A five-year strategic plan is needed instead of an annual one to maximise benefits.
Given the widely acknowledged constraining factors at play such as the ongoing virulent pandemic, the limited investment appetite of Indian businesses, and the spluttering economic recovery, the gigantic process of privatisation envisaged by the Union Government needs to be devised with ingenuity and care. Many a times in the past, the Union Government, as well as several states, have made lofty plans to divest public enterprises, particularly those run poorly, but failed miserably. Consequently, most such entities continue to remain in their bags even today.
The current reality, combined with the tepid past experience make it imperative that the new endeavour stays in sync with prevailing circumstances—this includes not just the shallowness of domestic capital markets which have to provide the requisite finances for buy-outs, but also the economy’s capacity to create alternative employment opportunities. The public sector is the largest employer in India, and with the society in its present predicament, we can ill afford to see a significant portion of these jobs vanish upon a meaningful privatisation exercise. When deciding on the pace of this transformation, decision-makers must be conscious that in private hands there may be no built-in safeguards that public enterprises had; this means a potential change in price and quality of products and services that differ from erstwhile government owned firms.
The 340-odd Central public sector enterprises (CPSEs) have, on average, been built over 35 years. Together, they have locked up Rs. 27 trillion of public capital, provided 1.5 mn direct jobs (besides three times or more indirect ones) and have an annual output of Rs 25 trillion. Granted, several of them might not be epitomes of efficiency with their products now capable of being produced more optimally by private businesses. Yet, a sudden dismantling of a majority of such enterprises, as has been talked about, may have noticeable deleterious impact.
In fact, missteps have the potential of being highly counterproductive. Even in the few change-of-ownerships effected in modest sized CPSEs (such as Hindustan Zinc, Modern Foods, VSNL, ITDC and Centaur Hotels) under Prime Minister A.B. Vajpayee in 2001-03, we saw less than satisfactory outcomes. Besides the relatively low price realised, these moves caused labour-unions to go up in arms, albeit more on emotional that real apprehensions. In many ways, the real result was the stoppage of the entire process of privatisation for almost 18 years thereafter. Such a chequered history should serve as a valuable lesson; on the other hand, it should not translate to an incapacity to go ahead with privatising and reaping its diverse and significant benefits.
To maximize chances of success, the process of privatisation this time needs to be made more robust and systematic. Gradual efforts that harmonise our fiscal objectives with the entire gamut of other relevant considerations, especially workers’ welfare, and the creation of new employment opportunities, must remain a non-negotiable priority. After all, the latter is virtually the sine quo non of development in a populous country like ours, not just merely hastening the pace of GDP growth or per capita income. Along with the other strategic parameters such as self-sufficiency in defence, health and food, the employment-intensity of a PSE must be zeroed upon as a relevant consideration for determining its strategic value-add, and play a significant part in deciding whether it should be offered for sale.
Rather than hitting an arbitrary annual target or plan, a five-year horizon to offload government stakes along with management control is warranted. The bias towards a longish programme would give government-managers greater flexibility to determine the right timing to offload stakes at their true value, thereby giving the public at large, the ultimate owner, more bang for its buck. A compulsion to adhere to a particular financial year to complete a deal, even when the overall environment may not be conducive, must be dispensed with and replaced with a more objective view.
It also cannot be overemphasised how important it is to carry out the privatisation exercise professionally. In a democratic and open society such as ours, it is difficult for government business-actions to remain confidential, but this leads to an inability to realise optimal valuations unlike the private sector where mergers and acquisitions are an artform. This has to be speedily corrected. In addition, reducing the multiple levels of accountability, the prescription to engage with a host of other miniseries, and playing it safe with an unrealistic insistence on putting down all the views and stands on paper, has to be fixed if we aim to maximise value.
Inspiration for effecting improvements may be drawn from the annual budgetary exercise undertaken away from public gaze. Only after elaborate in-house and external consultations, with scores of financial statements and proposals worked on in secrecy, does a fully baked Budget memoranda get shared in the appropriate forum. With such valuable experience under its belt, the Government mandarins need to emulate it while taking a call on the nuts and bolts of the privatisation-process. This would include the timing of selected entities going under the hammer, their reserve price, and at times even the manner of the sale process to follow. Besides assisting in fuller value realisation, it would also ensure fairness to all potential bidders with no prior information leaking to a select few.
