1. Editorial: Welcome new PSU plan

Editorial: Welcome new PSU plan

Finance minister announces important new caveats

By: | Updated: November 7, 2014 5:32 AM

Given that, till now, most believed the government was committed to a no-privatisation strategy and the view that every PSU could be turned around, finance minister Arun Jaitley’s comments at the World Economic Forum are a pleasant surprise. Without going into specifics, Jaitley has said he was open to the idea of privatising some loss-making PSUs. Since one of the hallmarks of the Modi government is to
attempt big reforms through seemingly routine announcements—FDI in railways and opening up of the coal sector to commercial mining are two recent examples—this could be a big policy reform step. The key, of course, is the kind of PSUs that are divested. Privatising a Scooters India Limited will have an impact, but it will be nowhere as large as inducting a strategic investor in, say, an MTNL. The alternative to privatising MTNL is to let it languish—it has been making losses for several years, from R2,611 crore in FY10 to R5,321 crore in FY13—but that won’t help anyone. Nor is ‘professionalising’ PSUs, a Modi buzzword, going to be enough unless it is coupled with savage restructuring—MTNL’s wage bill is more than its turnover, compared to a 5% number for most private sector competitors like Bharti Airtel and Vodafone. The key to identifying which PSUs fall in this category is Jaitley’s statement that ‘I will be open to look at companies which are on the verge of closure and will do much better in private hands’. In the case of Hindustan Zinc, for instance, profits have risen 101-fold in the 11 years since privatisation, market cap 78 times and investment levels are up from minus R3 crore in FY02 when it was a PSU to R3,200 crore in FY13.

Indeed, one option the government may wish to try in the case of PSUs like Air India—this does fit Jaitley’s description of the type of PSUs which can be put on the block—is to look at a kind of viability gap funding (VGF) as well. If, for instance, the government is willing to spend R30,000 crore on Air India over 10 years, this should be made available to potential buyers to sweeten the bid. Promising to absorb workers after 5 years—this was done in airports like Delhi and Mumbai as part of the privatisation deal—in case the private sector buyer doesn’t want them is another option to sweeten the deal.

While professionalising PSUs is an important step, an equally important one is to inject enough competition in the sector. By and large, with no competition between them, oil marketing PSUs sell petrol—and now diesel—at the same price, nor is there that much to distinguish them by way of extra service. Decontrolling diesel prices, however, will ensure that private players like Reliance and Essar come in, and once that happens, the oil PSUs will per force have to get more competitive. Reliance pumps, when they were operational, had a very good bonus-points and fleet-management system which helped it build good market share till the diesel subsidies put it out of business—it was this competition that forced BPCL to move its own fleet-management system to a higher level; a level at which BPCL today feels it can take on the challenge easily. Similarly, professionalising Coal India is critical, but once private players come in, this will have a far more salutary impact on the PSU monopolist’s functioning.

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