The Hindu Business Line : Disinvestment: Will politics and economics see eye to eye?

"To privatise is to drive a two-horse cart. The cart is the enterprise in question. One horse is called Political Goals and is flighty and fickle, the other is called Economics, and is slow and steady."

— Quote from an agency official from the book Privatisation, Principles and Practice, of the International Finance Corporation, Washington.

OVER the past ten days, there has been strident opposition from the Left parties to a slew of policy decisions considered/taken by the UPA Government. From the outcry over the Cabinet's clearance of the proposed disinvestment of 10 per cent equity stake in Bharat Heavy Electricals (BHEL), on `free' distribution of spectrum for 3G licences, to a spirited resistance to the proposed price hike in petrol and diesel, the Left contends that the Government has made "departures" from the Common Minimum Programme.

Take, for instance, the issue of oil price hike. The Prime Minister has for now appears to have used his persuasive powers to convince them that this was inevitable; yet, kerosene may be spared to ensure that the common man is not hit badly. Or, for that matter, consider the Left parties' recent suggestion that rather than disinvesting profit-making PSUs such as BHEL, the Government can levy an initial entry fee on telecom operators for spectrum allocation and use the proceeds for the social sector.

In the progress report of the UPA Government's first year in power, the reformist agenda of the Congress, especially on the issue of disinvestment, has taken a knock. The UPA Government was unable to sustain the momentum that the NDA Government had generated on disinvestment, through the successful sale of minority equity stakes in GAIL, ONGC, CMC, IPCL, IBP and Dredging Corporation of India last March. Though a tentative decision was taken to sell-off minority equity stakes in BHEL and Maruti Udyog in January, it was deferred later to the fiscal beginning April 1, 2005.

With the Prime Minister himself seeking to put disinvestment back on the rails, the Cabinet decided to sell 10 per cent equity in BHEL.There are also indications that sell-offs in at least four other PSUs — Nalco, Maruti Udyog, Power Grid Corporation and Shipping Corporation of India — are to follow.

The Government's keenness to press ahead with disinvestment is matched by the suspicion among the Left parties as to the real intent behind the Government's move. The statements by members of the Left that the BHEL sell-off decision was taken without consulting them and that this is a "creeping way for privatisation" suggest that their fears are more broadbased. They perhaps feel that once the first round of minority stake sell-off is completed, in a year or two, the Government will eventually move towards privatisation of these profit-making PSUs through dilution of equity stake to strategic or retail investors below 51 per cent.

The sustained opposition from the Left will have to be met by the Government by establishing that its intentions are not to "privatise" any of the profit-making PSUs, but to merely meet two key objectives:

Build a corpus for the National Investment Fund: Considering the ambitious objectives of the Government to spend on rural infrastructure development, education and healthcare, these objectives can be met by selling minority stakes in profit making PSUs.

Even in the BHEL sell-off, which is likely to raise over Rs 2000 crore, the Government has stated that 75 per cent of the proceeds will be used for beefing up the National Investment Fund and, in turn, will be spent on education and health.

And the balance 25 per cent will be used towards reviving ailing PSUs. Since the disinvestment proceeds have been delinked from the Consolidated Fund of India, used earlier to bridge the fiscal deficit, there is a good chance that the social sector objectives outlined in the Common Minimum Programme will be met in measured doses.

The suggestion from the Left parties that the initial entry fee from frequency spectrum be used for social sector does not appear prudent as those funds, if raised will be required for vacating the spectrum by the Defence establishment and other critical telecom targets for the rural sector.

Functional autonomy: The resounding success of the NTPC disinvestment and the IPO (initial public offering) last year has proved the enormous appetite for public sector stocks.

And this shows that depending on the PSU stocks on offer, they could be structured as pure disinvestment, as in the case of BHEL, or as a disinvestment-cum-IPO for companies such as Power Grid Corporation, which has meaningful capital investment plans.

Once the shareholding gets broadbased, there will be pressure from institutional and retail investors on the government to offer greater functional autonomy to these PSUs.

In turn, this will also infuse greater discipline and transparency among the top management in managing investor expectations, in line with what the public sector banks have done quite successfully in the recent past.

Unless the Government can convince the Left that its objectives do not go beyond these two aspects, the disinvestment process may not go far beyond the roller-coaster ride so far.

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