1
Liberalisation, Disinvestment, Privatisation orRestructuring of PSEs• Probably the most influential concept of
later part of 20th century– Repackaging free market economic theory
and adapting it to the language of the contemporary politics
– In 1969 Peter Drucker the design of a “new non-governmental autonomous institutions as agents of social performance under re-privatisation, may well become central job for tomorrows political architects
2
• MargarateThatcher a pioneer although Queensland between 1929-32 was the scene of first privatisation programme
• Meaning of privatisation– Involvement of greater market forces– Ensure higher competition– Reduced role of State– Involves transfer of ownership– Control over assets or activities– Expanding peoples participation
3
• Meaning of Liberalisation– A state of the economy and economic
principle which may include•Reasonable exchange rate•Removing entry barrier in industry•Lowering import duty•Creating international competition•Abolishing monopolies, access to
foreign technologies and investment, tax and trade reforms
4
• Change in ownership from public to private– Gains in productive efficiency but no
increase in allocative efficiency• Objectives of privatisation
– Improve efficiency and performance– Reduce Government interference– Promote private sector culture– Encourage popular capitalism– But it is different things to different
people
5
• Effects of privatisation– May improve enterprise efficiency– Develop competitive industry– Accessing capital know-how and
markets– Effective corporate governance
6
• Safeguards against privatisation– Without good Government control
privatisation may affect equity and social justice, efficiency and sustainable growth
– Private investment need to be supplemented by public investment in public goods
7
• MANAGEMENT PERSPECTIVE– Concept of performance– Have the objectives been achieved?– 3 elements viz, expected
performance, actual performance and measurement mechanism
8
• Multiple objectives of PSUs– In private industry, there is a single, clear
and unchanging primary objective– In the case of PSUs objectives are more
numerous, more ambiguous, ever changing• Financial versus non-financial objectives
– Arguments for and against– Arguments, however, cannot be extended
to cover up operational inefficiencies under the garb of social obligations
9
• Role of owners and managers– In private enterprises 3 distinguished
rules viz., ownership, strategic and operating are more well separated
– In public enterprises there is a conflict on roles between owners and managers
– In public enterprise boards, bureaucrats and interest groups dominates
– Thus, who dominates boards and exercise control are not specialists
– Bureaucrats are good at avoiding risks and business without risks is not possible
10
• Control mechanism– Control by Parliament, COPU,
administrative ministry, DPE, Audit Board etc. leading to decisions satisfying one group or the other without advancing enterprise interest.
11
• Is there a difference in productive efficiency between public sector and private sector?– No empirical study to prove either way– Till June 1984 money locked in sick
industrial units was 2900 crores (public sector 22.5%, joint sector 7%, private sector 70%)
12
• Does ownership matter– Ownership is not as important as
environment– ‘right’ to manage can make a big
difference
13
• Control mechanism– Multiplicity of control mechanism– MOU based on Arjun Sen Gupta
Committee Report introduced in 1986– Objectives of MOU– An agreement between Government and
PSU– Performance in improving system– Concrete goals and objectives– Objective performance evaluation system
14
• PUBLIC ENTERPRISES REFORM– May include improving performance– privatisation– liquidation
15
• Improving performance may include– Restructuring of existing financial,
technical and organisational structure– Clarifying enterprise objectives and
goals– Improving financial discipline and
performance monitoring– Increasing managerial autonomy and
accountability– Redefining the role of Government
16
• These improvements do not last long• The alternate course is privatisation
– Result of WB & IMF conditionality– Under private ownership loss to an
enterprise is private and not that of society
17
• Typology of privatisation– 2 broad categories:– Sale and contracting out services
• Types of sale– Total sale : suitable for both profit-
making and loss-making units– Can we fix price offer or through auction
