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Opinion
Selling Off Sick PSUs: Were they Really
Family Silver?
by Sushma Ramachandran
In the
brouhaha over Prime Minister Manmohan Singh's government reviving the
public sector divestment - or partial privatization - process, the old
argument about selling the "family silver" has been revived once again.
But the problem is much of the so-called "silver" has been tarnished and
a large quantity was never silver in the first place.
Most people tend to forget that the government at one time routinely
took over companies on the verge of closure that had been bled dry by
rapacious private entrepreneurs. In the absence of any other social
safety net for workers, the government used to rescue these companies
that were later nationalized and converted into "the family silver".
This includes the numerous sick textile companies that were banded
together into the National Textile Corp as well as many others in the
machinery, chemicals and pharma sectors of the economy.
Most of these companies are now bracketed in the category of sick
companies. In fact an official audit report of 218 companies, out of 419
public sector undertakings under the administrative control the central
government, reveals that equity investment in 72 of them have been
completely wiped out due to successive losses, eroding their net worth
by a staggering Rs.78,665 crore (Rs.786.65 billion/$16.1 billion).
Yet, the government has the potential to virtually become the country's
largest real estate player as the potential sale value of these
companies lies in the phenomenally high price of the urban land on which
they are located.
There is another segment of the public sector that also does not fall
into the category of family silver or valuable sovereign assets. This
would include the whole gamut of industries into which the government
ventured at a time when it was felt that the public sector companies
would form "the commanding heights of the economy".
These include hotels and bread factories. The previous National
Democratic Alliance (NDA) government of prime minister Atal Bihari
Vajpayee sold several hotels, inviting considerable controversy and
criticism, with allegations that the companies were hived off for a
song. It may well be true that the sale price was far lower than the
actual real estate value of these hotels. What is interesting, however,
is that this again boiled down to real estate and no one has ever argued
that these hotels were well run profit-making institutions.
No one has ever suggested that they should have been allowed to continue
operating efficiently and productively in the service of the Indian
taxpayer. It was only in the case of Ashok Hotel -- a landmark in the
capital despite the many stories of rats scampering through the
corridors -- that it was felt the institution deserved to be given
another chance for revival.
It is the third category of public companies that really come into what
can be described as the family silver. It is this group that has never
been considered for sale. Well, almost never. Former disinvestment
minister Arun Shourie did have a brainwave at one stage of splitting up
the Indian Oil Corp and selling it off but this idea was quickly shot
down.
The core group of companies include the strategically important ones in
oil refining, power generation, fertilizer and food procurement. Finance
Minister Pranab Mukherjee has been referring to these companies when he
has been talking about the need for public participation. Sale of even a
small portion of equity in these firms will not only raise huge
resources at a time when the government is cash strapped, it will also
bring about greater public accountability in them.
The fact is that the public sector is a huge entity in this country. The
"one size fits all" policy will not do to tackle its problems. The
original Disinvestment Commission headed by G.V. Ramakrishna had done a
tremendous job in categorizing these companies according to what was
needed to be done with them.
There were companies completely sick and beyond revival that needed to
be sold off. Then there were those that had a chance of revival but
needed private sector infusion of funds. And there were those in sectors
like hospitality from which the government needed to exit. There were
also companies in the pharmaceuticals sector that have been ailing for
decades for which numerous revival packages were formulated over the
years.
Unfortunately the privatization process became somewhat tainted when
some of the public sector hotels were sold at prices lower than the
market price of land. In one case a buyer resold the hotel at a much
higher price to another hotelier within six months. The sale of Modern
Foods to Hindustan Lever and of Balco to Sterlite Industries also
created much controversy though the purchases were considered a good fit
for the buyers.
Hindustan Lever finally resold Modern Foods but not before turning the
perennially loss-making concern into a profitable enterprise. On the
other hand, Sterlite is now reported to be keen to pump in as much as
Rs.70 billion ($1.4 billion) to buy the residual government equity in
Balco, the aluminium major. This would come as a great relief for the
public exchequer at a time when the fiscal deficit is set to widen to
6.8 percent of gross domestic product in 2009-10.
In any case, for the time being the government is clearly keen to steer
clear of any controversy, with the finance minister even chary of
charting out in the budget a road map for public sector divestment. But
as days pass, it is becoming increasingly evident that a road map will
be unveiled and the target, according to finance ministry officials,
could be in the region of Rs.150 billion ($3 billion).
This can easily be achieved through the painless process of selling
limited amounts of government equity through various routes to the
public. This will meet the twin aims of raising much needed resources to
bridge the fiscal deficit and also provide broader public participation
in the ownership of these firms.
As for selling off sick companies, one can certainly argue that there
have been inherent defects in the process in the past. At the same time,
this is merely an issue of fixing the right prices for real estate and
has little to do with the operational efficiency or productivity of
these companies.
It might be wise for the government to dust off the well researched
reports prepared by G.V. Ramakrishna and have a look at them while
formulating a sell-off plan. The issue remains a political hot potato
with the Left parties all set to cry hoarse about the sale of family
silver. They forced the previous UPA government to completely stop the
process of divestment.
There is however, only a limited quantity of public sector assets that
definitely need to be guarded and these include those in the core oil
and gas sector. But other chronically sick segments of the public sector
are merely an albatross around the neck of the public exchequer and need
to be disposed of in a pragmatic and systematic manner.
(Sushma Ramachandran is an economic and corporate analyst. She can be
reached at sushma.ramachandran@gmail.com)
July
19,
2009
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