Making transformative changes in the governmental scheme of things might, prima facie, appear virtually impossible; however, several structural steps must be taken. With a few dispensations granted under the Rules of Business of Government, DIPAM, the department under the Ministry of Finance, that is currently responsible for disinvestment in CPSEs can be moved to a new Ministry of Public Enterprises and Privatisation (MOPP) and converted into a professionally managed Bureau of Privatisation (BOP) tasked with the entire implementation exercise. The current Department of Public Enterprises (DPE) needs to be hived off from the Ministry of Heavy Industry and Public Enterprises (where it currently sits) and merged with DIPAM, making it the singular Ministry responsible for privatisation while continuing to oversee common issues of public enterprises.
After due diligence and internal consultations, once MOPP has identified an entity to be privatised and secured the Cabinet’s endorsement in principle, it should spearhead the entire exercise, rather than leaving it to the administrative ministry supervising the functioning of the public firm. Past experience, in fact, suggests that at this stage the enterprise itself should be moved out from the administrative ministry and placed under MOPP. In turn, MOPP should entrust the task of carrying this forward professionally and with the requisite confidentiality to the Bureau. Only for the final approval of the deal that includes details of the purchasing party, the terms and conditions of sale, and the price, should the Union Cabinet be approached.
DPE will bring to the table its domain knowledge of CPSEs, including the unique and contentious issues to be resolved in each entity earmarked for privatisation. All the policy related issues including enacting an omnibus Privatisation Act would be in MOPP’s charter of duties. Its accountability to the Parliament and regulatory and supervisory agencies such as the Comptroller and Auditor General, Central Vigilance Commission and Central Information Commission, would be at par with other Ministries. However, a more fair and appropriate degree of insulation afforded to its subordinate body, the BOP, in regard to its direct accountability to any of these bodies will enthuse more external experts to willingly offer their services to the Bureau on an “as needed” basis.
Streamlining the existing approval process of a sale is another urgent requirement. It currently takes 12-15 months to complete this convoluted process. Having to go back repeatedly to the same stakeholders including the Union Cabinet leads to delays and indecision, as has been witnessed in the still inconclusive three-year-old exercise of selling Air India, and at least the year and a half long processes with SCI, CONCOR and BPCL. Little wonder then that the Central Government has rarely been able to get anywhere close to the revenue-targets from divestment that it sets for itself.
The prevalent process usually involves the Niti Aayog identifying the CPSEs for sale, followed by a Core Group of Secretaries on Divestment (CGD) headed by the Cabinet Secretary making its recommendations to an Alternative Mechanism Group under the Union Finance Minister. Thereafter, DIPAM seeks the in-principle approval of the Cabinet Committee on Economic Affairs (CCEA) under the Prime Minister, which invariably also includes the Finance Minister. It may, together or separately, accord its approval to the 12 distinct stages of strategic divestment such as the identification of the enterprises for privatisation, the extent of government shareholding to be divested, the selection of intermediaries to carry forward the exercise, the floating of a preliminary information memorandum, approval of bids and finally, the execution of the share purchase agreements.
The suggested alternative methodology seeks to sharply shorten this process and timeline. MOPP, the unified focal point in the government, after consulting the enterprise’s administrative ministry and other relevant agencies, will seek the Cabinet/CCEA’s first stage approval. After remitting it to BOP for conducting the entire assignment confidentially, the new Ministry will adopt a hands-off approach to the particular transaction till such time as the BOP’s findings become available to it. Thereupon, it will revert to the Cabinet/CCEA for securing final government-approvals, and complete the transaction with the preferred private bidder.
Given that making changes along the lines laid out above in the extant scheme of things may take some time, the Union Government would do well to temper down its exuberance about privatisation and its potential benefits for about a year. Such an approach shouldn’t hinder the realisation of the current fiscal’s estimated revenue-goal of Rs 1.75 trillion since the already selected enterprises Air India, BPCL, CONCOR, SCI, two yet to be identified public sector banks, a general insurance company, and the 10% stake in LIC after a stock exchange listing, will yield this amount in enterprise value.
Dr Ajay Dua, a development economist and a public policy expert, is a former Union Secretary.