The Hindu : Key issues for success

Online edition of India's National Newspaper
Monday, Dec 09, 2002

Business

Business

Key issues for success

"Disinvestment should not be viewed purely from the revenue perspective. It must aim to unlock the productive potential of PSEs. Besides, disinvestments should galvanise these enterprises to promoting high quality employment as well as competition in the marketplace.'' — Mid-term Economic Review

DISINVESTMENT IS an important policy initiative of the present government. Successive budget speeches of the erstwhile Finance Minister, Yashwant Sinha, had emphasised the resolve of the Government to privatise all non-strategic public sector enterprises (PSEs) and liquidate all chronically loss-making public sector units.

Following up on this policy, the Government had succeeded admirably in privatising quite a few PSEs since 1999. However, of late, there appears to be considerable opposition not only on the modalities of disinvestment but against the very idea of privatisation. Therefore, clarity is needed on some of these issues that are bothering policy makers.

What to sell

One of the repeated objections relates to the wisdom of selling profitable units. At the outset, it is essential to clarify that privatisation of only loss-making units is neither feasible or desirable. Every effort has to be made to privatise all loss-making units, failing which they should be shut down after suitably compensating the workers. On this question, there can be no two opinions.

In the case of profit-making units, the question to be asked is whether they will continue to be profitable a few years hence when they will have to face competition without Government props such as purchase/price preference, subsidies and reservations. If the answer is in the affirmative, then these PSEs need not be privatised on economic grounds.

If the PSEs are of strategic importance to the economy, their control can remain in Government hands. Privatisation of profit-making PSEs can, however, be justified on ideological grounds, namely, that the Government has no business to be in business.

How to sell

The second issue on which there appears to be considerable opposition is the modality of disinvestment. Latterly, this issue has assumed importance in view of the Government's likely loss of control over petroleum companies, following moves to privatise some of them. The concept of strategic sale has been opposed even though it is admitted that it will fetch more for the Government. Those opposed to strategic sale have suggested that a portion of the Government's equity in these companies may be disinvested through an offer of shares in the capital market without relinquishing government control over management. This has obviously been suggested on grounds of `oil security.'

Such a method of disinvestment may help in broadening share ownership. However, unless there is change of management, there will not be much enthusiasm for the shares among the public. This method will also result in the Government becoming the largest shareholder, though its shareholding may be less than 51 per cent.

This will take the enterprise out of the "public sector" and consequent accountability to Parliament and other investigating agencies such as the Central Vigilance Commission and the Central Bureau of Investigation, while giving the Government the power to indulge in back seat driving! Such an arrangement should be avoided at all costs as it endows power without accountability.

A strategic sale of companies engaged in retail selling of petroleum products cannot be considered `strategic' by any means, especially as the Oil and Natural Gas Corporation and Indian Oil Corporation are still in government hands! The petroleum sector does not find a mention in the list of industries defined as 'strategic' by the Government for the purpose of disinvestment.

Probably, all this talk of 'oil security' is nothing but a cloak to cover the real purpose, namely, to retain management control and consequent power of patronage! The disinvestment exercise has also thrown up other issues such as timing, valuation and transparency, shareholder agreements, monopolies, surplus labour and public support. How important are these issues for successful disinvestment?

Timing

At present, there is an impression that there is unseemly haste in privatising public sector units, especially the profit making ones. One would wonder whether the present time is right for disinvestment in PSEs in the hospitality sector.

Already travel and tourism have been severely affected by terrorist attacks and threat of war. Hotel occupancies are at an all time low, thanks to travel advisories out of the U.S., the U.K. and other European countries. Maybe a better strategy would have been to hold on to the PSEs till better times.

In the past, government procedures did not allow it to seize opportunities of selling when the prices were favourable. This was the case in the GDR issues of VSNL and GAIL. At the same time, inordinate delay in disinvestment has a deleterious effect on the companies concerned. It not only precludes timely investment in the company, resulting in missed opportunities and profitability; it also saps the morale of the employees and gives a wrong signal to investors in the domestic and international community about the seriousness of the Government's intentions. Hence, disinvestment, once announced, should be completed within the shortest possible time and at the best price. Postponement should be only on the ground that the market situation is not favourable for obtaining a proper price.

