Disinvestment challenges

How sale of government shares in PSUs can be more effective

In the last few years, the United Progressive Alliance government has repeatedly set ambitious targets for disinvestment proceeds from public sector enterprises - and then missed those targets spectacularly. This is in spite of the fact that the fiscal deficit is high, which implies that revenue should be raised. The depressed state of the markets and the paucity of reasonable buyers mean that, frequently, the government has to prevail upon its own companies - such as the Life Insurance Corporation of India and the state-controlled oil companies - to step in to buy stakes in public sector units. This is faux disinvestment at the very least. The government's dilemma is understandable. The fact is that it is increasingly clear that, without a class of people for whom investment in equity is a normal activity, selling stakes in the public sector is fraught with danger. The idea behind disinvestment is that major companies be sold to a large set of private investors - and not serve to strengthen a half-formed oligarchy. If a major "navaratna" were privatised today, who would buy it? Would it not likely end up with one of India's budding oligarchs? Or is the only way to prevent that is to allow foreigners to own these assets?

Of course, part of the reason is that governments see no need to sell companies when the going is good - whether in terms of the companies' own balance sheets or, more generally, the market - and fear to sell them when things go bad. When things are bad, questions will be asked about the valuation paid, for example. That disinvestment remains entirely a political decision - and not a decision taken by a disinvestment commission, such as in some of India's neighbours or in countries like Mexico - is part of the problem. Yet, even if the decision is depoliticised, problems will remain.

Perhaps India needs to prepare its markets and prepare the companies for disinvestment first. For the latter to happen, it remains necessary to work on structural changes in how public sector companies are managed. Above all, public sector companies must be freed of the all-encompassing control of their nodal ministries. Over and over again, it is clear that politicians and bureaucrats in the ministry see their local public sector undertakings as a source of patronage and of perquisites. Unless this relationship is severed, the chances for good corporate governance in the public sector remain slim. The public sector's bloated workforce, too, must be trimmed - if necessary, by paying people to sit at home for a few years - so that the companies' balance sheets look more attractive.

There are other ways to discipline companies, too. One is to just open up the relevant sectors to private competition. Air India will not survive competition unless it cleans up its act. The big public telephone utilities are at a reform-or-perish stage, thanks to the presence of private competition. As for state-controlled banks, the problems there are even greater. After all, they have demonstrated that, unlike their private counterparts, they are unable to judge loan risk properly. Now, they need to be recapitalised twice over - once to satisfy Basel III norms, and once because they are struggling with bad loans. This will cost an enormous amount of money. Perhaps the banks must just shut down further lending; or some of them should be mashed together and sold.