or placement– Allows Government to raise money by
sale– But setting the initial price is difficult
18
• Partial sale – Above 49% or below
• Trade sale: •suitable for sale of parts of an
enterprise• where capital market is
undeveloped
• Restitution• Auction : generally for small units
19
• Sale through holding companies• Sale to management or workers
– In management buy-out distinction between owners and managers disappear
– Imply buy-out needs a lock-in period : role of institutional investors
– Institutions hold large shares e.g. U.K. (60%), Japan and Italy (75%)
– Can hold the management accountable– But institutions deal with others money
20
• Contracting out– Govt. acts as facilitator and provider
and not as a producer of goods and services e.g. security, maintenance of vehicles, buildings, railway platforms
– Quality and delivery may improve but cost may increase due to lack of competition
21
T o ta l ow nership t rans fe r P a rt ia l ow nership t rans fe r
S a les C ontrac t ing out
D e f ine O b jec t ives
Public Floatation
Trade salesor Specific buyer
Management Buy-out
Employers Buy-out
(Transfer of ownership)
* Fixed priceMarket priceProfit Earning Capacity value(PECV)D.C.F.*Auction*Private placement
(No transfer of ownership)
22
• Privatisation process– Define Govt. objectives and priorities– Meet objections of interested groups– Methods
• Selecting the PE for privatisation– Retain core group of enterprises– Sale of liquidate firms outside the core
group – Phase the programme
23
• Categorisation of firms Category Action(a) Essential/strategic/viable Retain under
Public ownership (b) Essential/strategic/Non-viable Retain, but take
specific steps to improve performance
© Non-essential/Non-strategic/ Sell total or in part Viable
(d) Non-essential/Non-strategic/ Liquidate Non-viable
24
• Alternate model Taxonomy of PEs
No. Profit/ Social Market NumberLoss obligation structure of PEs
& exter-nalities
1 Loss Low Competitive 972 Loss Low Monopoly 43 Loss High Competitive 74 Loss High Monopoly 205 Profit Low Competitive 776 Profit Low Monopoly 1
25
• Privatisation not an objective but an alternative for reforms
• As per IFC Report– 81% privatisation through direct sale
and 58% revenue– Public offer sale 12% and 39% revenue– Followed by other methods around 2%
26
PUBLIC SECTOR
• Evolution of public sector policy– To build infrastructure for economic
development and promote rapid economic growth and industrialisation of the country
– To create employment opportunities and promote balanced regional development
– To create a self-reliant economy through the development of local industries for import substitution and by encouraging and promoting exports
27
• Industrial policy resolution of 1956– Strategic role in the economy
• Effects– Countries ranking in industrialisation– Development of technical skills– Well trained work force
28
• Problems– Low productivity– Poor project management skills– Over manning– Lack of technological up-gradation– Inadequate R&D– Poor HRD
29
• New approach of July, 1991– Focus on strategic hi-tech and essential
infrastructure– Reference to BIFR for sick units– Disinvestment of a portion of Govt.
share – Professional Boards– MOU system - autonomy and
accountability
30
• Private Sector– Freedom to add new capacities– De-licensing of some industries– Investment in certain sectors
31
• Other option for PSUs– Reform and restructuring– Identify likely global giants for
support– Strengthen profit-making PSUs
32
Profile of PSUs (Rs.’00 crores)
FY 90 FY 91 FY 92 FY 93 FY 94 FY 95Operation Units (No) 233 236 237 239 240 241Net Profits 37.9 22.7 23.6 32.7 45.5 72.2Profitable Units (No) 131 123 133 131 121 130Net Profits 57.5 53.9 60.8 73.8 97.7 121.2Dividend 3.2 4.1 6.9 7.9 10.3 14.4Loss Making Units (No) 96 109 102 104 117 109
33
• Public Sector Plan Outlays Composition of Public Sector Plan Outlays
(%)FY 90 FY 91 FY 92 FY 93 FY 94 FY 95
Net Internal Resources 34 34 39 41 34 46Extra Budgetary Resources 34 42 42 45 52 41Total Budgetary Support 32 24 19 14 14 13Plan Outlay 100 100 100 100 100 100
34
• Profile of Loss-making Units
FY 90 FY 91 FY 92 FY 93 FY 94 FY 95Total No. of Units 96 109 102 104 117 109Total Loss (Rs.'00 Cr.) 19.6 30.4 36.7 39.5 52.9 49.1% Loss in Taken Over Units 24 16 15 24 24 20% Loss in Other Units 76 84 85 76 76 80
35
• Composition of Net Losses (%)
