Baby steps forward in divestment process

Shifting the Department of Public Enterprises to the Finance Ministry is logical which should be a win-win for the government. The Department for Investment and Disinvestment (DIPAM) is already under the Finance Ministry which makes transferring the DPE under this umbrella more effective.

One of the Finance Ministry’s big plans is to monetise assets of the PSEs and a prerequisite for this is the quality of the asset. The Finance Ministry can now have better coordinate with DIPAM and DPE. When there is a bureaucratic set-up with several Ministries and different echelons of power, the rules must be adhered to.

The disinvestment and asset monetisation plans are premised on leveraging the PSEs and making them more attractive for potential buyers (disinvestment) and investors (monetisation). The starting point has to be changing the way they work so that the loss-making units are able to turn around. The Finance Minister had already announced in the Atmanirbhar package last year that PSEs would be categorised and dealt with accordingly for disinvestment and this move is probably one of the first steps that will be taken.

Simultaneously, the Ministry has to find answers to several questions that have come in the way of carrying out a successful disinvestment programme.

Five top issues

There are basically five issues here. First, the basic issue of ideology has to be addressed; whether or not the government is willing to let go of the enterprise. As long as there is vacillation, the programme will remain stuck. It does look like that for some of the PSEs the government is firm which is encouraging.

Second, when dealing with loss making PSEs, it needs to be evaluated whether they should continue to operate or close down. Often, they cannot be closed because of labour issues. Selling such unviable units is difficult as there would not be any buyers for them, so either all the staff should be paid off or they must be absorbed into other units.

As these are PSEs, layoffs should not be the option. But taking a decision is important because it can then fit with the asset monetisation plan of the government. The longer the sick units are persisted with, the greater will be the erosion in their intrinsic at the time of monetisation.

Third, the debt of enterprises has to be addressed. Air India is the most glaring case where the debt can be a deterrent for a prospective buyer (around ₹38,000 crore in March 2020). Ideally the debt should be taken over by a government SPV and serviced and repaid through the Budget. Otherwise getting a buyer to take it over would be a challenge.

Fourth, it remains to be seen if the new set up allows bold decisions to be taken relating to sale of the company if market conditions are not good. Currently, markets are doing well, and the valuations will be competitive. But this may not always be the case. An approved policy has to be in place which should be implemented or else waiting for the right price can prolong the process.

Fifth, under no circumstance should PSUs be made to cross-hold in others as a compromise. Insurance companies and oil companies are the ones which are normally made to do so. Their surpluses anyway go to the government and there is no need for such indirect transfers. This concept has vitiated the entire process where the receipts increase but the entity remains with the government.

Asset monetisation

The second prong of the government is the asset monetisation plan. Here it must be made clear that the benefit from the sale of a PSE asset or government entity would not accrue to the Budget unless it is a government department which owns property and leases it. Therefore, roads owned by the NHAI when sold in any which way would mean income accruing to the company, and not the government.

Asset monetisation can be looked at in the form of sale or lease of land and sale of projects that are either ongoing or in the process of being completed. The former is a direct transaction where land or building owned by the PSE is sold or leased out to an outside party which provides a stream of income. This is a long haul as under the present conditions there may not be too much demand given that the pandemic has led to the WFH culture which obviates the need for space expansion for most companies. Hopefully here again it should not be other PSEs shifting their operations to the locations of the targeted PSE.

Road projects

The monetisation of road projects is however a potential revenue earner. A toll road which is profitable can be sold through the infrastructure investment trust route (InvITs). Here a mutual fund kind of structure buys these projects and sells the units to investors that will include a retail segment too. The gains can be had on the returns as well as appreciation in the value of the units.

Power Grid Corporation has launched such a scheme. Intuitively, a wide cross section of such assets can be monetised like power lines, railways stations, roads, etc.

A similar model can be followed for lease of land where land parcels or these lease rights are combined by the trust (REITs) and sold as units to investors through securities thus spreading the investor base.

The irony here is that theory says that the government should be in sectors which involve high investments as the private sector interest is limited. The corollary is that the government should move away from commercial activity like metals, engineering, chemicals, etc.

But the system of disinvestment and monetisation is counter to this theory because it has become easier to get something from infrastructure while it is hard to sell commercial activity due to legacy issues which have been handed down the ages.

The writer is Chief Economist, CARE Ratings. Views are personal

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