The government, to its credit, has consistently tried to come out with novel methods to provide funds for public sector expansion. So, while successive governments have used LIC to support the public sector divestment programme, this has got even more aggressive now. In addition, arrangements have been made for LIC to lend to, for instance, the Railways to help fund its aggressive capex plan. LIC gets a reasonable return on its loans and the Railways gets a steady supply of capital. The government, as FE reported earlier this week, has now come up with a plan to form a mega SPV of public sector units, in order to ensure better cash management.
Under the plan, all PSUs will park their extra cash with the SPV and this, in turn, will be lent out to other PSUs that need funds. While central PSUs have around `8 lakh crore of cash and surpluses that are currently parked in banks and mutual funds, the actual surplus after stripping out capex needs, is around `2.4 lakh crore—that’s roughly equal to the short-term borrowings of central PSUs. The PSUs that put in their cash get a higher return, say 6%, than what they get from putting this money in bulk deposits in banks. And, as for the PSUs that want to borrow, a 6-6.5% rate is far better than the 9-10% they pay to banks. In other words, the bank arbitrage is avoided.
The problem, however, arises when there is a default or a delay in payments. If an ONGC doesn’t get `10,000 crore lent to another PSU, what then? Indeed, the reason why banks need larger spreads, apart from their high costs, is that default rates are high and need to be provisioned for. It is not clear who bears the risk of delay or default in such cases. Also, while the savings in interest costs can be substantial, most PSUs need a lot more. Lower interest rates for an MTNL or a BSNL or an Air India, for instance, will be helpful, but if the basic model is flawed and this results in massive losses, how will it really help? Getting lower interest cost loans will be a big help for an FCI, but its massive inefficiency is not just a result of the higher costs of capital. This is what the government’s disinvestment plans need to tackle—lowering costs of capital is just a temporary solution.