How to achieve Rs 69,000 crore disinvestment target

If you are an investor in stocks of public sector enterprises, the government’s decision to raise as much as Rs 69,000 crore in fiscal year 2015-16 would have sent your pulse racing. This is the most ambitious target any government has ever set. For those familiar with government’s target-setting and achievements, the numbers looks audacious.

It suggests the government will not be content divesting small stakes in profitable public sector undertakings (PSUs) through the stock markets, but is betting on strategic sales. When the question was asked of finance minister Arun Jaitley at the post budget press conference, he did not rule it out strategic sales, but did not share any plans either. Strategic sales have not happened in more than 12 years, after it faced stiff resistance in the early 2000s from within the ruling National Democratic Alliance (NDA) government. The United Progressive Alliance (UPA) government was opposed to strategic sales of public sector enterprises excepting the chronically sick ones that were beyond the government’s ability to revive.

Needs a plan, have a ready script 

Before the government embarks on a disinvestment drive, it needs a plan. And, it could be based on the advice of the 14th Finance Commission, which allows complete exit of the government from certain PSUs, and not just the chronically sick ones.  

The government has not as yet declared its acceptance of this part of the Commission's recommendation. However, unlike the UPA, the BJP-led NDA has no reservations about outright sale of entities where it feels the government should not be present.  So what does the Finance Commission plan entail? The Commission has suggested various ways to go forward while protecting interests of employees.

The two key determinants to identity PSUs for disinvestment should be opportunity costs of retaining investments at current level and importance of a PSU's activity for public good. The Commission advises that if the returns from staying invested in a PSU is very low or if its role is better delivered by a private sector player, the government should sell that PSU with all its assets and liabilities. 

Five approaches 

To measure the fiscal cost of being invested in a PSU, the Commission suggests five approaches to evaluate if a PSU is a case for disinvestment. 

One, is the borrowing cost of the government test. If the return on equity is, say, less than 8 per cent, it is prima facie a candidate for relinquishing, unless there are benefits that are best obtained only through public ownership, says the Commission.

Two, if return on equity is not consistent with market expectation in view of the risks associated with equity holdings. In India, that figure could be 16 per cent.

Three, if the market value of equity is more than the capitalised value of expected returns, then again it makes sense to relinquish ownership. The private sector would be willing to pay a premium for the assets of a PSU because it expects to make better use of those assets.

Four, if there are alternate uses of resources generated through disinvestment such as providing those goods and services that only the government can. The Commission reasons that where the private sector can provide the goods and services that a PSU does, there is a case for unlocking investments in the PSU and using those resources to provide basic goods and services critical for growth and equity.

And fifth, is what the Commission describes as "crowding-in effects" of public investment in infrastructure, which is there could be benefits in shifting away investments from PSUs producing tradable goods and into building economic infrastructure that aids growth. Likewise, shifting away investment in tradable goods may allow resources for public and social goods. 

Priority enterprise and why 

The other determinant - importance of a PSU's activity and the role it plays in the economy - allows for classification of entities as high priority, priority, low priority or non-priority. The government could retain up to 100 per cent holding in PSUs classified as high priority and relinquish 100 per cent control in those which were non-priority. In no way was the government holding in high priority PSUs to fall below 74 per cent, the Commission suggests.  

In those that were priority, government could offload up to 49 per cent and in those that were low priority, the dilution could be as much as 74 per cent. So how does the government decide the category of a PSU?  The Commission suggest that high priority and priority PSUs could be the ones that were (a) strategic for public interest, (b) ones with natural resources having sovereign or quasi sovereign functions, (c) those required to cater to market imperfections (d) those where returns on investment is higher than any alternate investment by the government and (e) public utilities where PSU presence would help obtain reliable information for regulators. 

All other PSUs could be classified as low priority and non-priority. These PSUs could be in areas where the private sector is functioning well or unrestricted imports are allowed, is not a public utility or is a regulated public utility, is not a statutory monopoly or is a loss-making entity where there is no compelling reason for the government to continue. 

88 ready cases for sell off 

The Commission has identified 88 PSUs that falls into non-priority area and deserve to be relinquished. These 88 PSUs have turnover ranging between Rs 1 crore and Rs 100 crore and each with market share of less than one per cent in their areas. Their output is insignificant, yet the government has to supervise them.  

Among the profitable ones classified as non-priority are trading entities State Trading Corporation and PEC Ltd. With the opening up of external trade, these entities serve limited purpose. Among the loss making ones are Mahanagar Telephone Nigam Ltd, Hindustan Photofilms, Hindustan Cables, Hindustan Fertiliser and Fertiliser and Chemicals (Travancore) Ltd. At the other end of the spectrum are PSUs such as Oil and Natural Gas Corporation, India Oil Corporation, NTPC, Power Grid Corporation and NMDC Ltd where the Commission recommends the government should retain 74-100 per cent stake as these are high priority enterprises. Incidentally, the government holding in few of these are already below 74 per cent and so, if the Centre accepts the Commission's recommendation, it needs to raise stake in them. 

Another 50 are ready for listing 

The Commission notes there are about 50 entities that can be listed in the course of the next five years. These entities that can be listed on the basis of existing listing criteria, the department of disinvestment has told the Commission. At present, 51 PSU are listed on stock exchanges in India. In many other listed entities, public holding at less than 25 per cent is way the regulatory requirement. These too cases where the government can sell its shares. This enhances the scope for the government to raise resources through disinvestment.   

The intent is clear, and disinvestment can no longer be just an option when the government needs resources beyond what it can generate through taxes. Borrowing for spending is not always desirable either.

The government is willing to disinvest, the states governments too will support the exercise if they too are given a share in the proceeds as they desire and has been recommended by the Commission. Among the biggest stakeholders in the exercise are the employees of these enterprises. As the Commission suggests, their interests have to be protected. If they are ignored, they will prove to be the obstacle to the ambitious plans of the government.