FY 90 FY 91 FY 92 FY 93 FY 94 FY 95Total No. of Units 77 71 73 73 81 71Total Loss (Rs.'00 Cr.) 39 40 30 34 23 33% Loss in Taken Over Units 16 11 3 7 4 4% Loss in Other Units 100 100 100 100 100 100
36
• Sectoral Composition of Losses(% of total losses)
Sector No % No % No % No % No % No %
MANUFACTURINGFertilisers 4.00 18.30 3.00 14.90 2.00 15.00 5.00 18.00 6.00 15.00 3.00 16.00
Consumer Goods 13.00 13.30 14.00 7.20 14.00 6.10 15.00 9.50 15.00 14.00 15.00 14.00
Heavy Engg. 7.00 3.90 8.00 5.50 8.00 7.40 9.00 6.20 8.00 9.60 8.00 11.00
SERVICESTrans. Serv. 4.00 8.50 4.00 10.10 3.00 12.00 4.00 12.00 3.00 11.00 3.00 11.00
FY 94 FY 95FY 91FY 90 FY 92 FY 93
37
– Major losses in fertilizer, heavy engineering, consumer goods, transport
38
• Budgetary support– Plan outlay around Rs.50,000 crores– Rs.46000 crores internal accruals and
extra budgetary resources– Balance around Rs.4000 crores
budgetary support
39
• Budgetary support of PSUs– Plan investment– Plan investment for both profit/loss-making
PSUs– Non-plan outlay primarily for loss-making
units– Plan investment through budgetary support
(equity & loan) : 1210 crores to 15 units– Non-plan outlay : Rs.1028 crores to loss-
making units (1996-97).
40
• Budgetary support to profitable PSUs– Rs. 128 crores as equity– Rs. 2364 crores as loan to 21 units
41
Composition of Budgetary Support(Rs.Crores)
Category Plan NonPlan
G.Total
On lending Director Total
Profitable 1114 1378 2492 2492
Loss Making 254 956 1210 1028 2238
Total 1368 2334 3702 1028 4730
42
• Conclusions– Lending of Rs. 1114 crores from external
sources– Draft on budget Rs. 1378 crores for
profitable units– Rs. 956 crores to loss-making – Losses of loss-making units increased in
1990s– 60% of budgetary support relate to them
43
• Growth of public enterprises– Contributes quarter of our GDP– CPE 246 in number and SLPEs 850
• New orientation on PSUs 1991
44
• PSUs in strategic hi-tech and essential infrastructure. Along with that PSUs may enter in areas not reserved for it. Sick PSUs to be referred to BIFR– Govt. shareholdings to be offered to
mutual funds, financial institutions, general public and workers
– Powers to be made professional– MOU system
45
Profile of PSUs (Rs. ‘00
crores) FY 95 FY 94 FY 93 FY 92 FY 91 FY 90Operation Units (No.) 241 240 239 237 236 233Net Profits 72.2 45.5 32.7 23.6 22.7 37.9Profitable units 130 121 131 133 123 131Net Profits 121.2 97.7 73.8 60.8 53.9 57.5Dividend 14.4 10.3 7.9 6.9 4.1 3.2Loss making Units (No) 109 117 104 102 109 96Overall Losses 49.1 52.9 39.5 36.7 30.4 19.6
46
• Budgetary support– Decline in budgetary support as a
percentage of total plan outlay since 1991
– Increased component of extra budgetary resources
– Total assistance (plan and non-plan) to 15 loss-making units Rs.2238 crores
– Plan assistance to 21 profit-making units Rs.2492 crores
47
• Profit and loss profile– 120 PSUs with profit of Rs.9700 crores– 117 enterprises with a loss of Rs.5200
crores– 91 enterprises showing cash loss
(Rs.2827 crores in 1992-93).– Employment in these units 4,78,000– Cash loss of Rs.60,000 for maintaining
one employee– 120 out of 133 enterprises making profits
consistently
48
• Causes for loss– Poor choice of location– Non-availability of inputs like law
materials and fuel– Choice of wrong technology– Over manning at executive workers level– Poor internal management– Inefficiency in marketing– Effect of public policy
49
• Classification of PEs on the basis of competition, social obligation, efficiency
Taxonomy of Central PEsNo. Profit/ Social Market Likely
loss obligation structure decisionandexterna-lities
1, Loss Low Competition Close2 Loss Low Monopoly Encourage competition3 Loss High Competition Improve4 Loss High Monopoly Improve5 Profit Low Competition Privatise6 Profit Low Monopoly Encourage competition7 Profit High Competition Continue8 Profit High Monopoly Improve
50
• SLPE– 954 SLPEs approx– 875 under Companies Act or statutory
corporation– 436 commercial category– 312 commercial-cum-promotional
category– 121 promotional
51
• Possible lines on restructuring of PEs– Unanimity on methods amongst various
interest groups
• Rangarajan Committee Report– A reserve list for retention under public
control - disinvestment upto 49%– 74% disinvestment in enterprises not of
strategic importance– 100% disinvestment in other enterprises
52
• Social objectives– Traditional concept of PSUs furthering
social objectives– But private sector also fulfils certain
social objectives (industrial growth, employment opportunities, infrastructure development, etc.)
