Is India short-selling the family silver?

The public sector in India is a picture of of contradictions. Often, it elicits derision and ridicule in market circles. The government is apologetic about it, analysts are baying for its dismantling, and academics are divided over its relevance.

At the same time, when markets are on a free fall, investors look at public sector entities like LIC to bail them out. When Indians are stranded abroad and in distress, people expect Air India to airlift them. And when the government runs short of revenues, often public sector units are put up for sale to raise money.

Despite the privatisation wave across the world, the reach and influence of state-owned enterprises (SOEs) keeps growing.

According to OECD (a September 2017 presentation on size and sectoral distribution of state-owned enterprises), there are about 40 countries in the developed and developing world (excluding China) having SOEs valued at $2.5 trillion and employing nearly 10 million people.

In addition, governments hold minority shareholdings valued at $912 billion, employing 2.8 million people. Finance (26 per cent), electricity and gas (21) and transport (18) are the major sectors in which SOEs have a significant presence in value terms.

The presence of SOEs is strongest in China, India, Brazil and Eastern Europe.

China’s financial SOEs together hold $34 trillion of assets compared to non-financial SOEs’ $26 trillion. They employ millions and form a large part of global GDP (Asia Society Policy Institute, China Dashboard, Winter 2019).

China has also been extensively using SOEs categorised into key industries (defence, electricity, oil, aviation, rail, shipping, etc), pillar industries (autos, chemicals, construction, electronics) and normal industries (tourism, pharma, investment) for garnering revenues for the government to maintain economic stability.

SOEs have a strong presence in markets too, accounting for 26 per cent of MSCI EM Index and over 40 per cent of the market cap — with large weights in utilities (74.7 per cent), energy (59.1 per cent), financials (44.4 per cent) and industrials (40.2 per cent) — and 25 per cent of Schwab Fundamental EM Large Company ETF (Callan.com: SOEs in emerging market indices).

Large IPOs

Divestment of public sector is not something unusual in emerging markets.

A host of big SOEs with large IPOs like Agriculture Bank of China ($22 billion), ICBC ($22 billion), Bank of China ($11 billion), Rosneft ($11 billion), China Construction ($9 billion), Electricit de France ($9 billion), VTB Group ($8 billion) and China State Construction Engineering ($7 billion) are inspirations for many emerging economies.

Even General Motors of the US, which pulled off the biggest IPO in 2010 at $23 billion, was 61 per cent owned by the US government then; this fell to 33 per cent after the share issue. So there is no dispute about putting public sector units on the block, but the question is about how and when — selling them for meeting immediate needs or after making them strong enough to attract global interest. Large IPOs of SOEs in India such as Coal India ($3.3 billion), ONGC (2.2 billion) and GIC (1.6 billion) may look suboptimal compared to companies of similar stature and significance in other countries. The concern thus is whether India is able to realise the full value these companies hold or is it too hasty in cashing out.

The case of LIC

The plan to divest LIC too raises this concern; whether to sell it when apprehensions over its asset quality and slower pace of premium growth remain to be addressed or to make it strong before the sale.

While analysts in India and abroad will be number crunching to make some good money from its listing, a few points on how it is placed against its global peers may be pertinent.

On the net premiums written, LIC, with $48.9 billion (December 2018), is placed 17 among the 25 top global insurers and 21st on the basis of non-banking assets (Global Insurance Market Trends, OECD 2019).

On premiums written, LIC’s is $100 billion less than top ranked UnitedHealth Group of the US ($156 billion), and about $50 billion less than Ping An of China (4th rank). And in terms of non-banking assets, LIC’s $438 billion is less than half of Allianz’s $1 trillion.

When it comes to growth, direct gross premiums in life in India was a meagre 0.5 per cent with non-life better at 7.2 per cent. Growth in life insurance has been negative in 20 of the top 50 companies in 2017. On the other hand, gross claims paid by India’s insurance sector at 17.2 per cent in life and 15.9 per cent in non-life are on the higher side when compared with those in the US (2.8/4.6 per cent) and Korea (6.9/12.3 per cent).

Asset allocation of 77 per cent for bills and bonds is on a par with many markets, though with regard to equity, allocation in India is fairly high at 18 per cent — perhaps due to frequent calls to support the stock market and rescue sick companies — compared to 5.2 per cent in the UK, 11.7 per cent in the US, 13.9 per cent in Brazil, 12.4 per cent in Singapore, and 6.4 per cent in Russia.

While enthusiasts could look at LIC as another Aramco, evidence from the past is worth considering. China has listed all its four major insurance companies. China Life, the country’s biggest insurer raised $3 billion in 2003 when the market was down; Ping An made $5 billion in 2007 at its peak; China Pacific garnered $3.1 billion in 2009; and New China Life, $1.9 billion in 2011s. Premium written by Ping An is double of LIC’s, and the markets today look dicey. Add to this, the post listing prices of many PSUs have been less than inspiring ( www.insurancebusinessmag.com ).

Can be made productive

Public sector entities will be found wanting if they do not adapt to and learn from the changes happening around it. If directed properly and structured without too much bureaucratic interventions, the public sector too can become more productive. If listing is a sole solution, then why have many public sector banks with great listing history two decades back been merged to save the banking industry? How much growth and stability are the regions of Africa, Latin America and Eastern Europe showing after rampant privatisation compared to Asia, which largely thrives on growth driven by a large public sector?

It is the active support of the state that enabled Chinese financial firms to mop up most of the new capital issuance in the world. A sell-off to raise quick cash won’t be such an effective way in the long run for an economy in pursuit of global leadership. Selling family silver is easy, but creating heirlooms that a family can take pride in is difficult.

The writer runs the consulting firm ‘Growth Markets Advisory Services’

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