In a scene in Yes Minister, the constantly thwarted minister, Jim Hacker, wants to push through some legislation. His secretary Humphrey Appleby says: “I recommend that we set up an interdepartmental committee with fairly broad terms of reference so that at the end of the day we’ll be in the position to think through the various implications and arrive at a decision based on long-term considerations rather than rush prematurely to precipitate possibly an ill-conceived action which might well have unforeseen repercussions.”
“You mean, no?” asks the minister.
The political satire aired on BBC in the 1980s about a cabinet minister and his permanent secretary who battle their wits to stymie the other could well be relevant to today’s problems. In the show, the minister usually desires to formulate and implement policy or to bring about change, while the secretary fights to maintain a status quo. They only join forces when their remit is being cut.
I bring this up at a time when the finance minister’s inbox is planted with suggestions. As a druid, she decides which to pluck and throw into the cauldron to either keep the economy cantering, humming, or to re-vitalise the moribund parts (depending on your interpretation of the data) and which parts to reinvent.
My preference is for fixing the public sector units (PSUs) by consolidating government equity into a holding company. The relative underperformance of PSU shares in the market reflects all that is wrong with the current ownership and governance structure. The more recent pushback that investors have been giving board appointments in government-owned companies is another wake-up call. Apathy is not a business strategy.
In the past, divestment, where the government sells shares while the governance structure remains unchanged, was offered as a cure. The big challenge is to change the governance structure, and this has not been easy given the very direct pulls and pressures for those sitting behind the desk in the ministry. For one, they are answerable to parliament and their ministers. So, a missive from the stock exchanges, or even the Securities and Exchange Board of India, does not cut much ice. Two, the mindset is one where the commercial angle is usually sacrificed for the greater social cause. What is needed is balancing the two. And three, the larger remit and relatively short tenure of those in the ministry do not augur well for long-term decision-making. If anything, this arrangement makes oversight over PSUs an adjunct to their bigger job — an eye on the next role within the government.
Currently, state-owned enterprises are dispersed across different ministries. For example, those in the oil and gas sector are under the purview of the Ministry of Petroleum and Natural Gas and companies linked to the railways are under the administrative control of the Ministry of Railways. While this is an upgrade from commercial enterprises functioning as a departmental unit — as was the case with BSNL, till it was corporatised, there are alternative structures that might better serve the government’s objectives. The Railways are a commercial enterprise. If the social objective of running them is not so strong, they too can be corporatised.
Given that the default option is not to cede control, I suggest transferring the government’s shareholding to a government holding company on the lines of Temasek Holdings in Singapore or Khazanah in Malaysia. It is not as “revolutionary” as an independent fund outside the ambit of the government giving money to third parties to manage. So, while the ministry has to let go, the government remains in control.
The advantage is that such a fund can have a strong emphasis on the performance of these companies while keeping an eye on the returns to the government. It will serve as a centre of “ownership excellence”, and like PE firms, constantly learn and evolve as an owner of business. This structure enables it to have consistent processes, be it performance targets, board appointments (including the relevant ministry nominee) or leadership roles. The annual report will measure aggregate and individual company performance, sales, profits, margins, dividend declared, and so on. Comparing across businesses and over time will bring focus. And what gets measured gets done.
True, the ministry does try and tick these boxes, but without the serious intent running a business deserves, for reasons cited above, it ends up behaving like absentee landowners or repeatedly fails to exercise the stewardship over the businesses under its charge.
The market value of the Government of India’s shareholding in 59 listed companies and 15 listed banks and insurance companies as of December 31, 2020, is Rs 9,847.1 billion (or $133 billion). Assuming the same market cap-to-networth for unlisted entities as those of listed, the two aggregate to Rs 16,303.8 billion. or roughly $220 billion. One can quibble about these assumptions, but this is roughly the size of the fund we are talking about — without LIC. Banks can be held through a separate fund. The budget documents had estimated the FY20 dividend at Rs 482.6 billion, or $6.5 billion.
Were these numbers to double —in say three years, just by changing how the shares are held and by exercising stewardship responsibilities, the government can raise as much as the value today of its holding, while having the same amount leftover. This is an idea whose time has come.
The writer is with Institutional Investor Advisory Services. @AmitTandon_in
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
