Disinvestment and public sector reform

Updated: Feb 26 2005, 05:30am hrs
The disinvestment policy of the present government tries to straddle dual objectives, of raising resources and, at the same time, pleasing the Left parties. The concerns of the Left were sought to be addressed with the creation of an Investment Fund and raising the interest rates on employees provident fund. On the other hand, FDI limits in telecom have been raised from 49% to 74%, thereby giving a fillip to investment in that sector.

Consequently, the policy reflects the problems in political compromise. By ruling out privatisation and opting, instead, for retaining government shareholding at 51%, the options have been closed for any largescale disinvestment. In doing so, the resources that could be raised through disinvestment are limited as, in many enterprises, government shareholding is already below 100%. Further, only shares of some public enterprises, such as oil and power companies, attract investor interest. During 2004-05, the government had managed to secure only Rs 2,684 crore, against the targeted Rs 4,000 crore, and that, too, only through selling 5.25% of NTPCs shares. Now, it is understood that the target for the next year could be anywhere between Rs 10,000 crore to Rs 20,000 crore. The government could possibly achieve around Rs 2,500 crore through selling shares of BHEL and Maruti Udyog and maybe another Rs 1,500 crore by selling more shares in some oil and power companies. Anything beyond this would be highly optimistic. More so, given the way disinvestment is being handled. For many months now, there is no secretary-level officer in charge of the department. Second, there is no clarity on the future of disinvestment. For example, what will happen after the government runs through its residual stake (above 51%) in companies whose shares attract investor interest Will it go on to reduce its stake to levels below 51%, taking care to ensure it remains the majority shareholder If it does that, the consequences for management of public sector companies can only be damaging. Such actions will remove PSU companies from parliamentary purview and that of the CVC and the CBI, while allowing backseat driving, without accountability, by the government. To justify reducing government stake to below 51% and selling the shares to the public, the example of Britain has been quoted. But prior to the shares being sold to the public, the British government ensured professional managers were appointed and regulators were in place. These preconditions are necessary if we want to follow the UK model. And, the government will have to resolve not to interfere in the day to day working of public enterprises. That is easier said than done.

To attract competent managers, the Public Enterprises Selection Board should be revamped, by induction of professionals from reputed management institutions as part-time members. More, it has been observed that PESB recommendations are not always acted upon by the departments under whose administrative control the PSUs function. The secretary of the administrative department is an invitee to the selection committee to aid the PESB, but he usually functions as the eyes and ears of his minister. The practice of associating the administrative department could be dispensed with, so that selections may be perceived to be without bias. PESB recommendations must be accepted invariably by the government. For this, the PESB must be granted the same status as the Union Public Service Commission.

It should not forgotten that many PSUs are already losing heavily and several attempts to turn these around have failed. Hence, they would hardly attract any investor interest. Disinvestment, or outright asset sale, of failed enterprises must be an option the new Public Sector Restructuring Board (PSRB) should consider. Any attempt to again restructure these through government funds will amount to throwing good money after bad. The erstwhile ministry of disinvestment had invited bids for selling eight PSUs as running units, but failed to secure any offers. These and several other like PSUs are still being supported by the government, instead of being sold through asset sales. The government would need political will to sell the assets of companies which have long been closed. As a first step, all budgetary support to these enterprises must be stopped. Real estate properties valued at several thousand crore rupees belonging to failed and closed PSUs are unutilised in several states. Unused machinery has turned into junk and the premises have deteriorated into dens for thieves. Delay in their disposal only increases the governments burden of pay to officials employed in these companies and increases the risk of asset stripping, besides causing further depreciation to property. A fast-track approach for asset sales of perennially loss-making companies would, therefore, appear to be called for.This would enable encashment of saleable assets, payment of voluntary retirement compensation and stopping further bleeding from the government budget. The government may then be able to reduce taxation on citizens and utilise the resources saved, by useful investment in social sector projects.

Disinvestment has come to mean increased revenue for the government. But what does this mean for the PSU Does it lead to greater autonomy, or any improvement in performance Unless disinvestment is done to also bring improvements in the quality of governance of the public sector, it would continue to be perceived only as a measure of raising resources.

The writer, a retired IAS officer, was member-secretary of the erstwhile Disinvestment Commission