Disinvestment of profitable PSUs: Is it strategically advisable

Disinvestment can only be a short-term measure in plugging the widening fiscal gap

Privatisation is now rising high on Modi government’s economic agenda as it plans to sell its stake in blue chip companies like BPCL and multimodal logistics giant CONCOR. Recently, Central government kicked off its disinvestment plan by giving in-principle approval for strategic disinvestment in five public sector enterprises- Bharat Petroleum Corporation Ltd (BPCL); Shipping Corporation of India; Container Corporation of India (Concor); Tehri Hydro Power Development Corporation (THDCIL), and North Eastern Electric Power Corporation Ltd (NEEPCO), along with its management control. Further, government is also eyeing on complete sell-off of its national carrier, Air India. Under its future disinvestment proposal, the Cabinet Committee on Economic Affairs (CCEA) has given clearance to the reduction of government’s stake in select public sector units to 51 percent, “while retaining management control on case-to-case basis”.

Strategic Sale
BPCL	Shipping Corporation	CONCOR	Tehri Hydro	NEEPCO
Sale of full 53.3%  stake to strategic buyer(After removing Numaligarh refinery from its fold)	Sale of entire 63.8% stake to strategic buyer	30.8% stake and management control to strategic buyer(Government to retain 24% stake)	Entire 74.2% stake to NTPC	Entire 100% stake to NTPC

Based on current market prices, the disinvestment proceeds of the three firms  (BPCL, Concor and SCI) is estimated to fetch the central government approximately Rs 78,400 crore, bringing it close to the disinvestment target of Rs. 1.05 lakh crore of this fiscal year. With just Rs. 17,364 crore out of the Rs. 1.05 lakh crore disinvestment target realised so far, the Centre has left with no option but to accelerate its strategic sale proposals.

Given such large stake sale of government shareholding, to begin with, it’s important to understand what necessitates the disinvestment of PSUs in the first place. PSUs were initially set up after independence for promoting the core sectors of the economy such as coal, petroleum, heavy metal and engineering. The industries associated with these sectors were nationalised to generate employment, provide job security and good educational, medical and health services to its employees. However, prior government approvals in every stage, prevalence of red-tapism, excessive paperwork, tedious procedures and the bureaucratic nature of decision making made their functioning inefficient over time. High level of job security only increased corruption and idleness among employees. In consequence to this, once profit making PSUs started reporting heavy losses. Needless to say, there was widespread industrial sickness in public undertakings. Consequently, government started privatising PSUs as part of its 1991 economic reform agenda.

Nevertheless, disinvestment of loss making government undertakings which started in 1991 as an inevitable reform has significantly gained momentum in recent years. However, one thing is worth noting in today’s time is government’s privatisation of some of the profit making PSUs. One of the best examples is that of BPCL. BPCL, a government controlled Maharatna, is India's 2nd largest downstream oil company with total assets worth of US$20 billion and revenue generation of US$50 billion. This blue chip company has paid more than Rs 15,000 crore as dividend over the past four financial years. It has also remained a significant source of tax revenue for the government since its inception.

So, now the pertinent question is- what is the need for disinvestment in such profit generating enterprises? Faced with a considerable shortfall in revenue and capital receipts, this equity sale in profitable PSUs is aimed at helping government to narrow down its rising fiscal gap. According to government data, net tax revenue collected till September stood at Rs 6.07 lakh crore, which is 36.8% of its Budget target of Rs 16.49 lakh crore, while non-debt capital receipts were at 17.2% of the fiscal’s target. Thus, given its inadequate tax and non-tax revenues, disinvestment proceeds remain acute for the government to stick to its target of keeping fiscal deficit at 3.3 per cent of the GDP in the current fiscal year ending March 31, 2020. Also, mobilising funds from disinvestment has become more critical after it doled out Rs 1.45 lakh crore stimuli by way of a cut in corporate tax and other relief measures in mid-September.

Government has said many times that “it has no business to be in business”. Having said this, the primary motive behind this disinvestment programme remains unclear. It would have been reasonable if the government’s purpose was to sell unprofitable undertakings. BPCL, however, is a profitable refiner and a blue chip oil marketing company that has consistently paid a healthy dividend and high tax revenues over the years. In this context, entire stake sale in BPCL is not at all an appreciable move as it signifies substantial opportunity cost to the government. It’s stake sale is comparable to selling “one's own properties to meet the expenditure at home”.

Selling PSEs have also faced criticism on grounds of favouritism, low stock valuation and cronyism. However, to dispel these concerns, the disinvestment process needs to be transparent with constant review of PSU portfolio and proper stock valuation with a minimum selling price announced in advance that does justice to the valuable public assets being monetised. This requires a flawless book building mechanism of price discovery and third-party valuation of every PSU’s assets with a minimum number of participant bidders.

Going forward, disinvestment offers a short term solution for raising revenue and plugging fiscal gap, however, in the long run, it is not in the nation’s best interest to completely privatize our PSUs and giving its management control in private hands especially the profit generating one. Rather than selling profit generating PSUs, the government’s focus should be on turning around the sick PSUs. In addition, it is worth saying that performance of a public undertaking can’t be evaluated solely on the basis of economic and financial parameters because of their widespread participation in various activities for meeting social objectives. According to the data of the Ministry of Labour & Employment, PSEs provide employment to 17.6 million people as against 11.9 million in the private sector (Source: Labour and Employment report for 2011-12 on formal employment). PSEs are also major contributor to CSR spending in India.

Last but not the least, to make disinvestment an economic reform in true sense, capital proceeds from sale of assets should not be wasted away in meeting revenue expenditures such as interest or salary pay-outs but should be used for creation of capital assets through its prudent investment in commercially viable Greenfield or brownfield infrastructure projects. Government can also redirect the divested funds into National Investment and Infrastructure Fund, a sovereign wealth fund created by government for promoting infrastructural development.