The Hindu Business Line : BHEL divestment — Vision for dynamic PSU development

Contrary to the general impression, the public sector in India is operating broadly on profitable lines, contributing substantial resources to its own expansion. While the government is considering divestment in profitable PSUs, it should also undertake a substantial devolution of authority to make the public sector vibrant, says S. Venkitaramanan.

THE Finance Minister, P. Chidambaram's latest announcement on divesting 10 per cent share in BHEL marks the beginning of this year's divestment programme. This announcement has met with unexpected resistance from the coalition partners on the Left.

BHEL is undoubtedly a jewel in the crown of the public sector. It is profitable and its stock price is high, relatively speaking. The government currently holds 67.72 per cent equity in BHEL. The sale of 10 per cent does not mean privatisation in the conventional sense, since the government retains the majority stake anyway.

Further, the prospect of realising an appreciable contribution to the government's National Investment Fund is bright only if the sale of equity is made in a profitable PSU. The National Investment Fund, already set up, has to be supported by proceeds of divestment of PSU equity. Twenty five per cent of the Fund will be used for revitalising the public sector, such as its sick units, and the rest is spent in areas such as health and education.

The sale of 10 per cent of BHEL equity has, therefore, been balanced between considerations of raising resources for the National Investment Fund and the commitment given in the NCMP.

The Left's objection is two-fold. One, that the government may slowly cede control. This objection can be met if the percentage of sale remains at 10 per cent. And, two, that resources can be raised for social sector spending by raising taxes. This is a matter of fiscal policy. It seems unlikely that further tax measures can be implemented It seems unlikely that indirect taxes can be raised further, given the excise and Customs limitations on indirect taxes.

However, the political cost of raising taxes vis-à-vis resources through divestment is undoubtedly high. The Left has an eye on the existing concessions in the income-tax structure. Undoubtedly, it takes considerable effort on the part of government to convince the corporate sector that it is not being gouged too much.

To upset the applecart of incentives is easy. To restore them is difficult. While one can understand the Left's ideological position, it is important to keep in mind the need to strengthen the investment climate for both local and foreign corporates. The BHEL divestment proposal therefore, is intrinsically well-balanced and rational.

While on the subject of divestment of BHEL, one would also like to touch on incentivising the workers and managers by giving them a stake. Fortunately, the Finance Minister's proposal includes such a provision for the workers. The Ministry, after discussions with the Workers' Union, has agreed to a minimum of 15 per cent allocation of stake to workers. One hopes that, along with these, a suitable incentive for the officers will also be worked out.

Why not an employee stock option scheme in conjunction with future divestment? The fact that a few public sector units, such as BHEL, have become profitable and their stocks are attractive despite a liberalised import policy for capital goods, shows that public sector units need not be inefficient.

Unfortunately, the Government does not seem to have a vision of dynamic development for BHEL. The Budget estimates for expenditure show that the investment planned for BHEL in 2005-`06 is a paltry Rs 199 crore, — even that fully financed by internal resources.

While the total investment in PSUs in the year is around Rs 1,18,000 crore, the contribution from internal resources alone comes to nearly Rs 52,000 crore. Bonds and external commercial borrowing contribute Rs 32,000 crore. The overall picture of financing shows that, contrary to the general impression, the public sector is operating broadly on profitable lines, contributing substantial resources to its own expansion.

There is a need to look at possibilities of strengthening the management of PSUs further and giving them greater incentives for raising profitability and undertaking appropriate expansion, keeping in view technological options and the markets. This makes it essential that while the government considers divestment in profitable PSUs, it should also undertake a substantial devolution of authority to make the public sector vibrant.

The policy of partial divestment of equity of PSUs, paradoxically, gives better incentives to PSU managers and a benchmark to assess their own performance. They get a level playing field with their peer private sector managers. They can assess their firms' performance from the market.

In this context, the recommendations of the Expert Group chaired by Arjun Sen Gupta are relevant. These included proposals to enhance the ceiling on joint ventures and capital expenditures of navratnas and mini-ratnas. The boards of directors should be given full charge as in the case of competing private undertakings.

The relationship between the Ministry and the PSU should involve less constraints than that between a promoter and a private sector enterprise. The financing institutions that lend to PSUs will, no doubt, do a due diligence of all proposals of capital expenditure. Similarly, rating agencies will also keep the PSUs on alert. The placement of part of BHEL's equity in the market is thus a guarantee of continued vigilance on the part of the management.

The concerned Ministry should confine its role to that of a watchdog and should not interfere in matters such as awarding of tenders and transfers and promotion of personnel.

It is important that the question of proper governance of PSUs be taken up as a serious issue for discussion at the Cabinet level. The Department of Public Enterprises (DPE) was once thought of as the nerve-centre of public sector management. In course of time, the DPE deteriorated into a centre for compilation and issuance of obtuse guidelines — dos and don'ts for PSUs in matters such as inventory management and personnel policy .

What was intended to be a clearing house for PSUs became a constraining device, with mandatory guidelines and detailed instructions. It is necessary, however, to adopt a PSU governance monitoring system, a PSU governance board, which assesses the standards of corporate governance and level of interference by Ministries, placing PSUs on a level playing field. While there is a good deal of attention to governance, in general, there is less attention to greater autonomy for PSUs. It is time that the government sets itself the task of truly invigorating PSU managements. Only then can divestment be truly successful in the long run.

It is also worth reflecting on the fact that the stocks of some PSUs, such as ONGC, IOC and SBI, are highly priced and attract a number of investors, both domestic and foreign. Some of them have the pricing power that comes from being monopolies.

It is important to ensure that these advantages are not dissipated by populist policies on pricing and distribution of their products. At the same time, one has to ensure that the short-term view of market-based managements does not infect PSUs, as greater divestment of equity takes place. One has to guard against managements that are fixated on short-term profit maximisation goals.

It is important that as a promoter, the government's voice is heard clearly on the Board to maintain the long-term vision of the PSUs.

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