Rewind. Stop disinvesting, start privatising

One wonders why policy makers the world over assume that they can be more efficient than markets. One wonders why they do not have the foresight to set aside funds when times are good, in order to be able to deal better with bad times. For example, Saudi Arabia has a giant oil company Aramco, which is state-owned and over 10 times larger than privately-owned ExxonMobil, which is, today, valued at $323 billion. This is after the price of crude oil has dropped from a peak of $140 to around $33 today.

The Kingdom of Saudi Arabia (KSA) is following a policy of over-producing crude oil in order to retain market share and, in the process, causing a sharp drop in its price. The fall from $140 to $33 has led to a budget deficit of $100 billion and its forex reserves are going to be wiped out in a few years. It is obvious that Aramco would have been valued far higher when crude oil was at $140, and everyone was scrambling around to buy it, than when it is at $33.

So, KSA has cut its nose to spite its face, by delaying the idea of selling a stake in it. KSA probably took comfort from the belief that fossil fuels were irreplaceable, and that, since God has stopped making them, its reserves of crude oil would increase in value.

But humankind is amazingly adept at finding technological solutions, and the advent of horizontal fracking of tight oil, trapped in shale, led to the crash in price. Now, together with this, technology and ingenuity is creating a huge investment opportunity in renewables.

As much as 68 per cent of 16 GW of capacity additions to the US energy sector in 2015 was from renewable, an amazing figure, largely wind and solar. Natural gas extracted from shale is fast replacing coal and as much as 11 GW of coal-based power plants were shuttered.

It is the same for other countries, whose leaders neglected to develop state assets but, instead, exploited them for other things. Venezuela’s former President Hugo Chavez exploited its state-owned company PDVSA to run social schemes and provide assistance to neighbouring countries such as Cuba, to curry political support. Well, Venezuela is now bankrupt, since 95 per cent of its export revenues come from oil. It is rated as the most miserable country in the world and has a 98 per cent inflation rate. If only Chavez had used PDVSA resources more wisely.

India, too, has exploited ONGC’s resources to perpetuate a subsidy scheme for petro products, unmindful of the fact that petrol and diesel are used by those who do not need subsidies.

India’s policy makers too believe that they can forecast better than the market. In 2007, Air India was merged with Indian Airlines, after it took on huge debt for fleet expansion and was unable to service it.

The merger was supposed to generate a saving of around ₹1,000 crore; instead, the merged Air India posted a ₹5,500-crore loss. It has to be continually bailed out with taxpayer money; money that could be used, instead, to provide toilets, hospitals and schools for the poor. Why not privatise Air India? Margaret Thatcher was bold enough to do that with British Airways, which is now the # 20 amongst best airlines in the world. Indigo is at # 44 and Jet at # 76 . Air India does not figure in the top 100.

Why not privatise IDBI Bank and other smaller banks? Minister of State for Finance, Jayant Sinha, stated recently that the government was open to selling a strategic stake in IDBI Bank. Mr Sinha, why not think of selling a controlling stake instead?

Our policy makers continue to harbour the fake notion that the government needs to have a majority in as many as 27 banks to ensure stability of the financial system. This is hogwash.

So, it sells stakes in bits and pieces, calling it disinvestment, when it really ought to, as any good asset manager would do, sell the whole thing, which is called privatisation.

Else, one day, it will find that the asset it is trying to sell will fetch it a fraction of the price. Much like Aramco in KSA. Or Rosneft in Russia. Or PDVSA in Venezuela.

The writer is India Head, Euromoney Conferences

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