PSUs, Disinvestment, Public Monies, And The Shape Of Water

Disinvestment!

There is a halo around the genesis of the term. The phrase was originally popularized by John Maynard Keynes. In the seminal tome General Theory of Employment, Interest and Money (Published in December 1935) Keynes defined disinvestment as “the sale of an investment”.

This year the government of India would have collected Rs 92,475.73 crore – a record since the beginning of the ‘disinvestment’ programme in 1992. Of this Rs 36,915 crore would come from the sale of public sector retailer Hindustan Petroleum Corporation Ltd. to public sector explorer Oil & Natural Gas Corporation Ltd.

In effect over 39 percent of 2017-18 disinvestment receipt is the transfer of cash from a government-owned company to the government.

In India, disinvestment is not necessarily disinvestment as Keynes defined it. The hallowed etymology and the theoretical definition has been hollowed out in practice. Successive regimes, subscribers of Keynesian economics by design and default, have redefined disinvestment as the leverage of public assets to be used as an ATM for revenues to fill the pits of rising deficit.

Interestingly, HPCL was number 23 on the list of two dozen central public sector enterprises — and the only strategic sale, even if in a roundabout way. In March 2016 the government decided to ‘fast-track strategic disinvestment’. In October 2016 the Cabinet Committee on Economic Affairs gave ‘in-principle approval’ for the strategic sale of 24 CPSEs. Suffice to say the strategic sale of 23 CPSEs on the list of 24 continues to be stranded between the many what ifs and whys of the political process.

HPCL’s sale to ONGC, though, is not the first instance of a consanguineous transaction. Of Rs 5,371.11 crore raised in 1998-99, Rs 4,184 crore was from cross purchase of shares of ONGC, GAIL (India) Ltd. and Indian Oil Corporation Ltd. In 1999-2000 the government did more of the same and raised Rs.459.27 crore. This has been repeated ten times mostly within the petroleum sector.

The recent listings of General Insurance Corporation and New India Assurance Company too are propped by cross-holdings.

The accretion of Rs 17,357 crore in this year’s receipts would not have been possible without the intervention of Life Insurance Corporation — which bought half the shares issued, 8.5 percent in GIC and 8.6 percent in NIA. And GIC too invested in NIA. At the end of the day, directly and indirectly, the government holds nearly 95 percent of the equity in GIC and NIA.

Clearly, expediency matters when faced with debt and deficit. A recent addition in the lexicon of disinvestment is ‘buyback’. Governments have extracted buyback benefits from public sector companies like NHPC Ltd., National Aluminium Company Ltd., NMDC Ltd., NTPC Ltd., Coal India Ltd., NLC India Ltd., MOIL Ltd. and even unlisted entities such as Hindustan Aeronautics Ltd. and Bharat Dynamics.

Between 2013-14 and 2017-18, public sector enterprises have forked out as much as Rs 29,769.31 crore to the governments of the day.

In theory, reduction of outstanding shares through buybacks enable companies to increase the share value, particularly in where shareholding is public and widely held. Retail ownership in PSEs is minimal and government holding is as high as 70-plus percent. Buybacks by public sector entities are simply another ruse to transfer cash from the coffers of the company which may need it for productive purposes to the kitty of the government to fill the gap in disinvestment targets.

Exchange Traded Funds are another way the government raised monies – virtually a proxy for a yearly annuity with no disruption in ownership or control. Since appetite for CPSEs is low, props are used to ensure subscription. Take recently launched Bharat 22. Nearly a third of the holding is slices of the SUUTI-held equity of Larsen and Toubro Ltd. and ITC.

A better and smarter way would have been to list the entire holding of SUUTI as an ETF.

Other instruments of milking CPSEs include block deals, dividend, and bonus debentures.

Disinvestment arrived in India’s political discourse following the balance of payments crisis. The 25 conditionalities of the bailout of January 1991 included four on CPSEs — elimination of budgetary transfers and loans, listing, divestment and winding up. Disinvesting Nehru’s ‘temples of modern India’ was an anathema, so packets of PSU shares were dumped on LIC and Unit Trust of India. The debate that ensued was stalled in verbal calisthenics — strategic versus non-strategic; revive-and-sell versus sell-to-revive.

