To market, to market

Updated: Nov 27 2006, 05:39am hrs
Taking institutions like Power Finance Corporation (PFC), Powergrid and Rural Electrification Corporation (REC) to the market is a good idea, whichever way you look at it. These institutions need significant funds for lending to ultra mega power projects (UMPPs), to large transmission projects and for financing the network improvement in states, e.g., RECs support to Maharashtra. While debt may appear a less expensive alternative, there are limits to the leveraging of their existing capital. Beyond that, more equity will be needed for an acceptable capital structure. If private infrastructure companies can access the market successfully, these companies too can ride the current boom, while retaining control firmly with government.

Indeed, going to market would be beneficial whether or not the issues do well. If they do well, it will, first, affirm the markets faith in the management of these institutions. Second, the required infusions would preserve the governments resources for much needed expenditure on social services. Third, market discipline could improve the operating performance of these companies. Though the evidence so far on for firms with majority government shareholding is mixed, market oversight does make effects of government intervention more transparent and quantifiable, as is evident from the manner in which the market performance of oil companies reflected the governments decisions on petroleum subsidies. Fourth, if, as some argue, PFC and REC are lending indiscriminately and Powergrid is investing unwisely, this redistributes such risks. Currently, the costs of bad decisions and the consequent government bail out would be borne by the tax paying public at large. Given our continued reliance on indirect taxes, this puts the burden disproportionately on low income citizens. To the extent that these costs, if any, will now be shared much more by the investors in these companies, the burden becomes much more progressive, since equity investors, on average, are considerably richer than the average taxpayer. Also, to the extent of FII investment, the benefits and the burden will be globalised.

On the other hand, if these issues do not do well, it will signal the market's opinion that these institutions are currently misgoverned. If so, it will strengthen the hands of reformers in government to improve the management of these institutions, which are critical to the national infrastructure effort. Who could argue against such a win-win proposition