For listed PSUs, FIIs could be allowed to purchase shares so that listing in international stock exchanges does not become necessary
The announcement that India plans to privatise most PSUs except a few strategic ones is a huge signal for “maximum governance, minimum government” that PM Modi promised. India still has around 235 PSUs. About half are in manufacturing and mining, and the rest are in the service sector—transport, telecommunications, financial and technical services.
Since the 1991 liberalisation, the role of PSUs has begun to decline, largely because the private sector has expanded rapidly. PSU share in employment in the organised labour force and its share of value-added in GDP is now around 5%—down from 10% in 1990. But they still retain substantial assets: Over 20% of GDP. Their share in manufacturing and mining has declined, but remains significant.
- PSU stocks turning value creators after decade of underperformance; Edelweiss bets on these shares
- Nifty PSU Bank soars 2.5%; Central Bank of India, IOB share prices hit new 52-week highs on privatisation buzz
- Nifty PSU Bank index zooms over 4%; Central Bank of India, IOB, J&K Bank share prices hit 20% upper circuits
Combined, PSUs make profits, but about 30% of them are serial loss-makers. Overall, the return on capital—except for the largest PSUs—is below that of comparable private firms. The losses alone would amount to around 10% of India’s public infrastructure investment, showing the opportunity cost of persisting with these enterprises in the state sector. Labour productivity in PSUs, in the past, has grown at 2% per annum as against around 5% for the economy.
PSUs in the service sectors, such as Air India, MTNL and BSNL, have done poorly relative to those in mining and manufacturing. Not only is the performance of PSUs in the service sectors worse, but their presence could have also adversely affected the performance of private sector firms in those sectors in the past.
Rigorous analysis of performance shows that MoUs—performance contracts between a PSU and the government—have no positive effect, and do sometimes even have a negative effect, on performance. They are often gamed to deliberately under-promise. Share sales (divestment), even listings, as opposed to performance contracts (MoUs), have a much bigger positive impact on the productivity of PSUs.
Previous privatisation was a huge success
In addition to partial share sales (divestment), India also had a unique experiment with full privatisation (strategic disinvestment) during the period of the NDA-I government, from 1999 to 2004. Leaving aside those assets that were mainly sold for asset value , the performance of 12 PSUs that were privatised at that time—Bharat Aluminum, CMC, Hindustan Teleprinters, Hindustan Zinc, HTL, ICI India, Indian Petrochemicals, Jessop and Co, Lagan Jute Mills, Maruti Udyog, Modern Food Industries, Paradeep Phosphates and Videsh Sanchar Nigam—shows considerable improvements in their financial and productivity indicators after strategic disinvestment.
The seven Maharatnas—BHEL, Coal India, GAIL, Indian Oil, NTPC, ONGC and SAIL—which comprise one-third of total PSU asset, are collectively doing better than private companies of similar size and should be retained in government hands. Nevertheless, SAIL, BHEL and Indian Oil need serious restructuring and better leadership to make them world-class companies.
The remaining PSUs are classified as Navratnas (17), Miniratnas (73) and 120-odd companies that are not given a Ratna status. The performance of the 17 Navratnas is consistently worse than that of comparable private companies, with return on capital roughly 2% lower. Many of the companies in this group could be privatised, especially Bharat Electronics, MTNL, NMDC and Oil India.
The category of Miniratna features 73 companies, and these are the ones that are most ripe for strategic disinvestment. There seems to be no reason to run these as public companies except to provide employment to a small number of people and to be able to provide managerial positions to party members once any new government comes into power. A far more serious issue is that of tainted contracts and procurement, where lucrative deals are handed out to cronies. The remaining 120 may, in most cases, need to be closed or sold off for their assets.
How to do it will matter
It is often argued that PSUs should be prepared for privatisation through restructuring prior to the sale. But it is not evident that such restructurings are helpful or get higher valuations. The buyer may or may not value any of these restructurings and may have very different ideas on how to improve the company. On the other hand, financial restructuring may be needed for many PSUs as they often have a web of complicated financial relationships or, like Air India, are saddled with large debt.
Russian-style or Latin America style privatisation—where most state assets were sold to “oligarchs”—must be avoided. Transparent processes, competitive bidding and ensuring funds are set aside for worker compensation are vital. Strategic sales are considered the optimal way to get the best returns from privatisation, but this need not be so. Open market sales (share sales) could be designed to widen ownership and create a greater public stake for sales. India now has many large well-functioning private companies with professional management and are not family-owned. Employees could also be provided shares—employee stock option plans (ESOPs) in the privately managed companies—so that they are not so resistant to the sale and share the upside post-privatisation.
For companies that are already listed, the concern that such large block sales will lower their share price can be countered by call-auctions and pre-announced share sales in smaller chunks over time. FIIs could be allowed to purchase shares so that there would be no need to list these companies in international stock exchanges.
In order to avoid the charge that the government is selling the family silver to pay the grocer’s bill, the proceeds from the privatisation and sales of assets of closed firms should not go back into the budget but instead should be put into the National Infrastructure Investment Fund and used to pay worker compensation so that the people can visibly identify how the proceeds are being utilised.
The time has come for a five-year plan to privatise the PSUs and a separate Ministry reporting to the PM to ensure it happens.
Author was distinguished visiting professor, NIPFP