High time to unlock value of PSUs

Outlook seems to be brighter for next fiscal as more companies are now in the pipeline for either privatisation or for reducing share of government equity

Prime Minister Narendra Modi's comments about the need for privatisation of public sector companies and the key role of the private sector in economic development have come none too soon. It is high time that the concept of the private sector and entrepreneurs as corrupt and villainous entities needs to be altered to the reality. And the reality is that the private sector has been one of the biggest creators of wealth and the engine of the economy.

These comments come in the wake of the Budget proposals which have outlined ambitious plans for privatisation of public sector companies. Even the use of the term privatisation is significant since in the past, the term disinvestment has been used to refer to this process. This time around actually both areas have been covered in the Budget, disinvesting or divesting government equity in public enterprises as well as actually selling off or privatising companies. Another new development was the announcement that two public sector banks and one insurance company will also be privatized during the course of next year. This will be the first time that any public sector financial entity has been identified for privatisation. Whether this is the beginning of a process has yet to be seen, but the very fact that it has begun is certainly momentous.

The target for raising resources through the disinvestment or privatisation process has also been pegged at Rs 1.75 lakh crore for 2021-22. This is actually lower than the current year's target of Rs 2.10 lakh crore, but may end up being more realistic. The fact is that disinvestment receipts targets have not been met for the past few years. Goals had been set high but achievement has been minimal. The target for 2019-20 was set at Rs 1.01 lakh crore, but merely half of that was achieved. In the current fiscal, the revenues so far are a dismal Rs 12,400 crore while the year is expected to end with only Rs 32,000 crore. Thus target numbers are likely to remain only on paper, given that the plans to privatise Air India and Bharat Petroleum Corporation Limited (BPCL) have not fructified as yet.

The outlook, however, is brighter for the next fiscal as there are a whole host of companies that are now in the pipeline for either privatisation or for reducing the share of government equity. The biggest are Air India and BPCL. The two companies are not comparable as the first has accumulated enormous losses over the years while the other is a profitable oil firm that is sought after by many suitors. In the case of Air India, the first round of bids failed as no corporate was prepared to take on its enormous debt burden. It is now being offered for sale by divesting it of the debt overhang and providing other incentives to make it a more attractive purchase. There is a good chance the Tata's may seek to buy it, bringing things full circle for the company which was originally established by JRD Tata.

As for BPCL, it was the erstwhile Burmah Shell before being nationalized in the seventies by the Indira Gandhi government. It remains a profit-making and strategically important company. Any buyer of the government's equity stake will get 15.33 per cent of the country's oil refining capacity and 22 per cent share of the entire fuel marketing network. The mining to oil giant, Vedanta and two global equity funds are among the companies interested in taking over BPCL.

Apart from these larger ventures, the Department of Investment and Public Asset Management (DIPAM) as the Disinvestment Ministry is now called, has identified an entire pipeline of about two dozen public enterprises that need to be privatised. These include the Shipping Corporation of India, the Container Corporation of India, Cement Corporation and Pawan Hans. In addition, there is a plan pending since last year to have an initial public offer (IPO) for the Life Insurance Corporation.

What is significant, however, is that the government has finally set aside its hesitation on taking a public stance in favour of privatisation. The last time any meaningful privatisation of public enterprises took place was during the tenure of Atal Bihari Vajpayee. It had been expected that Narendra Modi becoming Prime Minister in 2014 would mean a return to the Vajpayee era days when many economic reforms were carried forwards. On the contrary, this government has been extremely wary of proceeding in this area. It was only last year during the Covid crisis that the Finance Ministry articulated a clear policy on privatisation while unveiling the Atmanirbhar Bharat package. The key elements of this policy were spelt out during the recent Budget proposals. These are that barring four strategic areas, divestment will gradually be carried out in all others. The selected areas have been identified as atomic energy, space and defence; transport and telecommunications; power, petroleum, coal and other minerals; and banking, insurance and financial services. Even in these sectors, a minimal number of public enterprises will be retained with government equity participation.

Much will depend, however, on implementation of this policy. If it remains merely a paper tiger like the disinvestment targets set for the past few years, it is not likely to achieve the goal of unlocking the potential of many companies that are constrained by being controlled by the government. The advantages of selling off the companies are innumerable. First, closure of heavily loss-making ventures will reduce the annual outgo of taxpayers' money on supporting these unviable entities. Second, those that have the potential to be revived can ultimately provide significant value to the country's economy, as in the case of Air India. Third, enterprises like BPCL that are profitable will become even more so in the hands of a private dynamic management set up. The case of Balco and Hindustan Zinc are oft cited as these turned into huge conglomerates after privatization.

After the Prime Minister's public advocacy of privatisation, there is hope that this policy will finally be carried out without any further delay. It is time for governments to resist political pressures about selling off the country's crown jewels. These jewels are gradually turning into worthless rocks. Only privatisation will enable them to shine yet again.