5. PSU disinvestment.

PSU disinvestment

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PSU disinvestment

IN the last decade, many steps have been taken to disinvest public sector enterprises in India, both in terms of listing central public sector enterprises companies on the stock market and selling controlling interest. After a lull, disinvestment is now back on the UPA governmentÂ’s agenda. There appears to be a political consensus on disinvestment in non-navratna profit making enterprises, and in chronic loss making PSUs. Hence, it is important to revisit the issues of rationale and mechanisms of disinvestment.

In this paper we argue that the main rationale for disinvestment is the increased efficiency of utilisation of resources of the economy, both labour and capital. An excessive focus on the fiscal aspects of disinvestment leads to undesirable consequences. Even partial privatisation, with the government retaining control, has yielded improved productivity. Disinvestment of profit making enterprises by public offering of shares is desirable insofar as it takes India towards a greater mass of companies with dispersed shareholding and avoids concentration of economic power.

However, for chronically loss making PSUs, the public at large is neither interested in buying shares, nor is it able to effect a transformation of management. For these firms, strategic sales are the best option, where full control of the PSU is auctioned off to the highest bidder. Some of these firms are in such bad condition with chronic losses and requiring regular infusions of capital, that the highest bid may be negative – the government should be willing to pay someone to take the PSU.

Normally the term ‘public sector’ includes activities of the government at all levels – central, state and local. These include defence, health, education, judiciary, police and other public utilities. Here, for the purposes of this paper, we refer to central public sector enterprises, companies that are owned and controlled by central government, as the public sector. Table 1 gives an indication of the size of this sector. There are 290 central government PSUs, including banks and insurance companies. These have an annual gross value added of Rs 2.8 trillion. Eighty-one companies out of the 290 have been partially privatised (listed). These 81 create Rs 1.8 trillion of gross value added per year, while the remaining 209 unlisted companies create Rs 0.9 trillion of value added per year. Thus the unlisted PSUs are roughly half the size of the listed PSUs.

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PSU disinvestment: Endemic problems

IT IS fairly clear now that disinvestment on any significant scale has lost its steam. The `socialist lobby' has succeeded, at least for the time being, in forcing the Cabinet to `reconsider' (read shelve) the matter. So, this may be a good time to look at the major issues involved in a dispassionate manner.

Public sector units in all countries typically suffer from three major problems. First, the soft budget constraint. Unlike private companies, many loss-making PSUs are kept afloat by either direct government subsidy or by directed bank credit from state-owned banks. In the past, even `sick' private companies have been taken over by the state, out of political considerations, creating a further drag on state finances. In fact, these have been major factors behind the near-bankruptcy of many State governments and some public sector banks.

Second, multiple objectives. PSUs were often not designed to be primarily profit-making enterprises. They were expected to promote social objectives such as generating guaranteed employment, taking industries to backward areas, buying inputs from other PSUs to support them, providing output at `reasonable' prices to people, irrespective of costs, and so on.

Their performance was not to be judged by commercial profitability. Apart from the confusion created in the minds of managers as to what goals to be given priority, it provided convenient excuses to hide inefficiencies. A manager of a perennially loss-making PSU can always claim to be promoting `social' profits.

Third, multiple-control authorities. Unlike the private sector manager, the public sector manager is subject to control and scrutiny by different ministries, the Bureau of Public Enterprise, various parliamentary committees and investigating agencies. Result: Status quo is the safest option for the manager. No bold decision on modernisation, diversification or technological upgradation is taken. For instance, automation may displace labour, and changing the supplier may disturb the existing patronage system. The promotion and career prospects of the manager are not usually linked to his dynamism or entrepreneurship and often have more to do with keeping his political bosses in good humour.

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The disinvestment debate

Disinvestment in India Policies, Procedures, Practices by Sudhir Naib; Sage Publications, New Delhi, 2004.

AFTER a great deal of initial excitement and reservations, disinvestment of public sector enterprises has become an ongoing process in the country. But the debate continues, with some enthusiastically endorsing it and others expressing apprehensions and opposition. By and large, this debate has been at the ideological level. Ideology cannot be kept out of the debate, but disinvestment has other dimensions too. The modalities of disinvestment are important. So are its consequences.

The Disinvestment debate

Disinvestment in India Policies, Procedures, Practices by Sudhir Naib; Sage Publications, New Delhi, 2004;

AFTER a great deal of initial excitement and reservations, disinvestment of public sector enterprises has become an ongoing process in the country. But the debate continues, with some enthusiastically endorsing it and others expressing apprehensions and opposition. By and large, this debate has been at the ideological level. Ideology cannot be kept out of the debate, but disinvestment has other dimensions too. The modalities of disinvestment are important. So are its consequences.

It is on these aspects that Sudhir Naib's work on disinvestment assumes significance. It is one of the few comprehensive treatments of disinvestment in India. After dealing with the evolution and rationale of the public sector in India (which may be familiar material) and a discussion of the influence of ownership on efficiency, the author moves on to an evaluation of privatisation and disinvestment in other parts of the world; in the United Kingdom in the 1980s during the prime ministership of Margaret Thatcher; in the Eastern European countries and the former Soviet Union after the collapse of communist regimes; in the East Asian countries and China; in Latin America; in West Asia and North America. The critical assessment of disinvestment in other parts of the world forms the background to Naib's detailed empirical account of disinvestments in India. (The material covered in this section of the book is not easily available to readers in India.)

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The disinvestment dilemma

THAT India has not been able to realise much out of disinvestment of public sector equities down the years despite setting up of ambitious target on this count year after year is by now familiar.

Undeterred by ground realities which offer scant comfort for the authorities to devise any pragmatic privatisation of public sector undertakings (PSUs), the policy makers of the Tenth Five Year Plan have set out to glean an annual disinvestment proceeds of Rs 16,000 crore in the draft Approach Paper.

Yet the experience of both developed and developing nations on this needs to be kept in view even as the Government of India had been endeavoring a menu of options on disinvestment since the late 1990s in the aftermath of the economic reforms.

In the first flush, India gave PSU equities to trade sales to a core group of shareholders such as mutual funds, public financial institutions and to a limited extent to PSUs own employees. But no less a body than the Controller and Auditor General of In dia (CAG) has roundly rapped the Government for the way in which the scrips were priced.

In the second phase, equity offers of PSUs were given to strategic sales where domestic companies either alone or through foreign partners were allowed to bid for PSU scrips, the latest example in the category being the Cabinet decision to award equities of Air India to Tata-SIA.

Though originally a few bidders were there such as Videocon, Hindujas and Tata-SIA, it was only Tata-SIA which ended up successful as others were eliminated for not conforming to parameters set by the Disinvestment Department. In the case of Balco disinv estment too, a domestic company successfully bid for it, though the whole issue evoked flak from State government of Chattisgarh and other Opposition parties.

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Interview with Arun jaitley

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