The finance minister, Nirmala Sitharaman has recently announced the broad contours of Modi government’s plans on privatization of the Central public sector undertakings (CPSUs). A CPSU is defined as an undertaking in which the Government of India (GOI) has shareholding of more than 50% and by virtue of this exercises majority ownership and control (currently, there were 249 operating Central PSUs as on March 31, 2019). Its privatization means the shareholding of GOI will be brought down to below 50%.
Which of the CPSUs will be privatized? To determine this, the undertakings will be divided in to two broad categories viz. ‘strategic sector’ and ‘non-strategic’. Whereas, all undertakings in the non-strategic sector will be privatized, in the strategic sector too, the government will be open to divestment of majority ownership with the caveat that at least one undertaking (and a maximum of 4) will be retained in the public sector.
Reportedly, the government has identified as many as 16 sectors as being ‘strategic’, virtually covering all conceivable sectors with supposed strategic nature. These include petroleum refining and marketing, crude exploration, power generation, coal and metals, atomic energy, space, heavy and medium engineering sector etc. The non-strategic sectors include ‘hotel and tourist services’, ‘transportation vehicle & equipment’, ‘industrial and consumer goods’, ‘trading and marketing’ and ‘transport and logistics’ etc.
Normally, one expects the government to remain focused on maintenance of law and order, commanding armed forces to defend national borders, take care of external relations, provide essential services, run welfare schemes for the poor and all other matters connected with governance.
It may also make a foray in areas which it considers as of strategic importance namely those which get identified with long-term interests of the country; for instance, nuclear power, railways, ports, highways, energy etc. But, it has no business to be in areas such as ‘hotel and tourist services’, ‘trading and marketing’ etc. Yet, it has made an indiscriminate entry in almost every conceivable business activity and runs a number of enterprises in areas where its presence serves no objective whatsoever; for instance, look at the Indian Tourism and Development Corporation (ITDC).
It may well be that in certain areas, due to historical circumstances say huge deficit of food and fertilizers in the 60s and 70s, it had set up trading enterprises such as State Trading Corporation (STC) or Minerals and Metals Trading Corporation (MMTC) etc to ensure timely import and supply of these essentials. But, in the current situation of self-sufficiency in food and in fertilizers also, where domestic production has increased substantially and even for imports, the private sector has the requisite capability to handle imports, it makes no sense to continue with these monolithic entities.
It is good to see the government now going into introspection mode and declaring its intent to go for privatization whole hog from all non-strategic sectors. 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 undertakings command. This alone can help in mitigating government’s concerns on account of high fiscal deficit.
In regard to strategic areas, the government’s willingness to relinquish majority ownership and control – as manifest in its exhortation of retaining a maximum of 4 undertakings in the public sector (in a number of these sectors, currently the number of CPSUs are more than this threshold) – is a welcome move. But, the logic of retaining a minimum of 4 enterprises with itself is not clear. What does it fear from?
Is its case that in say, petroleum refining and marketing, if there are only 2 CPSUs or taking an extreme scenario, not even one, the country will land in a vulnerable/unsafe zone. That private enterprises will not cater to the demand or will exploit consumers by charging high prices. If, that were the case then, why not reserve this sector exclusively for PSU? Why should it allow even one private company in this sector? This line of argument is bizarre.
From the perspective of arranging adequate supply and ensuring that consumers get the items at affordable price, it is necessary to have a certain minimum number of firms so that there is adequate competition in the market. Who those firms are – whether owned entirely by private promoters or government owned or a joint venture (JV) between the two – should not matter. Any decision to privatize a PSU even if it is in the ‘strategic sector’ should be taken on the merit of each individual case instead of being driven by any arbitrary diktat.
That apart, the government needs to be absolutely clear as to what it wants to do, have certainty of the policy, orchestrate an action plan for carrying out divestment (albeit strategic) and execute it in a time bound manner. But, we see none of this even as our policy makers are perennially in thought mode, making exhortations on and off and giving confusing signals. Even worse, whatever action has happened is entirely from the stand point of garnering revenue (albeit non-tax) for addressing fiscal deficit and has nothing to do with disinvestment exercise in its true sense of the term.
It has sold sale shares in small lot say 5% or 10% and in some cases, a substantial chunk to result in divestment of more than 50% of its shareholding. During the last 5 years, there have been very few cases in the latter category which too can’t be termed as ‘strategic divestment’ or privatization as even after the sale, majority ownership and control has remained with the government only. What are the facts?
During 2015-16 and 2016-17, there was hardly any case of strategic sale despite the NITI Aayog recommending to the government to exit over two dozen PSUs. During 2017-18, it sold 51.11% of its shareholding in Hindustan Petroleum Corporation Limited (HPCL) to Oil and Natural Gas Corporation [ONGC]. In 2018-19, it sold 52.63% of its shareholding in Rural Electrification Corporation (REC) to Power Finance Corporation (PFC). But, none of these can be termed as strategic as, even after sale, the government continues to exercise full control (albeit indirect) over HPCL/REC by virtue of having majority ownership of the acquirer namely, ONGC/PFC.
During 2018-19, the government had also offered Air India and its subsidiaries for sale but it didn’t happen. During 2019-20, besides resurrecting that offer, it also brought to the table divestment 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), others failed to materialize.
In January 2020, top brass in the finance ministry was pretty confident that sale of BPCL, ConCor and SCI besides Air India et al would get consummated during 2020-21 (this is also reflected in the ambitious target of divestment proceeds Rs 210,000 crore fixed by Sitharaman for the year). But, the devastation caused by Covid – 19 may have nipped in the bud chances of getting these sales through even during the current year.
Instead of getting bogged down with planning, take decisions in regard to each and every PSU and thrust it on the management under a typical top down approach, the government should only take in-principle policy decision. It should categorically state that except areas which get connected with national security, critical infrastructure (such as railways), welfare of the poor etc (segregation between ‘strategic’ and ‘non-strategic’ should be avoided), for the rest, the decision whether to divest or otherwise should be left entirely to the management of individual enterprises.
Under the present governance structure of PSUs, the managements do not enjoy autonomy. With this, they may not be able to take such major decisions. To get over this barrier, it needs to try something unconventional by creating a holding company (HC) to be manned by professionals where all shares of the union government in all central undertakings should be parked. The HC will work at ‘arms length’ from the establishment and give overall guidance to individual enterprises.
The process of disinvestment should be de-linked from the government’s resource mobilization exercise; besides it should refrain from issuing any over-arching diktat. This will give much needed flexibility to the HC/PSU management decide the ‘contours’ and ‘timing’ to divest so as to unlock value and even maximize revenue (albeit non-tax) for the government which the latter can utilize for managing its overall budgetary position. But, this should only be viewed as a collateral benefit; nothing beyond that.