From Disinvestment to Privatisation | Economics Optional Notes for UPSC PDF Download

Introduction

• Net profits are only 2.2% of their total assets for central public sector underakings, lower than for the private corporate sector. While the public sector or the state-led entrepreneurship played an important role in triggering India’s industrialisation, our evolving development needs, comparatively less-than-satis factory performance of the public sector enterprises, the maturing of our private sector, a much larger social base now available for expanding entrepreneurship and the growing institutional capabilities to enforce competition policies would suggest that the time has come to review the role of public sector.
• What should the portfolio composition of the government be? It should not remain static at all times. The airline industry works well as a purely private affair. At the opposite end, rural roads, whose sparse traffic makes tolling unviable, have to be on the balance sheet of the State. If the government did not own rural roads, they would not exist. Similarly, public health capital in our towns and cities will need to come from the public sector. Equally, preservation and improvement of forest cover will have to be anew priority for the public sector assets.
• Take steel. With near-zero tariffs, India is a globally competitive market for the metal. Indian firms export steel into the global market, which demonstrates there is no gap in technology. Indian companies are buying up global steel companies, which shows there is no gap in capital availability. Under these conditions, private ownership works best.
• In the private sector, bankruptcy is taken seriously. In contrast, public sector managers tend to be relatively relaxed about the prospect. Drastic adjustments do not take place, as the managers know that there is no real danger of extinction.
• Private ownership is clearly desirable in regulated industries, ranging from finance to infrastructure, where a government agency performs the function of regulation and multiple competing firms are located in the private sector. Here, the simple and clean solution — government as the umpire and the private sector as the players — is what works best. In many of these industries, we have a legacy of government ownership, where productivity tends to be lower, fear of bankruptcy is absent, and the risk of asking for money from the taxpayer is ever present. There is also the conflict of interest between government as an owner and as the regulator. The formulation and implementation of competition policy will be more vigorous and fair if government companies are out of action.
• In natural resource based industries such as upstream hydrocarbons sector, there is a strategic issue as well as the issue of optimal appropriation of the underlying vast resources rent. Similarly, the role of government vis-à-vis universities is also complex. Barring such a few, but key, areas we can confidently set about reformulating the activities of the State in the following two crucial areas.
• Firstly, the State should not be producing things that can be produced in competitive markets: this covers areas like steel or aluminium or cars. Second, the State should not be a player in regulated industries: areas like airlines, railways, shipping, telecom, banking or insurance.
• Embarking on disinvestment is fine, but we have to think about the end-game which is privatisation, where the government fully gets out of the picture. Two broad approaches that can be adopted for privatisation are strategic sales (where a controlling stake is sold to one buyer) or open market sales (where shares are sold to the public at large).
• Three arguments favour strategic sales: the buyer brings in new technology or expertise; he can exert sound governance inputs into the firm, and has incentives to do so owing to the large stake, and third, he can decisively displace government as the controller. Other arguments in favour of strategic sales are suspect. Crucially, strategic sales increase the concentration of power and wealth in the hands of a few hundred families of the country. The other approach, open market sales, disperses share ownership, creates widely-held, professionally managed companies, and spreads shareholder wealth.
• As per CMIE, there are 300 companies in India where promoters control below 10%. In each, the managing director and the rest of the top management team do not own a controlling stake, yet these companies continue to function without being captured by others.
• The disinvestment or privatisation program could explicitly target conversion of the larger PSUs into widely held, professionally managed companies. There could be provisions in the disinvestment mechanism that creeping acquisitions would not be permitted for a few years. This would give time for the professional management team to develop modern corporate governance mechanisms. The approach can be also applied to disinvestment in our banking sector. Dispersal of share ownership amongst crores of households could have enormous economic and political consequences.
• When shares are sold in India, they are accessible to foreign buyers through the FII route. This channel can be strengthened by further liberalising entry rules for FIIs and raising FII stakes in individual companies. The incentives of employees of PSUs could be influenced by sale of shares and employee stock option plans to align interests of employees with those of owners. For companies where some shares have been divested and a clear secondary market benchmark price exists, there is no impediment to establishing a steady and ongoing mechanism for GOI to finally reach 0% shareholding.
• Another instrumentality, particularly for partial disinvestment, relates to sale of under-performing or under-utilised PSU assets. Land, for example. Many PSUs have large tracts of valuable land. In cooperation with state governments, land assets can be leveraged by PSUs by making them available to new units. This will remove one of the new constraints faced by industry.
• When one includes such land assets of departmental enterprises such as Railways and Port Trusts, a mind boggling amount of resources will be available for the government for restructuring its balance sheet and for further industrialisation and alleviating housing constraints. This is also true for the state level public sector enterprises.