– Only about 22 PSUs fulfils social objectives (strategic objective and/or equity objective
– Even the MOUs do not mention of any social objectives
53
• Suggested ways of restructuring – Loss making CPEs– Priority attention to restructuring of
loss-making units– Of these nearly 100 PEs do not serve
any social purpose
• BIFR– Problems and inadequacies in
functioning of BIFR
54
• Possibility of a new authority– Like authority in Germany
(Treuhandanstalt)– Can be termed ALME– Will hold PE interest and seek a
solution
55
• Profit making PEs– Present approach to get cash resources– Unethical inter-generational
consideration
• Restructuring – Ownership– Financial and organisational– Possible change in gearing
56
• Modalities of privatisation– Management/workers buy-out– Floatation– Private negotiation
• National Renewal Fund
57
Privatisation around the world• USA
– The Government simply regulates business– Privatisation in USA is a misnomer– It has de-regulation revolution from the
time of President Ford– First de-regulation in 1968 by Federal
Communication Commission (FCC) by allowing limited competition against AT&T
58
– Transport de-regulation during Carter administration by Civil Aeronautics Board (CAB) and Interstate Commerce Commission (ICC) repealing price setting, allocation of market and restricted entry of new competitors in all transportation
– FCC de-regulated television and radio, broadcasting and tele-communication during Reagan administration
59
– Similarly oil price controls and allocation quotas were phased out by President Carter. This improved efficiency and quick adaptation to changing technologies
– The process lead to liquidation of many established companies (air transport, trucking companies) but emergence of new entrepreneurs
– Government of USA owned few assets. Therefore, privatisation in USA was different
60
– Selling of some Government assets, terminate support to commercial activity, price products more competitively and rely on voucher and contracting out
– The view was that Government should provide service and need not produce service•Sale of public assets•Lease back (to Govt.) arrangements,
vouchers and contracting out
61
• U.K.– Most extensive experience, 11% of GDP– Associated with post-1979 Conservative
Government– Thomas Cook, Rolls Royce privatised in
mid-1970
• While Paper supported autonomy, competition, greater efficiency, protection from political pressure
62
• Since 1977, 43 major cases of privatisation e.g. British Petroleum, British Aerospace, British Telecom, British Airways, British Rail etc.
