Disinvestment: The big privatisation pushback - Economy News

In recent years, disinvestment has become the main watchword for the Centre. Last year, the budget was in some ways even anchored to the expected disinvestment income, with the government looking to raise Rs 1.75 lakh crore from monetizing PSUs (public sector ventures) such as Air India, BPCL (Bharat Petroleum Corporation Limited) and SCI ( Shipping Companies India). ). However, by December 2021, the government had only met about five percent of that target, or Rs 9,240 crore. In her budget this year, Union finance minister Nirmala Sitharaman indirectly acknowledged the huge loss by reducing her projected FY22 disinvestment income from Rs 1.75 lakh crore to Rs 78,000 crore and setting a 2022-23 target of only Rs 65,000 crore.

In recent years, disinvestment has become the main watchword for the Centre. Last year, the budget was in some ways even anchored to the expected disinvestment income, with the government looking to raise Rs 1.75 lakh crore from monetizing PSUs (public sector ventures) such as Air India, BPCL (Bharat Petroleum Corporation Limited) and SCI ( Shipping Companies India). ). However, by December 2021, the government had only met about five percent of that target, or Rs 9,240 crore. In her budget this year, Union finance minister Nirmala Sitharaman indirectly acknowledged the huge loss by reducing her projected FY22 disinvestment income from Rs 1.75 lakh crore to Rs 78,000 crore and setting a 2022-23 target of only Rs 65,000 crore.

Over the years, the Center has faced a number of problems delivering on its privatization pledges, be it resistance from unions worried about their future or difficulty attracting investors. Many of the PSUs on the block also have complex and faulty balance sheets, making it difficult to assess them accurately. Tuhin Kanta Pandey, secretary, DIPAM (Ministry of Investment and Public Asset Management), said the government was heeding the challenges and had shifted focus from diluting PSU holdings to full privatization. The sale of Air India to Tata Group has been encouraging, despite bringing only Rs 2,700 crore in cash to the government. Pandey hopes to repeat this success.

Other PSUs on the block include IDBI Bank (which was not named in this year’s budget speech) and helicopter operator Pawan Hans. Although the privatization drive continues, this year’s Central budget is much more conservative in expectations and goals. First, it did not set a target for divestment of PSB (public sector banks) and financial institutions—a politically controversial area—and revised last year’s target to nil from Rs 1 lakh crore. The expected success is the upcoming LIC IPO (Life Insurance Company Initial Public Offering), which is expected to launch on March 11. The fund manager said the IPO could raise between Rs 50,000 crore and Rs 1 lakh crore, but with the outbreak of war in Ukraine, the government may choose to delay the launch, which would impact its divestment agenda. Meanwhile, Tata Steel has also acquired a 93.2 percent stake in the government of Neelachal Ispat Nigam, a steelmaker, for Rs 12,100 crore.

MISSED TARGET

The list of missed divestment targets includes companies that have now spent years on the block. Pawan Hans, for example, has been on sale for 10 years. The company’s revenue has reportedly fallen since 2016, with losses in 2019 and 2020. Last year, the Center made another attempt to sell it, relaxing its previous requirements to attract more buyers. In December, he announced he had accepted the offer, but little has been said about the matter since.

Another example is the sale of BPCL. So far, the government has had to extend the deadline for submitting an initial statement of interest four times. Part of the problem has to do with the sector—with crude oil prices so volatile in recent years, it’s been difficult to generate investor interest in energy companies. In the block is the entire 52.98 percent government stake in BPCL, which is said to have received three statements of interest. Ratings agency Fitch rated the company BBB- in a negative light, saying “uncertainty over the consortium of bidders and the complexity of the process, including valuation, could lead to potential delays in the privatization of India’s second-largest fuel retailer.” Similarly, the sale of SCI remains in limbo as bidders have difficulty completing due diligence on the company’s assets.

The main obstacle to privatization, across sectors, is resistance from trade unions. On the morning of 27 January, the day DIPAM will formally hand over Air India to the Tata Group, officials attended a virtual hearing at the Madras High Court. The court has taken up a petition by the union against the sale of Air India, citing concerns about the future welfare of current workers. Fearing that employee activism and litigation could derail the sale, the government agreed to nearly all of the union’s demands in this particular case, including the continuation of medical benefits for retired and retired Air India employees, disbursement of leave, and so on.

