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PSU disinvestment: Endemic problems

While it is difficult to expect the PSUs to maintain their profit records in a highly competitive regime, it is advisable for the government to sell them fast,when they are still making profits, and the proceeds could be earmarked for specific development projects, says Alok Ray.

IT IS fairly clear now that disinvestment on any significant scale has lost itssteam. The `socialist lobby' has succeeded, at least for the time being, in forcing the Cabinet to `reconsider' (read shelve) the matter. So, this may be a goodtime to look at the major issues involved in a dispassionate manner.

Public sector units in all countries typically suffer from three major problems.First, the soft budget constraint. Unlike private companies, many loss-making PSUs are kept afloat by either direct government subsidy or by directed bank credit from state-owned banks. In the past, even `sick' private companies have beentaken over by the state, out of political considerations, creating a further drag on state finances. In fact, these have been major factors behind the near-bankruptcy of many State governments and some public sector banks.

Second, multiple objectives. PSUs were often not designed to be primarily profit-making enterprises. They were expected to promote social objectives such as generating guaranteed employment, taking industries to backward areas, buying input

s from other PSUs to support them, providing output at `reasonable' prices to people, irrespective of costs, and so on.

Their performance was not to be judged by commercial profitability. Apart from the confusion created in the minds of managers as to what goals to be given priority, it provided convenient excuses to hide inefficiencies. A manager of a perennially loss-making PSU can always claim to be promoting `social' profits.

Third, multiple-control authorities. Unlike the private sector manager, the public sector manager is subject to control and scrutiny by different ministries, the Bureau of Public Enterprise, various parliamentary committees and investigating agencies. Result: Status quo is the safest option for the manager. No bold decision on modernisation, diversification or technological upgradation is taken. F

or instance, automation may displace labour, and changing the supplier may disturb the existing patronage system. The promotion and career prospects of the manager are not usually linked to his dynamism or entrepreneurship and often have more to do with keeping his political bosses in good humour.

The basic problems lie in the nature of ownership and the consequent incentives.State ownership is ownership by an impersonal legal entity called state. Sinceit is owned by everybody, it is owned by none. Social control boils down to control by politicians and bureaucrats. Often, state-owned units are headed and managed by politicians and civil servants, rather than professional mangers, as chairmen or managing directors.

It is because of these endemic problems of PSUs that even `socialist' China is t

rying hard to privatise its PSUs, at great peril to its social stability.

In the present Indian context, the most frequently asked question is: Why sell profit-making PSUs such as HPCL and BPCL the "family silver" while the governmentis not disposing of the loss-making ones or the `junks' first. The answer is simple. No one is willing to buy the junks, whereas there are people still willingto buy the silver at good prices before it loses its shine.

The opening up of the economy, the consequent competition from new domestic players and imports, and finally international prices gradually determining domestic

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prices following the dismantling of the administered pricing mechanism (APM) for oil products mean that the high profits of public sector oil and related companies would not continue to be guaranteed. So, assuming that the government willsell these PSUs, it is advisable to sell them fast, when they are still making profits. That way the government would be able to get better prices. We cannot reasonably expect that the PSUs, under the effective control of ministers and bureaucrats, would be able to maintain their profit record in a highly competitive regime.

As for the junk PSUs, many of them have been sick for long. Private investors would be willing to buy them provided they can restructure by infusing different technologies, which would imply getting rid of excess workers or diversifying into different product lines by closing down and selling off the assets (includingreal-estate) of the company.

Given the opposition from governments, trade unions and other interests, and thelong legal process for liquidation, no one wants to come forward to buy these perennial loss-makers. So, the government should not wait for the junks to be disposed of first.

The second question raised is: Why sell to private strategic investors? Again, the answer is simple. Selling to a large number of widely dispersed individuals would mean that effective management and control would remain in the ministry's hand and nothing basically will change. That may serve the interest of the politi

cal bosses but not of the nation. Block sale of shares to public financial institutions would not change the basic quality of the management either, if the recent experience with the managements of UTI or IFCI is any guide.

It is only by selling controlling interest to one major private investor who hasthe funds and the expertise to manage and, if necessary, restructure the company that the government can hope to get the best possible price. An investor wouldbe willing to pay the maximum only when he gets effective control, and that sets the market price. Divestment through retail sales can take place simultaneously, but not as a substitute.

Moreover, merchant bankers feel that the retail capital market in India cannot absorb the proposed divestment of about Rs 30,000 crore worth of shares of HPCL a

nd BPCL. Finally, the experiences of privatisation in the former USSR and East Europe overwhelmingly support the case for sales to strategic outside investors over an exclusive distribution of shares to general public including the employees and managers of former PSUs.

It is feared that strategic sales would lead to private monopolies. In many countries such as the US, oil companies are all private. If an existing player suchas Reliance buys a controlling interest in HPCL or BPCL, the chances of a private monopoly increases. But it must not be forgotten that these companies are involved in oil refining and marketing where there already are a number of players and there is potential competition from new private players.

In today's world, a large number of players are not needed to maintain competiti

on. Even two or three players can do it. For instance, Coke-Pepsi or Indian Airlines-Jet-Sahara situations. Finally, the government's job is to put in place independent regulators to curb anti-competition practices. If there are doubts about the effectiveness of an independent regulator, it is difficult to have trust in a government ministry or its surrogate public financial institutions to run aPSU efficiently with individual shareholders exercising no effective control?

The chances of creating a private monopoly in the present cases (such as HPCL, BPCL or Balco) in India are pretty slim. It is worrying to think about what the Government would do with the divestment proceeds.

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Disposing of PSU assets is a one-off thing, which cannot be repeated indefinitely. If the government uses the money to maintain its consumption expenditure rather than to retire past high-cost loans or invest in creating physical and socialinfrastructure, it would be just postponing the day of reckoning by trying to push the fiscal mess under the carpet. In that case, it would be behaving like analcoholic selling his wife's jewellery to sustain his drinking habits, with disastrous consequences for the family.

One practical solution to this problem could be earmarking of divestment proceeds for specific development projects, particularly in the regions where some people lose jobs as a result of privatisation.

If the people of the region can clearly see that new schools, hospitals or drinking water facilities are being built with these funds, then the political opposition to divestment would be less while, at the same time, the funds can be utilised in a productive manner.