63
• Methods adopted– Contracting out– Deregulating statutory monopolies to
create private firms for competition and better efficiency
– Sale of publicly owned firms– stock offering to employees and
customers– Popular capitalism
64
• Privatisation of water authorities– Sale of 10 water companies after writing
off of debts– Injecting substantial fund to cover
external debt– But new water authorities to incur heavy
capital expenditure to improve services
65
• Privatisation of Electricity industry– For privatisation, existing electricity
industry separated into:•generation, supply and transmission
• For transmission new company: National Grid– 12 local distribution companies in 1990– Central Electricity Generating Board (CEGB)
split into National Power and Power Gen– 40% stake of Government in National Power
66
• Benefits– Closing down high cost power stations
having combined cycle gas turbine plants– Up-stream move (bidding for North Sea
gas exploration, investment in foreign coal production) and down-stream move (energy management services)
– Electricity like any other commodity open for competition
67
Recommendations Action taken
Standard EmpoweredGroup
Core Group has beenempowered asrecommended
Transfer of Management Decision awaited
Reduction of GovernmentEquity
Decision awaited
68
Recommendations Action takenEstablish DisinvestmentFund
According to Govt.communication, Fund hadbeen set-up in September 1996.Details regarding the scope orpurpose are not available
Delink the disinvestmentprocess from theBudgetary Exercise ofGovernment
Decision awaited
69
Recommendations Action takenReferral of PSUs to theCommission
Govt. has decided not torefer subsidiaries of PSUsto the Commission
Voluntary RetirementScheme
Decision awaited
Disinvestment withoutreference to theCommission
Decision awaited
70
Recommendations Action takenPublic Offer of equity bythe PSUs referred to theCommission
Decision awaited
Disinvestment Package Decision awaited
Offer of Sale Book Building followedin GDR issues
71
Recommendations Action takenStrategic Sale Process for selection of
global financial advisors forthe strategic sale ofBALCO and KIOCL hasbeen initiated
Selection of Intermediaries Accepted
Retailing of PSU shares toSmall Investors &Employees
Accepted
72
Recommendations Action takenRecommendation onJoining the NSDL
Accepted
Audit of DisinvestmentTransactions
Decision Awaited
Professionalising theBoard of Directors
Broad basing Boards by 3non-official part-timeDirectors (1/3rd of totalBoard strength).
73
Recommendations Action takenProvision for ElectedDirectors
Decision Awaited
Selection of TopManagement
Decision Awaited
Salaries and Incentivesfor Top Management
Decision Awaited
Autonomy in PriceFixation
Decision Awaited
74
Recommendations Action takenAccountability Accepted
Setting up of Pre-Investigation Board
Decision Awaited
Strengthening theInvestor Interface
Decision Awaited
Powers to Dispose ofAssets
Decision Awaited
75
Recommen-dations
Action taken
Freedom ofInvestmentwithin certainlimits
Up to Rs.300 crores or net worth forcategory 1 PSUsUp to Rs.150 crores or 50% of net worthfor category II PSUs
Powers to formjoint ventures
JV upto Rs.100 crores or 5% of net worthfor category I PSUsJV up to Rs.50 crores or 5% of net worthfor category II PSUs.Overall selling of 15% of their net worth inboth cases.
Full freedomwith regard toinvestments
Same both for strong performers andmoderate performers
76
REVIEW OF DISINVESTMENT COMMISSION RECOMMENDATIONS
– Disinvestment Commission set up on 23rd August, 1996
– Main objectives:•Determine extent of disinvestment•Select F.A.•Supervise overall sale process•Advise Govt. on capital restructuring
77
• Disinvestment Commission to be an advisory body– Disinvestment Commission, therefore,
recommended constitution of SEG for implementation
78
• 50 PSUs referred– Reference of 7 PSUs withdrawn later– Commission classified PSUs into
strategic (100 % holding by Government) Core (disinvestment upto 49%) Non-core (disinvestment upto 100%)
79
• Recommendations– Establishment of disinvestment fund– Delinking disinvestment from
budgetary exercise– Standing empowered group– Pre-qualification and selection of
strategic buyers– Selection of FA and global co-ordinator
80
• Recommendations (contd.)– Transfer of management– Reduction of Government equity– Strategic sale– PSU shares for small investors & PSU
employees– Audit of disinvestment transactions– VRS
81
• Recommendations (contd.)– Grant of autonomy– Pre-investigation board– Disinvestment package
82
• REVIEW OF DISINVESTMENT COMMISSION RECOMMENDATIONS– Disinvestment Commission set up on 23rd
August, 1996– Main objectives:
• Determine extent of disinvestment• Select FA• Supervise overall sale process• Advise Government on capital
restructuring
83
• Disinvestment Commission to be an Advisory Body– Disinvestment Commission, therefore,
recommended constitution of SEG for implementation
84
• 50 PSUs referred– Reference of 7 PSUs withdrawn later– Commission classified PSUs into
strategic core and non-core units– Core (disinvestment ... (100%
holding by upto 49%) ... Government)– Non-core (disinvest- ment upto 100%)
85
• Recommendations– Establishment of Disinvestment Fund– De-linking Disinvestment from
budgetary exercise– Standing empowered group– Pre-qualification and selection of
strategic buyers– Selection of FA & global coordinator– Transfer of management
86
– Reduction of Government equity– Strategic sale– PSU shares for small investors and
PSU employees– Audit of disinvestment transactions– VRS– Grant of autonomy– Pre-investigation Board– Disinvestment package
87
SOME EMERGING ISSUES IN PSU REFORMS• PSU accounts for over 50% of
industrial capital– Investment of more than 2 lakh crore
rupees in Central PSUs– Need for reform to ensure sustained
growth– Reform in the context of deregulation
and globalisation
88
– Role of free market in improving productivity
– Use of disinvestment in this context to achieve•Roll back of the State•Larger public ownership•Disposal of sick units•Encouraging competitiveness
89
• Goals– Short-term and long-term goals– Short-term goals: to reduce fiscal
deficits– to improve
efficiency– Is there a long-term goal ?
90
• Portfolio– Which PEs share-holdings to be off loaded– Canada and Spain started disinvesting loss-
making PEs– UK & Chille followed the opposite route– In Canada, UK & Pakistan core PEs have
been disinvested– In India both profit & loss-making units had
been selected indicating lack of focus
91
• Partial versus full disinvestment– Partial disinvestment permits Government to
control and own– Successful examples British Telecom,
Malaysian Airlines– East European countries for full
disinvestment– In India adopted partial disinvestment– No management change and little autonomy– The 3 E’s
92
• Process of disinvestment– Initial bidding & tendering in India– The above practices created doubts– In UK it was through IPO– In France, Malaysia the stock market
route– Question of transparency
93
• Participative involvement of PSUs– In India participation by PSU was
inadequate– Unlike in UK & France– Should PE determine quantum, time-
frame and pricing of shares ?
94
• Scope of extent of disinvestment– Only Rs.12,000 crores between 1991
and 1997 works out to 1.25% per year of total investment
– In UK it was Rs.80,000 crores from 1979 to 1986
95
• Shareholding by workers– Cost to workers of disinvestment
shares– At market rate or at discount?– No clear policy in India
96
• Valuation of share– Valuation should be on accurate, up
to date and wide variety of data– Valuation should be on in-depth
research of data and timing price value and market needs
– In France, valuation is done by two independent banks and examined by privatisation commission
97
• Capital market development– Its need for implementing
disinvestment programme– Absorptive capacity of capital market
in India low– Govt. shareholding is high– Off loading of PSUs shares may lead to
crowding out of private sector– Need to attract valuation– Listing in foreign bourses
98
• Disinvestment mechanism– Generally by an independent body,
need a separate enactment (e.g. France, Malaysia, Singapore)
– In Mexico, a high power unit in Ministry of Finance
– In Philippines an asset privatisation trust headed by a qualified businessman and supported by experts
99
– In Kenya, need a decentralised structure by holding companies
– In India, through Disinvestment Commission as an Advisory Body under an executive order
– Implications
100
• Restructuring– Abroad (UK, France, Argentina, Singapore)– Both internal and external restructuring
before disinvestment– Internal restructuring consisting of
commercialisation, corporatisation of PEs– Financial restructuring consisting of
adjustment of debt equity mix and equity from private parties
101
– Product policy changes– Labour restructuring– External restructuring, redefining
limits of Parliament, Government, Vigilance and C&AG
– In India such restructuring is for from complete
102
• Role of BIFR– Generally ineffective– Role of National Renewal Fund
inadequate so far
• Disinvestment so far– By fits and starts– Not achieving the avowed objectives
• Evolution of Public Sector Policy
103
• Industrial Policy Resolution 1956– Strategic role in the economy
• Effects– Countries ranking in industrialisation– Development of technical skills– Well trained work force