Unions almost never support divestment. The main reasons include job security and salary levels. “PSU employees want to stay [in the public sector] because they earn triple their salaries in the private sector,” said Nilesh Shah, MD of Kotak Mahindra Asset Management. “BPCL’s average salary is Rs 20 lakh per year—the average private sector employee makes a third of that.”

Another systemic problem is the complexity of PSU’s balance sheet, which complicates the valuation of such companies. In addition to the huge debt they often carry, many government businesses are also bundled with unwanted assets. Air India is again a great example—the sale required the airline’s non-core assets (including real estate like the Centaur Hotel) and about Rs 51,000 crore of its debt to be partitioned into SPV (special purpose vehicles). After many rounds of discussion, it was also decided to sell the airline at its company value (market capitalization plus net debt) rather than its equity value. An official closely linked to the project said that only after this decision was taken could the Center find a bidder. “We faced a lot of hurdles with the sale of Air India,” admits Pandey. “The bidder is afraid.” In the case of the sale of BPCL, the government may once again have to take the asset segregation route, as the main stumbling block is the company’s enormous real estate assets.

According to DIPAM, in 2021-22, the government has received around Rs 44,450 crore as of 3 January from various subsidiaries. Of this amount, only Rs 9,329.9 crore came from the divestment, with the remaining Rs 35,116.72 crore being dividend receipts.

NEXT

On the one hand, the challenge of government divestment becomes more difficult with each success, because what is left on the block are companies that investors have passed on to. Pandey said, “Unless new listings—eg LIC IPOs, which are a huge opportunity as we bring something new to the market—the scope is very limited for governments to raise money through divestment. We have diluted our stake in existing companies. If we want [reduce our stake] below 51 percent, then we are talking about privatization and handing over management control.”

The to-do list so far includes IDBI, SCI, BPCL and Pawan Hans, which are proving hard to sell for a variety of reasons. A senior official closely linked to the divestment effort said, “Pawan Hans has been on the block for 10 years, and it will be difficult to find a buyer for IDBI due to the bank’s poor competitiveness. Most companies are also saddled with tarnished assets.”

One of the challenges that the government must face is how to maintain investor interest through this process. Often, bidders cool off in the middle of their due diligence assessment/review, perhaps realizing how difficult it is to take over management of the PSU. In addition to depreciating assets, massive debt, and complex asset holdings, there is also the challenge of bringing many different stakeholders—unions, existing PSU management, bidders, regulators, and policymakers—all on the same page. . While the political leadership seems determined to get this done, the reduced divestment target in the 2022-’23 budget demonstrates recognition of the magnitude of this challenge.

This difficulty is also exacerbated by the problem of continuity at DIPAM. The secretary has a relatively short term—three years—but building, retaining, and channeling the investor interest needed to divest a PSU is a huge undertaking. It involves not only a marketing blitz but also careful financial analysis and a strategic political and regulatory campaign to steer the deal to a successful conclusion.

There is no easy answer to privatization. Experts say a clear plan and quick decision-making can help. It was also important to accelerate sales to offset asset erosion—Air India’s debt doubled in the period between the first announcement of privatization and its eventual handover to the Tata Group. The reopening of old cases by the courts, such as those relating to the divestment deal made under the supervision of former IAS officer Pradeep Baijal, or relating to the divestment of Seng Hindustan years after the deal was concluded, has also had dire effects. at bureaucratic speed.

Shah said the Center might find it efficient to adopt the Singapore model. In that country, one company, Temasek Holdings, manages investments and assets previously held by the government, while another—GIC (formerly Government of Singapore Investment Corporation)—manages government financial assets. This frees up the ministry to do policy work by leaving the privatization process to professionals. Yet another option is to leverage the equity market to liquidate PSU shares and let private boards manage these companies. Meanwhile, an amendment to the General Insurance Business Act (Nationalization) was passed during the monsoon session of the DPR. The Banking Act (Amendment) 2021 bill, related to the privatization of two PSBs, is also listed for introduction in the 2021 winter session, but opposition from bank unions and state elections have delayed its submission.

The fact that billionaire investor Rakesh Jhunjhunwala chose to launch his own airline rather than bid for Air India is a lesson for the Centre. There are many reasons why India’s ailing PSUs remain bogged down—from their poor competitiveness and heavy debt to continued asset erosion and resistance from unions. If the Center is committed to achieving its divestment target, then these issues must be addressed quickly and comprehensively.

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