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| The lease option | | Alternatives to privatisation should be carefully worked out |
| Business Standard / New Delhi Sep 30, 2009, 00:16 IST |
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The proposal to lease six sick state-owned fertiliser units, as an alternative to an outright sale, is a potentially workable idea. Though the 90-year lease that is planned makes it a virtual sale, and should therefore be shortened to no more than 20 or 30 years, a lease will be more acceptable politically. The substantive advantage is that a lease, as opposed to an outright sale, opens up the project to smaller companies as well, and this would include companies/entrepreneurs who are confident of their ability to turn around these sick companies but do not have the money to offer upfront. India’s telecom revolution, for instance, almost died still-born when the bidding process involved stiff annual fees but blossomed once the government moved to a more sensible revenue-share licence fee structure — this allowed a little-known firm like Bharti to take off and become the country’s top telecom service provider. A public-private partnership structure (which is what a lease deal would be) also helps get over the problem of dealing with the valuation for assets such as land, which have dogged many privatisation deals; valuation methods of firms that are sold as a “going concern” do not look at underlying asset value, whereas sick companies with large tracts of land often have unused land as their primary asset. Since all revenues under a revenue-share model will be shared with the government, a lease would allow the government to get a share of the upside in rentals and, if the lease is cancelled for non-performance or the firm is closed, it still gets to keep the land and other assets.
However, the experience with such projects makes it clear that contracts have to be properly drafted in order to not allow loopholes that the lease partner can exploit later. To take one instance of such a project, the Delhi airport was mired in controversy when the franchisee insisted that the six-year deposits it was taking — based on the average rentals over the entire length of the contract — were not revenues and hence did not need to be shared with the government. Prior to this, there was a controversy over whether the franchisee could create subsidiaries which could bill for services — this would have meant that the project’s revenues (to be shared with the government) would not be aggregate sales but the profits declared by the subsidiaries. In telecom, there are investigations going on into how some players have been under-declaring their revenues; some years ago, controversy erupted when Reliance Communications pretended that international calls to and from its network were local calls in order to avoid paying a fee on all international calls. Now there is a question raised about the charging of a marketing fee for gas, over and above the gas price mandated by the government.
The larger question is whether such projects are viable, on the basis of an outright sale or on a revenue-share lease basis. Typically, state-owned units are grossly over-staffed, with people either not qualified or unwilling to change the nature of their work, and sick units usually are no more than empty industrial shells needing additional investment. If the government is not going to give a franchisee the freedom to change these operating conditions, the PPP model becomes sub-optimal in terms of what it can achieve. If the objective is to make the unit viable, the government should not shy away from allowing management to make the changes that are required to achieve viability, with an end-period pay-off in terms of valuing the unit on its final operating ratios.
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