Valuation and transparency

An oft-repeated criticism heard is that Government holdings have been sold for a song. Valuation arrived at by the Government is questioned and motives are attributed. It should be remembered that there is no such thing as a perfect valuation. Though most inputs that go into valuation are objective, the ultimate judgment on the price is subjective. What is essential is that the reserve price arrived at by time-tested methods of valuation should be kept secret and the highest bid above the reserve price should be accepted. A little more transparency in acceptance of bids will be welcome. For instance, the bids can be opened in the glare of TV cameras and the highest bid announced to the bidding parties and the press. It is essential to generate confidence in the society that the Government has secured the best price for its equity.

Shareholder agreements

Before finalising disinvestment deal, the shareholder agreement has to be clearly and carefully drafted to take care of interests of the Government and the purchaser. If this is not done, then the Government may be faced with problems such as the one relating to VSNL's investment in Tata Teleservices from VSNL's reserves. In this case, it was found that the shareholders' agreement provided for consultation with the Government in the case of mergers or granting of loans but did not mention anything on equity participation in other companies. Whether this was deliberate or somebody goofed up is anybody's guess.

Monopolies issue

It is essential that the disinvestment process should not result in the creation of monopolies. In the absence of adequate legal safeguards and a strong regulatory machinery, it will be difficult to ensure that consumers are not exploited by monopolies. For example, the requisite regulatory machinery is absent to prevent overexploitation of scarce natural resources for commercial gains.

Some have tried to explain away the Government's decision to sell majority stakes in Indian Petrochemicals Corporation to Reliance Industries by averring that it is not monopoly per se but abuse of monopoly that we should be bothered about. But, is there any regulatory machinery now that will decide what constitutes abuse of monopoly? Are there adequate laws to prevent such abuse? In the given circumstances in India, it will be preferable to pre-qualify bidders for disinvestment from the monopolistic angle also. After all a Government monopoly will be infinitely better than a private monopoly!

Surplus labour

The next issue is what to do with surplus labour in PSEs that are being privatised. Merely assuring employment for a period of one or two years after privatisation postpones the obvious. The headache of dealing with surplus labour is transferred to the strategic buyer along with the assets of the company. In a scenario where fresh investment is not forthcoming due to the adverse security climate, any attempt to retain labour for a certain period is likely to bring down the value of the equity sold.

The challenge is to minimise the ill effects of labour restructuring by providing adequate compensation, training/counselling for alternative jobs and the like.

Public support

Ultimately, disinvestment will succeed or fail depending on the support the process gets from the public.

It is easy to mislead the public by alleging that the priceless jewels of the country are being gifted away to unscrupulous businessmen. Unless the public understands the issues involved, their support for disinvestment will not be forthcoming. It was with this intention that the Disinvestment Commission had recommended the setting up of a Disinvestment Fund, into which all receipts from disinvestment would go and the monies would be spent on earmarked social sector projects such as housing, education and health. The public would then be convinced of the benefits of disinvestment.

So far, the Government has not agreed to the creation of the Disinvestment Fund on the ground that prudent financial management precludes keeping of funds outside the Consolidated Fund of India. But it has agreed to set up a Road Fund into which receipts from levies on fuel would be deposited and the funds would be spent on development of roads. It is clear that unless urgent and radical measures aimed at reform are taken, most of the PSEs will be unable to overcome competition. It will be in the Government's interest to remain in businesses that are highly profitable and contribute substantially to public interest, and not fritter away its energies in running a host of sundry, unprofitable businesses.

All such enterprises that are not of strategic importance will have to be privatised urgently. And those that do not have to remain in the public sector and that cannot be privatised must be liquidated without any delay. PSEs should not get any more financial assistance from the Government in the form of equity, loans or grants. If they have worthwhile projects, they should approach financial institutions for assistance.

The time has come when the public sector has to be lean, efficient and capable of taking on domestic as well as international competition.

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