THE state of PSUs reminds me of the tale of an old farmer planting a mango sapling. On asked why was he planting it when he wouldn’t be enjoying its fruits, he said the sapling was for the next generation. For the last decade or so, the government has been enjoying the fruits of the seeds sowed as PSUs back in the 1950s. For the future, a long-term, impactful PSU engagement policy needs to be developed to address divestment, value creation from the sick PSUs, creation of new PSUs and strategic future needs of the country.
The PSUs run from the Junk to Jewel category. The government needs to have a vision, backed by strategic planning, to have these junk PSUs generate value for it and for the tax payers. One common factor among the PSUs is the large land bank they hold. A look at the business conglomerates of yesteryear shows they had massive land allocations for manufacturing, secured at concessional rates. Many have housed these land parcels in real estate companies and are developing townships, bringing moolah to these companies.
One such strategy could be to have a real estate holding company that sits above all these PSUs. The land bank of these PSUs can be transferred to this holding company. The land bank can be used for multiple purposes, ranging from affordable housing, commercial offices, amusement parks, public utilities, green belts, etc. This will release the value residing at virtually nil valuation in the books of PSUs. This could result in a multiplier effect for the holding company and the government over five to ten years.
Another set of PSUs is those that are not doing well but are still operational. An overhaul of management, operations and strategy is required in their case. The easiest way is to let them be lost into oblivion or slowly sink to perpetual non-viability. But that’s not what tax payers’ money is to be used for. Hence, invigorating the management by giving them complete autonomy, getting rid of vigilance, restructuring labour, bringing in operational discipline, non-interference from politicians and product diversification could be some of the measures that may be adopted to support them. The ultimate objective is to turn them around to ensure value creation for the shareholders by doing whatever it takes.
Natural resources are limited in supply and not all resources are available in India. Given the anticipated future population growth, the hunger for natural resources by Indian industry and population is going to grow immensely.
It is inevitable now for the government to think 100 years ahead. We need to own natural resources wherever they are in the world. The best vehicle available to the government for such resource acquisition is the PSUs.
We can see that a lot of resources are available in South America and Africa. Already, large pieces of land tracks containing natural resources are acquired by different countries and India is waiting in the wings, pondering whether or not to take action. We must use our PSUs in a decisive manner to ensure that the future supply of resources is assured. The lackadaisical attitude of the PSUs and the government has already put India behind the other emerging countries. Resource acquisitions can be made in Europe and the US, where technology in certain sectors is far advanced and could be useful to bring them to India. What better times than now for that given the valuations in these countries. Buy at the bottom, isn’t it?
Back to the farmer where we started. What about the future generations? Are we sowing something that future India can reap? It is time creation of a new set of PSUs was considered by the government. Again, we need to learn from the past mistakes and not repeat them while creating the new ones in terms of management, independence, etc.
Infrastructure is one sector where the government has to play a pivotal role. The government needs to think in terms of creating holding companies at each infrastructure sector level. These holding companies in turn will float special purpose vehicles (SPVs) to execute a project. Once the project is ripe and mature, it can be brought in for divestment.
The proceeds will flow into the holding company and the same can be recycled for new projects. Not just this, the holding company will have the ability to leverage itself suitably to reduce reliance on government and also consequently fiscal deficit. Sectors such as railways, ports, metros, smart cities, urban infrastructure, etc can be right opportunities for creation of such holding companies.
Sector-wise holding companies can also be used for dividend re-routing. The operational, profitable project SPVs that generate positive cash flows can dividend it out to the holding company. These cash flows can then be re-routed into the same sector projects investment or de-leverage the SPVs where the cost of funding is high or de-leverage at the holding company level itself or could be loaned out to other sector holding companies.
To manage these cash flows smoothly and seamlessly, a board of PSU holding companies may be created that is manned professionally and empowered completely to take decisions.
To conclude, the options that the government has to exploit these PSUs are limited only by the creative thinking of the government.
Multiple modes
* Transfer ‘junk’ PSUs’ land parcels to a real estate holding company for commercial/social development
* Overhaul management, strategy and operations of also-ran PSUs
* Use PSUs to acquire natural resources abroad for future use
* Float infrastructure-wise and sector-level holding companies, which will float project-based SPVs
* These SPVs can be listed on the stock exchanges and profitable ones retained for dividend income
The author is MD & CEO, India Ratings
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