Divesting it right

Strategic disinvestment or privatisation is back on the top of the agenda — for the government which is making yet another bid to sell its stake in public sector companies (PSUs) and, therefore, for the many vested and ideological interests which oppose privatisation. The Modi government announced its intention to restart the strategic disinvestment programme in February 2016, 13 years after the last PSU was privatised in the Vajpayee era. Despite cabinet approvals for the strategic disinvestment of at least 25 PSUs, beginning in 2016, not one transaction has materialised in almost four years. That is unusual in a government whose forte is implementation. Will it be different this time around with several big-ticket divestments (of BPCL, Shipping Corporation of India and Container Corporation of India) lined up?

First, it would be useful to understand why no deal has been executed thus far. Perhaps there isn’t quite the firm conviction in the top echelons of the government that privatisation is the right thing to do. The recent decision to try and revive the near defunct BSNL and MTNL would seem to suggest that. Also, there are influential voices in the BJP (such as Subramanian Swamy) and in the wider BJP ecosystem (the Swadeshi Jagran Manch for example) which are explicitly opposed to the government giving up control of PSUs. For them, strategic divestment is either ideologically unpalatable or practically abhorrent because it transfers state-owned assets to private parties at what they believe are throwaway prices. 

There may also be the matter of the particular PSUs which were selected to be put up for strategic sale. The most high-profile attempt at a sale made by the government in its last term was Air India which is probably the toughest PSU to divest given its massive debt burden and entrenched legacy issues. Others like Pawan Hans may not have had the burden of Air India but were perhaps not attractive enough for investors to make a beeline. A similar logic could be applied to units like Bharat Pumps and Compressors or to sundry construction and consulting companies which were simply too small (in revenue and profit) and too large (in terms of employees) to attract interest.

Arguably, the most important reason for the lack of success in getting privatisation off the ground is the reluctance of the bureaucracy to sign off on any deal. The overhang of the CVC, CBI, CAG and courts would make most bureaucrats nervous about sale of state-owned assets even if it is via auction. That creates the incentive for officials to either make the bid conditions so onerous that investors are scared away or to set reserve prices so high that no rational investor would put in a bid or to hive off, before the sale process, assets which may actually interest an investor (surplus land to expand operations for example). 

The narrative around strategic disinvestment needs to change before any successful privatisation can take place. The government needs to place privatisation in a context of economic efficiency rather than in the context of revenue generation for the government. This is critical. If the dominant narrative is revenue generation, there will be constant accusations of selling the “family silver” and fears about getting the “right” price from a sale. The fact is that only the market can determine the right price, not an administrative fiat. And only private ownership can ensure that the family silver doesn’t fade away (like it has in Air India, BSNL and so many others) but instead is made shining. While it is of course true that the government can earn useful revenue in the short run from divestment, the economy (and the government) can gain much more in the medium term by the efficiency gains from privatisation which will increase revenues, profits, employment and taxes from all these companies.

The reality in a revenue generation context is that in hindsight it will inevitably appear that the government “undersold” its asset because of the massive efficiency and valuation gains that private ownership brings. It is a mirage. Government ownership can never bring those valuations for PSUs.

The one reason that the latest round of proposed strategic divestments may have a higher probability of success is that better, more profitable PSUs have been put on the block. That these are listed in the stock market makes price discovery more transparent. However, unless the government shifts the argument towards efficiency rather than revenue, the all too familiar problems may derail a very worthwhile reform. The government must also give full political imprimatur to the sales so that the bureaucracy is not left feeling threatened by potential investigations in the future. 

Nothing succeeds like success. The first deal will clear the path for many more. It will also be the toughest to execute.  

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The author is chief economist, Vedanta