The approach of successive governments has been to deal tactically with an issue that requires a strategic call. Ergo, disinvestment has been mostly about shifting cash from one pocket to another. The irony there is scarcely any ‘sale of investment’ as Keynes defined but extraction of resources to pay for Keynesian spending.

The exception to the trend was the NDA regime under Atal Bihari Vajpayee. It did adhere to the definition as per Keynes when it disinvested 16 entities — Balco, VSNL, CMC, IPCL, Hindustan Zinc Ltd., Modern Food, and hotels. It was not without hiccups. The DMK opposed privatization of Salem Steel, Shiv Sena blocked the exit from Centaur Hotel, the TDP was against sale of Vizag Steel and senior ministers were against privatization of VSNL and oil companies. As the late Pramod Mahajan then said — half in jest — “everyone was for it as long as it didn’t impact their turf and politics”.

In the quarter of a century since 1992, committees and commissions have listed rationale and entities for sale. The most comprehensive were the eleven reports by the Disinvestment Commission headed by GV Ramakrishna. New lists are a recast of the old list — Scooters India Ltd., Dredging Corporation of India Ltd., Pawan Hans, BEML Ltd., Air India now in the October 2016 list have all been on lists since 1997.

There is a certain consistency in the method and the madness. Choice of expediency over economic propriety is par for the course in politics. There is an ideological fervour about revival and confusion — the government quotes an October 2015 order in August 2017 in Parliament. And a report of the Bibek Debroy Committee, instituted in July 2016, to monitor revival packages of CPSEs lies buried under layers of dust.

The government told Parliament that the NITI Aayog classified CPSEs into “high priority” and “low priority” based on “national security, sovereign function at arm’s length, market imperfections and public purpose for strategic disinvestment”. Which PSE falls under what bucket is unknown for the report is not in public domain. ‘Strategic disinvestment’ in past years has been the sale of private sector equity hosted in government-owned SUUTI — Rs 4,153.65 crore in 2017-18.

The moot question is: must the government own all that it owns and must it manage all that it owns.

Why not deploy the Maruti formula to divest in tranches what it does not want to own?

Why not transfer ownership of that which it does want to own to a trust, professionalise management, and list it as an ETF? Arguably this government does not subscribe to privatisation and has a political rationale. But what is the rationale for political management of business enterprises?

Consider the destruction of value and the erosion of public wealth caused by the political management of business enterprises. This week stock indices recorded new highs — the Nifty 50 crossed 11,000 and the BSE Sensex crossed 36,000. The indices delivered returns of over 37 percent. The government is the biggest industrial house of India and the biggest player in the financial sector. How have public sector entities done?

  • Coal India and Power Grid Corporation of India Ltd. (monopolies so-to-speak) delivered negative returns, and NTPC is barely in positive territory.
  • ONGC, Bharat Petroleum Corporation Ltd., and IOC have delivered between 4 and 6 percent returns. And these are the blue chips among PSUs.
  • The market value of all listed public sector banks, with 70 percent share, is barely a third of the market capitalisation of private banks. The battle of the bad loan bulge in public sector banks is well known to need further illustration.

That is the state of affairs of listed CPSEs. What about the others and what is the overall picture. Of the 244 operational CPSEs — data for which is available only until 2015-16 in January 2018 — every year roughly a third or more, that is 75-plus of the CPSEs report losses.

On January 4, 2018, the government informed Parliament that in between 2012-13 and 2015-16, the losses of public sector enterprises add up to Rs 1,06,157 crore — that is Rs 72 crore a day. 

Notwithstanding rage and outrage about Nehruvian economics, 76 new CPSEs are under construction.

The state of PSUs symbolizes inadequacy of strategic thinking and systemic sloth. Critical for the solvency of governments is liquidity. What the government spends on or loses in determines what it can spend on or is unable to spend on — for instance on social sectors and in much-needed infrastructure.

The defining principle of managing public wealth cannot be fluid, like the shape of water!

Shankkar Aiyar is a political-economy analyst, and the author of Aadhaar: A Biometric History of India’s 12-Digit Revolution; and Accidental India.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.

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