This is the first in two-part series that looks at how divestment of government stakes can not just help revive PSUs, but also help finance major education and health programs.
Need for resuscitation of PSUs (Public Sector Undertaking) in India is growing by the day. The more the government delays a holistic, planned revamp of these companies the bigger the damage can be for all stakeholders.
The 25 largest PSUs by market capitalisation have a notional loss of about Rs 17.5 lakh crore (i.e. about 10 percent of India’s FY2018 GDP) in the last ten years. Their combined market capitalisation grew just 75 percent versus 302 percent growth in the benchmark Nifty 50 index during the period. In fact, the combined profits of these PSUs declined 40 percent between FY2008 and FY2018 – versus an increase of 145 percent for Nifty 50 constituent companies.
Indeed, there is growing risk of more companies turning into colossal liabilities like Air India due to a dimmed business environment, intense competition, lack of long-term vision, and poor execution. Perhaps the most debilitating factor behind the fast dwindling fortunes of PSUs, has been the slow and excessively circumspect decision-making process.
This to a large extent is engendered in the heavy government involvement in top level decisions of these companies. With a debt of about Rs 55,000 crore on its books and an annual loss of over Rs 3,000 crore, Air India has not only become a burden for the government but is also jeopardising the future of the over 10,000 employees and their families.
The problem is if preventive action is not taken urgently some more PSU companies may meet the same fate standing as they are on the edge of the precipice. Even those PSUs that seem to be trudging along are losing market share fast in their respective sectors – except for a handful of those protected by regulatory or legacy entry barriers.
Here, the first step for the government should be to formulate a long-term action plan with an aim to bolster these companies’ prospects, to curtail government’s financial risks, and to protect the interests of employees and other stakeholders like minority shareholders and customers.
The central idea should be to professionalise these companies. Realigning mid and senior management’s compensation packages with market trends, increasing lateral hiring, fully empowering the boards, are some of the simple ways towards the above objectives.
A ‘must have’ here, is some law that brings PSUs on par with private sector companies when it comes to oversight of institutions like CAG (Controller and Auditor General), CVC (Central Vigilance Commissioner), and investigative agencies. It is unfair to treat PSUs as government’s arms especially post disinvestment.
Also, serious consideration should be given to the merger of PSUs in the same industry. The size and synergies achieved from such mergers can bolster long-term prospects of many of these companies. What is required is the willingness of the government to step back into the role of just a financial investor versus its current status of the “owner”.
Disinvestment – a reduction of government’s stake in PSUs -is another part of the jigsaw that desperately needs remodelling. Now, the case for the government to curb its exposure to, if not to withdraw altogether from, businesses – of hospitality, aviation, power, telecom, metals and mining, banking, insurance, automobiles etc – continues to get stronger.
Apart from poor economics and damage to these PSU companies’ viability, there are other reasons too. One problem is a conflict of interest. Government’s role as a business owner and as facilitator and arbiter for businesses at the same time raise questions of fairness and transparency.
Historically, disinvestment exercise in India has been taken up in a rather ad-hoc fashion. The process of selection of companies for – and pace of- disinvestment seem to have been based more on saleability and government’s short-term fund requirements without much consideration for companies’ needs and performance, and sector dynamics. In reality what is required is to make a long term, say five-year, schedule for phase-wise disinvestment in various companies. Timeline for progressive disinvestment should be based on company parameters like their relative capabilities versus competition, vulnerability to technological or otherwise disruption, financial strength, the extent of sustainable business advantages, manpower strength etc.
Further, some important “non-negotiables” should be put in place preferably through legislative action. The government may state upfront that it will continue to hold say a minimum of 25- 30 percent stake in these companies, continue to be the largest shareholder and retain enough board representation to ensure that employee interests are not harmed. Then, the government can avoid selling the stakes to one strategic investor and instead opt to sell it only to financial investors. This way the government can get the “buy-in” from employees for this plan.
Finally, there should be a clear framework for the application of proceeds from disinvestment. So far, though there are quantitative targets for disinvestment proceeds as outlined in central government’s annual budget, the application of proceeds has largely been to plug fiscal deficit. Thus, over the years while assets have been gradually off-loaded from the government’s balance sheet the proceeds have been essentially used up for unproductive or short-term purposes.
These have ranged from pay hike arrears of government employees to illogical and poorly targeted subsidies. It is extremely important that divestment proceeds should be earmarked to create other assets rather than fritter them away on revenue expenditure. These other assets can be in the shape of urban and rural infrastructure, or human capital by upskilling the youth or investing in education and healthcare.
Importance of this aspect is rooted in the sum that can potentially be raised by divestment- more than Rs 12 lakh crore if government stake is brought down to 25 percent in all PSUs. Either way, the country must proceed urgently, and in a planned manner, to enhance the sustainability of PSUs, to monetise investments in these PSUs, and invest the proceeds of such divestment to create other more productive, valuable and long-lasting assets.
The second part, which will be published tomorrow, makes a case for a government to use divestment funds to push education and health reforms(Vipul Prasad is founder and CEO, Magadh Capital)