Privatise, don’t disinvest

The Finance Minister’s statement that the Centre is open to exiting loss-making public sector undertakings is welcome in so far as it a long overdue reform that the UPA government couldn’t summon up the courage for. Though PSU divestment has been a recurring feature of annual budgets for the last 10 years, it was mostly used to sell inconsequential stakes in listed PSUs or shed minority stakes in profitable ones. Such ‘divestment’ did not serve one of the main purposes, that of reducing the Government’s role in businesses it should never have ventured into. Moreover, while the Centre was busy divesting profitable PSUs, loss-making ones continued to drain its coffers. In the five years from 2008 to 2013 (the latest available data), the number of loss-making PSUs shot up from 54 to 79 and their combined annual losses more than doubled to ₹28,260 crore. Capital of nearly ₹2 lakh crore is locked up in their assets. PSUs in telecom services (BSNL, MTNL), aviation (Air India) and consumer goods (Hindustan Photofilms) account for nearly two-thirds of the above losses. These are clearly non-strategic sectors where the presence of the state serves little social or public purpose.

Privatising loss-making PSUs will not be easy. Public offers of shares will find few takers and the Centre will have to put through strategic sales of each of these firms, through auctions to private bidders. The previous NDA regime attempted such an exercise, auctioning off controlling interests in firms such as VSNL, Modern Food Industries, Balco, CMC and Paradeep Phosphates to private players. The private acquirers, in many cases, did manage to turn around the acquired PSUs, but the sale process was mired in controversy. A CAG report in 2006 pointed out that many of these PSUs had been undervalued due to poor participation in the bidding, improper listing of the firms’ assets and even undue ‘adjustment’ clauses that allowed private buyers to make compensation claims on the exchequer, even after the sale was concluded. Care should be taken in this tranche of strategic sales, to address these concerns. Even before the sale process is flagged off, a comprehensive stocktaking and valuation of the assets of each PSU can be conducted by an independent valuer.

It would be best to kick off any such privatisation exercise with the biggest white elephant of them all — the national carrier. Air India has been the recipient of a phased ₹30,000 crore bail-out package from the Centre since 2012. So far, it has failed to meet many of the restructuring or profit targets set for it during the bailout. A strategic sale of the carrier, in order to attract any interested bidders, may first require the Centre to address chronic problems such as overstaffing and undue freebies and facilities to government staff. But if the Centre tackles this head on, privatising the other PSUs could prove smooth sailing thereafter.

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