense for the Government to take the lead. Since then, lot of water has flown down the river Ganga. Currently, there is considerable interest among private investors and the government itself is inviting them. Therefore, any arbitrary restriction should be avoided.
Any decision to privatize a PSU should be taken on the merit of each case irrespective of whether it is in strategic or non-strategic area. Likewise, the mandatory closure of any loss making enterprise should apply to all such entities without any distinction. The national security concerns are always best addressed through strong, resilient and responsive regulatory and surveillance mechanisms.
Implementation is far more important than the policy. In this regard, the score of Modi – Government during the last 7 years or so (it was pursued under a sophisticated nomenclature ‘strategic disinvestment’) has been disappointing. Except for two big ticket sales viz. divestment of its 51.11% shareholding in Hindustan Petroleum Corporation Limited (HPCL) in 2017-18 and 52.63% stake in the Rural Electrification Corporation (REC) in 2018-19, there is nothing much to show. Even these sales can’t be termed as privatization as the buyers were Oil and Natural Gas Corporation (ONGC) and Power Finance Corporation (PFC) respectively – both PSUs.
As per the original plan, 51.11% shares of the Union Government in HPCL were to be sold to a private investor. But things did not pan out as planned and towards the fag end of that year i.e. January 2018, the Government had to ask ONGC to pick up the entire stake, as it desperately needed money to meet the fiscal deficit (FD) target. In case of REC too, it asked PFC to buy. During 2018-19, Air India was also put on the block but failed.
During 2019-20, besides resurrecting that offer, the Government also took up sale of all of its shareholding in Bharat Petroleum Corporation Limited (BPCL) 53.29% ; Containers Corporation of India (ConCor) 30%; Shipping Corporation of India (SCI) 63.75%; North Eastern Electric Power Corporation (NEEPCO): 100% and THDC India Limited: 75%. Sans NEEPCO and THDC which were sold to National Thermal Power Corporation (NTPC) – a CPSU in the power sector – others made no progress. During 2020-21, the Covid – 19 pandemic spoilt the party.
For 2021-22, there is not much hope either. The target for proceeds for disinvestment speaks for itself. At Rs 175,000 crore, this is substantially lower than the target for 2020-21 (Rs 210,000 crore). This is despite adding 2 public sector banks (PSBs) and one general insurance company to the list of those (Air India, BPCL, SCI, ConCor, LIC) already under hammer but have not materialized during the current year. The mandarins in finance ministry have sensed, while some may not go through, others would fetch lower valuation.
There are four major bottlenecks in the way viz. (i) policy flip flops (it stymied Air India sale in 2018-19/2019-20); (ii) bureaucratic red tape (but for this, HPCL could have got a private suitor and BPCL sale could have happened in 2019/20); (iii) thrusting decisions on PSU boards under a typical top down approach; (iv) linking share sale to meeting FD target. (iii) and (iv) have the inevitable effect of ‘delaying’ and ‘reducing’ realization from every sale.
The Budget offers nothing to address any of these bottlenecks. Under a business as usual approach, it will take several years, if not decades, for the sale process to get completed. The decision to set up an empowered group of secretaries to address the concerns of potential investors won’t be of much help as even under this arrangement, bureaucrats will continue to rule the roost.
Modi should de-bureaucratize the process of running PSUs; this should be done even before privatization is taken up. The Government may set up a holding company (HC) – on the lines of a bank investment company (BIC) recommended by an RBI committee under P Nayak – where all its shares in PSUs will be vested. It should authorize the HC to take all decisions including share sale to private investors in consultation with the management. To be manned by eminent professionals drawn from respective fields (the role of concerned ministry should be limited to providing requisite inputs/data/information), the company should to be given full autonomy in its working.
This mechanism will also help in de-linking divestment from the budget exercise and give much needed flexibility to HC decide the ‘contours’ and ‘timing’ of sale taking into account the market conditions so as to maximize the proceeds from sales.