Why privatisation needs to wait, for now

Lokeshwarri SK | Updated on May 21, 2020

With Covid-19 impacting employment and the fiscal situation, the Centre should postpone its privatisation drive

The stimulus package announced by the Finance Minister fell short on many counts, but there is a consensus that some of the reforms announced over the five days, will have far-reaching impact. One such proposal was the promise of a cohesive, long-term plan to decrease government stakes in public sector enterprises.

The government plans to first identify ‘strategic’ sectors that require presence of government-owned companies. The number of PSEs in strategic sectors are to be restricted to four, with private players also allowed to operate in these sectors. The government plans to exit other ‘non-strategic’ sectors, over time.

The mammoth size of some of the public sector enterprises makes them significant enough to warrant a very serious discussion. According to a CAG report tabled last year, the government had an investment of ₹3,57,064 crore in the shares of 420 government companies and corporations, towards the end of March 2018. The market value of shares held by the government in 42 listed PSEs was ₹13,63,194 crore.

A comprehensive plan that looks at the entire PSE ecosystem to deliver a solution is certainly welcome. The government has grown increasingly dependent on the funds raised through PSU divestment and the dividends from these companies in recent past, leading to ad-hoc stake sales to public, cross selling among PSEs, buybacks, and so on. A revamp of the government ownership in PSEs will surely help re-allocate resources to key areas such as health and education. But given the current state of the economy with the Covid-19 pandemic impacting employment and the fiscal situation, it is important to not rush into privatisation in the immediate future.

Harking back to socialism?

Many PSEs that exist today are vestiges of a socialistic era. Prior to Independence, the government operated select utilities such as railways, post and telegraph, ordnance and aircraft units, and a few salt and quinine factories. The socialist slant was however evident in the industrial policy drafted in 1948, that envisaged a greater role for the government in almost all sectors. The policy segregated industries into three categories.

One, manufacture of defence equipment, atomic energy and railways were to be controlled exclusively by the Centre. Two, the Centre, State and other public authorities were to set up companies in six sectors — coal, iron and steel, aircraft manufacture, ship building, manufacture of telephone, telegraph and wireless apparatus and mineral oils. Private companies could be allowed in these segments, if needed. Three, private enterprises were free to set up companies in other sectors, but the government too could have presence here, if progress was found to be slow.

Over the years, the Centre and the States have permeated into many industries where they are not required, such as tourism and hospitality, pharmaceuticals, fertilisers and chemicals, information technology, construction, and so on.

However, experience in the past seven decades shows that PSEs are needed in only in few other sectors besides defence, railways and atomic energy. These are social sectors where companies have to work towards improving backward regions or segments, promoting smaller artisans and crafts, education and healthcare. The private sector may not be interested in operating in these segments.

Poor financial picture

Besides PSEs operating in irrelevant sectors, there is also a strong case for shutting down PSEs that are in deep financial trouble, with their businesses being hit by reasons ranging from changing technology, user habits or intense competition from private enterprises.

According to the CAG report, there were 184 CPSEs with accumulated losses of ₹1,42,309 crore towards the end of March 2018. Of these, 66 were undergoing winding up, liquidation or strategic disinvestment. Further, 77 CPSEs had negative networth amounting to ₹83,122.38 crore.

The Public Enterprises Survey, 2018-19, shows that 70 CPSEs recorded total losses amounting to ₹31,635 crore in FY19. Three companies, BSNL (₹14,904 crore), MTNL (₹3,390 crore) and Air India (₹8,474 crore) accounted for 84 per cent of the losses. There are many PSEs that have negligible operations and have not filed their annual statements.

Lack of leadership, with constant rotation in top management, allegation of corruption and poor governance have further impeded strategic decision-making in most public sector entities. Private ownership could help revive the fortunes of PSEs that continue to have sound business prospects.

The problem is that even the profit making CPSEs are faring worse than their private sector counterparts on most operational metrics. PSEs operating as monopoly seem to have let complacency seep-in, impacting their performance.

Privatisation is therefore necessary, but it may not be easy. While private sector players may be drawn by the assets owned by the PSEs, they may be wary of the large debt on the books of some companies such as Air India, NTPC, BSNL and MTNL.

Legacy problems related to the work-force and the regulatory risk in minerals and mining, power, steel, oil and gas may also make suitors think twice about taking over PSEs in these segments.

Take it slow

While strategic stake sale was easier in the 2001-2004 period, when the economy was just beginning to enter a high growth phase, recent efforts to sell stakes in Air India and BPCL show that getting the right value for the premium public sector assets may not be easy.

Further, the Covid-19 related disruption is set to roil the Centre’s divestment plans in FY21. But that may not be such a bad thing. For, the dividends paid by the PSEs have been substantial in recent past. One hundred and twenty one public sector enterprises paid the government ₹71,916 crore as dividend in FY19. With its capital restructuring policy, the Centre has ensured that PSEs pay dividend amounting to 30 per cent of net profit or 5 per cent of net-worth, whichever is higher.

This means that even if the PSEs record net losses, as long as their net-worth is positive, they have to pay dividends to the government. These funds are very important this year, when tax revenue is set to tank.

The restructuring policy also states that CPSEs with net-worth of at least ₹2,000 crore and bank balance over ₹1,000 crore shall exercise the option of share buy-back. The buyback route could also be used by the Centre over the next two years, to get some revenue.

The Centre should also keep in mind that unemployment has spiked above 23 per cent in April 2020 due to the lockdown. It would be hazardous to tamper with PSEs that employ over 15 lakh people, at this juncture.

While there is no harm in identifying the strategic sectors and beginning the process of consolidation of PSEs, the implementation of the privatisation programme needs to be postponed, at least until 2022.

Published on May 20, 2020

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