Dont Hold On To PSU Jewels

Updated: Sep 26 2002, 05:30am hrs
Considerable attention is being paid to the ongoing disinvestment programme of public sector companies. The National Democratic Alliance (NDA) government had accelerated the pace of this programme during the last year in line with the agenda that sale with change of management (strategic sale) should be undertaken of those public sector undertakings (PSUs) which are not of a strategic nature. With this acceleration, transactions were completed for units like Indian Petro Chemicals Ltd, IBP, CMC, Balco, Videsh Sanchar Nigam Ltd, Maruti Udyog etc.

The government has realised extremely good prices, far in excess of the book values or market values and, for once, the estimate of receipts from PSU sales Rs 12,000 crore this year appears to be a realistic target. However, suddenly a spanner has been thrown in the works and the programme is being reviewed. One point which comes up repeatedly, and which thus needs deeper examination, is the question whether profitable units should be sold.

Some seem to be against the sale of profitable units. These include not only marginal opponents like the communists, but even the Congress which has suddenly found the success of this programme a bit too uncomfortable. These persons say that if a PSU is profitable, there is no need to sell it. This is a very dangerous argument, incorrect in its basics. To say that the profit of a PSU is a measure of efficiency is to be ignorant of how these profits are made.

The public sector invariably operates in a monopolistic or a quasi-monopolistic environment. Let us look at the Gas Authority of India (Gail). It is the monopoly producer of natural gas in the country and supplies the product through the Hajipur-Bijapur-Jagdishpur pipeline. Its selling price and cost price are decided by ministers and secretaries sitting in Delhi. This being so, it does not require an expert in economics to deduce that one can decide beforehand what this profit is going to be. The reasons for this are historical and need not be discussed here, but the simple fact is that the profit made by Gail has nothing to do with its efficiency. If one were to go deeper into Gail and mark-to-market (an expression used by investment banks to relate prices to actual market conditions), one would quickly find that much of Gails profits would disappear if there was competition and prices were determined by market forces.

Or take Mahanagar Telephone Nigam Ltd (MTNL), for instance. It enjoys a near-monopoly status in running the telephone business in two of Indias largest cities, New Delhi and Mumbai. It rakes in money because till recently there was no choice. It did not have to do any marketing for a product where there was a waiting list running into years. On the pricing front, while in many parts of the world local calls are either free or absurdly cheap, MTNL in the absence of competition charged the consumer exorbitantly. A few years back, it even started to charge a call every three minutes a pretty market-unfriendly measure. Now if this company makes profits, how real are they, and how much is it because of its monopolistic position It is worth noting that when MTNL went into the really competitive segment of cellular phone services, its efficiency came out in its true colours.

The profits made by trading outfits like Minerals and Metals Trading Corporation and State Trading Corporation are even more mythical. In the heydays of socialism when everything was controlled, these so-called canalising agencies were used by the government to import and export everything under the sun from Mercedes Benz to hair collected in Tirupati! The presence of these two companies was pervasive and practically every businessman has a story to tell about the profits of these companies.

Now with the liberalisation of the economy, removal of unnecessary trade controls and India becoming an economy of surpluses rather than shortages, the STCs and MMTCs have become marginalised. Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) are often touted as highly profitable PSUs. But here again there is no competition from the private sector, and pricing of products by Indian Oil Corporation, HPCL and BPCL is identical. How efficient these are will be known only when the industry is thrown open to large private players, but one can surmise what it will be!

Lest one thinks that it is only a monopoly situation that leads to public sector profits, there are many other ways. One is through receiving enormous bouts of equity capital on which a PSU does not have to pay any return until it makes profit. The government waits patiently for this to happen, while in real life no investor would be prepared to do so. The second is by way of low-interest loans which the government provides. These are nothing but a subsidy coming from the tax payer. Last but not the least, the government gives guarantees which enable the PSU companies to borrow money at lower rates even though it jeopardises State finances.

If there is any proof required that PSU profits do not represent efficiency but monopoly status and subsidisation, one needs to look at the fate of PSUs which work in a competitive environment. Air India competes with major world airlines and the government gives it all the support it can, but its financial results are terrible compared to its competitors. The Ashok Group of hotels works in a profitable industry but has been taken to the cleaners by its private competitors. In the banking sector, in spite of a major first-mover advantage, HDFC Bank and ICICI Bank are making PSU banks look staid, stodgy and inefficient.

We would be making a cardinal mistake if we confuse profits with efficiency. The decision to get the government out of businesses except where there is a strategic consideration involved was a well-thought out and sound one. This has the backing of every leading economist in the world including great friends of India and masters of privatisation like Jeffrey Sachs. It is necessary that we see through these type of arguments and continue the disinvestment programme as set out in the NDA agenda.

The author is an investment banker and convenor of the BJP Economic Cell. The views expressed are personal. He can be contacted at